FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
September 30, 1996
Commission file number 1-9983
OEC MEDICAL SYSTEMS, INC.
(Registrant)
Incorporated in the State of Delaware
I.R.S. Employer Identification Number 94-2538512
384 Wright Brothers Drive, Salt Lake City, Utah 84116
(Address of Principal Executive Offices)
Telephone: (801) 328-9300
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 requirements
for the past 90 days.
Yes X No
----
As of October 31, 1996, there were 13,119,049 shares of Common Stock ($.01 par
value) outstanding.
Part I. Financial Information
Item 1. Financial Statements
OEC MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE & NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(In thousands, except per share amounts)
(unaudited)
Quarter Ended Nine Months
September 30, Ended September 30,
1995 1996 1995 1996
Net sales
Product $29,948 $21,571 $78,611 $63,048
Service 4,079 3,899 12,193 11,353
------- ------- ------- -------
Total net sales 34,027 25,470 90,804 74,401
------- ------- ------- -------
Cost of sales
Product 17,477 12,685 46,170 37,464
Service 2,927 2,359 8,228 6,595
------- ------- ------- -------
Total cost of sales 20,404 15,044 54,398 44,059
------- ------- ------- -------
Gross margin 13,623 10,426 36,406 30,342
------- ------- ------- -------
Operating Expenses
Research and development 2,229 1,942 6,447 5,821
Marketing and sales 5,577 4,391 15,357 13,128
Administrative, general
and other 2,116 1,315 5,210 4,344
------- ------- ------- --------
Total operating expenses 9,922 7,648 27,014 23,293
------- ------- ------- --------
Operating income 3,701 2,778 9,392 7,049
Interest income 179 198 566 500
Interest expense (5) (5) (8) (9)
------- ------- ------- -------
Income before income taxes 3,875 2,971 9,950 7,540
Income tax benefit -- 170 -- 855
------- ------- ------- -------
Net income $3,875 $3,141 $9,950 $8,395
======= ======= ======= =======
Net income per common
and common equivalent
share: $ 0.30 $ 0.25 $ 0.78 $ 0.67
======= ======= ======= =======
Common and common
equivalent shares 12,777 12,584 12,815 12,558
OEC MEDICAL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(In thousands)
ASSETS
1996 1995
(Unaudited)
Current Assets:
Cash and temporary cash investments $13,889 $16,584
Accounts and notes receivable, net of
allowances of $854 and $577, respectively 32,134 24,982
Inventories 23,870 18,031
Prepaid expenses and other current assets 1,433 885
Deferred income taxes 7,967 5,810
------- -------
Total current assets 79,293 66,292
Long-term receivables 1,607 1,002
Property and equipment, net 11,385 9,868
Cost in excess of net assets acquired,
net of accumulated amortization
of $8,023 and $7,542, respectively 10,373 10,854
Deferred income taxes 3,125 2,898
Other assets, net 718 548
------- -------
$106,501 $91,462
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $7,454 $ 4,673
Accrued salaries and benefits 3,666 2,920
Accrued warranty and installation costs 1,747 1,259
Deferred income and customer deposits 6,045 5,511
Income taxes payable 58 412
Accrued legal fees and litigation
settlements 3,929 3,793
Accrued distributor commissions 2,760 1,892
Other accrued liabilities 2,945 1,932
------ ------
Total current liabilities 28,604 22,392
------ ------
Stockholders' equity:
Preferred stock, $.01 par value
Authorized--2,000 shares,
including 1,100 shares
of convertible preferred stock,
none outstanding
Common stock, $.01 par value
Authorized--30,000 shares
Outstanding--12,919 and 12,789
shares, respectively 129 128
Capital in excess of par value 77,168 76,344
Stock subscription receivable (210) (210)
Retained earnings/(Accumulated deficit) 6,824 (3,126)
Treasury stock, 729 and 560 shares at
cost, respectively (5,842) (4,056)
Foreign currency translation adjustment (172) (10)
-------- -------
Total stockholders' equity 77,897 69,070
-------- -------
$106,501 $91,462
======== =======
OEC MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(In thousands)
(unaudited)
1996 1995
OPERATING ACTIVITIES:
Net income $ 9,950 $ 8,395
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 2,191 2,444
Bad debt expense 115 --
Deferred income tax benefit (2,384) (1,306)
Changes in current assets and liabilities:
Accounts and notes receivable (7,267) 3,146
Inventories (5,839) (893)
Prepaid expenses and other
current assets (548) (359)
Other assets (170) (296)
Accounts payable 2,781 (1,440)
Accrued salaries and benefits 746 210
Accrued warranty and installation
costs 488 167
Deferred income and customer deposits 534 66
Income taxes payable (354) 51
Accrued legal fees and litigation
settlements 136 (204)
Accrued distributor commissions 868 (566)
Other accrued liabilities 1,013 253
------ ------
Net cash provided by operating activities 2,260 9,668
------ ------
INVESTING ACTIVITIES:
Increases in long-term receivables (605) (520)
Additions to property and equipment, net (3,227) (688)
Other (162) 29
------ ------
Net cash used by investing activities (3,994) (1,179)
------ ------
FINANCING ACTIVITIES:
Sales of common stock, net 825 1,685
Purchases of treasury stock (1,786) (2,891)
------ ------
Net cash used by financing activities (961) (1,206)
------ ------
Net increase (decrease) in cash and
temporary cash investments (2,695) 7,283
Cash and temporary cash investments
at beginning of period 16,584 7,608
------- -------
Cash and temporary cash investments
at end of period $13,889 $14,891
------- -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $8 $9
Cash paid during the period for
income taxes $2,738 $554
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the nine months ended September 30, 1995, the Company increased its net
deferred income tax asset by $1,414, as a result of reducing the valuation
allowance on the deferred tax assets. Of the total $1,414 of valuation
allowance reallocation, $108 was credited directly to stockholders' equity and
$1,306 was recorded as a deferred tax benefit.
OEC MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995
(unaudited)
1. Interim information is unaudited but, in the opinion of Company management,
all adjustments necessary for a fair presentation of interim results have
been included. The results for the nine months ended September 30, 1996 and
1995, are not necessarily indicative of the results to be expected for the
entire year. These financial statements and notes should be read in
conjunction with the Company's financial statements for the year ended
December 31, 1995, filed on Form 10-K on April 1, 1996.
2. Inventories are stated at the lower of cost, utilizing the first-in/first-
out method, or market. Inventories consist of the following:
September 30, December 31,
1996 1995
(In thousands)
Purchased parts and
completed subassemblies $9,256 $ 8,190
Work-in-process 3,718 3,216
Finished goods 11,034 5,147
Service and repair parts 3,896 4,171
------- --------
Total 27,904 20,724
Less: reserves (4,034) (2,693)
------- --------
Net $ 23,870 $ 18,031
======= ========
OEC MEDICAL SYSTEMS, INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
For the third quarter and nine months ended September 30, 1996, OEC Medical
Systems, Inc. had net income of $3.9 million and $9.9 million, respectively,
compared with net income of $3.1 million and $8.4 million, respectively, for the
same periods last year. The results for the nine month period ended September
30, 1996 has no tax expense or benefit compared to 1995 which had a $0.9 million
benefit, or $.07 per share resulting primarily from the reversal of certain
reserves against deferred tax assets. These reserves were established upon the
adoption of Statement of Financial Accounting Standard No. 109 in the first
quarter of 1993. As of September 30, 1996, the company has fully reversed its
deferred tax reserve. Going forward, the company expects to accrue taxes at a
34% tax rate.
The following table sets forth OEC's operating results as a percent of net
sales:
Three Months Nine Months
1996 1995 1996 1995
Net sales
Product 88.01% 84.69% 86.57% 84.74%
Service 11.99% 15.31% 13.43% 15.26%
------ ------ ------ -----
Total net sales 100.00% 100.00% 100.00% 100.00%
Cost of sales
Product 51.36% 49.81% 50.85% 50.36%
Service 8.60% 9.26% 9.06% 8.86%
------ ------ ------ ------
Total cost of sales 59.96% 59.07% 59.91% 59.22%
Gross margin 40.04% 40.93% 40.09% 40.78%
Operating expenses:
Research and development 6.55% 7.62% 7.10% 7.82%
Marketing and sales 16.39% 17.24% 16.91% 17.65%
Administrative, general
and other 6.22% 5.16% 5.74% 5.84%
------ ------ ------ ------
Total operating expenses 29.16% 30.02% 29.75% 31.31%
------ ------ ------ ------
Operating income 10.88% 10.91% 10.34% 9.47%
Net income 11.39% 12.33% 10.96% 11.28%
Sales and Markets
Net product sales for the quarter and nine months ended September 30, 1996, were
$29.9 million and $78.6 million, respectively, compared to net product sales of
$21.6 million and $63.0 million respectively, for the comparable periods of
1995. This reflects 39% and 25% increases, respectively.
The order rate for the company's core product, the Series 9600 Digital Mobile
Imaging System, is ahead of last year both domestically and internationally.
The increase is a result of increased coverage and acceptance of the product in
all regions. Growth in the sales of the Uroview 2600 contributed significantly
to the overall revenue increase again this quarter and put that segment
significantly ahead of prior years. Revenue from the newly introduced MINI 6600
and COMPACT 7600 C-arms also contributed to the overall revenue growth. The
6600 is gaining market acceptance in line with the company's expectations.
However, the 7600 market penetration and acceptance has not yet met the
company's plan. Although product sales have been improving, continued
competitive pricing pressures in all product categories are expected to remain
worldwide for the foreseeable future.
Service revenue for the quarter and nine months ended September 30, 1996 was
$4.1 million and $12.2 million, respectively, up from the previous year's $3.9
million and $11.4 million. Revenue growth in service has slowed somewhat from
prior years. The main reason is that independent service organizations and the
consolidation of hospitals have taken away some of the service revenue
opportunities.
Margin Analysis
OEC's gross margin expressed as a percentage of net sales decreased 0.9% for the
third quarter and 0.7% for the nine months when compared with the same periods
in 1995. Ongoing improvements in manufacturing efficiency did not fully offset
the impact of continuing increased competition and pricing pressures.
Service expenses for the quarter and nine months were up against last year $0.6
million and $1.6 million, respectively. These increases are attributed to
higher labor costs and lower warranty utilization due to increasing system
reliability.
Operating Expenses
Research and development costs are up $0.3 and $0.6 million, for the three and
nine month periods, respectively. This reflects our continuing investment in
product development and improvements.
Marketing and sales are up $1.2 million and $2.2 million, respectively, for the
three and nine month periods. This increase is due primarily to greater
commissions because of higher sales, and increased costs associated with more
coverage, both domestically and internationally, to obtain the higher revenue.
Expressed as a percentage of total revenue, the marketing and sales expense is
down 0.8% and 0.7%, respectively.
Administrative expenses are up $0.8 million and $0.9 million, for the three and
nine months, respectively. The main reason for the increase in the third
quarter was the cost associated with the implementation of the new computer
system and the associated training costs. This will continue into the first
quarter of 1997 but at lower levels.
Income Taxes
During 1996, the company has reversed the remaining balance of the valuation
allowance for the deferred tax assets. The company believes that it will
generate enough taxable income to fully utilize the deferred tax assets,
primarily made up of tax credits, prior to their expiration. This reversal of
the valuation allowance has offset the tax provisions required for federal and
state income taxes. Going forward, the company expects to accrue tax expense at
an estimated 34% tax rate.
Liquidity and Capital Resources
Cash provided by operations for the first nine months of 1996 was $2.3 million,
compared to $9.7 million for the first nine months of 1995. The primary
operational cash uses were increases in accounts receivable due to increased
revenues and extended payment arrangements, inventory increases to support
increased production and provide additional demonstration units and federal and
state income taxes paid after net operating losses were fully utilized.
PART II. Other information.
ITEM 1. Legal proceedings
There are no significant changes in legal proceedings from the previous stated
position in the Company's annual report for 1995 or Form 10K filed with the
Securities & Exchange Commission on April 1, 1996.
ITEM 6. Exhibits
(a) The following exhibit (numbered in accordance with Item 601 of SEC
Regulations S-K) is filed as part of this report:
None
(b) Reports on Form 8-K
Not applicable.
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.
OEC MEDICAL SYSTEMS, INC.
(Registrant)
By: /s/ Randy W. Zundel
Randy W. Zundel
Chief Financial Officer
(Principal Accounting Officer)
Date: November 12, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE BALANCE SHEET AS OF SEPTEMBER 30, 1996, AND STATEMENTS
OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 13,889
<SECURITIES> 0
<RECEIVABLES> 32,988
<ALLOWANCES> 854
<INVENTORY> 23,870
<CURRENT-ASSETS> 79,293
<PP&E> 24,431
<DEPRECIATION> 13,046
<TOTAL-ASSETS> 106,501
<CURRENT-LIABILITIES> 28,604
<BONDS> 0
<COMMON> 129
0
0
<OTHER-SE> 77,768
<TOTAL-LIABILITY-AND-EQUITY> 106,501
<SALES> 78,611
<TOTAL-REVENUES> 90,804
<CGS> 46,170
<TOTAL-COSTS> 54,398
<OTHER-EXPENSES> 27,014
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8
<INCOME-PRETAX> 9,950
<INCOME-TAX> 0
<INCOME-CONTINUING> 9,950
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,950
<EPS-PRIMARY> (.78)
<EPS-DILUTED> (.78)
</TABLE>
