Attached files

file filename
EX-31.1 - EXHIBIT 31.1 - THERAGENICS CORPex31-1.htm
EX-31.2 - EXHIBIT 31.2 - THERAGENICS CORPex31-2.htm
EX-32.1 - EXHIBIT 32.1 - THERAGENICS CORPex32-1.htm
EX-32.2 - EXHIBIT 32.2 - THERAGENICS CORPex32-2.htm


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 quarterly period ended March 31, 2011
 
or
 
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________
 
Commission File No. 001-14339
 
THERAGENICS CORPORATION®
(Exact name of registrant as specified in its charter)
 
Delaware
 
58-1528626
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification Number)
 
5203 Bristol Industrial Way
   
Buford, Georgia
 
30518
(Address of principal executive offices)
 
(Zip Code)
 
Registrant's telephone number, including area code: (770) 271-0233
 
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 the filing requirements for at least the past 90 days.  YES x   NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES o  NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer o                                                       Accelerated Filer o                                      Non Accelerated Filer o     Smaller Reporting Companyx

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YESo    NO x
 
As of May 5, 2011 the number of shares of $0.01 par value common stock outstanding was 33,888,717.
 

 
 

 

 
THERAGENICS CORPORATION

TABLE OF CONTENTS



 
Page No.
PART I. FINANCIAL INFORMATION
 
   
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
   
Condensed Consolidated Statements of Earnings for the quarters ended March 31, 2011 and 2010
3
   
Condensed Consolidated Balance Sheets – March 31, 2011 and December 31, 2010
4
   
Condensed Consolidated Statements of Cash Flows for the quarters ended March 31, 2011 and 2010
5
   
Condensed Consolidated Statement of Shareholders’ Equity for the quarter ended March 31, 2011
6
   
Notes to Condensed Consolidated Financial Statements
7
   
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
14
   
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
21
   
ITEM 4. CONTROLS AND PROCEDURES
21
   
PART II. OTHER INFORMATION
22
   
ITEM 1. LEGAL PROCEEDINGS
22
   
ITEM 1A. RISK FACTORS
22
   
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
22
   
ITEM 6. EXHIBITS
23
   
SIGNATURES
24
   
 
 
 
 

 


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
 
THERAGENICS CORPORATION AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
 
(UNAUDITED)
 
(Amounts in thousands, except per share data)
 
 
   
Quarter Ended March 31,
 
   
2011
   
2010
 
REVENUE
           
Product sales
  $ 19,738     $ 19,972  
License and fee income
    515       346  
      20,253       20,318  
                 
COST OF SALES
    12,286       12,471  
                 
GROSS PROFIT
    7,967       7,847  
                 
OPERATING EXPENSES
               
Selling, general and administrative
    5,847       5,904  
Amortization of purchased intangibles
    698       846  
Research and development
    535       440  
Loss on disposal of assets
    1       --  
      7,081       7,190  
                 
EARNINGS FROM OPERATIONS
    886       657  
                 
OTHER INCOME(EXPENSE)
               
Interest income
    40       30  
Interest expense
    (177 )     (317 )
Other
    1       --  
      (136 )     (287 )
                 
EARNINGS BEFORE INCOME TAXES
    750       370  
                 
Income tax expense
    292       226  
                 
NET EARNINGS
  $ 458     $ 144  
                 
EARNINGS PER SHARE:
               
Basic
  $ 0.01     $ 0.00  
Diluted
  $ 0.01     $ 0.00  
                 
WEIGHTED AVERAGE SHARES
               
Basic
    33,338       33,213  
Diluted
    33,645       33,362  
                 
The accompanying notes are an integral part of these statements.

 
3

 

 
THERAGENICS CORPORATION AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(Amounts in thousands, except per share data)
 
 
ASSETS
           
   
March 31,
2011
(Unaudited)
   
December 31, 2010
 
CURRENT ASSETS
           
Cash and cash equivalents
  $ 25,570     $ 29,674  
Marketable securities
    13,768       10,949  
Trade accounts receivable, less allowance of $2,651 in 2011 and $2,413 in 2010
    10,540       9,567  
Inventories, net
    13,731       13,116  
Deferred income tax asset
    1,868       1,843  
Prepaid expenses and other current assets
    902       917  
TOTAL CURRENT ASSETS
    66,379       66,066  
                 
    Property and equipment, net
    36,452       36,722  
Intangible assets, net
    11,604       12,319  
Other assets
    86       80  
                 
         TOTAL ASSETS
  $ 114,521     $ 115,187  

LIABILITIES & SHAREHOLDERS’ EQUITY
       
             
CURRENT LIABILITIES
           
Trade accounts payable
  $ 1,694     $ 1,887  
Accrued salaries, wages and payroll taxes
    1,680       2,340  
Short-term borrowings
    3,333       3,333  
Income taxes payable
    469       8  
Other current liabilities
    1,525       1,400  
TOTAL CURRENT LIABILITIES
    8,701       8,968  
                 
Long-term borrowings
    22,833       23,667  
Deferred income taxes
    1,056       1,213  
Decommissioning retirement liability
    764       749  
Other long-term liabilities
    253       311  
TOTAL LIABILITIES
    33,607       34,908  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
SHAREHOLDERS’ EQUITY
               
Common stock, authorized 100,000 shares of $0.01 par value, issued and outstanding,
               
     33,879 in 2011 and 33,651 in 2010
    338       336  
Additional paid-in capital
    74,071       73,902  
Retained earnings
    6,487       6,029  
Accumulated other comprehensive gain
    18       12  
TOTAL SHAREHOLDERS' EQUITY
    80,914       80,279  
                 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
  $ 114,521     $ 115,187  

The accompanying notes are an integral part of these statements.

 
4

 

THERAGENICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Amounts in thousands)
   
Quarter Ended March 31,
 
   
2011
   
2010
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net earnings
  $ 458     $ 144  
Adjustments to reconcile net earnings to net cash provided by operating activities:
               
Depreciation and amortization
    1,780       1,786  
Deferred income taxes
    (182 )     (139 )
Provision for allowances
    269       62  
Share-based compensation
    171       117  
Change in fair value of interest rate swaps
    (33 )     103  
Decommissioning retirement liability
    15       13  
Loss on sale of marketable securities
    1       1  
Changes in assets and liabilities:
               
Accounts receivable
    (1,211 )     (1,159 )
Inventories
    (646 )     (857 )
Prepaid expenses and other current assets
    15       (30 )
Trade accounts payable
    (175 )     1,013  
Accrued salaries, wages and payroll taxes
    (660 )     (577 )
Income taxes payable/refundable
    461       358  
Other current liabilities
    55       714  
Other
    (31 )     (203 )
Net cash provided by operating activities
    287       1,346  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Purchases and construction of property and equipment
    (696 )     (2,788 )
Proceeds from sale of property and equipment
    5       --  
Purchases of marketable securities
    (4,176 )     (10,813 )
Maturities of marketable securities
    1,310       --  
Proceeds from sales of marketable securities
    --       200  
Net cash used by investing activities
    (3,557 )     (13,401 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Repayment of borrowings
    (834 )     (833 )
Employee stock purchase plan
    14       --  
    Retirement of common stock
    (14 )     --  
Net cash used by financing activities
    (834 )     (833 )
                 
NET DECREASE IN CASH AND CASH EQUIVALENTS
  $ (4,104 )   $ (12,888 )
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    29,674       45,326  
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 25,570     $ 32,438  
                 
SUPPLEMENTARY CASH FLOW DISCLOSURE:
               
Interest paid
  $ 212     $ 238  
Income taxes paid
  $ 14     $ 7  
                 
NON-CASH INVESTING AND FINANCING ACTIVITIES:
               
Liability for property and equipment acquired
  $ 95     $ 1,215  

The accompanying notes are an integral part of these statements.

 
5

 

THERAGENICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
FOR THE QUARTER ENDED MARCH 31, 2011
(UNAUDITED)
 (Amounts in thousands, except per share data)

 
     Common Stock                  Accumulated        
   
Number
of
Shares
   
Par
Value
Amount
   
Additional
Paid-in
Capital
   
Retained
Earnings
   
other comprehensive
gain
   
Total
 
                                     
BALANCE, December 31, 2010
    33,651     $ 336     $ 73,902     $ 6,029     $ 12     $ 80,279  
                                                 
Issuance of restricted shares
    223       2       (2 )     --       --       --  
                                                 
    Employee stock purchase plan
    13       --       14       --       --       14  
                                                 
Share-based compensation
    --       --       171       --       --       171  
                                                 
Other comprehensive gain
    --       --       --       --       6       6  
                                                 
Shares retired
    (8 )     --       (14 )     --       --       (14 )
                                                 
Net earnings for the period
    --       --       ---       458       --       458  
                                                 
BALANCE, March 31, 2011
    33,879     $ 338     $ 74,071     $ 6,487     $ 18     $ 80,914  
                                                 
 
The accompanying notes are an integral part of these statements.
 
 
 
6

 
THERAGENICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
(Unaudited)

NOTE A - BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS

The accompanying unaudited interim condensed consolidated financial statements reflect the consolidated operations of Theragenics Corporation and its wholly-owned subsidiaries.  All material intercompany accounts and transactions have been eliminated.  The terms "Company", "we", "us", or "our" mean Theragenics Corporation and all entities included in our consolidated financial statements.  These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) and, therefore, do not include all information and footnote disclosures normally included in our annual consolidated financial statements.

To prepare financial statements in accordance with GAAP, we must make certain estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and the related disclosure of contingent assets and liabilities at the date of the financial statements.  Actual amounts may differ from these estimated amounts.  In our opinion, these interim financial statements include all adjustments (including normal recurring accruals) considered necessary for a fair presentation.

Our consolidated results of operations for the interim periods presented herein are not necessarily indicative of the results that may be expected for a full year.  These interim financial statements and notes should be read in conjunction with our audited consolidated financial statements and notes for the year ended December 31, 2010 included in the Form 10-K Annual Report that we filed with the SEC.

We are a medical device company serving the surgical products and cancer treatment markets, operating in two business segments. Our surgical products business consists of wound closure, vascular access, and specialty needle products.  Wound closure includes sutures, needles, and other surgical products.  Vascular access includes introducers, guidewires, and related products.  Specialty needles include coaxial, biopsy, spinal and disposable veress needles, access trocars, and other needle based products.  Our surgical products segment serves a number of markets and applications, including among other areas, interventional cardiology, interventional radiology, vascular surgery, orthopedics, plastic surgery, dental surgery, urology, veterinary medicine, pain management, endoscopy, and spinal surgery.  Our brachytherapy business manufactures, markets and distributes “seeds” used primarily in the minimally invasive treatment of localized prostate cancer.  Our brachytherapy product line includes our palladium-103 TheraSeed® device and the iodine-125 based devices I-Seed and OncoSeed™, all of which are used primarily in the minimally invasive treatment of localized prostate cancer.

NOTE B FINANCIAL INSTRUMENTS AND FAIR VALUE

Financial Instruments

We are exposed to certain risks relating to our ongoing business operations. We manage our interest rate risk using interest rate swaps associated with outstanding borrowings under our credit agreement since our interest rates are floating rates based on LIBOR.  Our interest rate swaps are intended to convert a portion of our floating rate debt to a fixed rate.  We do not use interest rate swaps for speculative or trading purposes, and we hold no other derivative financial instruments other than interest rate swaps.  Our interest rate swaps are recorded as either assets or liabilities at fair value on our condensed consolidated balance sheet.  We enter into interest rate swaps that are designed to hedge our interest rate risk but are not designated as “hedging instruments”, as defined under guidance issued by the Financial Accounting Standards Board (“FASB”).  Changes in the fair value of these instruments are recognized as interest expense on our condensed consolidated statement of earnings.  The counterparty to our interest rate swaps is the lender under our credit agreement.  Accordingly, we are exposed to counterparty credit risk from this financial institution. We entered into interest rate swaps based on our relationship with this financial institution as our lender and on their credit rating and the rating of their parent company. We continue to monitor our counterparty credit risk.


 
7

 
THERAGENICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
(Unaudited)


A roll forward of the notional value of our interest rate swaps for the quarter ended March 31, 2011 is as follows (in thousands):
 
 
Balance, December 31, 2010
 
$
11,000
 
 
New contracts
   
-
 
 
Matured contracts
   
(834
)
 
Balance, March 31, 2011
 
$
10,166
 
           
 
The location and fair value of our derivative financial instruments not designated as hedging instruments in our condensed consolidated balance sheets were as follows (in thousands):
 
 
Type
 
 
Maturity
 
 
Balance Sheet Location
 
March 31,
2011
   
December 31,
2010
 
Interest rate swaps
 
June 2012
 
Other long-term liabilities
  $ 154     $ 187  
                         

The following table includes information about gains and losses recognized on our derivative financial instruments not designated as hedging instruments in our condensed consolidated statement of earnings (in thousands):

   
Quarter Ended March 31,
   
   
2011
   
2010
 
Location of Loss
(Gain) Recognized
Periodic settlements
  $ 33     $ 53  
Interest expense
Change in fair value
  $ (33 )   $ 103  
Interest expense

Fair Value of Financial Instruments Measured at Fair Value on a Recurring Basis
 
We measure fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. In accordance with guidance issued by the FASB, we use a three-level fair value hierarchy to prioritize the inputs used to measure fair value. The hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
 
  •  
Level 1 — Quoted prices in active markets for identical assets or liabilities.
 
  •   
Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
 
  •   
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

We had the following assets (liabilities) measured at fair value on a recurring basis subject to disclosure requirements:
   
Quoted Prices in Active Markets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
   
 
Total
 
March 31, 2011
                       
Money market funds
  $ 11,344     $ --     $ --     $ 11,344  
Marketable securities
    13,768       --       --       13,768  
        Total assets
  $ 25,112     $ --     $ --     $ 25,112  
                                 
     Interest rate swaps liability
  $ --     $ (154 )   $ --     $ (154 )
                                 
December 31, 2010
                               
Money market funds
  $ 8,053     $ --     $ --     $ 8,053  
Marketable securities
    10,949       --       --       10,949  
  Total assets
  $ 19,002     $ --     $ --     $ 19,002  
                                 
     Interest rate swaps liability
  $ --     $ (187 )   $ --     $ (187 )
                                 
 
 
 
8

 
THERAGENICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
(Unaudited)

Our interest rate swaps are contracts with our financial institution and are not contracts that can be traded in a ready market.   We estimate the fair value of our interest rate swaps based on, among other things, discounted cash flows based upon current market expectations about future amounts, yield curves, and mid-market pricing.  Accordingly, we classify our interest rate swap agreements as Level 2.  Due to the uncertainty inherent in the valuation process, such estimates of fair value may differ significantly from the values that would have been used had a ready market for our interest rate swaps existed.

Financial Instruments Not Measured at Fair Value

Our financial instruments not measured at fair value consist of cash and cash equivalents, accounts receivable, and accounts payable, the carrying value of each approximating fair value due to the nature of these accounts. Our financial instruments not measured at fair value also include borrowings under our credit agreement.  We estimate the fair value of outstanding borrowings under our credit agreement based on the current market rates applicable to borrowers with credit profiles similar to us.  We estimate that the carrying value of our borrowings approximates fair value at March 31, 2011.

There were no nonfinancial assets or nonfinancial liabilities measured at fair value at March 31, 2011 or December 31, 2010.

NOTE C - INVENTORIES

Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (“FIFO”) or weighted average cost method, which approximates FIFO. Market is replacement cost or net realizable value. We estimate reserves for inventory obsolescence based on our judgment of future realization. Inventories were comprised of the following (in thousands): 
 
   
March 31,
2011
   
December 31,
2010
 
Raw materials
  $ 5,739     $ 5,709  
Work in process
    2,705       2,423  
Finished goods
    4,988       4,625  
Spare parts and supplies
    899       928  
      14,331       13,685  
Allowance for obsolete inventory
    (600 )     (569 )
    Inventories, net
  $ 13,731     $ 13,116  

NOTE D – INCOME TAXES

Our effective income tax rate for the first quarter of 2011 and 2010 was approximately 39% and 61%, respectively, which includes federal and state income taxes.  Our tax rate in both periods was higher than income taxes as computed at the statutory rates primarily due to the non-cash write off of deferred income tax assets related to certain share-based compensation.  The amount of the tax deduction upon vesting of certain restricted shares was less than the financial reporting expense we recorded over the vesting period in accordance with guidance issued by the FASB, requiring us to write off $32,000 and $90,000 of deferred tax assets associated with them in the first quarter of 2011 and 2010, respectively.


 
9

 
THERAGENICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
(Unaudited)


NOTE E – SHARE-BASED COMPENSATION

During the quarter ended March 31, 2011, we granted 423,500 stock options (with a grant date fair value of $1.15 per share) and 222,800 shares of restricted stock (with a grant date fair value of $1.71 per share based on the market price of the underlying common stock at the grant date) to executive officers in connection with long-term incentive compensation programs.  The stock options and restricted stock each vest ratably over four years.  The exercise price of the stock options granted is $1.71 per share, which is equal to the market price of the underlying common stock on the date of grant.  The grant date fair value of the stock options was estimated using the Black-Scholes options-pricing model using the following assumptions:
 
Expected dividend yield
  0.0%  
Expected volatility
  62.8%  
Risk-free interest rate
  3.03%  
Expected life
 
8 years
 

Expected stock price volatility is based on the historical volatility of our stock price over the most recent period commensurate with the expected option life. When determining the expected life of stock options, we classify options into groups for employees where relatively homogeneous exercise behavior is expected. The vesting period of the options, the length of time similar grants have remained outstanding in the past, and the expected volatility of the stock are also considered. These factors may cause the expected volatility and expected life of options granted to differ from period to period.

Compensation cost for the stock options and restricted stock is being recorded over the requisite service period of the grants.  As of March 31, 2011, there was approximately $455,000 and $348,000 of unrecognized compensation cost related to the stock options and restricted stock granted in the first quarter of 2011, respectively, which is each expected to be recognized over a weighted average period of 2.5 years.

NOTE F – COMPREHENSIVE INCOME

The following table summarizes comprehensive income for the applicable period (in thousands):

     
Quarter Ended March 31,
 
     
2011
   
2010
 
 
Comprehensive income:
           
 
Net earnings
  $ 458     $ 144  
 
Other comprehensive gain (loss), net of taxes:
               
 
    Unrealized gain (loss) on securities available for sale
    6       (35 )
 
Total comprehensive income
  $ 464     $ 109  


NOTE G - DISTRIBUTION AGREEMENTS AND MAJOR CUSTOMERS
 
Brachytherapy Seed Distribution Agreements
 
Our brachytherapy seed business sells our TheraSeed® device directly to healthcare providers and to third-party distributors.  Under our third-party distribution agreements, we are the exclusive palldium-103 seed supplier for the treatment of prostate cancer for each distributor, and each distributor has the non-exclusive right to sell TheraSeed® in the U.S. and Canada.  Certain agreements also provide distributors with rights to distribute TheraSeed® for the treatment of solid localized tumors other than prostate and with rights to distribute to certain locations outside of North America.  Such applications (non-prostate and outside of North America) have not been material.  Our principal non-exclusive distribution agreement is with C. R. Bard (“Bard”).  Our agreement with Bard (the “Bard Agreement”) provides for automatic one year extensions of the term, unless either party gives notice of its intent not to renew at least twelve months prior to the end of the current term. The current term expires December 31, 2012 and will be automatically extended for one additional year unless either party gives notice of its intent not to extend by December 31, 2011.
 

 
10

 
THERAGENICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
(Unaudited)
 
Core Oncology (“Core”) became an additional non-exclusive distributor of TheraSeed® in January 2010.  In February 2011, we terminated our agreement with Core due to Core’s failure to satisfy its financial obligation to us in accordance with the contractual terms of the agreement.  Core had been attempting to become current with amounts due to us.  However, litigation filed against Core by a third party in late January 2011 created what we viewed as an unacceptable level of uncertainty surrounding Core’s ability to satisfy their financial obligations to us for both current and ongoing sales.  To ensure that scheduled patient procedures proceeded as planned, our termination notice provided a transition period during which additional orders from Core have been accepted and honored, including orders from Core on a prepaid basis.

Major Customers

Sales to Bard under the Bard Agreement represented approximately 29% and 38% of total brachytherapy seed segment revenue for the quarters ended March 31, 2011 and 2010, respectively. Our surgical products segment also sells to Bard.  Total consolidated sales to Bard, including sales in our brachytherapy seed segment and our surgical products segment, represented approximately 11% and 14% of consolidated revenue for the quarters ended March 31, 2011 and March 31, 2010, respectively.

Accounts receivable from Bard represented approximately 16% of brachytherapy accounts receivable and less than 10% of consolidated accounts receivable at March 31, 2011. At December 31, 2010, accounts receivable from Bard under the Bard Agreement represented approximately 19% of brachytherapy accounts receivable and 10% of consolidated accounts receivable.

Sales to Core in our brachytherapy segment totaled approximately 11% and 12% of total brachytherapy seed segment revenue for the quarters ended March 31, 2011 and 2010, respectively.  Brachytherapy accounts receivable due from Core was $1.8 million and $1.7 million and consolidated accounts receivable due from Core was $2.2 million and $2.1 million at March 31, 2011 and December 31, 2010, respectively.  An allowance for doubtful accounts has been established for all unpaid amounts due from Core at March 31, 2011 and December 31, 2010, respectively.
 
NOTE H - SEGMENT REPORTING

We are a medical device company serving the cancer treatment and surgical markets, operating in two business segments. Our surgical products business consists of wound closure, vascular access, and specialty needle products.  Our brachytherapy seed business produces, markets, and distributes “seeds” used primarily in the minimally invasive treatment of localized prostate cancer.  Our brachytherapy product line includes our palladium-103 TheraSeed® device and the iodine-125 based devices I-Seed and OncoSeed™, all of which are used primarily in the minimally invasive treatment of localized prostate cancer.


 
11

 
THERAGENICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
(Unaudited)

The following tables provide certain information for these segments (in thousands):

 
Quarter Ended March 31,
 
 
2011
 
2010
 
         
Revenues
       
Surgical products
  $ 14,392     $ 14,570  
Brachytherapy seed
    5,953       5,892  
Intersegment eliminations
    (92 )     (144 )
    $ 20,253     $ 20,318  
                 
Earnings (loss) from operations
               
Surgical products
  $ (191 )   $ (390 )
Brachytherapy seed
    1,078       1,060  
Intersegment eliminations
    (1 )     (13 )
    $ 886     $ 657  
                 
Capital expenditures
               
Surgical products
  $ 135     $ 2,102  
Brachytherapy seed
    561       686  
    $ 696     $ 2,788  
                 
Depreciation and amortization
               
Surgical products
  $ 1,201     $ 1,242  
Brachytherapy seed
    579       544  
    $ 1,780     $ 1,786  
                 
We evaluate business segment performance based on segment revenue and segment earnings from operations. Earnings from operations by segment do not include interest expense, interest income, other income and expense, or provisions for income taxes.  Intersegment eliminations are primarily for surgical products segment sales transactions.  Corporate expenses are allocated based upon the relative revenue for each segment.

Supplemental information related to significant assets follows (in thousands):

   
March 31,
   
December 31,
 
   
2011
   
2010
 
             
Identifiable assets
           
Surgical products
  $ 70,111     $ 69,994  
Brachytherapy seed
    63,342       65,649  
Corporate investment in subsidiaries
    111,439       111,439  
Intersegment eliminations
    (130,371 )     (131,895 )
    $ 114,521     $ 115,187  
Intangible assets
               
Surgical products
  $ 11,499     $ 12,198  
Brachytherapy seed
    105       121  
    $ 11,604     $ 12,319  


 
12

 
THERAGENICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
(Unaudited)

Information regarding revenue by geographic regions follows (in thousands):
   
Quarter Ended March 31,
 
   
2011
   
2010
 
Product sales
           
  United States
  $ 17,206     $ 17,853  
  Europe
    2,175       1,790  
  Other foreign countries
    357       329  
      19,738       19,972  
License and fee income
               
  United States
    197       140  
  Canada
    318       206  
      515       346  
                 
    $ 20,253     $ 20,318  

Foreign sales are attributed to countries based on the location of the customer. The license fees attributed to Canada are from Nordion, a Canadian based company, for the license of our TheraSphere® product.  Substantially all other foreign sales are related to the surgical products segment.  All of our long-lived assets are located within the United States.

NOTE I – EARNINGS PER SHARE
 
Basic earnings per share represents net earnings divided by the weighted average shares outstanding. Diluted earnings per share represents net earnings divided by weighted average shares outstanding adjusted for the incremental dilution of outstanding stock options and awards.  A reconciliation of weighted average common shares outstanding to weighted average common shares outstanding assuming dilution for the periods presented follows (in thousands, except per share data):
 
         
      March 31,  
      2011        2010   
                 
Net earnings
  $ 458     $ 144  
                 
Weighted average common shares outstanding
    33,338       33,213  
Incremental common shares issuable under stock options and awards
    307       149  
Weighted average common shares outstanding assuming dilution
    33,645       33,362  
                 
Earnings per share
               
  Basic
  $ 0.01     $ 0.00  
  Diluted
  $ 0.01     $ 0.00  
 
For the quarters ended March 31, 2011 and 2010, approximately 1,400,000 and 1,119,000 stock options and awards, respectively, were not included in the computation of diluted earnings per share because their effect is antidilutive.
 
NOTE J – CONTINGENCIES

Litigation and claims

From time to time we may be a party to claims that arise in the ordinary course of business, none of which, in our view, is expected to have a material adverse effect on our consolidated financial position or our results of operations.
 
 
13

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Theragenics Corporation is a medical device company serving the surgical products and cancer treatment markets, operating in two business segments.   The terms "Company", "we", "us", or "our" mean Theragenics Corporation and all entities included in our consolidated financial statements.

Our surgical products business consists of wound closure, vascular access, and specialty needle products.  Wound closure includes sutures, needles and other surgical products. Vascular access includes introducers, guidewires, and related products.  Specialty needles include coaxial, biopsy, spinal and disposable veress needles, access trocars, and other needle based products.  This segment serves a number of markets and applications, including among other areas, interventional cardiology, interventional radiology, vascular surgery, orthopedics, plastic surgery, dental surgery, urology, veterinary medicine, pain management, endoscopy, and spinal surgery.  Our surgical products business sells our devices and components primarily to original equipment manufacturers (“OEMs”) and to a network of distributors.

Our brachytherapy business manufactures, markets and distributes “seeds” used primarily in the minimally invasive treatment of localized prostate cancer.  Our brachytherapy product line includes our palladium-103 TheraSeed® device and the iodine-125 based devices I-Seed and OncoSeed™, and other related products and services, all of which are used primarily in the minimally invasive treatment of localized prostate cancer.  Physicians, hospitals and other healthcare providers, primarily located in the United States, utilize our devices. The majority of TheraSeed® sales are channeled through third-party distributors. We also maintain an in-house sales force that sells TheraSeed®,  I-Seed, and OncoSeed™ devices directly to physicians.  We manufacture the TheraSeed® and I-Seed devices.

In April 2011 we executed an agreement with Oncura, a unit of GE Healthcare (the “Oncura Agreement”), pursuant to which we became a non-exclusive North American distributor of Oncura’s brachytherapy related products used in the treatment of prostate cancer effective May 1, 2011.  The Oncura Agreement has an initial term of one year, with additional one-year terms upon mutual agreement of the parties.  Oncura is the manufacturer of OncoSeed™, widely considered to be the industry standard for I-125 based products.  We believe access to OncoSeed™, along with our industry leading Pd-103 based TheraSeed®, pairs up the two most recognized brands in brachytherapy treatment and may provide additional opportunities for us. Under the terms of the Oncura Agreement, we can continue to produce, market and sell our I-Seed I-125 device.

Results of Operations

Revenue

Following is a summary of revenue by segment (in thousands):
 
     Quarter Ended March 31,    
Increase (decrease)
 
    2011      2010      $      %  
Revenues by segment:
                       
   Surgical products
                       
      Product sales
  $ 14,381     $ 14,555     $ (174 )     (1 %)
      License and fee income
    11       15       (4 )     (27 %)
         Total surgical products
    14,392       14,570       (178 )     (1 %)
                                 
   Brachytherapy seed
                               
      Product sales
    5,449       5,561       (112 )     (2 %)
      License and fee income
    504       331       173       52 %
         Total brachytherapy seed
    5,953       5,892       61       1 %
                                 
Intersegment eliminations
    (92 )     (144 )     52       36 %
                                 
  Consolidated
                               
      Product sales
    19,738       19,972       (234 )     (1 %)
      License and fee income
    515       346       169       49 %
         Total consolidated
  $ 20,253     $ 20,318     $ (65 )     --  


 
14

 

Surgical Products Segment

Revenue in our surgical products business decreased 1% in the first quarter of 2011 from the first quarter of 2010. We believe this was reflective of the variable and unpredictable ordering patterns of our larger customers, especially on a quarter to quarter basis. In addition, revenue in the first quarter of 2010 benefitted from relieving a high backlog that existed at December 31, 2009.

Open orders in our surgical products segment were $15.0 million on March 31, 2011 compared to $13.0 million at December 31, 2010.  Open orders represent firm orders from customers for future delivery.  Open orders are not guaranteed shipments, and they are subject to cancellation or delay.  Backlog in our surgical products business was $725,000 at March 31, 2011 and $345,000 at December 31, 2010.  Backlog represents orders included in open orders on which we have missed promised shipment dates.  At the end of first quarter 2011, a portion of our backlog was due to the implementation of our new ERP system at one of our locations.  In April 2011, our backlog began to be reduced to levels more comparable to December 31, 2010.  We do expect our backlog to continue to vary based on changes in ordering patterns of our larger customers and changes in customer behavior.

A significant portion of the products in our surgical business continue to be sold to OEMs and a network of distributors.  Ordering patterns of these customers vary and are difficult to predict. Accordingly, surgical products revenue continues to be subject to fluctuation, especially on a quarter-to-quarter basis.  In addition, revenue has been and will continue to be affected by our customers’ response to efforts by hospitals to reduce inventories and conserve cash due to the difficult economic climate and macroeconomic uncertainties.  All of these factors may cause the fluctuations in our results to be even more volatile from period to period.

Brachytherapy Seed Segment

We sell our TheraSeed® palladium-103 device directly to healthcare providers and to third-party distributors.  We also sell I-Seed and OncoSeed™, both iodine-125 based devices, and other brachytherapy related products, directly to healthcare providers.  We sell OncoSeedTM as a result of our non-exclusive distribution agreement with Oncura executed in April 2011.  We had no OncoSeedTM activity in the first quarter of 2011.

Our brachytherapy product sales decreased 2% compared to the first quarter of 2010.  We believe that the prostate brachytherapy industry in the United States continues to experience pressure from newer forms of treatment.  Some newer forms of treatment have increased their market share, especially those with Medicare reimbursement levels that are higher than reimbursement levels for brachytherapy.  These newer forms of alternative treatments include Intensity Modulated Radiation Therapy (“IMRT”) and robotic surgery.    In addition to treatment options that enjoy favorable reimbursement rates, we believe brachytherapy seed volume and revenue are also affected by disruptive pricing from other brachytherapy providers and uncertainties surrounding reimbursement.

We have non-exclusive distribution agreements in place for the distribution of our TheraSeed® device.  Under our third party distribution agreements, we are the exclusive palladium-103 seed supplier for the treatment of prostate cancer for each distributor, and each distributor has the non-exclusive right to sell TheraSeed® in the U.S. and Canada.  Certain agreements also provide distributors with the right to distribute TheraSeed® for the treatment of solid localized tumors other than in the prostate and with rights to distribute to certain locations outside of North America.  Such applications (non-prostate and outside of North America) have not been material and are not expected to become material in the near future. Our principal non-exclusive distribution agreement is with C.R. Bard (“Bard”).  Our agreement with Bard provides for automatic one year extensions of the term, unless either party gives notice of its intent not to renew at least twelve months prior to the end of the current term. The current term expires December 31, 2012 and will be automatically extended for one additional year unless either party gives notice of its intent not to extend by December 31, 2011. Sales to Bard by our brachytherapy segment represented 29% and 38% of brachytherapy seed segment revenue in the first quarter of 2011 and 2010, respectively.

 
15

 

Core Oncology became an additional non-exclusive distributor of TheraSeed® in January 2010.  In February 2011, we terminated our agreement with Core due to Core’s failure to satisfy its financial obligation to us in accordance with the contractual terms of the agreement. Core had been attempting to become current with amounts due to us.  However, litigation filed against Core by a third party in late January 2011 created what we viewed as an unacceptable level of uncertainty surrounding Core’s ability to satisfy their financial obligations to us for both current and ongoing sales.  To ensure that scheduled patient procedures proceeded as planned, our termination notice provided a transition period during which additional orders from Core have been accepted and honored, including orders from Core on a prepaid basis.  To date, we have continued to supply TheraSeed® to Core on a prepaid basis as they attempt to obtain refinancing.  Sales to Core represented 11% and 12% of brachytherapy segment revenue in the first quarter of 2011 and 2010, respectively.

In the past, healthcare providers have shown strong loyalty to TheraSeed® and we have been highly successful in retaining TheraSeed® customers following the termination of distribution agreements. Healthcare providers who previously purchased TheraSeed® through Core have the opportunity to continue an uninterrupted supply of our product for their patients, either directly from us or through our other distribution channels, including through Core under our arrangements to sell to Core on a prepaid basis.  Should Core ultimately demonstrate an ability to satisfy its obligations going forward, we would consider reentering into a distribution agreement with Core.  As of May 12, 2011, we have not experienced a material decline in unit volumes compared to the volumes we would have expected had the Core agreement not been terminated by us.  However, it is difficult to predict how much unit volume we will ultimately retain due to, among other things, uncertainties in the marketplace, a continuing decline in overall industry-wide procedures and competition.

Certain shipments made to Core in January 2011 immediately prior to our notice of termination of the agreement and during the notice period did not meet the revenue recognition criteria of U.S. GAAP, which require that collectability be reasonably assured.  These shipments totaled approximately $248,000 and were not recognized as revenue in the first quarter of 2011.  Should Core demonstrate an ability to satisfy these obligations, we would recognize this revenue (and income) in the period in which collectability was reasonably assured.  We believe this would most likely be at the time any such payments were collected.

We believe that Medicare reimbursement policies have affected the brachytherapy market and will continue to affect the brachytherapy market.  Prior to 2010, Medicare continued to reimburse for brachytherapy seeds under the “charges adjusted to costs” methodology, which is based on the actual invoiced cost of the seeds and which we sometimes refer to as a “pass-through” methodology.   Consistent with proposals that the Centers for Medicare & Medicaid Services (“CMS”) attempted unsuccessfully to implement in recent years, CMS published a final hospital outpatient prospective payment system (“OPPS”) on November 20, 2009 with fixed prospective payment rates for brachytherapy seeds.  This fixed OPPS, which we sometimes refer to as “fixed reimbursement”, went in effect on January 1, 2010 and fixed the per seed rate at which Medicare reimburses hospitals for the purchase of seeds.  We expect to continue to support efforts to urge Congress and CMS to replace this “fixed reimbursement” rule by obtaining a new extension of the “pass-through” reimbursement policies which existed prior to 2010.  Fixed reimbursement policies at CMS can be expected to lead to pricing pressure from hospitals and other healthcare providers, and to have an adverse effect on our brachytherapy revenue.  The extent of the effect is impossible for us to predict, especially when fixed reimbursement policies are being introduced at a time that coincides with 1) an industry-wide decline in procedures being experienced due, at least in part, to favorable CMS reimbursement rates enjoyed by alternative, less proven, technologies for early stage prostate cancer treatment and 2) uncertainties regarding the implementation and impact of healthcare reform generally.  These factors could have an adverse effect on brachytherapy revenue.

License fees in our brachytherapy segment increased $173,000, or 52% in the first quarter of 2011 over the comparable 2010 period.   License fees include fees from the licensing of our TheraSphere® product, a medical device used for the treatment of liver cancer.  Licensing fees also include fees related to the licensing of certain intellectual property related to an expandable brachytherapy delivery system that we developed. This agreement, which was executed in May 2008, provides for a minimal non-refundable initial license fee and non-refundable, continuing royalties based upon sales and subject to certain minimums.


 
16

 

Operating income and costs and expenses

Following is a summary of operating income by segment (in thousands):
 
       Quarter Ended March 31,      Increase        
      2011       2010      $        
 
Operating income (loss)
                       
 
  Surgical products
  $ (191 )   $ (390 )   $ 199        
 
   Brachytherapy seed
    1,078       1,060       18        
 
Intersegment eliminations
    (1 )     (13 )     12        
 
  Consolidated
  $ 886     $ 657     $ 229        

Surgical Products Segment

In the first quarter of 2011, we incurred an operating loss of $191,000 in our surgical products segment compared with an operating loss of $390,000 in the first quarter of 2010.  Items affecting the comparability of our results included an increase in the corporate overhead allocation of $300,000 to our surgical products segment in the first quarter of 2011, of which $183,000 was directly related to expenses incurred to consider, address and respond to an unsolicited acquisition proposal.   In the first quarter of 2010, we incurred $351,000 of professional fees directly related to our initiation of legal actions against the former owner of CP Medical.  These actions were settled in the fourth quarter of 2010.
 
In addition to the above mentioned items, we experienced a slight improvement in our gross margins on sales, from 33% in the first quarter of 2010 to 34% in 2011. We did see improvements in process efficiencies, especially in our new needle manufacturing facility built in 2010. However, the ordering patterns of our larger customers continue to be difficult to predict.  Our gross margins were also affected by severe winter storms in the Dallas, Texas area, where our introducer and guidewire facility is located.  Our plant was closed for several days during the quarter, requiring us to utilize more temporary workers and incur more overtime than we ordinarily would in order to maintain production.  We also experienced significant increases in the pricing of certain raw materials in the first quarter, not all of which can be passed along to our customers.
 
Research and development (“R&D”) expenses increased $69,000 from 2010.  Our R&D program is intended to focus on product extensions, next generation products, and new products that are complementary to our current product lines and that support our customers’ product lines.  Our R&D program is directed toward 510(k) products that have an established market and not on products that require lengthy and expensive clinical trials. Looking forward, our quarterly results are expected to be affected by the timing of these investments.

Looking forward, we expect a number of items to continue to affect the profitability in our surgical products business including, among other things:
 
·  
ordering patterns of our larger OEM and distributor customers,
·  
costs incurred to address significant changes in demand,
·  
continued investments in infrastructure, R&D, products, and companies as we make investments to support anticipated future growth and to develop products to address growth opportunities,
·  
changes in product mix and sales channels, with sales through OEM channels generally carrying a relatively lower gross profit margin and sales through distributor channels generally carrying a somewhat higher gross profit margin,
·  
continued pricing pressure from customers,
·  
the implementation of our new, corporate-wide ERP systems, and
·  
the increasing scale of our surgical products business.

Brachytherapy Seed Segment

Operating income in our brachytherapy business was $1.1 million in both the first quarter of 2011 and 2010.   Manufacturing related expenses in our brachytherapy business tend to be fixed in nature.  Accordingly, even modest changes in revenue can have a significant impact on operating income.  Gross margins and operating income in our brachytherapy seed business are expected to continue to be highly dependent on sales levels due to this high fixed cost component.   Higher revenue in the first quarter of 2011 was offset by an increase in allocation of corporate expenses of $139,000, of which $76,000 was directly related to expenses incurred to consider, address and respond to an unsolicited acquisition proposal.

 
17

 
Bad debt expense in the first quarter of 2011 increased by $177,000 over 2010, primarily due to $215,000 of bad debt expense in the first quarter of 2011 related to amounts due from Core Oncology for which we believe collection is doubtful.

An allowance for doubtful accounts was been established for all unpaid amounts due from Core at December 31, 2010 (which totaled $1.7 million in our brachytherapy segment and $2.1 million on a consolidated basis) and at March 31, 2011 (which totaled $1.8 million in our brachytherapy segment and $2.2 million on a consolidated basis). We continue to pursue collection of all amounts due to us from Core.  If Core demonstrates an ability to pay any or all of the amounts previously considered doubtful, this would represent a change in our estimate.  Any resulting change in estimate would in turn reduce our operating expenses in the period in which Core demonstrates an ability to pay any or all of the amounts due to us.

Other income/expense

A summary of our interest expense is as follows (in thousands):
 
     
Quarter Ended March 31,
 
     
2011
   
2010
 
               
 
  Interest paid or accrued, including loan fees
  $ 226     $ 252  
 
  Fair value adjustment
    (33 )     103  
 
  Interest capitalized
    (16 )     (38 )
                   
 
Total interest expense
  $ 177     $ 317  

Interest expense paid or accrued, including loan fees, is related to our effective interest rates and the level of our outstanding borrowings under our credit facility.  Fair value adjustments are related to our interest rate swaps.  Such fair value adjustments are unrealized gains or losses and reflect the period to period changes in the estimated fair value of our swaps.  Interest capitalized primarily relates to our new ERP system and, in 2010, the construction of our specialty needle manufacturing facility.  Interest capitalized is expected to decline in 2011 as construction on the needle facility was completed in 2010.  Our weighted average effective interest rate was 3.0% at March 31, 2011.

We manage our interest rate risk using interest rate swaps associated with outstanding borrowings under our credit agreement since our interest rates are floating rates based on LIBOR.  We do not hold or issue interest rate swaps for trading purposes, and we hold no other derivative financial instruments other than interest rate swaps. We enter into interest rate swaps that are designed to hedge the interest rate risk but are not designated as “hedging instruments”, as defined under guidance issued by the Financial Accounting Standards Board (“FASB”).  Changes in the fair value of these instruments are recognized as interest expense.  Such changes in fair value are based on, among other things, discounted cash flows based upon current market expectations about future amounts, yield curves, and mid-market pricing.  Accordingly, the fair value of our interest rate swaps is subject to fluctuation and may have a significant effect on our results of operations in future periods.  Additionally, the counterparty to our interest rate swaps is the lender under our Credit Agreement.  Accordingly, we are exposed to counterparty credit risk from this financial institution. We entered into interest rate swaps based on the relationship with this financial institution as our lender and on their credit rating and the rating of their parent company. We continue to monitor our counterparty credit risk.

Income tax expense

Our effective income tax rate was 39% in the first quarter of 2011 and 61% in the first quarter of 2010, including federal and state income taxes.  Our tax rates in both periods were higher than our normal rates primarily because of the non-cash write off of deferred income tax assets related to certain share-based compensation of $32,000 in 2011 and $90,000 in 2010.  Upon vesting of restricted shares, the tax deduction we receive is determined by the underlying value of the shares at the vesting date.  In both periods, this value was less than the expense we were required to record for financial reporting purposes under guidance issued by the FASB, requiring us to write off the deferred tax asset associated with them. This income tax expense amount is not related to the amount of pre-tax income and, accordingly, can have a significant effect on the tax rate depending upon the pre-tax income amount.   Under FASB guidance, differences between deductible temporary differences related to share-based payments and the tax deduction that would result based on the current fair value of our shares cannot be considered in measuring the gross deferred tax asset or determining the need for a valuation allowance.  In other words, prior to the vesting of these restricted shares, we cannot provide a valuation allowance for this deferred tax asset or otherwise write off this asset, even though we believe that all or a portion of the asset will not ultimately be realized.  Looking forward, these and other similar circumstances may continue to cause fluctuations in our effective income tax rate for financial reporting purposes.

 
18

 
Critical Accounting Policies and Estimates

The preparation of financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The SEC defines “critical accounting policies” as those that require application of our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Our significant accounting policies are more fully described in the notes to our consolidated financial statements included in our Form 10-K for the year ended December 31, 2010. Certain accounting policies, as more fully described under “Critical Accounting Policies and Estimates” included in the Management’s Discussion and Analysis of our 2010 Form 10-K, are those which we believe are most critical in fully understanding and evaluating our reported financial results, and are areas in which our judgment in selecting an available alternative might produce a materially different result. There have been no significant changes to our critical accounting policies since December 31, 2010.

Liquidity and Capital Resources

We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Significant factors affecting the management of liquidity are: cash flows generated from operating activities, capital expenditures, operational investments to support growth (such as research and development programs), and acquisitions of businesses and technologies.

We had cash, cash equivalents, and marketable securities of $39.3 million at March 31, 2011 compared to $40.6 million at December 31, 2010.

Cash provided by operations was $287,000 and $1.3 million for the first quarter of 2011 and 2010, respectively. Cash provided by operations consists of net earnings plus non-cash expenses such as depreciation, amortization, deferred income taxes and changes in balance sheet items such as accounts receivable, inventories, prepaid expenses and payables.  The decline in cash from operations from first quarter of 2010 is mainly due to the timing of payments on our accounts payable.

Capital expenditures totaled $696,000 and $2.8 million during the first quarter of 2011 and 2010, respectively.  The 2010 expenditures were primarily for the construction of our new specialty needle manufacturing facility (completed in the third quarter of 2010) and development of our new ERP system.  During 2010 we implemented our new ERP system at two of our four primary locations.  During the first quarter of 2011 we implemented our new ERP system at a third location.  Other than temporary increases in backlog, no significant interruptions in our day to day operations have been experienced during any of our implementations thus far. We expect to complete the ERP implementation at our one remaining location over the next twelve months. We expect our capital expenditures for the full year of 2011 to be approximately $2.5 million to $3.5 million as we complete the implementation of our ERP system and continue our investments to support growth in the surgical products segment and maintain the brachytherapy segment.  However, the timing and amounts of capital expenditures are subject to fluctuation depending upon opportunities we may identify.

Cash used by financing activities was $834,000 in the first quarter of 2011, which consisted of principal repayments of our outstanding borrowings, in accordance with the terms of our credit facility.  The terms of our credit facility require another $2.5 million of principal repayments during the remainder of 2011.

We may also continue to use cash for the pursuit of additional diversification efforts, such as product development and the purchase of technologies, products or companies.  We believe that current cash and investment balances, our current credit facility (see below) and cash from future operations will be sufficient to meet our current short-term anticipated working capital and capital expenditure requirements. However, continued disruption and instability in the U.S. and global financial markets and worldwide economies may hinder our ability to take advantage of opportunities for long-term growth in our businesses.  In the event additional financing becomes necessary, we may choose to raise those funds through other means of financing as appropriate.


 
19

 

Credit Agreement

We have a Credit Agreement with a financial institution which provides for up to $30 million of borrowings under a revolving credit facility (the “Revolver”) and a $10 million term loan (the “Term Loan”).  The Revolver matures on October 31, 2012 with interest payable at the London Interbank Offered Rate (“LIBOR”) plus 2.25%.  Maximum borrowings under the Revolver can be increased to $40 million with the prior approval of the lender under an accordion feature.  The Revolver also provides for a $5 million sub-limit for trade and stand-by letters of credit.  Letters of credit totaling $946,000, representing decommission funding required by the Georgia Department of Natural Resources, were outstanding under the Credit Agreement as of March 31, 2011. The Term Loan is payable in thirty-six equal monthly installments of $278,000 plus interest at LIBOR plus 1.75%, through July 2012.  The Credit Agreement is unsecured, but provides for a lien to be established on substantially all of our assets upon certain events of default.  The Credit Agreement contains representations and warranties, as well as affirmative, reporting and negative covenants customary for financings of this type.  Among other things, the Credit Agreement restricts the incurrence of certain additional debt and requires the maintenance of certain financial ratios, including a minimum fixed charge coverage ratio, a maximum liabilities to tangible net worth ratio, and the maintenance of minimum liquid assets of $10 million, as all such ratios and terms are defined in the Credit Agreement.  We were in compliance with all covenants, as amended, at March 31, 2011.

We also have certain interest rate swap agreements to manage our variable interest rate exposure.  We entered into a floating to fixed rate swap with respect to the entire principal amount of the Term Loan, at a fixed interest rate of 3.27%, and a separate floating to fixed rate swap with respect to $6 million of the principal amount outstanding under the Revolver, at a fixed interest rate of 4.26%.  Both interest rate swaps expire on June 1, 2012.  Our weighted average effective interest rate at March 31, 2011 was 3.0%.

Medicare Developments

Prior to 2010, Medicare continued to reimburse for brachytherapy seeds under the “charges adjusted to costs” methodology, which is based on the actual invoiced cost of the seeds and which we sometimes refer to as a “pass-through” methodology.   Consistent with proposals that CMS attempted unsuccessfully to implement in recent years, CMS published a final hospital OPPS on November 20, 2009 with fixed prospective payment rates for brachytherapy seeds.  This fixed OPPS, which we sometimes refer to as “fixed reimbursement”, went in effect on January 1, 2010 and fixed the per seed rate at which Medicare reimburses hospitals for the purchase of seeds.  We continue to support efforts that urge Congress and CMS to replace this “fixed reimbursement” rule by obtaining a new extension of the “pass-through” reimbursement policies which existed prior to 2010.  Fixed reimbursement policies at CMS can be expected to lead to pricing pressure from hospitals and other healthcare providers, and to have an adverse effect on our brachytherapy revenue.  The extent of the effect is impossible for us to predict, especially when fixed reimbursement policies are being introduced at a time that coincides with 1) an industry wide decline in procedures being experienced due, at least in part, to favorable CMS reimbursement rates enjoyed by alternative, less proven, technologies and 2) uncertainties regarding the implementation and impact of healthcare reform generally.  These factors could have an adverse effect on brachytherapy revenue.

Forward Looking and Cautionary Statements

This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, without limitation, statements regarding sales, marketing and distribution efforts, ordering patterns of customers, future costs to address significant changes in demand, short term volatility of our results, our expectation regarding changes in product mix and sales channels, with sales through OEM channels generally carrying a relatively lower gross profit margin and sales through distributor channels generally carrying a somewhat higher gross profit margin, our ability to control operating expenses, effects of healthcare reform, third-party reimbursement, CMS policy, sales mix, effectiveness and continuation of non-exclusive distribution agreements, pricing for the TheraSeed® and I-Seed devices, anticipated growth in the surgical products business segment,  the increasing scale of our surgical products business, the move to a new and larger specialty needle manufacturing facility, which is expected to have higher maintenance and operating costs, future cost of sales and gross margins, R&D efforts and expenses (including our centralized, corporate-wide R&D initiative), investment in additional personnel, infrastructure and capital assets, implementation of a new ERP system, future SG&A expenses, potential new products and opportunities, future results in general, plans and strategies for continuing diversification, valuation of marketable securities and cash equivalents we may hold, and the sufficiency of our liquidity and capital resources.

 
20

 
Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected, anticipated or implied. Although it is not possible to predict or identify all such risks and uncertainties, they may include, but are not limited to, the following factors. You should not consider this list to be a complete statement of all potential risks and uncertainties:

·  
changes in the U.S. healthcare industry and regulatory environment;
·  
competition;
·  
new product development cycles;
·  
development and growth of new applications within our markets;
·  
changes in FDA regulatory approval processes;
·  
effectiveness and execution of marketing and sales programs, including those of our distributors;
·  
changes in third-party reimbursement, including CMS and private payors;
·  
potential changes in product pricing;
·  
changes in costs and availability of materials and other operating costs;
·  
continued acceptance of our products in the marketplace;
·  
changes in demand for products;
·  
our ability to meet customer demands and/or the need to incur additional costs and inefficiencies to meet such demand;
·  
a reduction in the number of procedures utilizing our devices caused by cost containment pressures, alternative therapies, or  by other reasons;
·  
our ability to successfully identify, consummate and integrate strategic acquisitions;
·  
our ability to capitalize on opportunities for growth;
·  
increased costs or product delays required to comply with existing and changing regulations applicable to our businesses, operations  and products;
·  
effectiveness of implementation of our new ERP system;
·  
ability to realize our estimate of fair value upon sale or liquidation of cash, cash equivalents and marketable securities that we may hold;
·  
retention of key employees;
·  
damage to one or more of our facilities;
·  
volatility in U.S. and global financial markets;
·  
substantial defaults in payments or a material reduction in purchases by, or loss of, a large customer;
·  
changes in circumstances that could impair our intangible assets;
·  
new or revised tax legislation or challenges to our tax positions;
·  
changes in accounting principles generally accepted in the United States of America;
·  
general economic conditions, including changes in the financial markets that may affect the availability and cost of credit to us, our customers or our suppliers; and
·  
the other factors set forth or incorporated by reference under “Risk Factors” in our 2010 Form 10-K.

These and other risks and uncertainties are described herein and in other information contained in our publicly available SEC filings and press releases.  You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date such statements were first made. Except to the extent required by federal securities laws, we undertake no obligation to publicly release the result of any revisions to these forward-looking statements to reflect events or circumstances after the date hereof, or to reflect the occurrence of unanticipated events.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 
The quantitative and qualitative disclosures about market risk are discussed in Item 7A in our 2010 Annual Report on Form 10-K. There have been no material changes in information reported since the year ended December 31, 2010.

Item 4. Controls and Procedures
 
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended.  Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2011, the end of the period covered by this report.
 
During the first quarter of 2011, we continued development of a corporate-wide ERP system.  Our new ERP system is expected to standardize and automate business processes, to improve operational and financial performance, and to enhance internal controls.  We implemented our new ERP system at one of our primary locations during the first quarter of 2011. The implementation of our new ERP system at this location has resulted in changes to our business processes and internal controls over financial reporting.
 
 
21

 
Other than the changes mentioned above with respect to the implementation of our new ERP system, there have been no changes in our internal control over financial reporting during the quarter ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  Further changes in our internal control over financial reporting are expected as we complete the implementation of our new ERP system at one remaining location.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we are subject to certain legal proceedings and claims in the ordinary course of business. We currently are not aware of any such legal proceedings or claims that we believe will have, individually or in aggregate, a material adverse effect on our business, financial condition, or operating results.

Item 1A. Risk Factors

In addition to the other information set forth in this report, the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010, which could materially affect our business, financial condition or future results, should be carefully considered. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

During the first quarter of 2011,  8,127 shares of our common stock were purchased from employees to pay the withholding taxes associated with the vesting of restricted stock.

   
(a)
   
(b)
   
(c)
   
(d)
 
Period
 
Total Number
of Shares
Purchased (1)
   
Average Price Paid
Per Share
   
Total Number of Shares Purchased as Part of
Publicly Announced
Plans or Programs
   
Maximum Number (or Approximate Dollar
Value) of Shares that
May be Purchased
Under these Plans or
Programs
 
  January 1 to 31, 2011
    --     $ --                                    --       --  
  February 1 to 28, 2011
    8,127     $ 1.71                                  --       --  
  March 1 to 31, 2011
    --     $ --                                   --       --  
  Total
    8,127     $  1.71                                  --       --  

(1)  
Represents shares purchased from employees to pay the withholding taxes related to the vesting of restricted stock.  The shares were not part of a publicly announced repurchase plan or program.

 
22

 

Item 6. Exhibits 
       
 
Exhibit No.
 
Title
       
 
31.1
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002.
       
 
31.2
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002.
       
 
32.1
 
Certification of Chief Executive Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted to Section 906 of the Sarbanes-Oxley Act of 2002.
       
 
32.2
 
Certification of Chief Financial Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 

 
23

 


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.
 
 
 
REGISTRANT:
 
       
 
THERAGENICS CORPORATION
 
  
  
  
 
Date: May 12, 2011
By:  
/s/ M. Christine Jacobs
 
   
M. Christine Jacobs
 
   
Chief Executive Officer
 
       
  
  
  
 
Date: May 12, 2011
By:  
/s/ Francis J. Tarallo
 
   
Francis J. Tarallo
 
   
Chief Financial Officer
 
 
 
24