RNS Number:8451Q
Spacelabs Healthcare Inc.
07 February 2007
Spacelabs Healthcare, Inc. Interim Results for the Six Months Ended December 31,
2006
HAWTHORNE, CA -- (MARKET WIRE) -- February 07, 2007 -- Spacelabs Healthcare,
Inc. (LSE: SLAB) ('Spacelabs' or the 'Company'), an international developer,
manufacturer and distributor of medical equipment and services, today announces
its Interim Results for the six months ended December 31, 2006.
Financial Highlights
-- Revenues of $111.0 million (H1 FY 2006: $112.4 million).
Excluding revenues attributable to Del Mar Reynolds ("DMR"), acquired in
July 2006, revenues decreased 13% from the period ended December 31, 2005.
-- Operating loss of ($5.6) million (H1 FY 2006: operating income of $6.5
million).
The operating loss for the first half of fiscal 2007 includes a $0.6
million one-time pre-tax charge for in-process research and development
relating to the Company's acquisition of DMR.
-- Net loss of ($4.9) million (H1 FY 2006: net income of $4.1 million).
-- Cash and cash equivalents of $4.8 million as of December 31, 2006
($11.7 million at December 31, 2005).
Corporate Initiatives
-- Restored sales momentum - following the disappointing level of North
American patient monitoring orders in the first quarter, reversing a steady
pattern of year-on-year order book increases for the past nine quarters,
sales momentum has been restored. In the second quarter North American
patient monitoring bookings increased 31% compared to Q2 of FY 2006
resulting in a strong order book entering H2 FY 2007.
-- Restructured the business - to enhance accountability and to
facilitate our global product strategy the Company has restructured into
three key areas: North America managed by Joe Davin, Europe, Middle East
and Africa ("EMEA") managed by Gary Grenter and Emerging Markets managed by
Nicholas Ong. The Company has appointed Dave Tilley as Chief Operating
Officer. In addition, the Company, after analyzing its product lines,
elected to divest certain loss-generating non-core operations. This
divesture was effective January 1, 2007 and these operations accounted for
total revenues of approximately $8 million in fiscal year 2006.
-- Initiated an aggressive cost reduction program - the Company has
identified approximately $10 million of annualized savings resulting from
the integration of DMR and rationalization of manufacturing facilities and
a reduction of approximately 8% of its employees. The Company expects to
realize cost savings of $2 - $3 million in H2 FY 2007 with the full benefit
evident in fiscal 2008.
-- Sustained a significant R&D program - the Company continues to invest
in improving its product portfolio, especially as it relates to patient
monitoring and connectivity. These efforts ensure the competitiveness of
the current range of products and include the development of next
generation monitoring and connectivity solutions.
-- Increased focus on emerging markets - the Company looks to expand its
presence in the emerging markets through the development of a low cost
monitoring family and increased manufacturing presence in these markets in
order to lower manufacturing and supply chain costs.
Deepak Chopra, Chief Executive Officer of Spacelabs Healthcare, Inc., said:
"After a slow start to the fiscal year, management moved quickly to recapture
the momentum we had experienced through the end of fiscal 2006. We have taken
proactive steps to improve our operations and profitability. These actions are
an initial step of an ongoing process. To that end we have begun to see positive
signs of improvement in the second quarter and look forward to improved results
for the remainder of the fiscal year with revenues and net income significantly
stronger than those of the first half."
Earnings Conference Call Information
Spacelabs Healthcare, Inc. will host a conference call at 5:00pm GMT (12:00pm ET
or 9:00am PT) today, February 7, 2007, to discuss its interim financial results.
For further information please contact Jeremy Norton at +1 310 717 9182
(jnorton@osi-systems.com) or John Gilbert at +44 207 269 7169.
To listen to a live webcast of the conference call please log on
www.earnings.com, www.spacelabshealthcare.com or www.osi-systems.com and follow
the link that will be posted on the front page. A replay of the webcast will be
available shortly after the presentation and will be archived on the websites
outlined above. A replay of the webcast will be available shortly after the
conclusion of the conference call at 10:00pm GMT (5:00pm ET or 2:00pm PT) until
February 21, 2007. The replay can either be accessed through the Company's
website, www.spacelabshealthcare.com, or via telephonic replay by calling
1-888-286-8010 and entering the conference call identification number '89582960'
when prompted for the replay code.
This press release contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Such statements include information
regarding the company's expectations, goals or intentions about the future,
including, but not limited to, sales momentum, cost savings measures, research
and development efforts, activities in emerging markets and improving operations
and results. The actual results may differ materially from those described in or
implied by any forward-looking statement. In particular, there can be no
assurance that sales momentum will continue, research and development efforts
will in fact ensure the continued viability of current products or produce
successful products in the future, that significant sales in emerging markets
will materialize or that the Company will produce improved results in the
remainder of the fiscal year. Other important factors are set forth in the
Securities and Exchange Commission filings of OSI Systems, Inc. All
forward-looking statements speak only as of the date made, and we undertake no
obligation to update these forward-looking statements.
Spacelabs Healthcare, Inc.
Interim Report for the six months ended December 31, 2006
CEO'S STATEMENT
Introduction
Spacelabs Healthcare, Inc. (www.spacelabshealthcare.com) is an international
developer, manufacturer and distributor of medical equipment and services
including patient monitoring solutions, anesthesia delivery and ventilation
systems, diagnostic cardiology solutions and supplies and accessories selling to
hospitals, clinics and physicians offices. Additionally, the Company provides
electrocardiogram ("ECG") laboratory services to pharmaceutical companies
undertaking clinical trials, whereby patient ECG data is recorded, analyzed,
tabulated and interpreted.
The Company has established brand names in both medical devices and medical
services such as "Spacelabs," "Blease," and "Del Mar Reynolds." It employs
approximately 1,200 personnel in offices located in the United States, UK,
Canada, France, Germany, Finland, India and Singapore.
Operational Highlights
The Company reported revenues of $111.0 million for the first half of fiscal
2007, a decrease of approximately 1% when compared to $112.4 million reported
for the first half of fiscal 2006. Excluding revenues contributed by DMR,
acquired in July 2006, revenues declined by approximately 13% compared to the
prior comparable period. The year on year decrease in revenues is primarily
attributable to weak sales in the first quarter in the North American patient
monitoring market.
Gross profit margin was 44% for the first half of fiscal 2007, a decrease of
approximately 3% when compared to 47% for the first half of fiscal 2006. The
year on year decrease in gross margins is primarily attributable to the
aforementioned weak sales in the North American patient monitoring market, which
is historically a high margin market for the Company. In the second quarter,
North American patient monitoring order intake increased by 31% when compared
the second quarter of fiscal 2006 and sequentially 64% when compared to the
first quarter of the current fiscal year.
Corporate Initiatives
-- Restored sales momentum - following the disappointing level of North
American patient monitoring orders in the first quarter, reversing a steady
pattern of year-on-year order book increases for the past nine quarters,
sales momentum has been restored. In the second quarter North American
patient monitoring bookings increased 31% compared to Q2 of FY 2006
resulting in a strong order book entering H2 FY 2007.
-- Restructured the business - to enhance accountability and to
facilitate our global product strategy the Company has restructured into
three key areas: North America managed by Joe Davin, Europe, Middle East
and Africa ("EMEA") managed by Gary Grenter and Emerging Markets managed by
Nicholas Ong. The Company has appointed Dave Tilley as Chief Operating
Officer. In addition, the Company, after analyzing its product lines,
elected to divest certain loss-generating non-core operations. This
divesture was effective January 1, 2007 and these operations accounted for
total revenues of approximately $8 million in fiscal year 2006.
-- Initiated an aggressive cost reduction program - the Company has
identified approximately $10 million of annualized savings resulting from
the integration of DMR and rationalization of manufacturing facilities and
a reduction of approximately 8% of its employees. The Company expects to
realize cost savings of $2 - $3 million in H2 FY 2007 with the full benefit
evident in fiscal 2008.
-- Sustained a significant R&D program - the Company continues to invest
in improving its product portfolio, especially as it relates to patient
monitoring and connectivity. These efforts ensure the competitiveness of
the current range of products and include the development of next
generation monitoring and connectivity solutions.
-- Increased focus on emerging markets - the Company looks to expand its
presence in the emerging markets through the development of a low cost
monitoring family and increased manufacturing presence in these markets in
order to lower manufacturing and supply chain costs.
The Company operates in two businesses: (a) Equipment, Service & Supplies and
(b) Clinical Trial Services.
Equipment, Service & Supplies Business
The Equipment, Service & Supplies business develops, manufactures, and
distributes medical equipment including patient monitoring and connectivity
solutions, anesthesia delivery and ventilation systems, diagnostic cardiology
solutions and supplies and accessories. The products are sold to hospitals,
clinics and physicians offices. This business includes such brand names as
"Spacelabs Medical," "Blease" and "Del Mar Reynolds."
For the first half of fiscal 2007, the Equipment, Service & Supplies business
recorded revenues of $105.6 million (H1 FY 2006: $110.0 million), representing
approximately 95% of the Company's total reported revenues. Revenues recorded in
the first half of fiscal 2007 include approximately $11.2 million of revenue
contributed by Del Mar Reynolds, acquired in July 2006. The decrease in revenue
in the first half of fiscal 2007 was primarily attributable to the weaker sales
in the North American patient monitoring market.
After a slow start to the fiscal year, our North American Patient Monitoring
order intake increased by 31% in the second quarter when compared the second
quarter of fiscal 2006 and sequentially 64% when compared to the first quarter
of the fiscal year. The second quarter order intake was the highest recorded,
clearly demonstrating that the market in North America, despite the weak first
quarter, remains strong and has not fallen away. Shipments lagged behind orders
and were down versus the prior year in both quarters.
Sales outside of North America increased in the second quarter by 32% when
compared to the second quarter of fiscal 2006 and 47% versus the first quarter
of fiscal 2007. Excluding Del Mar Reynolds, sales outside of North America
increased by 5% and 44%, respectively, over the same periods. This is especially
encouraging as we continue to diversify our revenue base and lessen our
dependence on the U.S. healthcare market.
The Company remains committed to expanding into emerging markets. To that end,
in November 2006, the Company introduced its first product targeted specifically
at these markets, the mCare 300. The mCare 300 is a standalone monitor for low
acuity patients and represents the Company's initial entry into the fast growing
low cost emerging market segments.
In October 2006, the Company was honored by Frost & Sullivan as its 2006 North
American Patient Monitoring Company of the Year. This award acknowledged the
Company's success in 2006, a year in which the Company experienced strong double
digit revenue growth in North America.
In October 2006, the Company also announced the introduction of the BleaseSirius
advanced anesthesia system and Ultraview Perioperative Monitoring Suite into the
North American market. The Company is excited about this opportunity as we
leverage our strong number 3 position in patient monitoring, existing sales and
support network and strong established brand name.
Core Strategy: Equipment Service and Supplies Business
The Company remains committed to its Core Strategy to be a leading provider of
innovative, reliable and cost-optimized patient care solutions. Through focused
development of open standards, connectivity and networking to enable 'on demand'
information, our products help improve the quality of care administered to
patients and improve clinician productivity.
The Company believes that the second half of the fiscal year will see improved
operating results based on the positive signs of improving order intake in the
second quarter after a disappointing start to the fiscal year in the first
quarter. Overall the Company continues to focus on the following key
initiatives:
-- Solidify and improve sales within the core North American Market:
- North America is a high margin business as we sell direct to our customers.
- We aim to capture additional opportunities through the newly introduced
anesthesia delivery systems, diagnostic cardiology and a low acuity monitor into
this market. Additionally, the Company expects to benefit from integration of
diagnostic cardiology into the North American sales channel.
-- Build upon the strong H1 performance outside North America:
- This represents a large growth opportunity for the Company.
- By increasing our international sales we lessen the Company's dependence upon
the North American market.
- Capture additional opportunities from sales of the new low acuity monitor.
- Leverage on a strong cardiology presence in the UK and Germany.
-- Improve cost structure and operating income:
- Deliver $10 million in annualized savings.
- Shift to low cost manufacturing facilities.
- Continued focus on supply chain efficiencies.
- Continue steps to improve gross margins up above 50%.
- Focus on improving operating income to levels consistently above 10%.
-- Continue to focus on research and development:
- Product innovation is key to our long term growth plans.
- Spacelabs has a reputation as market leader in product innovation.
- Our R&D efforts are driven by our interaction with our customers and intimate
knowledge of their operations.
-- Strategic acquisitions:
- Continue to evaluate strategic acquisitions of complementary products and
technologies or sales channels.
Clinical Trial Services Business
The Clinical Trial Services business collects, interprets and distributes
Electrocardiogram (ECG) and Ambulatory Blood Pressure (ABP) cardiac safety data
from clinical trials performed by Clinical Research Organizations (CROs) and
pharmaceutical companies. The business operates under the trade names "Spacelabs
Medical Data" and "Hertford Cardiology," primarily in the U.S and European
markets.
The Company acquired Hertford Cardiology as part of its July 2006 acquisition of
Del Mar Reynolds.
In the first half of fiscal 2007, the Clinical Trial Services business recorded
revenues of $5.4 million (H1 FY 2006: $2.4 million), representing approximately
5% of the Company's total revenue. Revenues recorded in the first half of fiscal
2007 include approximately $2.0 million of revenue contributed by Hertford
Cardiology, acquired as part of the July 2006 acquisition of DMR. During the
first half of fiscal 2007, the contract order book for the business continued to
grow aside from the contribution from Hertford Cardiology. This significant
increase in the order book was a direct result of the successful completion of a
number of audits conducted by key sponsors including both CROs and major
pharmaceutical companies.
Core Strategy: Clinical Trial Services Business
The Company intends to take advantage of this high growth and profitable
business by leveraging its newly expanded North American and European presence,
which should allow us to:
-- Offer global coverage to our large pharmaceutical clients.
-- Consolidate the infrastructure.
-- Focus on improving operating income to levels consistently above 20%.
Partnerships and Collaborations
The Company continues to focus on the development of partnerships and
collaborations throughout the healthcare industry. The Company's software
platform for its patient monitoring systems provides an open architecture
allowing it to work closely with other software and hardware providers, thereby
ensuring that its customers receive the best integrated solutions available.
FINANCIAL REVIEW
Profit and Loss Account
The Company reported revenues of $111.0 million for the first half of fiscal
2007, a decrease of approximately 1% when compared to $112.4 million reported
for the first half of fiscal 2006. Excluding revenues contributed by DMR,
acquired in July 2006, revenues declined by approximately 13% compared to the
prior comparable period. The year-on-year decrease in revenues is primarily
attributable to weak first quarter sales in the North American patient
monitoring market.
The gross margin for the first half of fiscal 2007 was 44% compared to 47%
reported in the first half of fiscal 2006. The decrease in gross margin was
largely attributable to the aforementioned weak sales in the North American
patient monitoring market, which is historically a high margin market for the
Company.
Selling and General Administrative ("SG&A") expenses were $42.1 million for the
first half of fiscal 2007, an increase of $5.3 million from $36.8 million for
the first half of fiscal 2006. The increase in SG&A expenses was attributable to
the acquisition of DMR in July 2006.
Research and development expenses were $11.7 million for the first half of
fiscal 2007, an increase of $2.3 million from $9.4 million reported in the first
half of fiscal 2006. The increase in research and development expenses was
attributable to DMR and increased spending on enhancements to our current
product portfolio and the development of new product lines. Research and
development expenses for the first half of fiscal 2007 include $0.6 million in
write-offs of acquired in-process research and development costs associated with
the DMR acquisition.
Stock-based compensation expenses for the first half of fiscal 2007 was $0.8
million compared to $0.5 million in the first half of fiscal 2006. Including
stock-based compensation, the Company reported an operating loss of ($5.6)
million for the first half of fiscal 2007 compared to operating income of $6.5
million reported for the first half of fiscal 2006.
Interest expense in the first half of fiscal 2007 was $2.2 million, compared to
$0.4 million in the first half of fiscal 2006. The increase in interest payable
was associated with the increased borrowings used to fund the Company's
acquisition of DMR.
The tax rate for the first half of fiscal 2007 was 35.5% compared to 36.1% for
the first half of fiscal 2006.
The net loss for the first half of fiscal 2007 was ($4.9) million compared to
net income of $4.1 million reported for the first half of fiscal 2006.
Balance Sheet
At December 31, 2006, the Company reported total assets of $176.2 million,
including cash and cash equivalents of $4.8 million, and equity of $45.8
million. The Company has outstanding long term debt of $57.6 million.
The increase in total assets and liabilities from June 30, 2006 is attributable
primarily to acquisition of DMR.
Cash Flow Statement
For the period, the Company used $4.0 million in cash. Net cash used in
operating activities was ($6.4) million. The Company used approximately $22.0
million for the acquisition of DMR, funded through a long term bank loan.
OUTLOOK
After a slow start to the fiscal year in the first quarter, we saw significant
improvement in the Patient Monitoring order book in North America in the second
quarter and as such we are optimistic for a stronger performance in the second
half of the fiscal year. We have also moved proactively to take the necessary
steps to improve our operations and profitability. These actions are an initial
step of an ongoing process. To that end, we have begun to see positive signs of
improvement in the second quarter and look forward to improved results for the
remainder of the fiscal year with revenues and net income significantly stronger
than those of the first half.
Deepak Chopra
Chief Executive Officer
SPACELABS HEALTHCARE, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
December 31, December 31,
---------- ---------
ASSETS 2006 2005
---------- ---------
Current Assets:
Cash and cash equivalents $ 4,778 $ 11,662
Accounts receivable, net of allowance for
doubtful accounts 65,213 58,434
Inventories, net 34,549 32,800
Prepaid expenses and other current assets 10,460 7,227
---------- ---------
Total Current Assets 115,000 110,123
---------- ---------
Property and equipment, net 15,219 7,577
Goodwill 19,310 5,694
Intangible assets, net 24,667 18,081
Other assets 1,965 1,157
---------- ---------
Total Assets $ 176,161 $ 142,632
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 19,466 $ 17,558
Current portion of long-term debt and capital
leases 4,486 -
Payables to related parties, net 6,156 9,866
Income taxes payable 7,639 5,667
Accrued payroll and related expenses 6,492 6,887
Deferred revenue 5,817 4,176
Accrued warranties 3,408 3,695
Accrued expenses and other current liabilities 11,866 8,410
---------- ---------
Total Current Liabilities 65,330 56,259
---------- ---------
Loan from OSI 29,311 35,310
Long-term debt and capital leases, less current
portion 28,285 -
Other long-term liabilities 7,456 8,607
---------- ---------
Total Liabilities 130,382 100,176
---------- ---------
Commitments and contingencies (Notes 2 and 8)
Shareholders' Equity:
Common stock 68 68
Additional paid-in capital 42,362 40,275
Retained earnings 2,678 3,318
Accumulated other comprehensive income (loss) 671 (1,205)
---------- ---------
Total Shareholders' Equity 45,779 42,456
---------- ---------
Total Liabilities and Shareholders' Equity $ 176,161 $ 142,632
========== =========
See accompanying notes to unaudited condensed consolidated financial
statements.
SPACELABS HEALTHCARE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands of dollars, except per share amounts)
Six months ended December 31,
------------------------------
2006 2005
-------------- --------------
Revenues $ 110,970 $ 112,371
Cost of goods sold 61,643 59,149
-------------- --------------
Gross profit 49,327 53,222
-------------- --------------
Operating expenses:
Selling, general and administrative 42,122 36,828
Research and development 11,718 9,370
Management retention bonus 549 572
Write off of in-process research and
development 561 -
-------------- --------------
Total operating expenses 54,950 46,770
-------------- --------------
Income (loss) from operations (5,623) 6,452
Interest expense - loan from OSI 1,079 402
Interest expense - other 1,074 -
Other income (129) (392)
-------------- --------------
Income before provision for income taxes
and minority interest (7,647) 6,442
Provision (benefit) for income taxes (2,716) 2,324
Minority interest - (31)
-------------- --------------
Net income (loss) $ (4,931) $ 4,087
============== ==============
Earnings (loss) per share:
Basic (0.07) 0.07
============== ==============
Diluted (0.07) 0.07
============== ==============
Shares used in per share calculation:
Basic 67,926 59,366
============== ==============
Diluted 67,926 59,377
============== ==============
See accompanying notes to unaudited condensed consolidated financial
statements.
SPACELABS HEALTHCARE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
Six months ended December 31,
------------------------------
2006 2005
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (4,931) $ 4,087
Adjustments to reconcile net income (loss)
to net cash (used in) provided by
operating activities:
Depreciation and amortization 3,888 2,014
Stock compensation expense 830 513
Write off of in-process research and
development 561 -
Other (101) (270)
Changes in operating assets and
liabilities, net of business acquisitions (6,663) (6,029)
-------------- --------------
Net cash (used in) provided by
operating activities (6,416) 315
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (2,943) (1,544)
Proceeds from sale of assets 147 922
Cash paid for DelMar, net cash acquired (22,031) -
Other (630) (204)
-------------- --------------
Net cash used in investing activities (25,457) (826)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments to OSI (2,499) (22,000)
Net proceeds from public offering of common
stock - 26,280
Acquisition loan, net of repayments 23,598 -
Line of credit borrowings, net of
repayments 7,825 -
Other (437) -
-------------- --------------
Net cash provided by financing
activities 28,487 4,280
-------------- --------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (645) 18
-------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS (4,031) 3,787
CASH AND CASH EQUIVALENT, BEGINNING OF
PERIOD 8,809 7,875
-------------- --------------
CASH AND CASH EQUIVALENT, END OF PERIOD $ 4,778 $ 11,662
============== ==============
SPACELABS HEALTHCARE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX-MONTH PERIODS ENDED DECEMBER 31, 2006 AND 2005
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
On August 2, 2005, OSI Systems, Inc. ("OSI") formed Spacelabs Healthcare, Inc.
("Spacelabs Healthcare" or the "Company"), which is the combination of the
following OSI healthcare division subsidiaries: (a) Spacelabs Medical, Inc.
(U.S.A.) and its affiliates in Canada, China, Finland, France, Germany, Italy,
Greece, Singapore and the U.K. (collectively, "Spacelabs Medical"); (b) Blease
Medical Holdings Limited (U.K.) and its wholly owned subsidiaries Blease Medical
Equipment Limited and Blease Medical Service Limited (collectively, "Blease");
(c) Dolphin Medical, Inc. (U.S.A.) and its subsidiary, Dolphin Medical Products
Limited (Singapore), (collectively, "Dolphin Medical"); and (d) Osteometer
MediTech, Inc. ("Osteometer"). OSI is a publicly traded, vertically integrated,
worldwide provider of security and inspection systems, medical monitoring and
anesthesia systems and optoelectronic devices and value-added subsystems.
On October 24, 2005, OSI transferred 100% of the shares of Spacelabs Medical,
Blease, and Osteometer and the 89% of the shares it owned in Dolphin Medical to
Spacelabs Healthcare in exchange for approximately 54.4 million shares of
Spacelabs Healthcare common stock (the "Stock Transfer"). Also on October 24,
2005, Spacelabs Healthcare completed an initial public offering ("IPO") of its
common stock on the Alternative Investment Market ("AIM") in London. This IPO
resulted in the sale to the public of approximately $13.5 million newly issued
shares of common stock, or 19.8% of the Company, and raised approximately $26.3
million, net of expenses.
Description of Business
Spacelabs Medical is a global manufacturer and distributor of patient monitoring
and clinical information systems for use primarily in hospitals. It designs,
manufactures and markets patient monitoring solutions for critical care,
emergency and perioperative areas of the hospital, wired and wireless networks
and connectivity solutions, ambulatory blood pressure monitors and medical data
services, all aimed at providing caregivers with instant patient information.
Spacelabs Medical is included in the Patient Monitoring/Anesthesia/Cardiology
operating segment, except for its medical data services business which is
included in the Clinical Trial Services operating segment. Blease is a global
manufacturer and distributor of anesthesia delivery systems, ventilators and
vaporizers. Blease sells its products primarily to hospitals for use in
operating rooms and anesthesia induction areas as well as in magnetic resonance
imaging facilities. Blease also sells its systems and components, such as
anesthesia vaporizers and ventilators, directly to pharmaceutical companies and
other manufacturers of anesthesia delivery systems. Blease is included in the
Patient Monitoring/Anesthesia/Cardiology operating segment. Dolphin Medical
designs, manufactures and markets pulse oximetry instruments and compatible
pulse oximetry sensors, which are used to non-invasively monitor oxygenation
levels in a patient's blood. Osteometer designs, manufactures and markets x-ray
and ultrasound densitometers, which are used to diagnose osteoporosis as well as
to provide follow-up bone density measurements. Osteometer is included in the
Patient Monitoring/ Anesthesia/Cardiology operating segment. As further
described in Note 2, the Company acquired Del Mar Reynolds in July 2006, see
Note 2. Del Mar Reynolds manufactures and markets cardiac monitoring and
diagnostic systems primarily to the hospital market. In addition, Del Mar
Reynolds also offers a core laboratory business that provides clinical trial
services to pharmaceutical companies and to clinical research organizations. Del
Mar Reynolds is included in the Patient Monitoring/Anesthesia/Cardiology
operating segment, except for its core laboratory business which is included in
the Clinical Trial Services operating segment.
Basis of Presentation
The accompanying condensed consolidated financial statements include the
accounts of Spacelabs Healthcare, Inc. and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
These financial statements have been prepared by us, without audit, pursuant to
Accounting Principles Board Opinion No. 28, "Interim Financial Reporting."
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles in the United States of America have been condensed or omitted
pursuant to such rules and regulations. However, in the opinion of management,
all adjustments, consisting of only normal and recurring adjustments, necessary
for a fair presentation of the financial position and the results of operations
for the periods presented have been included. These condensed consolidated
financial statements and the accompanying notes should be read in conjunction
with the audited consolidated financial statements and accompanying notes for
the year ended June 30, 2006, included in our Annual Report. The results of
operations and cash flows for the six months ended December 31, 2006 are not
necessarily indicative of the results to be expected for the fiscal year ending
June 30, 2007.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the
current year's presentation.
Derivative Instruments
The Company may, from time to time, purchase foreign exchange contracts in order
to attempt to reduce foreign exchange transaction gains and losses, or enter
into interest rate swaps. In June 2006, the Company entered into a $25.4 million
forward contract to buy British pounds in anticipation of the acquisition of Del
Mar Reynolds (see Note 2). At June 30, 2006, the Company recorded a $0.5 million
unrealized gain related to this contract. In July 2006, the Company completed
the Del Mar Reynolds acquisition and settled the foreign currency forward
contract resulting in a fiscal year 2007 loss of $24,000 related to this
contract.
Per Share Computations
The Company computes basic earnings (loss) per share by dividing net income
(loss) available to common shareholders by the weighted average number of common
shares outstanding during the period. The Company computes diluted earnings
(loss) per share by dividing net income available to common shareholders by the
sum of the weighted average number of common and dilutive potential common
shares outstanding. Potential common shares consist of shares issuable upon the
exercise of stock options using the treasury stock method. The Company excludes
from the calculation of diluted earnings per share stock options with exercise
prices greater than the average market price of the Company's common stock
because their effect would be anti-dilutive. The Company excludes all stock
options from the calculation of diluted loss per share because their effect
would be anti-dilutive.
The following table sets forth the computation of basic and diluted earnings
(loss) per shares for the six months ended December 31, 2006 and 2005 (in
thousands of dollars, except per share amounts):
Six months ended December 31,
-------------------------------
2006 2005
-------------- --------------
Net income (loss) $ (4,931) $ 4,087
Effect of dilutive interest in subsidiary
stock - (209)
-------------- --------------
Income (loss) available to common
shareholders (4,931) 3,878
============== ==============
Weighted average shares outstanding -
basic 67,926 59,366
Dilutive effect of stock options - 11
-------------- --------------
Weighted average shares outstanding -
diluted 67,926 59,377
============== ==============
Basic earnings (loss) per share $ (0.07) $ 0.07
============== ==============
Diluted earnings (loss) per share $ (0.07) $ 0.07
============== ==============
Comprehensive Income
Comprehensive income (loss) is computed as follows (in thousands of dollars):
Six months ended December 31,
-------------------------------
2006 2005
-------------- --------------
Net income (loss) $ (4,931) $ 4,087
Foreign currency translation adjustments 701 (346)
Unrealized gain on available for sale
marketable securities - 36
Reclassification adjustment for gains on
available for sale
marketable securities
included in net income (loss) (26) (190)
-------------- --------------
Comprehensive income (loss) $ (4,256) $ 3,587
============== ==============
Recent Accounting Pronouncements
In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes." This interpretation clarifies how companies should
account for uncertainty in income taxes that they recognize in accordance with
FASB Statement No. 109, "Accounting for Income Taxes." This Interpretation is
effective for fiscal years beginning after December 15, 2006. The Company has
not yet determined the impact that this interpretation will have on its
financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." This
statement defines fair value, establishes a framework for measuring fair value
and expands disclosures about fair value measurements. It is effective for
fiscal years beginning after November 15, 2007. The Company has not yet
determined the impact that this statement will have on its consolidated
financial statements.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans -- an amendment of FASB
Statements No. 87, 88, 106, and 132(R)." This statement requires that an
employer recognize the over-funded or under-funded status of a defined benefit
postretirement plan (other than a multiemployer plan) as an asset or liability,
as applicable, in its statement of financial position and that it recognize, in
comprehensive income of a business entity, any changes in such status in the
year in which the changes occur. This statement also requires that an employer
measure the funded status of a plan as of the date of its year-end statement of
financial position, with limited exceptions. This statement is effective for
fiscal years ending after December 15, 2006. The Company has not yet determined
the impact that this statement will have on its consolidated financial
statements.
2. ACQUISITION OF DEL MAR REYNOLDS
On July 31, 2006, the Company completed the acquisition of the Del Mar Reynolds
Cardiac division of Ferraris Group PLC. Pursuant to the terms of the acquisition
agreement, the Company made an initial cash payment of $25.9 million, subject to
a working capital adjustment and to an adjustment of plus or minus $1.9 million
based upon revenue and earnings results for Del Mar Reynolds for the 13-month
period ending September 30, 2006. In September 2006, Ferraris Group PLC paid the
Company $1.7 million in connection with the working capital adjustment and in
November 2006 it paid the Company an additional $1.9 million as a result of the
failure of Del Mar Reynolds to meet certain revenue and earnings results for the
13-month period ending September 30, 2006.
Contingent consideration of up to #5 million ($9.4 million at December 31, 2006)
will be payable if Del Mar Reynolds achieves certain revenue targets during
fiscal year 2007. The additional earn-out, if any, may be satisfied, at
Company's discretion, either in cash or by the issuance of the Company's common
stock. This acquisition expands the portfolio of products that the Company
offers to the hospital market with the addition of cardiac monitoring systems.
Del Mar Reynolds also offers a core laboratory business that provides clinical
trial services to pharmaceutical companies and to clinical research
organizations.
The results of operations for Del Mar Reynolds have been included in the
accompanying condensed consolidated financial statements since the date of
acquisition. The total cost of the acquisition, excluding the potential
earn-out, was as follows (in thousands of dollars):
Cash paid for common stock $ 25,879
Less refund pursuant to working capital adjustment (1,694)
Less refund pursuant to 13-month revenue and earnings
adjustment (1,872)
Direct costs 814
----------
Total purchase price $ 23,127
==========
The Company has based the preliminary allocation of the purchase price on an
estimate of fair values of the assets acquired and the liabilities assumed. The
final determination of the allocation of the purchase price is pending the final
assessment of a third party's valuation of the assets acquired and liabilities
assumed. The finalization of the purchase price allocation may result in asset
fair values and liabilities assumed that differ from the preliminary estimates
of these amounts. As of December 31, 2006, the preliminary purchase price
allocation was as follows (in thousands of dollars):
Net tangible assets acquired $ 2,150
In-process research and development costs acquired 561
Identifiable intangible assets acquired 7,567
Goodwill 12,849
----------
$ 23,127
==========
A history of operating margins and profitability, a strong scientific employee
base and operations in an attractive market niche were among the factors that
contributed to a purchase price resulting in the recognition of goodwill.
In-process research and development costs acquired were expensed during the six
months ended December 31, 2006, and are included in operating expenses. Projects
that qualify as in-process research and development represent those that had not
yet reached technological feasibility and had no alternative future use.
As part of the integration of the Del Mar Reynolds business operations into the
Company, the Company established the following reserve for the termination and
relocation of certain employees to other sites, and legal and accounting fees
(in thousands of dollars):
Employee severance $ 692
Relocation costs 212
Legal and accounting fees 63
Rent and lease obligations 571
----------
$ 1,538
==========
During six months ended December 31, 2006, the Company paid $0.2 million in
connection with severance charges, relocation costs and rent obligations. At
December 31, 2006, the reserve amounted to $1.3 million and is included in
accrued expenses and other current liabilities in the Consolidated Balance
Sheets.
3. INVENTORY
Inventory consisted of the following (in thousands of dollars):
December 31,
--------------------------------
2006 2005
--------------- ---------------
Raw materials and components $ 16,354 $ 15,331
Work in process 1,140 1,184
Finished goods 5,942 6,383
Demonstration inventories 4,023 3,207
Customer service inventories 7,090 6,695
--------------- ---------------
Total $ 34,549 $ 32,800
=============== ===============
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands of dollars):
December 31,
-------------------------------
2006 2005
-------------- --------------
Equipment $ 10,799 $ 4,922
Leasehold improvements 1,556 1,437
Tooling 1,679 1,599
Furniture and fixtures 1,997 980
Computer equipment and software 7,923 3,560
Vehicles 227 22
-------------- --------------
Total 24,181 12,520
Less accumulated depreciation and
amortization (8,962) (4,943)
-------------- --------------
Property and equipment, net $ 15,219 $ 7,577
============== ==============
Depreciation expense was $2.5 million and $1.2 million for the six months ended
December 31, 2006 and 2005, respectively.
5. GOODWILL AND INTANGIBLE ASSETS
SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), requires that
goodwill and other intangible assets with indefinite lives be tested for
impairment on an annual basis and on an interim basis if an event occurs or
circumstance change that may reduce the fair value of a reporting unit below its
carrying value. We performed our annual goodwill impairment test as of December
31, 2006, and concluded that no impairment of goodwill was indicated.
The changes in the carrying amount of goodwill for the six months period ended
December 31, 2006 are as follows (in thousands of dollars):
Balance as of July 1, 2006 $ 5,990
Goodwill acquired during the period 13,070
Foreign currency translation adjustment 250
----------
Balance as of December 31, 2006 $ 19,310
==========
Amortization expense for the six months ended December 31, 2006 and 2005 was
$1.4 million and $0.8 million, respectively.
6. INCOME TAXES
The Company is included in the consolidated US federal and California state
income tax filings of OSI. The Company files separate state income tax returns
for other states and files separate foreign tax returns for its subsidiaries
outside the United States. The Company's tax expense (benefit) and deferred
taxes have been computed as if the Company were filing separate, stand-alone,
federal and state income tax returns. Accordingly, any settlement of U.S.
federal or California state income taxes payable will be to OSI rather than to
the Internal Revenue Service.
On October 24, 2005, the Company entered into a tax sharing agreement with OSI.
The agreement becomes effective once OSI's ownership interest in the Company
falls below 80% whereby the Company will no longer be able to be included in
OSI's consolidated U.S. federal income tax return. The terms of this agreement
assign responsibility to the Company for all taxes arising in the pre-separation
period attributable to the Company. OSI will retain, and indemnify the Company
for, among other things, the tax liabilities incurred as a result of
transferring assets to the Company. Any other separation-related tax liabilities
generally will be paid by the party legally responsible and OSI and the Company
agreed to cooperate in the resolution of such taxes. The tax sharing agreement
also deals with the allocation of obligations and responsibilities in connection
with certain administrative matters relating to taxes.
7. LONG TERM DEBT
On July 18, 2006, the Company entered into a syndicated revolving credit and
term loan agreement with Bank of the West as lead bank and syndication agent.
The agreement provides for a $10 million senior revolving line-of-credit,
including a letter-of-credit and foreign exchange facility, and a term loan of
up to $27.4 million to fund the purchase of Del Mar Reynolds. The agreement is
secured by all the U.S. assets of the Company and by shares of its subsidiaries.
Interest on the loans is based, at the Company's option, on either the bank's
prime rate, plus up to 0.5%, or on the British Bankers Association Interest
Settlement Rate for deposits in U.S. dollars plus up to 2.5%, with the margin
varying based on the Company's Leverage Ratio (as defined in the agreement). At
December 31, 2006, the weighted average effective interest rate was 7.8% on the
revolving loan and 7.4% on the term loan. The agreement contains various
representations, warranties, affirmative, negative and financial covenants, and
conditions of default customary for financing of this type. As of December 31,
2006, the Company was not in compliance with certain financial covenants;
however, the bank waived these covenant violations. The revolving line of credit
expires in July 2009 at which time all outstanding amounts are due and payable.
As of December 31, 2006, $7.8 million was outstanding under the revolving
line-of-credit. The term loan is repayable in 20 quarterly installments of $0.9
million, with a balloon payment of the remaining balance due on July 18, 2011.
At December 31, 2006, $23.6 million was outstanding under the term loan.
8. COMMITMENTS AND CONTINGENCIES
Product warranties
The Company offers its customers warranties on many of the products that it
sells. These warranties typically provide for repairs of the products if
problems arise during a specified time period after original shipment.
Concurrent with the sale of products, the Company records a provision for
estimated warranty expenses with a corresponding increase in cost of goods sold.
The Company periodically adjusts this provision based on historical and
anticipated experience. The Company charges actual expenses of repairs under
warranty, including parts and labor, to this provision when incurred.
The change in accrued warranties is as follows (in thousands of dollars):
Six months ended December 31,
-------------------------------
2006 2005
-------------- --------------
Balance at the beginning of the period $ 3,835 $ 3,706
Additions 1,263 1,546
Reductions for warranty repair costs (1,690) (1,557)
-------------- --------------
Balance at the end of the period $ 3,408 $ 3,695
============== ==============
Litigation
In March 2004, certain individuals named Spacelabs Medical, OSI Systems Inc. and
a hospital in a petition claiming that the individuals suffered injuries in
March 2003 caused, in part, by a defective monitoring system manufactured by
Spacelabs Medical. OSI has been dismissed from the action. The amount of the
claim has not yet been specified.
In April 2004, certain individuals named Spacelabs Medical, as well as several
other defendants, in a petition that alleges, among other things, that a product
possibly manufactured by Spacelabs Medical failed to properly monitor a hospital
patient thereby contributing to the patient's death in November 2001. The amount
of the claim has not yet been specified.
In accordance with SFAS No. 5, "Accounting for Contingencies," the Company has
not accrued for loss contingencies relating to the above matters because it
believes that, although unfavorable outcomes in the proceedings or unasserted
claims may be possible, they are not considered by management to be probable or
reasonably estimable. If one or more of these matters are resolved in a manner
adverse to the Company, the impact on the Company's results of operations,
financial position and/or liquidity could be material.
In February 2005, a Greek distribution company filed an action in the courts of
Greece claiming that Spacelabs orally agreed to appoint them as Spacelabs'
exclusive Greek distributor in 1999, but failed to do so. The distribution
company claims that it incurred significant expenses as a result of Spacelabs'
actions, and demands EUR 0.9 million (approximately $1.1 million as of June 30,
2006) in compensation. The Company has accrued a $0.3 million loss contingency
for this claim which represents the Company's best estimate of the probable loss
that may be incurred. This amount is included in other accruals in the
consolidated balance sheets.
Various lawsuits and claims are pending against the Company, including product
liability claims which are generally covered by insurance policies. Although the
outcome of such lawsuits and claims cannot be predicted with certainty, the
expected disposition thereof will not, in the opinion of management both
individually and in the aggregate, result in a material adverse effect on the
Company's results of operations and financial position.
Contingent Acquisition Obligations
In February 2005, the Company acquired Blease Medical Holdings Limited and
certain affiliated companies for approximately $9.3 million in cash (net of cash
acquired), including acquisition costs. For the three years following the close,
contingent consideration is payable based on Blease's net revenues, provided
certain requirements are met. The contingent consideration is capped at #6.25
million (approximately $12.1 million as of December 31, 2006). As of December
31, 2006, no contingent consideration has been earned.
9. STOCK-BASED COMPENSATION
The Company accounts for stock options in accordance with Statement of Financial
Accounting Standards No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)
"), which requires that it measure and recognize compensation expense for all
share-based payment awards made to employees and directors based on estimated
fair values.
The Company recorded stock-based compensation expense in the consolidated
statements of operations as follows (in thousands):
Six months ended December 31,
--------------------------------
2006 2005
--------------- ---------------
Cost of goods sold $ 108 $ 48
Selling, general and administrative 660 441
Research and development 62 24
--------------- ---------------
$ 830 $ 513
=============== ===============
The income tax benefit related to such compensation for the six-month periods
ended December 31, 2006 and 2005 was approximately $0.3 million and $0.2
million, respectively. As of December 31, 2006, total unrecognized compensation
cost related to non-vested share-based compensation arrangements amounted to
$1.5 million. The Company expects to recognize this cost over a weighted-average
period of 2.0 years.
10. RELATED-PARTY TRANSACTIONS
Allocations
All operating expenses associated with the Company are included in the
accompanying consolidated financial statements, including expenses incurred by
OSI on behalf of the Company. Certain corporate expenses incurred by OSI that
are not practicable to be specifically identified as costs of the Company, which
include human resources, treasury, accounting, information technology and
executive officer costs, have been allocated by OSI. Management has allocated
these costs based on percentage estimates of time or departmental effort devoted
to working on Company related matters in relation to overall OSI matters.
Allocated costs of $0.7 million and $0.8 million for the six month ended
December 31, 2006 and 2005, respectively, are included in selling, general and
administrative expenses in the accompanying condensed consolidated statements of
operations. Management believes these methods of allocation are reasonable, and
approximate what these expenses would have been on a stand-alone basis.
Loans from OSI
OSI has historically provided loans to the Company for working capital needs and
to fund acquisitions. Through October 24, 2005, the loans were non-interest
bearing and had unspecified repayment terms. On October 24, 2005, the Company
entered into a formal loan agreement with OSI that specifies that interest is
accrued on the loans at LIBOR rate plus 1.65% and that allows OSI to call for
full or partial repayment of the loans with a notice period of 367 days. As
notice from OSI has not been provided as of December 31, 2006, the loans are
recorded as long term on the accompanying balance sheets. During the six months
ended December 31, 2006 and 2005, the Company recorded interest expense related
to these loans of $1.1 million and $0.4 million, respectively.
Supply arrangements
The Company purchases printed circuit board assemblies, certain sub-assemblies
and various finished goods from subsidiaries of OSI. For the six-month periods
ended December 31, 2006 and 2005, inventory purchases from OSI affiliates were
$9.2 million and $5.1 million, respectively. Management of the Company believes
the costs of these purchases are equivalent to what the Company could purchase
from third party suppliers.
Manufacturing and office facilities
Certain of the Company's businesses share manufacturing and office space with
OSI and its subsidiaries. The cost of these facilities is charged to the Company
based on square-footage of the shared facility. The amounts charged to the
Company for the six-month periods ended December 31, 2006 and 2005 were $0.3
million and $0.2 million, respectively.
Insurance
The Company is covered under OSI's various liability and property insurance
coverages. The actual costs of these coverages are charged to the Company on a
specific identification basis. The amounts charged to the Company for the
six-month periods ended December 31, 2006 and 2005 were $0.9 million and $0.8
million, respectively.
Other
OSI and certain of its subsidiaries perform other activities on behalf of the
Company including accounting, legal, information technology, and engineering.
For the six-month periods ended December 31, 2006 and 2005, OSI charged the
Company $0.1 million and $0.4 million, respectively, related to these services
based on the actual costs of the services provided. In addition, Spacelabs
Medical also performs certain activities on behalf of OSI and certain of its
subsidiaries. Spacelabs Medical charged OSI $0.1 million for these services
during each of the six-month periods ended December 31, 2006 and 2005.
11. SEGMENT INFORMATION
The Company operates in two reportable segments as defined by SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("FAS
131"). The Equipment, Services & Supplies segment includes two operating
segments Patient Monitoring/Anesthesia/Cardiology and Dolphin Medical. The
Clinical Trial Services segment includes the Company's medical data services
business and the core laboratory business acquired as part of the Del Mar
Reynolds acquisition (see Note 2). The Patient Monitoring/Anesthesia/Cardiology
and Dolphin Medical operating segments have been aggregated pursuant to the
rules of FAS 131. There were no inter-segment revenues during the six-month
periods ended December 31, 2006 and 2005.
The following table presents the operations and identifiable assets by segment
as of and for the six months periods ended December 31, 2006 and 2005 (in
thousands):
December 31, 2006 December 31, 2005
---------------------------- ----------------------------
Equipment, Clinical Equipment, Clinical
Services & Trial Services & Trial
Supplies Services Total Supplies Services Total
-------- -------- ----- -------- -------- -----
External
customer
revenue $105,580 $ 5,390 $110,970 $109,962 $ 2,409 $112,371
========= ======== ========= ========= ======== =========
Income
(loss)
from
operations $ (5,526) $ (97) $ (5,623) $ 7,022 $ (570) $ 6,452
========= ======== ========= ========= ======== =========
Total
Assets $168,619 $ 7,542 $176,161 $140,167 $ 2,465 $142,632
========= ======== ========= ========= ======== =========
12. SUBSEQUENT EVENT
In January 2007, the Company sold its Osteometer subsidiary and a portion of the
Dolphin Medical business to a subsidiary of OSI for approximately $1.0 million,
which equaled the net book value of the assets sold. Management estimates that
the fair values of the sold businesses approximated their net book values. The
Company does not expect to generate a gain or loss on this transaction.
For further information, please contact:
Spacelabs Healthcare, Inc.
Jeremy Norton
Director, Investor Relations
Tel: +1 310 717 9182
Financial Dynamics
David Yates
John Gilbert
Tel: +44 207 831 3113
SOURCE: Spacelabs Healthcare
This information is provided by RNS
The company news service from the London Stock Exchange
END
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