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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the third quarter period ended May 31, 2002
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 0-20212
ARROW INTERNATIONAL, INC.
----------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1969991
- -------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2400 Bernville Road, Reading, Pennsylvania 19605
- ------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 378-0131
--------------
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Shares outstanding at July 10, 2002
--------- -----------------------------------
Common Stock, No Par Value 21,969,388
ARROW INTERNATIONAL, INC.
Form 10-Q Index
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at May 31, 2002
and August 31, 2001 3-4
Consolidated Statements of Income 5-6
Consolidated Statements of Cash Flows 7-8
Consolidated Statements of Comprehensive Income 9
Notes to Consolidated Financial Statements 10-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-27
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 27-29
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 29
Item 6. Exhibits and Reports on Form 8-K 30
Signature 31
Exhibit Index 32
-2-
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ARROW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
May 31, August 31,
2002 2001
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 14,959 $ 2,968
Accounts receivable, net 78,573 79,151
Inventories 85,147 94,420
Prepaid expenses and other 24,085 24,596
Deferred income taxes 4,130 2,850
------------- ------------
Total current assets 206,894 203,985
------------- ------------
Property, plant and equipment:
Total property, plant and equipment 259,398 241,491
Less accumulated depreciation (127,236) (115,231)
-------------- ------------
132,162 126,260
------------- ------------
Goodwill, net 38,485 43,422
Intangible and other assets, net 33,473 41,115
Deferred income taxes 2,204 2,928
------------- ------------
Total other assets 74,162 87,465
------------- ------------
Total assets $ 413,218 $ 417,710
============= ============
See accompanying notes to consolidated financial statements
Continued
-3-
ARROW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS, Continued
(In thousands, except share amounts)
(Unaudited)
May 31, August 31,
2002 2001
------------- -------------
LIABILITIES
Current liabilities:
Current maturities of long-term debt $ 300 $ 300
Notes payable 15,214 50,422
Accounts payable 7,029 8,164
Cash overdrafts 2,336 1,964
Accrued liabilities 9,213 8,629
Accrued compensation 6,905 6,557
Accrued income taxes 2,205 2,393
------------- ------------
Total current liabilities 43,202 78,429
Long-term debt 300 600
Accrued postretirement benefit obligation 12,130 12,592
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, no par value;
5,000,000 shares authorized;
none issued - -
Common stock, no par value;
50,000,000 shares authorized;
issued 26,478,813 shares 45,661 45,661
Additional paid-in capital 3,860 930
Retained earnings 364,335 332,806
Less treasury stock at cost:
4,515,399 and 4,477,413 shares,
respectively (50,410) (45,995)
Accumulated other comprehensive
expense (5,860) (7,313)
------------- ------------
Total shareholders' equity 357,586 326,089
------------- ------------
Total liabilities and
shareholders' equity $ 413,218 $ 417,710
============= ============
See accompanying notes to consolidated financial statements
-4-
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
(Unaudited)
For the Three Months Ended
--------------------------
May 31, May 31,
2002 2001
------------- -------------
Net sales $ 86,712 $ 85,993
Cost of goods sold 43,378 40,760
------------- -------------
Gross profit 43,334 45,233
Operating expenses:
Research, development and engineering 6,854 7,033
Selling, general and administrative 19,611 19,992
------------- -------------
Operating income 16,869 18,208
------------- -------------
Other expenses (income):
Interest expense, net of amounts capitalized 73 1,217
Interest income (36) (959)
Other, net (62) 202
-------------- -------------
Other expenses, net (25) 460
-------------- -------------
Income before income taxes 16,894 17,748
Provision for income taxes 5,491 5,856
------------- -------------
Net income $ 11,403 $ 11,892
============= =============
Basic earnings per common share $ .52 $ .54
============= =============
Diluted earnings per common share $ .51 $ .54
============= =============
Cash dividends per common share $ .070 $ .065
============= =============
Weighted average shares outstanding
used in computing basic earnings
per common share 21,928,023 21,987,476
============= =============
Weighted average shares outstanding
used in computing diluted earnings
per common share 22,221,799 22,109,969
============= =============
See accompanying notes to consolidated financial statements
-5-
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
(Unaudited)
For the Nine Months Ended
-------------------------
May 31, May 31,
2002 2001
-------------- -------------
Net sales $ 256,740 $ 247,026
Cost of goods sold 125,331 117,128
--------------- -------------
Gross profit 131,409 129,898
Operating expenses:
Research, development and engineering 19,973 19,244
Selling, general and administrative 57,464 57,042
--------------- --------------
Operating income 53,972 53,612
--------------- -------------
Other expenses (income):
Interest expense, net of amounts capitalized 511 2,391
Interest income (118) (1,025)
Other, net 217 509
--------------- -------------
Other expenses, net 610 1,875
--------------- -------------
Income before income taxes 53,362 51,737
Provision for income taxes 17,343 17,073
--------------- -------------
Net income $ 36,019 $ 34,664
=============== =============
Basic earnings per common share $ 1.65 $ 1.58
=============== =============
Diluted earnings per common share $ 1.63 $ 1.57
=============== =============
Cash dividends per common share $ .205 $ .190
=============== =============
Weighted average shares outstanding
used in computing basic earnings
per common share 21,894,075 21,992,866
=============== =============
Weighted average shares outstanding
used in computing diluted earnings
per common share 22,105,540 22,118,087
=============== =============
See accompanying notes to consolidated financial statements
-6-
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the Nine Months Ended
-------------------------
May 31, May 31,
2002 2001
-------------- -------------
Cash flows from operating activities:
Net income $ 36,019 $ 34,664
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 13,601 11,733
Amortization of intangible assets 2,375 4,442
401(k) plan stock contribution 553 -
Gain on sale of securities (1,703) -
Deferred income taxes (560) (940)
Unrealized holding loss on securities 1,052 560
Unrealized holding (loss) gain on foreign currency options (170) 356
Loss on sale of implantable drug
infusion pump business 1,415 -
Other (525) 577
Changes in operating assets and liabilities:
Accounts receivable, net 1,413 (5,067)
Inventories 4,422 (9,381)
Prepaid expenses and other 438 (5,828)
Accounts payable and accrued liabilities (2,257) 2,521
Accrued compensation 420 (432)
Accrued income taxes (438) (630)
--------------- --------------
Total adjustments 20,036 (2,089)
-------------- --------------
Net cash provided by operating activities 56,055 32,575
-------------- -------------
Cash flows from investing activities:
Capital expenditures (17,623) (15,095)
(Increase) in intangible and other assets (364) (4,124)
Cash paid for business acquired, net - (3,250)
Proceeds from sale of business 13,000 -
Proceeds from sale of securities 2,540 -
-------------- -------------
Net cash used in investing activities (2,447) (22,469)
Cash flows from financing activities:
(Decrease) increase in notes payable (35,014) (3,079)
Principal payments of long-term debt (300) (340)
Increase (decrease) in book overdrafts 372 (154)
Dividends paid (4,382) (4,069)
Proceeds from stock options exercised 3,256 248
Purchase of treasury stock (5,758) (1,085)
--------------- --------------
Net cash used in financing activities (41,826) (8,479)
Effect of exchange rate changes on cash
and cash equivalents 209 (121)
Net change in cash and cash equivalents 11,991 1,506
Cash and cash equivalents at beginning of year 2,968 3,959
-------------- -------------
Cash and cash equivalents at end of period $ 14,959 $ 5,465
============== =============
See accompanying notes to consolidated financial statements
Continued
-7-
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(In thousands)
(Unaudited)
For the Nine Months Ended
-------------------------
May 31, May 31,
2002 2001
----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest (net of amounts capitalized) $ 522 $ 1,986
Income taxes $ 14,877 $ 17,382
Supplemental schedule of non-cash investing and financing activities:
Estimated fair value of assets acquired,
net of cash acquired $ - $ 5,100
Cash paid for assets, net of cash acquired
of $0 - 3,250
----------- -----------
Liabilities assumed $ - $ 1,850
=========== ===========
Cash paid for business acquired:
Property, plant and equipment $ - $ 180
Goodwill, intangible assets and in-process
research and development - 3,070
----------- -----------
$ - $ 3,250
=========== ===========
Treasury stock issued for 401(k) plan
contribution $ 553 $ -
=========== ===========
Intangible assets acquired by issuing
treasury stock $ 464 $ 918
=========== ===========
See accompanying notes to consolidated financial statements
-8-
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
For the Three Months Ended
--------------------------
May 31, May 31,
2002 2001
------------- -----------
Net income $ 11,403 $ 11,892
Other comprehensive income (expense):
Currency translation adjustments 4,080 (1,531)
Unrealized holding (loss) gain on foreign
currency option contracts (840) 184
Unrealized holding gain on securities,
net of tax ($0 and $(169), respectively) - 272
------------- -----------
Other comprehensive income (expense) 3,240 (1,075)
------------- ------------
Total comprehensive income $ 14,643 $ 10,817
============= ===========
For the Nine Months Ended
-------------------------
May 31, May 31,
2002 2001
------------- -----------
Net income $ 36,019 $ 34,664
Other comprehensive income (expense):
Currency translation adjustments 3,314 (1,441)
Unrealized holding (loss) gain on foreign
currency option contracts (169) 356
Unrealized holding loss on securities,
net of tax ($399 and $560, respectively) (642) (901)
Reclassification adjustment for gains
on securities included in net income, net of
tax ($653 and $0, respectively) (1,050) -
------------- -----------
Other comprehensive income (expense) 1,453 (1,986)
------------- -----------
Total comprehensive income $ 37,472 $ 32,678
============= ===========
See accompanying notes to consolidated financial statements
-9-
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION:
These unaudited consolidated financial statements include all adjustments,
consisting only of normal recurring accruals, which management considers
necessary for a fair presentation of the consolidated financial position,
results of operations, and cash flows of Arrow International, Inc. (the
"Company") for the interim periods presented. Results for the interim periods
are not necessarily indicative of results for the entire year. Such statements
are presented in accordance with the requirements of Form 10-Q and do not
include all disclosures normally required by generally accepted accounting
principles or those normally made on Form 10-K. These statements should be read
in conjunction with the consolidated financial statements and notes thereto
contained in the Company's Annual Report to Stockholders for the fiscal year
ended August 31, 2001.
NOTE 2 - INVENTORIES:
Inventories are summarized as follows:
May 31, August 31,
2002 2001
------------- ------------
Finished goods $ 25,708 $ 32,336
Semi-finished goods 24,845 21,863
Work-in-process 9,098 12,890
Raw materials 25,496 27,331
------------- ------------
$ 85,147 $ 94,420
============= ============
NOTE 3 - COMMITMENTS AND CONTINGENCIES:
The Company is a party to certain legal actions, including product liability
matters, arising in the ordinary course of its business. From time to time, the
Company is also subject to legal actions involving patent and other intellectual
property claims. The Company is currently a defendant in two related lawsuits
alleging that certain of its hemodialysis catheter products infringe patents
owned by a third party. Based upon information presently available to the
Company, the Company believes it has adequate legal defenses with respect to
these actions. Although the ultimate outcome of these actions is not expected to
have a material adverse effect on the Company's business or financial condition,
whether an adverse outcome in these actions would materially adversely affect
the Company's reported results of operations in any future period cannot be
predicted with certainty.
Continued
-10-
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
NOTE 4 - ACCOUNTING POLICIES:
Reclassifications:
Certain prior period information has been reclassified for comparative purposes.
Revenue Recognition:
Revenue is recognized at the time products are shipped and title has passed to
the customer. Net sales represent gross sales invoiced to customers, less
certain related charges, including discounts, returns, rebates and other
allowances.
Goodwill, Intangible and Other Assets:
Goodwill represents the excess of the cost over the fair value of net assets
acquired in business combinations. "Intangible and Other Assets," net, include
certain assets acquired from business acquisitions and investments and are being
amortized using the straight-line method over their estimated periods of
benefits, from 5-20 years.
As further discussed in Note 6 below, the Company adopted the provisions of
Statement of Financial Accounting Standards 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"), effective as of September 1, 2001. In accordance with this
statement, the Company no longer amortizes goodwill. In addition, any goodwill
or intangible assets determined to have an indefinite life that are acquired in
a future purchase business combination will not be amortized but will be
evaluated for impairment.
NOTE 5 - SEGMENT REPORTING:
The Company operates as a single reportable segment. The Company operates in
four main geographic regions, therefore, information by product category and
geographic areas is presented below.
Continued
-11-
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
NOTE 5 - SEGMENT REPORTING (CONTINUED):
The following table provides quarterly information about the Company's sales by
product category:
Quarter ended Quarter ended
May 31, 2002 May 31, 2001
------------ ------------
Critical Cardiac Critical Cardiac
Care Care Care Care
------------ ----------- ----------- ------------
Sales to external
customers $ 72,300 $ 14,400 $ 71,200 $ 14,800
The following tables present quarterly information about geographic areas:
Quarter Ended May 31, 2002
---------------------------------------------------------------------------
United Asia and Other
States Africa Europe Foreign Export Consolidated
---------- ---------- --------- --------- ---------- ------------
Sales to unaffiliated
customers $ 57,000 $ 7,800 $ 7,900 $ 2,900 $ 11,100 $ 86,700
Quarter Ended May 31, 2001
---------------------------------------------------------------------------
United Asia and Other
States Africa Europe Foreign Export Consolidated
---------- ---------- --------- --------- ---------- ------------
Sales to unaffiliated
customers $ 56,400 $ 8,900 $ 7,600 $ 2,600 $ 10,500 $ 86,000
Continued
-12-
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
NOTE 5 - SEGMENT REPORTING (CONTINUED):
The following table provides year-to-date information about the Company's sales
by product category:
Nine months ended Nine months ended
May 31, 2002 May 31, 2001
------------ ------------
Critical Cardiac Critical Cardiac
Care Care Care Care
------------ ----------- ----------- ------------
Sales to external
customers $ 215,500 $ 41,200 $ 204,200 $ 42,800
The following tables present year-to-date information about geographic areas:
Nine Months Ended May 31, 2002
---------------------------------------------------------------------------
United Asia and Other
States Africa Europe Foreign Export Consolidated
---------- ---------- --------- --------- ---------- ------------
Sales to unaffiliated
customers $ 171,100 $ 22,800 $ 23,100 $ 7,900 $ 31,800 $ 256,700
Nine Months Ended May 31, 2002
---------------------------------------------------------------------------
United Asia and Other
States Africa Europe Foreign Export Consolidated
---------- ---------- --------- --------- ---------- ------------
Sales to unaffiliated
customers $ 163,700 $ 26,100 $ 20,900 $ 7,700 $ 28,600 $ 247,000
NOTE 6 - NEW ACCOUNTING STANDARDS:
SFAS 142 addresses how intangible assets should be accounted for in financial
statements upon their acquisition and how goodwill and other intangible assets
should be accounted for after they have been initially recognized in the
financial statements.
As stated in Note 4 above, the Company adopted the provisions of SFAS 142
effective as of September 1, 2001. In accordance with the statement, the Company
no longer amortizes goodwill. In addition, any goodwill or intangible assets
determined to have an indefinite life that are acquired in a future purchase
business combination will not be amortized but will be evaluated for impairment.
In accordance with the provisions of SFAS 142, the Company completed step one of
the impairment test of the goodwill that existed on the Company's balance sheet
at the date of its adoption of SFAS 142. Based on the completion of step one,
the Company does not presently anticipate recording any impairment of such
goodwill.
The impact of the adoption of SFAS 142 on the Company's financial statements was
to decrease goodwill amortization by $746 and $2,314 for the three and nine
month periods ended May 31, 2002, respectively. This resulted in an increase in
net income of $515 and $1,593 after tax, and basic and diluted earnings per
share of $0.02 and $0.07, in each case for the three and nine month periods
ended May 31, 2002, respectively.
Continued
-13-
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
NOTE 6 - NEW ACCOUNTING STANDARDS (CONTINUED):
The following tables reflect consolidated results adjusted as though the
Company's adoption of SFAS 142 occurred as of September 1, 2000.
For the Three Months Ended
May 31, May 31,
2002 2001
------------- -------------
Net Income:
As reported $ 11,403 $ 11,892
Goodwill amortization (net of tax of $0 and $238) - 528
As adjusted $ 11,403 $ 12,420
Basic Earnings Per Share:
As reported $ 0.52 $ 0.54
Goodwill amortization (net of tax of $.00 and $.01) - 0.02
As adjusted $ 0.52 $ 0.56
Diluted Earnings Per Share:
As reported $ 0.51 $ 0.54
Goodwill amortization (net of tax of $.00 and $.01) - 0.02
As adjusted $ 0.51 $ 0.56
For the Nine Months Ended
May 31, May 31,
2002 2001
------------- -------------
Net Income:
As reported $ 36,019 $ 34,664
Goodwill amortization (net of tax of $0 and $604) - 1,408
As adjusted $ 36,019 $ 36,072
Basic Earnings Per Share:
As reported $ 1.65 $ 1.58
Goodwill amortization (net of tax of $.00 and $.03) - 0.06
As adjusted $ 1.65 $ 1.64
Diluted Earnings Per Share:
As reported $ 1.63 $ 1.57
Goodwill amortization (net of tax of $.00 and $.03) - 0.06
As adjusted $ 1.63 $ 1.63
Continued
-14-
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
NOTE 6 - NEW ACCOUNTING STANDARDS (CONTINUED):
Amortization expense of intangibles under this pronouncement for the three and
nine month periods ended May 31, 2002 was $657 and $2,375, respectively.
Estimated intangible amortization expense for each of the next five succeeding
fiscal years is as follows:
Fiscal year ending August 31: Amount
----------------------------- ------
2002 $ 3,193
2003 3,000
2004 2,976
2005 2,925
2006 2,812
Statement of Financial Accounting Standard No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. The provisions of
this statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. The Company is studying the provisions of
this statement and has not determined the impact that the adoption of this
statement may have on its financial statements.
NOTE 7 - SALE OF SECURITIES:
Proceeds from the Company's sale of marketable securities available for sale
were $0 and $2,540 for the three and nine months ended May 31, 2002,
respectively. Gains on the sale of these securities in fiscal 2002 amounted to
$1,703, and were included in selling, general and administrative expenses in the
Company's consolidated statements of income.
NOTE 8 - SALE OF IMPLANTABLE DRUG INFUSION PUMP BUSINESS:
On April 1, 2002, the Company completed the sale of substantially all of the
assets of its implantable drug infusion pump business for a sales price of
$13,000 in cash pursuant to an asset purchase agreement dated as of March 1,
2002. An estimated loss on the sale was recorded in the second quarter of fiscal
2002, during which period the Company's Board of Directors authorized the
transaction. The transaction was accounted for as a sale of a non-integrated
portion of a reporting unit, as defined by SFAS 142. After further adjustments
to the estimated loss were made in the third quarter of fiscal 2002, the loss
before tax on the transaction was $1,415 (after taxes, such loss was $955, or
$0.04 per basic and diluted common share), and was included in selling, general
and administrative expenses in the Company's consolidated statements of income.
-15-
ARROW INTERNATIONAL, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
THE FOLLOWING DISCUSSION INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS. SUCH
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO A NUMBER OF FACTORS, INCLUDING
MATERIAL RISKS, UNCERTAINTIES AND CONTINGENCIES, WHICH COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS. FOR A
DISCUSSION OF IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS, SEE EXHIBIT 99.1 TO THIS REPORT
AND THE COMPANY'S PERIODIC REPORTS AND OTHER DOCUMENTS FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION.
Results of Operations
THREE MONTHS ENDED MAY 31, 2002 COMPARED TO THREE MONTHS ENDED MAY 31, 2001
Net sales for the three months ended May 31, 2002 increased by $0.7 million, or
0.8%, to $86.7 million from $86.0 million in the same period last year due
primarily to an increase in critical care product sales. Net sales represent
gross sales invoiced to customers, less certain related charges, discounts,
returns and other allowances. Revenue from sales is recognized at the time
products are shipped and title is passed to the customer. Sales of critical care
products increased 1.5% to $72.3 million from $71.2 million in the comparable
prior year period due primarily to increased sales of central venous catheters.
Cardiac care product sales decreased to $14.4 million from $14.8 million, a
decrease of 2.7% from the comparable fiscal 2001 period, due primarily to
decreased sales of intra-aortic balloon ("IAB") products. International sales
increased by 0.3% to $29.7 million from $29.6 million in the same prior year
period and represented 34.3% of net sales, compared to 34.4% in the same fiscal
2001 period. The strength of the U.S. dollar reduced net sales for the quarter
by $0.2 million. As discussed above in Item 1 - Notes to Consolidated Financial
Statements - Note 8, on April 1, 2002, the Company completed the sale of
substantially all of the assets of its implantable drug infusion pump business
as of March 1, 2002. As a result of the sale, the Company reported no
implantable drug infusion pump sales for the months of April and May, 2002,
compared to $1.3 million of such sales in the same two months of fiscal 2001.
Gross profit decreased 4.2% to $43.3 million in the three months ended May 31,
2002, compared to $45.2 million in the same period of fiscal 2001. As a
percentage of net sales, gross profit decreased to 50.0% during the three months
ended May 31, 2002 from 52.6% in the comparable prior year period, due primarily
to increased manufacturing variances caused by the Company's manufacturing of
products at a rate below its actual sales rate in order to bring the Company's
inventories more in line with requirements following manufacturing shifts to the
Company's expanded international plants. The Company's gross profit in the third
quarter of fiscal 2002 was also affected by a less profitable product sales mix
and pricing. The Company anticipates that its gross profit in the fourth quarter
of fiscal 2002 will continue to be affected by manufacturing variances
associated with inventory reduction.
-16-
ARROW INTERNATIONAL, INC.
The Japanese Ministry of Health and Welfare has adopted new reimbursement
pricing for central venous catheters effective as of April 1, 2002. The impact
of this reduced pricing on the Company's earnings for the three months ended May
31, 2002 was not material. Although the Company anticipates that this reduced
pricing will have some effect on its gross profit in the fourth quarter of
fiscal 2002, it does not expect this effect to be material due to the Company's
planned implementation of offsetting cost reductions.
In addition, effective as of March 1, 2002, the Company entered into an
agreement with a group purchasing organization resulting in reduced pricing to
the hospitals participating in this organization. The impact of the reduced
pricing under this arrangement on the Company's earnings in the third quarter of
fiscal 2002 was not material. The Company presently anticipates that the effect
of these pricing concessions on its future earnings will be more than offset by
increased sales volumes under this arrangement.
Research, development and engineering expenses decreased by 2.5% to $6.9 million
in the three months ended May 31, 2002 from $7.0 million in the comparable prior
year period. As a percentage of net sales, these expenses decreased in the third
quarter of fiscal 2002 to 7.9%, compared to 8.2% in the same period in fiscal
2001. Although research expenses related to the LionHeart(TM), the Company's
Left Ventricular Assistant System, and its CorAide(TM) cardiac assist research
programs were lower in the third quarter of fiscal 2002 than in the comparable
period of fiscal 2001, they were higher than anticipated in order to provide
necessary information to TUV Munich in support of the Company's application for
CE mark approval to sell the LionHeart(TM) in Europe and to fund development of
a new external power source for the device.
As of June 20, 2002, the Company has implanted the LionHeart(TM) in a total of
25 patients in Europe and seven in the U.S. On June 4, 2002, the Company
announced that its European Notified Body, TUV Munich, had completed a
preliminary review of the clinical data supporting the Company's application for
CE mark approval. TUV Munich concluded that establishing the long-term benefit
of the device is a key consideration in the approval process and requested that
the Company provide it with additional trial data further demonstrating such
long-term benefit, thereby extending the LionHeart(TM) trial for an additional
six months to December 20, 2002. As a result, the Company now targets early
calendar year 2003 for receipt of CE mark approval. Although TUV Munich's
decision to request additional trial data will delay the Company's ability to
sell the LionHeart(TM) in Europe, the Company intends to continue the training
of additional European implant sites, complete improvements to the device
designed to downsize both internal and external power sources, and continue to
broaden the exposure of the LionHeart(TM) to the medical community. As
previously reported, the U.S. Food and Drug Administration (FDA) has approved an
additional seven implants of the LionHeart(TM) as a continuation of the Phase I
U.S. clinical trial of the device and the Company continues to anticipate that
these implants will begin soon. Discussions also continue with the FDA relative
to the pivotal Phase II trial to support approval of the LionHeart(TM) for
destination therapy in the U.S.
Selling, general and administrative expenses decreased by 1.9% to $19.6 million
in the three months ended May 31, 2002 from $20.0 million in the comparable
prior year period. These expenses represented 22.6% of net sales for the third
quarter of fiscal
-17-
ARROW INTERNATIONAL, INC.
2002, compared to 23.2% in the same period of fiscal 2001. As a result of the
adoption of SFAS 142 effective as of September 1, 2001, the Company's
amortization expense decreased by $0.7 million for the three month period ended
May 31, 2002 (see Item 1 - Notes to Consolidated Financial Statements - Notes 4
and 6). In the three months ended May 31, 2002, the Company's expenses related
to its defined benefit pension plans have increased over the third quarter of
the prior year due primarily to decreased income generated from the plans'
assets. In addition, during the three months ended May 31, 2002, the Company
continued to incur legal costs in connection with a patent dispute relating to
certain of its hemodialysis catheter products (see Item 1 - Notes to
Consolidated Financial Statements - Note 3).
Principally due to the above factors, operating income decreased in the third
quarter of fiscal 2002 by 7.4% to $16.9 million from $18.2 million in the
comparable prior year period.
Other expenses (income), net, were less than $0.1 million of income in the third
quarter of fiscal 2002 as compared to $0.5 million of expense in the comparable
prior year period, principally due to lower interest expense on the Company's
revolving credit facility.
As a result of the factors discussed above, income before income taxes decreased
in the third quarter of fiscal 2002 by 4.8% to $16.9 million from $17.7 million
in the comparable prior year period. For the third quarter of fiscal 2002, the
Company's effective income tax rate was 32.5%, a decrease from 33.0% in the same
period of fiscal 2001, principally as a result of the Company's adoption of SFAS
142 and the elimination of nondeductible goodwill (see Item 1 - Notes to
Consolidated Financial Statements - Notes 4 and 6) in the first quarter of
fiscal 2002 and anticipated research and development tax credits.
Net income in the third quarter of fiscal 2002 decreased by 4.1% to $11.4
million from $11.9 million in the comparable prior year period primarily as a
result of the above factors. As a percentage of net sales, net income
represented 13.2% in the three months ended May 31, 2002 compared to 13.8% in
the same period of fiscal 2001. As a result of the Company's adoption of SFAS
142 and its discontinuation of amortization of goodwill, net income increased by
$0.5 million after tax and basic and diluted earnings per common share increased
by $0.02 for the three month period ended May 31, 2002.
Basic earnings per common share were $0.52 and $0.54 in the third quarters of
fiscal 2002 and 2001, respectively. Diluted earnings per share were $0.51 and
$0.54 in the third quarters of fiscal 2002 and 2001, respectively. Weighted
average common shares outstanding used in computing basic earnings per common
share decreased to 21,928,023 in the third quarter of fiscal 2002 from
21,987,476 in the comparable prior year period primarily as a result of the
Company's previously announced share repurchase program, which remains in
effect. Weighted average shares of common stock outstanding used in computing
diluted earnings per common share increased to 22,221,799 in the third quarter
of fiscal 2002 from 22,109,969 in the comparable prior year period primarily as
a result of an increase in potentially dilutive shares resulting from an
increased share price.
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ARROW INTERNATIONAL, INC.
NINE MONTHS ENDED MAY 31, 2002 COMPARED TO NINE MONTHS ENDED MAY 31, 2001
Net sales for the nine months ended May 31, 2002 increased by $9.7 million, or
3.9%, to $256.7 million from $247.0 million in the same period last year. This
increase was due primarily to increased sales of the Company's critical care
products. Sales of critical care products were $215.5 million for the nine
months ended May 31, 2002, compared to $204.2 million in the same period of
fiscal 2001, due primarily to increased sales of central venous catheters.
Cardiac care product sales decreased to $41.2 million from $42.8 million, a
decrease of 3.7% from the comparable prior year period, due primarily to
decreased sales of diagnostic products and IAB products. International sales
increased by 2.8% to $85.6 million from $83.3 million in the same prior year
period, and decreased to 33.3% of net sales for the nine months ended May 31,
2002 from 33.7% in the comparable period of fiscal 2001, principally as a result
of the increased strength of the U.S. dollar relative to currencies in countries
where the Company operates direct sales subsidiaries. The strength of the U.S.
dollar, relative to currencies in countries where the Company operates direct
sales subsidiaries, decreased net sales for the nine month period ended May 31,
2002 by $2.9 million. As discussed above in Item 1 - Notes to Consolidated
Financial Statements - Note 8, on April 1, 2002, the Company completed the sale
of substantially all of the assets of its implantable drug infusion pump
business as of March 1, 2002. As a result of the sale, the Company reported no
implantable drug infusion pump sales for the months of April and May, 2002,
compared to $1.3 million of such sales in the same two months of fiscal 2001.
Gross profit increased 1.2% to $131.4 million in the nine months ended May 31,
2002, compared to $129.9 million in the same period of fiscal 2001. As a
percentage of net sales, gross profit decreased to 51.2% during the nine months
ended May 31, 2002 from 52.6% in the comparable period of fiscal 2001, due
primarily to increased manufacturing variances associated with inventory
reduction (as discussed above) and a less profitable product sales mix. The
Company anticipates that its gross profit in the fourth quarter of fiscal 2002
will continue to be affected by manufacturing variances associated with
inventory reduction.
The Japanese Ministry of Health and Welfare has adopted new reimbursement
pricing for central venous catheters effective as of April 1, 2002. The impact
of this reduced pricing on the Company's earnings for the nine months ended May
31, 2002 was not material. Although the Company anticipates that this reduced
pricing will have some effect on its gross profit in the fourth quarter of
fiscal 2002, it does not expect this effect to be material due to the Company's
planned implementation of offsetting cost reductions.
Research, development and engineering expenses increased by 3.8% to $20.0
million in the nine months ended May 31, 2002 from $19.2 million in the
comparable prior year period, primarily as a result of increased research and
development spending on the Arrow LionHeart(TM), the Company's Left Ventricular
Assist System. As a percentage of net sales, these expenses were 7.8% in both
the nine months ended May 31, 2002 and 2001.
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ARROW INTERNATIONAL, INC.
As of June 20, 2002, the Company has implanted the LionHeart(TM) in a total of
25 patients in Europe and seven in the U.S. On June 4, 2002, the Company
announced that its European Notified Body, TUV Munich, had completed a
preliminary review of the clinical data supporting the Company's application for
CE mark approval. TUV Munich concluded that establishing the long-term benefit
of the device is a key consideration in the approval process and requested that
the Company provide it with additional trial data further demonstrating such
long-term benefit, thereby extending the LionHeart(TM) trial for an additional
six months to December 20, 2002. As a result, the Company now targets early
calendar year 2003 for receipt of CE mark approval. Although TUV Munich's
decision to request additional trial data will delay the Company's ability to
sell the LionHeart(TM) in Europe, the Company intends to continue the training
of additional European implant sites, complete improvements to the device
designed to downsize both internal and external power sources, and continue to
broaden the exposure of the LionHeart(TM) to the medical community. As
previously reported, the U.S. Food and Drug Administration (FDA) has approved an
additional seven implants of the LionHeart(TM) as a continuation of the Phase I
U.S. clinical trial of the device and the Company continues to anticipate that
these implants will begin soon. Discussions also continue with the FDA relative
to the pivotal Phase II trial to support approval of the LionHeart(TM) for
destination therapy in the U.S.
Selling, general and administrative expenses increased by 0.7% to $57.5 million
in the nine months ended May 31, 2002 from $57.0 million in the comparable prior
year period and represented 22.4% of net sales in the nine months ended May 31,
2002 compared to 23.1% in the comparable period of fiscal 2001, due primarily to
increased expenses related to the Company's defined benefit pension plans over
the comparable prior year period resulting from decreased income generated from
the plans' assets. This increase was offset by reduced goodwill amortization
expense of $2.3 million related to the Company's adoption in the first quarter
of fiscal 2002 of SFAS 142 (see Item 1 - Notes to Consolidated Financial
Statements - Notes 4 and 6).
As discussed in Note 8 of Notes to Consolidated Financial Statements in Item 1
above, during the second quarter of fiscal 2002, the Company recorded an
estimated loss on the sale of its implantable drug infusion pump business, with
final adjustments made in the third quarter of fiscal 2002. As discussed in Note
7 of Notes to Consolidated Financial Statements in Item 1 above, the Company
also recorded a gain on the sale of securities available for sale. The net
impact of these two offsetting transactions was not material to the Company's
results of operations for the nine months ended May 31, 2002.
Principally due to the above factors, operating income increased in the first
half of fiscal 2002 by 0.7% to $54.0 million from $53.6 million in the
comparable period of fiscal 2001.
Other expenses (income), net, decreased to $0.6 million of expense in the nine
months ended May 31, 2002 from $1.9 million of expense in the same period of the
prior fiscal year principally due to lower interest expense on the Company's
revolving credit facility.
As a result of the factors discussed above, income before income taxes increased
in the nine months ended May 31, 2002 by 3.1% to $53.4 million from $51.7
million in the comparable prior year period. The Company's effective income tax
rate decreased to
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ARROW INTERNATIONAL, INC.
32.5% from 33.0% in fiscal 2001, principally as a result of the Company's
adoption of SFAS 142 and the elimination of nondeductible goodwill (see Item 1 -
Notes to Consolidated Financial Statements - Notes 4 and 6) in the first quarter
of fiscal 2002 and anticipated research and development tax credits.
Net income in the nine months ended May 31, 2002 increased 3.9% to $36.0 million
from $34.7 million in the nine months ended May 31, 2001. As a percentage of net
sales, net income represented 14.0% during both the nine months ended May 31,
2002 and 2001. As a result of the Company's adoption of SFAS 142 and its
discontinuation of amortization of goodwill, net income increased by $1.6
million after tax and basic and diluted earnings per common share increased by
$0.07 for the nine month period ended May 31, 2002.
Basic earnings per common share were $1.65 for the nine month period ended May
31, 2002, up 4.4%, or $0.07 per share, from $1.58 in the comparable prior year
period. Diluted earnings per common share were $1.63 for the nine month period
ended May 31, 2002, up 3.8%, or $0.06 per share, from $1.57 in the comparable
prior year period. Weighted average shares of common stock outstanding used in
computing basic earnings per common share decreased to 21,894,075 in the nine
months ended May 31, 2002 from 21,992,866 in the comparable prior year period.
Weighted average shares of common stock outstanding used in computing diluted
earnings per common share decreased to 22,105,540 in the nine months ended May
31, 2002 from 22,118,087 in the comparable prior period. These decreases were a
result of the Company's previously announced share repurchase program, which
remains in effect.
Liquidity and Capital Resources
Arrow's primary source of funds continues to be cash generated from operations,
as shown in the Company's Consolidated Statement of Cash Flows under Item 1
above. For the nine months ended May 31, 2002, net cash provided by operations
was $56.1 million, an increase of $23.5 million from the same period in the
prior year, due to increased collections of accounts receivable, decreased
inventory levels and less cash used for prepaid expenses, offset in part by
increased payments of accounts payable. Accounts receivable, measured in days
sales outstanding during the period, decreased to 84 days at May 31, 2002 from
86 days at May 31, 2001, due to improved collection efforts of the Company.
As previously reported, the parent company of one of the Company's major U.S.
distributors had been experiencing declining net sales and significant net
losses. This company recently completed a major recapitalization and, in May
2002, it reported first quarter earnings and a substantial reduction in debt
related to its recapitalization. The Company has accounts receivable due from
this distributor in the amount of $5.2 million as of May 31, 2002. Based on
information presently available to the Company and the payment history of this
distributor, the Company continues to believe the receivables due from this
distributor will be collected in the normal course of business. In September
2001, this company hired as its new president for the distributor the Company's
former Vice-President of Domestic Sales (who had resigned from the Company in
February 1999) and who is also the spouse of the Company's current Vice-
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ARROW INTERNATIONAL, INC.
President of Domestic Critical Care Sales. At such time, the Company changed
management responsibility for this distributor so that the Company's manager of
its Critical Care Business directly oversees all transactions between the
Company and this distributor. Transactions between the Company and this
distributor are on terms and at prices that the Company believes are customary
in the marketplace.
Inventories decreased $9.3 million in the nine months ended May 31, 2002
compared to a $9.0 million increase in the same period of fiscal 2001. These
decreased inventory levels are attributable to the Company's implementation of
an inventory reduction program in the first nine months of fiscal 2002 as well
as the sale of inventory included in the sale of its implantable drug infusion
pump business on April 1, 2002 (see Item 1 - Notes to Consolidated Financial
Statements - Note 8). Prepaid expenses decreased $0.5 million in the first nine
months of fiscal 2002 due primarily to a decrease in prepaid taxes, offset in
part by an increase in prepaid pension costs. Accounts payable decreased $1.2
million in the nine months ended May 31, 2002 primarily as a result of increased
payments to the Company's vendors.
Net cash used in the Company's investing activities decreased to $2.5 million in
the nine months ended May 31, 2002 from $22.5 million for the same period in
fiscal 2001, due primarily to proceeds received from the Company's sale of
securities available for sale and proceeds received from the Company's sale of
its implantable drug infusion pump business in the nine month period ended May
31, 2002 (see Item 1 - Notes to Consolidated Financial Statements - Notes 7 and
8).
In fiscal 2001, the Company's Board of Directors approved spending of up to
$10.0 million for the construction of additional manufacturing capacity,
including related equipment, at its existing manufacturing and research facility
in the Czech Republic. Construction of the additional space at this facility was
completed in December 2001. As of May 31, 2002, the Company has spent $8.2
million on this construction including $4.4 million in fiscal 2002, and
anticipates spending up to the authorized amount during the remainder of fiscal
2002 to bring such additional manufacturing capacity on-line.
Financing activities used $41.8 million of net cash in the nine months ended May
31, 2002, compared to $8.5 million in the same period in fiscal 2001, primarily
as a result of an increase in fiscal 2002 in the Company's repayment of
borrowings under its U.S. revolving credit facility and an increase in the
Company's use of cash to purchase shares of its common stock in the open market
in connection with its previously announced share repurchase program. The
Company's Board of Directors has authorized the repurchase of up to a maximum of
2,000,000 shares under this program. During the nine months ended May 31, 2002,
the Company purchased 158,500 shares of its common stock under this program for
$5.8 million. As of May 31, 2002, the Company had repurchased a total of
1,418,800 shares under this program for approximately $43.7 million since the
program's inception in March 1999.
-22-
ARROW INTERNATIONAL, INC.
To provide additional liquidity and flexibility in funding its operations, the
Company from time to time also borrows amounts under credit facilities and other
external sources of financing. At May 31, 2002, the Company had a revolving
credit facility providing a total of $65.0 million in available revolving credit
for general business purposes. In fiscal 2001, the terms of this facility were
amended and restated to, among other things, include certain of the Company's
subsidiaries as permitted borrowers, allowing up to $25.0 million of the $65.0
million to be drawn upon by any one or more of these subsidiaries in their local
currency. As of May 31, 2002, certain of the Company's foreign subsidiaries have
$6.5 million outstanding under the facility. Under this credit facility, the
Company is required to comply with the following financial covenants: maintain a
ratio of total liabilities to tangible net worth (total assets less total
liabilities and intangible assets) of no more than 1.5 to 1 and a cash flow
coverage ratio of 1.25 to 1 or greater; a limitation on certain mergers,
consolidations and sales of assets by the Company or its subsidiaries; a
limitation on its and its subsidiaries' incurrence of liens; and a requirement
that the lender approve the incurrence of additional indebtedness unrelated to
the revolving credit facility when the aggregate principal amount of such new
additional indebtedness exceeds $50.0 million. At May 31, 2002, the Company was
in compliance with all such covenants. Failure to remain in compliance with
these covenants could trigger an acceleration of the Company's obligation to
repay all outstanding borrowings under this credit facility. In addition,
certain other subsidiaries of the Company had revolving credit facilities
totaling the U.S. dollar equivalent of $19.0 million, of which $8.7 million was
outstanding as of May 31, 2002. Interest rate terms for both U.S. and foreign
bank credit facilities are based on either bids provided by the lender or the
prime rate, London Interbank Offered Rates (LIBOR) or Certificate of Deposit
Rates, plus applicable margins. Certain of these borrowings, primarily those
with U.S. banks, are due on demand. Interest is payable monthly during the
revolving credit period. Combined borrowings under these facilities decreased
$18.6 million and $35.2 million during the three and nine months ended May 31,
2002, respectively.
-23-
ARROW INTERNATIONAL, INC.
A summary of all of the Company's contractual obligations and commercial
commitments as of May 31, 2002 were as follows:
PAYMENTS DUE
OR
COMMITMENT EXPIRATION
BY PERIOD
-----------------------------------------------------------
CONTRACTUAL OBLIGATIONS AND LESS THAN 1 - 3 4 - 5 AFTER 5
COMMERCIAL COMMITMENTS TOTAL 1 YEAR YEARS YEARS YEARS
---------------------- ----- ------ ----- ----- -----
($ IN MILLIONS)
Long-term debt $ 0.6 $ 0.3 $ 0.3 $ - $ -
Operating leases 9.3 3.7 3.7 1.3 0.6
Other long-term obligations 1.3 0.8 0.1 0.1 0.3
Lines of credit* 15.2 15.2 - - -
Standby letters of credit 2.1 2.1 - - -
----- ----- ------ ----- -----
Total cash contractual obligations and
commercial commitments $28.5 $22.1 $ 4.1 $ 1.4 $ 0.9
===== ===== ====== ===== =====
* Includes short-term indebtedness of the Company and its subsidiaries under
various revolving credit facilities, as discussed above in this Item 2.
As discussed in Item 3 of this Report - Quantitative and Qualitative Disclosures
About Market Risk, a portion of the Company's sales and, to a lesser extent,
costs of goods sold, are denominated in currencies other than U.S. dollars. The
Company periodically enters into foreign currency exchange and foreign currency
option contracts, which are derivative financial instruments, with major
financial institutions to reduce the effect of these foreign currency risks,
primarily on U.S. dollar cash inflows resulting from the collection of
intercompany receivables denominated in foreign currencies and to hedge
anticipated sales in foreign currencies to foreign subsidiaries. Such
transactions occur throughout the year and are probable, but not firmly
committed. Forward contracts are marked to market each accounting period, and
the resulting gains or losses on these contracts are recorded in Other Income /
Expense of the Company's consolidated statements of income. Realized gains and
losses on these contracts are offset by changes in the U.S. dollar value of the
foreign denominated assets, liabilities or transactions being hedged. The
premiums paid on foreign currency option contracts are recorded as assets and
amortized over the life of the option. Other than the risk associated with the
financial condition of the counterparties, the Company's maximum exposure
related to foreign currency options is limited to the premiums paid. The total
premiums authorized to be paid in any fiscal year cannot exceed $1.0 million
pursuant to the terms of the Foreign Currency Management Policy Statement
approved by the Company's Board of Directors in fiscal 2001. Gains and losses on
purchased option contracts result from changes in intrinsic or time value. Both
time value and intrinsic value gains and losses are recorded in shareholders'
equity (as a component of comprehensive income) until the period in which the
underlying sale by the foreign subsidiary to an unrelated third party is
recognized, at which point those deferred gains
-24-
ARROW INTERNATIONAL, INC.
and losses are recognized in net sales. By their nature, all such contracts
involve risk, including the risk of nonperformance by counterparties.
Accordingly, losses relating to these contracts could have a material adverse
effect upon the Company's business, financial condition and results of
operations. Based upon the Company's knowledge of the financial condition of the
counterparties to its existing forward contracts, the Company believes that it
does not have any material exposure to any individual counterparty. The
Company's policy prohibits the use of derivative instruments for speculative
purposes. As of May 31, 2002, outstanding foreign currency exchange contracts
totaling the U.S. dollar equivalent of $10.1 million mature at various dates
through August 2002 and foreign currency option contracts with a fair market
value of $0.1 million mature at various dates through February 2003. The Company
expects to continue to utilize foreign currency exchange and foreign currency
option contracts to manage its exposure, although there can be no assurance that
the Company's efforts in this regard will be successful.
Based upon its present plans, the Company believes that cash generated from its
operations and available credit resources will be adequate to repay current
portions of long-term debt, to finance currently planned capital expenditures
and repurchases of the Company's stock in the open market, and to meet the
currently foreseeable liquidity needs of the Company.
During the periods discussed above, the overall effects of inflation and
seasonality on the Company's business were not significant.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company has disclosed in Note 1 to its consolidated financial statements
included in its Annual Report on Form 10-K for the year ended August 31, 2001
those accounting policies that it considers to be significant in determining its
results of operations and financial position. In all material respects, the
accounting principles utilized by the Company in preparing its consolidated
financial statements are in conformity with generally accepted accounting
principles in the United States of America.
The preparation of these consolidated financial statements requires the
Company's management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses, as well as the disclosure
of contingent assets and liabilities at the date of its financial statements.
The Company bases its estimates on historical experience, actuarial valuations
and various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Some of those judgments can be subjective and complex and,
consequently, actual results may differ from these estimates under different
assumptions or conditions. While for any given estimate or assumption made by
the Company's management there may be other estimates or assumptions that are
reasonable, the Company believes that, given the current facts and
circumstances, it is unlikely that applying any such other reasonable estimate
or assumption would materially impact the financial statements included in this
Report.
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ARROW INTERNATIONAL, INC.
The Company's management believes the following critical accounting policies
affect its more significant estimates and judgments used in the preparation of
the Company's consolidated financial statements.
Revenue Recognition:
Revenue is recognized by the Company at the time its products are shipped and
title has passed to its customer. The Company's net sales represent gross sales
invoiced to customers, less certain related charges, including discounts,
returns, rebates and other allowances.
Inventory:
The Company values its inventories at the lower of cost or market. Cost is
determined by the "first-in, first-out" (FIFO) method. Inventory reserves are
recorded to write-down the value of inventory to its fair market value. The
Company uses a materials management program for identifying, redeploying and/or
destroying slow-moving, inactive or potentially obsolete inventory. A reserve is
recorded for all inventory specifically identified as slow-moving, inactive and
potentially obsolete. In addition, a general reserve is recorded based upon the
Company's historical experience with inventory becoming obsolete due to age,
changes in technology, etc. The Company's inventory reserves are evaluated on an
on-going basis and are adjusted as necessary to accurately reflect current
conditions.
Impairment of Goodwill:
Goodwill represents the excess of the cost over the fair value of net assets
acquired in business combinations. Currently, the Company uses a single
reporting unit. Goodwill and other "indefinite-lived" assets are not amortized
and are subject to the impairment rules of SFAS 142, which, as discussed above,
the Company adopted effective as of September 1, 2001. Goodwill is tested for
impairment on an annual basis or upon the occurrence of certain circumstances or
events. The Company determines the fair market value of its reporting unit using
quoted market rates and cash flow techniques. The fair market value of the
reporting unit is compared to the carrying value of the reporting unit to
determine if an impairment loss should be calculated. If the book value of the
reporting unit exceeds the fair value of the reporting unit, an impairment loss
is indicated. The loss is calculated by comparing the fair value of the goodwill
to the book value of the goodwill. If the book value of the goodwill exceeds the
fair value of goodwill, an impairment loss is recorded. Fair value of goodwill
is determined by subtracting the fair value of the identifiable assets of a
reporting unit from the fair value of the reporting unit.
Employee Benefit Plans:
The Company sponsors pension, post-retirement, medical and life insurance plans
covering substantially all of its employees who meet the applicable eligibility
requirements. The Company uses several actuarial and other statistical factors
which attempt to anticipate future events in calculating its expense and
liability related to these plans. These factors include assumptions about
discount rate, expected return
-26-
ARROW INTERNATIONAL, INC.
on plan assets and rate of future compensation increases, as determined by the
Company within specified guidelines. In addition, the Company's actuarial
consultants also utilize subjective assumptions, such as withdrawal and
mortality rates, to estimate these factors. The actuarial assumptions used by
the Company may differ materially from actual results due to changing market and
economic conditions, higher or lower withdrawal rates or longer or shorter life
spans of participants. These differences, depending on their magnitude, could
have a significant impact on the amount of pension expense recorded by the
Company in any particular period.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Financial Instruments:
During the nine month periods ended May 31, 2002 and 2001, the percentage of the
Company's sales invoiced in currencies other than U.S. dollars was 21.0% and
22.1%, respectively. In addition, a part of the Company's cost of goods sold is
denominated in foreign currencies. The Company periodically enters into foreign
currency forward contracts, which are derivative financial instruments, with
major financial institutions to reduce the effect of these foreign currency risk
exposures, primarily on U.S. dollar cash inflows resulting from the collection
of intercompany receivables denominated in foreign currencies. Such transactions
occur throughout the year and are probable, but not firmly committed. Forward
contracts are marked to market each accounting period, and the resulting gains
or losses on these contracts are recorded in Other Income / Expense of the
Company's consolidated statements of income. Realized gains and losses on these
contracts are offset by the assets, liabilities and transactions being hedged.
The Company does not use financial instruments for trading or speculative
purposes. The Company expects to continue to utilize foreign currency exchange
contracts to manage its exposure, although there can be no assurance that the
Company's efforts in this regard will be successful.
Operations of the Company are also exposed to, in the normal course of business,
fluctuations in interest rates. This interest rate risk exposure results from
changes in short-term U.S. dollar interest rates or London Interbank Offered
Rates (LIBOR) applicable to outstanding borrowings under the Company's revolving
credit facilities.
The Company's exposure to credit risk consists principally of trade receivables.
Hospitals and international dealers account for a substantial portion of trade
receivables and collateral is generally not required. The risk associated with
this concentration is limited due to the Company's on-going credit review
procedures. See "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
-27-
ARROW INTERNATIONAL, INC.
At May 31, 2002, the Company had forward currency exchange contracts to sell
foreign currencies which mature at various dates through July 2002. The
following table identifies forward exchange contracts to sell foreign currencies
at May 31, 2002 and August 31, 2001, as follows:
May 31, 2002 August 31, 2001
Notional Fair Market Notional Fair Market
Amounts Value Amounts Value
--------- --------- --------- ---------
Foreign currency: (U.S. Dollar Equivalents)
Japanese yen $ 1,593 $ 1,612 $ 1,661 $ 1,688
Canadian dollars 320 327 1,942 1,933
Euro 3,285 3,259 2,599 2,606
Mexican peso 815 824 1,286 1,280
African rand 367 402 - -
--------- --------- --------- ---------
$ 6,380 $ 6,424 $ 7,488 $ 7,507
========= ========= ========= =========
At May 31, 2002, the Company also had forward currency exchange contracts to buy
foreign currencies which mature at various dates through August 2002. The
following table identifies forward exchange contracts to buy foreign currencies
at May 31, 2002 and August 31, 2001, as follows:
May 31, 2002 August 31, 2001
Notional Fair Market Notional Fair Market
Amounts Value Amounts Value
--------- --------- --------- ---------
Foreign currency: (U.S. Dollar Equivalents)
Czech koruna $ 3,563 $ 3,678 $ - $ -
From time to time, the Company purchases foreign currency option contracts to
hedge anticipated sales in foreign currencies to foreign subsidiaries. The
option premiums paid are recorded as assets and amortized over the life of the
option. Other than the risk associated with the financial condition of the
counterparties, the Company's maximum exposure related to foreign currency
options is limited to the premiums paid. The total premiums authorized to be
paid in any fiscal year cannot exceed $1.0 million pursuant to the terms of the
Foreign Currency Management Policy Statement as approved by the Company's Board
of Directors in fiscal 2001. Gains and losses on purchased option contracts
result from changes in intrinsic or time value. Both time value and intrinsic
value gains and losses are recorded in shareholders' equity (as a component of
comprehensive income) until the period in which the underlying sale by
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ARROW INTERNATIONAL, INC.
the foreign subsidiary to an unrelated third party is recognized, at which point
those deferred gains and losses are recognized in net sales. During the three
and nine month periods ended May 31, 2002, the Company recognized a time value
gain of $241 and a time value loss of $46, respectively, against net sales
offset by the recognition of intrinsic value gains of $238 and $352,
respectively. At May 31, 2002, the Company had an unrealized holding loss of $55
related to these foreign currency option contracts. The Company had the
following foreign currency option contracts at May 31, 2002, which mature at
various dates through February 2003.
May 31, 2002 August 31, 2001
Premium Fair Market Premium Fair Market
Paid Value Paid Value
---- ----- ---- -----
Foreign currency: (U.S. Dollar Equivalents)
Japanese yen $ 294 $ 54 $ 230 $ 46
PART II. OTHER INFORMATION
Item 2. Changes in securities and use of proceeds
On April 1, 2002, the Company issued 10,000 shares of its common stock held in
treasury to The Cleveland Clinic Foundation ("CCF") as an additional royalty for
CCF's completion of certain research and development milestones under the
Company's previously announced license agreement with CCF dated as of March 28,
2001, pursuant to which the Company received an exclusive license of CCF's
patents relating to certain technology underlying the CorAide(TM) ventricular
assist device. The shares of the Company's common stock issued in this
transaction were exempt from registration under the Securities Act of 1933, as
amended (the "Securities Act"), in reliance on Section 4(2) of the Securities
Act as a transaction by an issuer not involving any public offering. In
connection with this transaction, CCF was provided adequate access to
information about the Company, CCF made appropriate representations as to its
qualifications as an investor, including its being an "accredited investor" as
defined in Rule 501(a) under the Securities Act, and appropriate legends
regarding the restricted nature of the shares issued to CCF were affixed to the
certificate representing such shares.
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ARROW INTERNATIONAL, INC.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
The following exhibits will be filed as part of this Form 10-Q:
Exhibit 3.2 By-laws of the Company, as amended
and restated
Exhibit 99.1 Cautionary Statement for Purposes of
the Safe Harbor Provisions of the
Private Securities Litigation Reform
Act of 1995
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended May
31, 2002.
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ARROW INTERNATIONAL, INC.
SIGNATURE
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.
ARROW INTERNATIONAL, INC.
(Registrant)
Date: July 15, 2002 By: /s/ Frederick J. Hirt
-------------------------------------
(signature)
Frederick J. Hirt
Chief Financial Officer
Vice President-Finance and Treasurer
(Principal Financial Officer and
Chief Accounting Officer)
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EXHIBIT INDEX
EXHIBIT DESCRIPTION
NUMBER OF EXHIBIT METHOD OF FILING
------ ---------- ----------------
3.2 By-laws of the Company, Filed with this report
as amended and restated
99.1 Cautionary Statement for Purposes of Page 33 of this report
the Safe Harbor Provisions of the
Private Securities Litigation Reform
Act of 1995
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