FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 1998
Commission File Number 0-9387
Empi, Inc.
(Exact name of registrant as specified in its charter)
Minnesota 41-1310335
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
599 Cardigan Road
St. Paul, Minnesota 55126-4099
(Address of principal (Zip code)
executive offices)
Registrant's telephone number, including area code (651) 415-9000
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
6,624,077 shares of common stock were outstanding as of November 9, 1998.
<PAGE>
EMPI, INC. & SUBSIDIARIES
INDEX PAGE
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30, 1998
(Unaudited) and December 31, 1997 3
Consolidated Statements of Operations (Unaudited) for the
periods ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows (Unaudited) for the
periods ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
<PAGE>
PART I - - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
EMPI, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 30 December 31
1998 1997
------------ -----------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,690 $ 3,020
Short-term investments 8,550 21,480
Accounts receivable, net of allowances 18,713 18,046
Inventories - Note B 8,107 8,003
Deferred income tax benefit 4,403 3,874
Other 1,109 1,072
-------- --------
TOTAL CURRENT ASSETS 42,572 55,495
PROPERTY, PLANT AND EQUIPMENT - NET 5,291 6,506
OTHER ASSETS 965 1,892
-------- --------
$ 48,828 $ 63,893
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,128 $ 1,990
Customer advances 401 332
Employee compensation 1,858 1,655
Commissions payable 559 526
Current portion of long-term debt 269 269
Income taxes payable 869 --
Other 387 366
-------- --------
TOTAL CURRENT LIABILITIES 6,471 5,138
LONG-TERM DEBT, LESS CURRENT PORTION 66 66
SHAREHOLDERS' EQUITY:
Common stock (15,195) 9,847
Retained earnings 57,486 48,842
-------- --------
TOTAL SHAREHOLDERS' EQUITY 42,291 58,689
-------- --------
$ 48,828 $ 63,893
======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
FORM 10 - Q - - PART I - ITEM 1 (CONTINUED)
EMPI, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
------- ------- ------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $18,728 $18,409 $53,991 $54,878
Cost of goods sold 4,705 4,839 13,675 14,269
------- ------- ------- -------
GROSS PROFIT 14,023 13,570 40,316 40,609
Operating expenses:
Selling, general and administrative 7,809 8,393 24,284 25,960
Research and development 924 1,018 2,609 2,965
------- ------- ------- -------
Total operating expenses 8,733 9,411 26,893 28,925
------- ------- ------- -------
INCOME FROM OPERATIONS 5,290 4,159 13,423 11,684
Other income, net 100 206 633 681
------- ------- ------- -------
EARNINGS BEFORE INCOME TAXES
5,390 4,365 14,056 12,365
Income tax expense 2,075 1,681 5,412 4,761
------- ------- ------- -------
NET EARNINGS $ 3,315 $ 2,684 $ 8,644 $ 7,604
======= ======= ======= =======
BASIC EARNINGS PER SHARE $ .49 $ .33 $ 1.20 $ .94
======= ======= ======= =======
Weighted average shares
outstanding - Note C 6,757 8,035 7,227 8,091
DILUTED EARNINGS PER SHARE $ .49 $ .33 $ 1.18 $ .92
======= ======= ======= =======
Diluted weighted average shares
outstanding - Note C 6,822 8,230 7,305 8,281
</TABLE>
See notes to consolidated financial statements.
<PAGE>
FORM 10 - Q - - PART I - ITEM 1 (CONTINUED)
EMPI, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1998 1997
-------- --------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 8,644 $ 7,604
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,481 2,888
Provision for deferred income taxes (529) (46)
Provision for loss on accounts receivable 1,702 1,723
Changes in operating assets and liabilities:
Accounts receivable (2,369) (2,576)
Inventories (104) (1,087)
Other assets/liabilities 39 (163)
Accounts payable and accrued expenses 443 (358)
Income taxes payable 921 (151)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 11,228 7,834
INVESTING ACTIVITIES
Maturities of short-term investments 24,349 14,700
Purchase of short-term investments (11,419) (18,511)
Reductions in other assets -- 410
Purchase of equipment and improvements (394) (1,469)
-------- --------
NET CASH PROVIDED BY(USED IN) INVESTING ACTIVITIES 12,536 (4,870)
FINANCING ACTIVITIES
Principal payments on long-term debt -- (12)
Purchases and retirement of common stock (25,277) (6,403)
Proceeds from exercise of common stock options 183 3,025
-------- --------
NET CASH USED IN FINANCING ACTIVITIES (25,094) (3,390)
-------- --------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (1,330) (426)
Cash and cash equivalents at beginning of year 3,020 2,849
-------- --------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 1,690 $ 2,423
======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
FORM 10 - Q - - PART I - ITEM 1 (CONTINUED)
EMPI, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management of the Company, all
adjustments (consisting of only normal recurring accruals) considered necessary
for a fair presentation of the results have been included. Operating results for
the three months and nine months ended September 30, 1998 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1998. For further information, refer to the consolidated financial statements
and footnotes thereto included in Empi, Inc. and Subsidiaries' annual report on
Form 10-K for the year ended December 31, 1997.
NOTE B - INVENTORIES
(In thousands)
September 30 December 31
1998 1997
------ ------
(Unaudited) (Audited)
Finished goods $5,742 $5,515
Work-in-process 822 556
Raw materials and purchased parts 1,543 1,932
------ ------
$8,107 $8,003
====== ======
<PAGE>
FORM 10 - Q - - PART I - ITEM 1 (CONTINUED)
NOTE C - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
------ ------ ------ ------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net income $3,315 $2,684 $8,644 $7,604
Denominator for earnings per share:
Weighted average shares; denominator
for basic earnings per share 6,757 8,035 7,227 8,091
Effect of dilutive securities:
Employee and nonemployee stock options 65 195 78 190
------ ------ ------ ------
Dilutive common shares; denominator
for diluted earnings per share 6,822 8,230 7,305 8,281
====== ====== ====== ======
Basic earnings per share $ .49 $ .33 $ 1.20 $ .94
====== ====== ====== ======
Diluted earnings per share $ .49 $ .33 $ 1.18 $ .92
====== ====== ====== ======
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Results of Operations
Sales
The Company's net sales for the third quarter of 1998 were $18.7 million, a 2%
increase over the 1997 third quarter sales of $18.4 million. Net sales for the
first nine months of 1998 totaled $54.0 million compared to 1997 sales for the
same period of $54.9 million, representing a 2% decrease. Electrotherapy sales
accounted for 63% of net sales for both the third quarter and first nine months
of 1998 in comparison to 64% and 66%, respectively, for the same periods in
1997. Net sales for the third quarter of 1998 for both the electrotherapy and
orthotics product groups were flat in comparison to the 1997 third quarter.
Sales growth of 9% was achieved by the iontophoretic drug delivery group;
whereas, the incontinence product line experienced a sales decrease of 24% from
a small base. International sales remained soft, due to the strength of the U.S.
dollar, accounting for approximately 3% of net sales for both the third quarter
and the first nine months of 1998.
Even though Empi continues to encounter pricing pressures from third-party
payors and price volume concessions within preferred supplier agreements
relative to its electrotherapy products, the Company's overall average selling
prices for these products have improved in 1998 given the shift from wholesale
to retail sales. Lack of Medicare reimbursement for pelvic floor stimulation
continues to adversely impact growth of the Company's incontinence product line,
and management does not anticipate that this situation will change in the near
future. As fourth quarter net sales are expected to be at or slightly above
third quarter net sales, the Company anticipates that net sales for calendar
year 1998 will remain flat at best in comparison to 1997.
Gross Profit
Gross profit for the third quarter of 1998 was $14.0 million, or 74.9% of net
sales, as compared to $13.6 million, or 73.7% of net sales, for the 1997 third
quarter. For the first nine months of 1998 and 1997, gross profit was $40.3
million and $40.6 million, or 74.7% and 74.0% of net sales, respectively. The
higher gross profit margins for the third quarter and the first nine months of
1998 reflect favorable pricing obtained from new supplier agreements.
The Company anticipates that throughout 1998, gross profit, as a percentage of
net sales, will remain near its current level or experience a slight decrease.
Factors that continue to influence the Company's gross profit margin include:
competitive pricing pressures, shifts in product mix, proportion of wholesale to
retail sales, and efficiencies achieved in manufacturing and distribution.
Selling, General and Administrative
Selling, general and administrative expenses were $7.8 million and $8.4 million,
or 41.7% and 45.6% of net sales, during the third quarter of 1998 and 1997,
respectively. For the first nine months of 1998 and 1997, SG&A expenses were
$24.3 million and $26.0 million, or 45.0% and 47.3% of net sales, respectively.
Contributors to lower SG&A expenditures in the first nine months of 1998
included reductions in depreciation and facility-related expenses.
<PAGE>
FORM 10 - Q - - PART I - ITEM 2 (Continued)
Research and Development
Research and development expenses for the 1998 third quarter were $924,000, or
4.9% of net sales, as compared to $1.0 million, or 5.5% of net sales, for the
third quarter of 1997. For the first nine months of 1998 research and
development expenses were $2.6 million, or 4.8% of net sales, versus $3.0
million, or 5.4% of net sales, for the first nine months of 1997. Research and
development spending continues to be driven in the first nine months of 1998 by
activities related to the development of new and next-generation products, the
development of new applications of existing technology as with iontophoresis,
and continuation engineering.
Empi's products are regulated under the federal Food, Drug and Cosmetic Act
requiring clearance from the U.S. Food and Drug Administration (FDA) prior to
market introduction. The Company's long-term growth is dependent upon continued
FDA clearance, which may be delayed or denied, thus determining the successful
introduction of new products or new applications of existing technology.
Other Income and Expenses
Interest income for the third quarter and first nine months of 1998 was $120,000
and $554,000, respectively, compared to $237,000 and $713,000 in the same
periods of 1997. The decrease in interest income was attributable to a lower
cash position, resulting primarily from the Company's aggressive stock
repurchasing in the first half of 1998.
Net Earnings
Net earnings for the third quarter of 1998 were $3.3 million in comparison to
$2.7 million for the 1997 third quarter, an increase of 23.5%. Net earnings for
the first nine months of 1998 and 1997 were $8.6 million and $7.6 million,
respectively. Net earnings improved in 1998 as a result of an increase in gross
margin percentage and an overall decrease in operating expenses of approximately
7%. The effective tax rate for each of the third quarters of 1998 and 1997
remained flat at 38.5%.
Although the Company experienced strong net earnings growth in 1998 (13.7%
increase during the nine-month period), Empi believes this trend will not
continue in 1999 without both a growth in net sales and continued management of
expenses.
Liquidity and Capital Requirements
The Company's cash and security investments approximated $10.2 million as of
September 30, 1998, a decrease of $14.3 million from year end 1997 due to Empi's
aggressive stock repurchase efforts during the first half of 1998. The Company
has purchased a total of 1,301,500 shares year to date at a total cost of
approximately $25.3 million. Empi's working capital as of September 30, 1998 was
$36.1 million, a decrease of approximately $14.3 million compared to the
Company's working capital position at the end of calendar year 1997. The current
ratio at the end of the third quarter was 6.6 to 1. The Company believes its
existing cash and security investments, together with internally generated
funds, will be sufficient to meet its working capital and other cash
requirements for the immediate and foreseeable future.
<PAGE>
FORM 10 - Q - - PART I - ITEM 2 (Continued)
Year 2000
The Year 2000 ("Y2K") century date issue affects software, hardware and
databases from nearly every source. Historically, most computer systems were
designed to represent century dates with two digits rather than four. As a
result, if these systems recognize "00" as the year 1900 rather than the year
2000, the systems could fail or create erroneous results. Incomplete or untimely
resolution of the Y2K issue by the Company, its key suppliers, customers and
other parties could have a material adverse effect on the Company's results of
operations, financial condition and cash flows. To address the Y2K issue, Empi
has established a Year 2000 Project led by the Chief Financial Officer, with
participation from the Director of Information Systems and other business
department representatives.
The Company's Y2K Project is divided into three major phases: Inventory and
Assessment of Business Systems, Remediation and Replacement, and Testing.
Inventory and Assessment of Business Systems
This phase commenced in August of 1998 and was designed to identify internal and
external business systems that are susceptible to failure or miscalculation due
to the Y2K issue. The Company has recently substantially completed the inventory
of its information technology ("IT") business systems, and has set a goal to
complete the assessment of critical IT systems by November 1998. The Company
plans to complete the inventory of its non-information technology ("Non-IT")
systems in December of 1998, with the assessment of Non-IT and non-critical IT
systems substantially completed by January of 1999. Non-IT systems include, but
are not limited to, manufacturing production lines, elevators, heating and air
conditioning systems.
As part of this phase, Empi sent questionnaires to over 3,000 suppliers and
service providers requesting representation as to their Y2K readiness. The
Company has identified 200 of these vendors as critical to its business
operations. Similar questionnaires will be submitted to significant customers,
including managed health care organizations and governmental entities, in first
quarter of 1999. The Company will continue to monitor the readiness of key
suppliers and customers throughout 1999.
Remediation and Replacement
The Company expects that remediation and replacement will commence in early
1999, with a projected completion date of May 1999 for all affected internal
business systems. In developing its plan, the Company will prioritize the
remediation of all critical IT systems. To date, the Company has spent only a
minimal amount in the inventory and assessment phase. Given the Company's
initial assessment, the estimated total cost of remediation and replacement will
be $500,000. Internally generated cash flows are expected to fund these costs,
of which a substantial amount will be capitalized.
Testing
Testing of the remediation and replacement of affected systems is expected to
occur throughout 1999.
<PAGE>
FORM 10 - Q - - PART I - ITEM 2 (Continued)
Empi's company-wide efforts involved with its Year 2000 Project are being
designed to minimize the adverse effects of significant disruptions. There is no
assurance that the Company's Y2K readiness efforts will prevent a material
adverse impact on its results of operations, financial condition and cash flows
since its compliance is dependent upon third parties also being Y2K ready in a
timely manner. Noncompliance by the Company or these third parties could result
in, among other things, delays in billing and collection, delays in the receipt
of supplies, and delays in delivery of finished product. Beginning in early
1999, contingency plans will be developed to mitigate, to the extent possible,
potential disruptions. The Company believes that if unforeseen delays were to
occur within the manufacturing process, consigned inventory of certain products
could be utilized to meet customers' immediate needs.
Cautionary Statements
The Management's Discussion and Analysis contains certain forward-looking
statements related primarily to flat or increased net sales in the fourth
quarter; gross profits remaining at current levels or decreasing; and Year 2000
issues, potential resolutions and costs. The statements are subject to certain
risks and uncertainties, which could cause results to differ materially from
those projected. These risks and uncertainties, in addition to those discussed
in Management's Discussion and Analysis, include (i) shifts in product mix and
proportion of wholesale to retail sales; (ii) competitive pricing pressures and
manufacturing and distribution efficiencies; and (iii) the accuracy and
reliability of the Company's, its suppliers' and its customers' assessment and
remediation of Year 2000 issues.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable
<PAGE>
PART II - - OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders
None
Item 5. Other Information
On October 13, 1998, Empi announced that its board of directors approved
additional funding for an expanded share repurchase program to be executed by
management over the next several quarters. The Company's intention to continue
its stock repurchase program during the next several quarters is dependent upon
current and future market conditions and the Company's available cash and
security investments.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description Page No.
(27) Financial Data Schedule
(filed only in electronic format)
(b) No report on Form 8-K has been filed during the quarter ended
September 30, 1998.
<PAGE>
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 thereto duly authorized.
Empi, Inc.
By /s/ Joseph E. Laptewicz, Jr.
November 16, 1998 Joseph E. Laptewicz, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
By /s/ Patrick D. Spangler
November 16, 1998 Patrick D. Spangler
Vice President, Chief Financial Officer
and Assistant Secretary
(Principal Financial and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THIRD
QUARTER 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 1,690
<SECURITIES> 8,550
<RECEIVABLES> 23,416
<ALLOWANCES> 4,703
<INVENTORY> 8,107
<CURRENT-ASSETS> 42,572
<PP&E> 17,666
<DEPRECIATION> 12,375
<TOTAL-ASSETS> 48,828
<CURRENT-LIABILITIES> 6,471
<BONDS> 0
0
0
<COMMON> (15,195)
<OTHER-SE> 57,486
<TOTAL-LIABILITY-AND-EQUITY> 48,828
<SALES> 53,991
<TOTAL-REVENUES> 53,991
<CGS> 13,675
<TOTAL-COSTS> 13,675
<OTHER-EXPENSES> 26,893
<LOSS-PROVISION> 1,702
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 14,056
<INCOME-TAX> 5,412
<INCOME-CONTINUING> 8,644
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,644
<EPS-PRIMARY> 1.20
<EPS-DILUTED> 1.18
</TABLE>
