UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
For the first quarter period ended November 30, 2000
or
( ) Transition Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934.
For the transition period from ____________ to ____________
Commission File Number 0-20212
ARROW INTERNATIONAL, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1969991
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2400 Bernville Road, Reading, Pennsylvania 19605
------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(610) 378-0131
--------------
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
- -
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest
practicable date.
Class Shares outstanding at January 11, 2001
------- --------------------------------------
Common Stock, No Par Value 21,988,613
<PAGE>
ARROW INTERNATIONAL, INC.
Form 10-Q Index
Page
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[S] [C]
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at
November 30, 2000 and August 31, 2000 3-4
Consolidated Statements of Income 5
Consolidated Statements of Cash Flows 6-7
Consolidated Statements of
Comprehensive Income 8
Notes to Consolidated Financial
Statements 9-12
Item 2. Management's Discussion and Analysis of
Financial Condition and
Results of Operations 13-17
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
Signature 20
Exhibit Index 21
-2-
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
ARROW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
November 30, August 31,
2000 2000
------------ ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,110 $ 3,959
Accounts receivable, net 78,298 73,796
Inventories 84,050 82,801
Prepaid expenses and other 18,178 15,964
Deferred income taxes 2,979 3,131
---------- ----------
Total current assets 188,615 179,651
Property, plant and equipment:
Total property, plant and
equipment 227,295 223,416
Less accumulated depreciation (105,523) (101,976)
---------- ----------
121,772 121,440
---------- ----------
Goodwill, net 38,372 38,879
Intangible and other assets, net 38,911 41,270
Deferred income taxes 5,387 4,574
---------- ----------
Total other assets 82,670 84,723
---------- ----------
Total assets $ 393,057 $ 385,814
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
Continued
-3-
<PAGE>
<TABLE>
<CAPTION>
ARROW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
November 30, August 31,
2000 2000
------------ ----------
<S> <C> <C>
LIABILITIES
Current liabilities:
Current maturities of long-term
debt $ 8,215 $ 8,400
Notes payable 47,066 52,081
Accounts payable 9,027 8,151
Cash overdrafts 160 1,195
Accrued liabilities 9,918 9,316
Accrued compensation 6,935 8,049
Accrued income taxes 7,180 2,409
---------- ----------
Total current liabilities 88,501 89,601
Long-term debt 900 900
Accrued postretirement benefit
obligation 10,273 10,109
Commitments and contingencies - -
SHAREHOLDERS' EQUITY
Preferred stock, no par value;
5,000,000 shares authorized;
none issued - -
Common stock, no par value;
50,000,000 shares authorized;
issued 26,478,813 shares 45,661 45,661
Retained earnings 301,676 291,870
Less treasury stock at cost:
4,477,030 and 4,477,910 shares,
respectively (45,083) (45,092)
Accumulated other comprehensive
expense (8,871) (7,235)
---------- ----------
Total shareholders' equity 293,383 285,204
---------- ----------
Total liabilities and
shareholders' equity $ 393,057 $ 385,814
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
-4-
<PAGE>
<TABLE>
<CAPTION>
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
(Unaudited)
For the Three Months Ended
----------------------------
November 30, November 30,
2000 1999
------------ ------------
<S> <C> <C>
Net sales $ 77,308 $ 76,717
Cost of goods sold 35,650 35,337
-------- ---------
Gross profit 41,658 41,380
Operating expenses:
Research, development and engineering 6,090 5,371
Selling, general and administrative 18,303 18,243
Special charge - 3,320
-------- ---------
Operating income 17,265 14,446
Other expenses (income):
Interest expense, net of
amounts capitalized 729 463
Interest income (162) (149)
Other, net 92 160
-------- ---------
Other expenses, net 659 474
-------- ---------
Income before income taxes 16,606 13,972
Provision for income taxes 5,480 4,750
-------- ---------
Net income $ 11,126 $ 9,222
======== =========
Basic earnings per common share $ .51 $ .40
======== =========
Diluted earnings per common share $ .50 $ .40
======== =========
Cash dividends per common share $ .060 $ .055
======== =========
Weighted average shares outstanding
used in computing basic earnings
per common share 22,001,538 22,899,232
========== ==========
Weighted average shares outstanding
used in computing diluted earnings
per common share 22,134,017 22,899,232
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
-5-
<PAGE>
<TABLE>
<CAPTION>
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the Three Months Ended
------------------------------
November 30, November 30,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 11,126 $ 9,222
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 3,715 3,838
Special charge - 3,320
Amortization of intangible assets
and goodwill 1,398 1,246
Deferred income taxes (668) (161)
Unrealized holding loss on securities 620 149
Other 150 81
Changes in operating assets and liabilities:
Accounts receivable (5,306) 1,649
Inventories (1,446) (861)
Prepaid expenses and other (2,591) 393
Accounts payable & accrued liabilities 2,311 (2,453)
Accrued compensation (1,115) 432
Accrued income taxes 4,836 4,175
--------- ---------
Total adjustments 1,904 11,808
--------- ---------
Net cash provided by
operating activities 13,030 21,030
--------- ---------
Cash flows from investing activities:
Capital expenditures (4,316) (6,266)
Increase in intangible and other assets (201) (1,036)
Cash paid for business acquired, net - (10,595)
--------- ---------
Net cash used in investing activities (4,517) (17,897)
--------- ---------
Cash flows from financing activities:
Increase (decrease) in notes payable (4,903) 11,247
Principal payments of long-term debt (40) (235)
Decrease in book overdrafts (1,035) (394)
Dividends paid (1,320) (1,268)
Proceeds from stock options exercised 9 -
Purchase of treasury stock - (8,703)
--------- ---------
Net cash provided by (used)
in financing activities (7,289) 647
--------- ---------
Effect of exchange rate changes
on cash and cash equivalents (73) (30)
Net change in cash and cash equivalents 1,151 3,750
Cash and cash equivalents at
beginning of year 3,959 3,939
---------- ----------
Cash and cash equivalents at
end of period $ 5,110 $ 7,689
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
Continued
-6-
<PAGE>
<TABLE>
<CAPTION>
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(In thousands)
(Unaudited)
For the Three Months Ended
----------------------------
November 30, November 30,
2000 1999
------------ ------------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 729 $ 463
Income taxes $ 744 $ 903
Supplemental schedule of non-cash investing and financing
activities:
Estimated fair value of assets acquired,
net of cash acquired $ - $ 12,913
Cash paid for assets, net of
cash acquired of $460 - 10,595
-------- --------
Liabilities assumed $ - $ 2,318
======== ========
Cash paid for business acquired:
Working capital $ - $ (317)
Property, plant and equipment - 66
Goodwill, intangible assets and in-process
research and development - 11,306
-------- --------
$ - $ 11,055
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
-7-
<PAGE>
<TABLE>
<CAPTION>
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
For the Three Months Ended
-----------------------------
November 30, November 30,
2000 1999
------------ ------------
<S> <C> <C>
Net income $ 11,126 $ 9,222
Other comprehensive income (expense):
Currency translation adjustments (638) (143)
Unrealized holding loss on securities,
net of tax ($620 and $149, respectively) (998) (211)
--------- ---------
Other comprehensive expense (1,636) (354)
Total comprehensive income $ 9,490 $ 8,868
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
-8-
<PAGE>
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
Note 1 - Basis of Presentation:
These unaudited consolidated financial statements include all
adjustments, consisting only of normal recurring accruals, which
management considers necessary for a fair presentation of the
Company's consolidated financial position, results of operations,
and cash flows for the interim periods presented. Results for
the interim periods are not necessarily indicative of results for
the entire year. Such statements are presented in accordance
with the requirements of Form 10-Q and do not include all
disclosures normally required by generally accepted accounting
principles or those normally made on Form 10-K.
Note 2 - Inventories:
Inventories are summarized as follows:
<TABLE>
<CAPTION>
November 30, August 31,
2000 2000
----------- ----------
<S> <C> <C>
Finished goods $ 27,456 $ 27,706
Semi-finished goods 20,260 18,742
Work-in-process 10,269 10,562
Raw materials 26,065 25,791
---------- ----------
$ 84,050 $ 82,801
========== ==========
</TABLE>
Note 3 - Commitments and Contingencies:
The Company is a party to certain legal actions, including
product liability matters, arising in the ordinary course of its
business. From time to time, the Company is also subject to
legal actions involving patent and other intellectual property
claims. The Company is currently a party to two unrelated
lawsuits involving alleged infringement by third parties of
patents owned by the Company relating to its IAB catheter and
constant flow delivery pump products. The Company is also a
defendant in two related lawsuits alleging that certain of its
hemodialysis catheter products infringe patents owned by a third
party. Based upon information presently available to the
Company, the Company believes it has valid and enforceable legal
rights and/or adequate legal defenses with respect to these
actions. Although the ultimate outcome of these actions is not
expected to have a material adverse effect on the Company's
business or financial condition, whether an adverse outcome in
any one or more of these actions would materially adversely
effect the Company's reported results of operations in any future
period cannot be predicted with certainty.
Note 4 - Accounting Policies:
Certain prior period information has been reclassified for
comparative purposes.
Continued
-9-
<PAGE>
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
Note 4 - Accounting Policies: (Continued)
Financial Instruments:
Effective September 1, 2000, the Company adopted FASB Statement
No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("FAS 133"). FAS 133 requires that all derivative
financial instruments, such as foreign exchange contracts, be
recognized in the financial statements and measured at fair value
regardless of the purpose or intent for holding them. Changes in
the fair value of derivative financial instruments are either
recognized periodically in income or shareholders' equity (as a
component of comprehensive income), depending on whether the
derivative is being used to hedge changes in fair value or cash
flows. The adoption of FAS 133 did not have a material effect on
the Company's financial statements or cash flows.
The carrying value of the Company's financial instruments
approximates fair value. The fair value of financial instruments
is generally determined by reference to market values resulting
from trading on a national securities exchange or in an over-the-
counter market. In cases where quoted market prices are not
available, such as for derivative financial instruments, fair
value is based on estimates using present value or other
valuation techniques.
Note 5 - Business Acquisition:
On September 1, 1999, the Company completed the acquisition of
Sometec, S.A., a French development company that has recently
developed a non-invasive esophageal ultrasound probe that
continuously measures descending aortic blood flow, for
approximately $11,000. The acquisition has been accounted for
using the purchase method of accounting. The excess of the
purchase price over the estimated fair value of the net assets
acquired is being amortized over a period of 20 years.
Intangible assets acquired are being amortized over a period of
10 years. The results of operations of this business are
included in the Company's consolidated financial statements from
the date of acquisition. Pro forma amounts are not presented as
this acquisition has no material effect on the Company's results
of operations or financial condition.
Note 6 - Special Charge:
In the first quarter of fiscal 2000, the Company recorded a non-
cash pre-tax special charge of $3,320 ($2,208 after tax or $.10
per basic and diluted common share) related primarily to a
write-down for the in-process research and development
acquired in connection with the Company's acquisition of Sometec,
S.A. (see footnote 5). The technology acquired is a compact
monitoring device that measures and monitors the descending
aortic blood flow during anesthesia and intensive care. The
device provides real-time aortic blood flow (a measurement
Continued
-10-
<PAGE>
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
Note 6 - Special Charge: (Continued)
of cardiac output) by using both pulsed Doppler for measuring
blood velocity and M-mode ultrasound to accurately measure the
aortic diameter. The monitoring system consists of four main
components: the main console (monitor), a transesophagael probe,
a disposable jacket and an articulated probe holder. The monitor
provides the physician with a continuous display of a patient's
hemodynamic profile, including aortic blood flow, heart rate,
stroke volume, peak velocity, acceleration, left ventricular
ejection time and systemic vascular resistance. To facilitate
use of this device, a disposable jacket, containing an acoustic
gel, is placed over the probe utilizing a special vacuum mounting
tool supplied with the jacket. The Company believes that the
speed and ease of use of this new noninvasive measurement
technique has the potential of establishing cardiac output as a
frequently used physician tool with value similar to blood
pressure, EKG and pulse oximetry measurements. In accordance
with SFAS No. 2, "Accounting for Research and Development Costs"
and FIN No. 4, "Applicability of SFAS No. 2 to business
combinations accounted for by the Purchase Method", these costs
were charged to expense at the date of consummation of the
acquisition. The value assigned to purchase Sometec in-process
technology was based on a valuation prepared by an independent
third-party appraisal company. Each of the technologies under
development at the date of acquisition was reviewed for
technological feasibility, stage of completeness at the
acquisition date, and scheduled release dates of products
employing the technology to determine whether the technology was
complete or under development. At the acquisition date, the
research and development project was estimated to be 75%
complete. Incomplete development efforts at the time of
acquisition included improved portability, software development
and development of the disposable sheath. The valuation was
based on the estimated cash flows resulting from commercially
viable products discounted to present value using a risk adjusted
after tax discount rate of 22%. The research and development
costs from these projects have commenced. Some cash inflows from
these projects have commenced. However, while the Company
believes these projects will be completed as planned, the Company
cannot assure you that they will be completed on schedule or once
completed, that the new products resulting from these projects
will be successfully introduced into the marketplace. The
Company does not anticipate material adverse changes from
historical pricing, margins and expense levels as a result of the
introduction of the new technologies related to the projects.
Note 7 - Segment Reporting:
The Company uses the "Management Approach" specified by SFAS No.
131, "Disclosures about Segments of an Enterprise and Related
Information". The management approach is based on the way
management organizes the segments within the enterprise for
making operating decisions and assessing performance. The
Company operates as a single reportable segment. The Company
operates in four main geographic regions, therefore, information
by product category and geographic areas is presented below.
-11-
<PAGE>
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
Note 7 - Segment Reporting: (Continued)
The following table provides quarterly information about the Company's
sales by product category:
<TABLE>
<CAPTION>
Quarter ended Quarter ended
November 30, 2000 November 30, 1999
------------------- ---------------------
Critical Cardiac Critical Cardiac
Care Care Care Care
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Sales to external
customers $ 64,900 $ 12,400 $ 63,900 $ 12,800
The following tables present quarterly information about geographic
areas:
Quarter ended November 30, 2000
---------------------------------------------------------
United Asia and Other
States Africa Europe Foreign Eliminations Consolidated
-------- -------- ------ ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 60,321 $ 8,085 $6,347 $2,555 $ - $ 77,308
Quarter ended November 30, 1999
----------------------------------------------------------
United Asia and Other
States Africa Europe Foreign Eliminations Consolidated
-------- -------- ------ ------- ------------ ------------
Sales to unaffiliated
customers $ 57,992 $ 9,348 $7,293 $2,084 $ - $ 76,717
</TABLE>
Export sales to unaffiliated customers were $7,673 and $7,948 for the
three months ended November 30, 2000 and November 30, 1999,
respectively.
Note 8 - New Accounting Standards:
Recently, the FASB's Emerging Issue Task Force ("EITF") released Issue
00-10, "Accounting for Shipping and Handling Revenues and Costs",
which requires amounts charged to customers for shipping and handling
be classified as revenue and provides further guidance in accounting
for shipping and handling costs. This EITF Issue is effective for the
fourth quarter of fiscal year 2001. The Company is currently
evaluating the impact EITF Issue 00-10 will have on its financial
statements, if any.
Note 9 - Subsequent Events:
As part of the Company's purchase of assets of the cardiac assist
division of C.R. Bard, Inc. in December 1998, the Company also agreed
to acquire specified assets and assume specified liabilities of the
Belmont Instruments Corporation for $5,000, $3,000 of which is planned
to be paid in January 2001, with the remaining $2,000 payable over the
next two years in eight quarterly installments of $250, commencing in
April 2001.
-12-
<PAGE>
ARROW INTERNATIONAL, INC.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion includes certain forward-looking
statements. Such forward-looking statements are subject to a
number of factors, including material risks, uncertainties and
contingencies, which could cause actual results to differ
materially from the forward-looking statements. For a discussion
of important factors that could cause actual results to differ
materially from the forward-looking statements, see Exhibit 99.1
to this Report and the Company's periodic reports and other
documents filed with the Securities and Exchange Commission.
Results of Operations
Three Months Ended November 30, 2000 Compared to Three Months
Ended November 30, 1999
Net sales for the first quarter of fiscal 2001 ended November 30,
2000 increased 0.8% to $77.3 million, compared with $76.7 million
in the same period last year. Net sales represent gross sales
invoiced to customers, less certain related charges, including
freight costs, discounts, returns and other allowances. Sales of
critical care products increased 1.6% to $64.9 million from $63.9
million in the comparable prior year period due primarily to
additional unit shipments of central venous catheters. Sales of
cardiac care products decreased to $12.4 million from $12.8
million, a decrease of 3.2% from the comparable fiscal 2000
period, principally as a result of lower international sales of
intra-aortic balloon products and the increased strength of the
U.S. dollar, relative to currencies in countries where the
Company operates direct sales subsidiaries. International sales
decreased by 7.5% to $24.7 million from $26.7 million in the same
prior year period, principally as a result of the increased
strength of the U.S. dollar, relative to currencies in countries
where the Company operates direct sales subsidiaries.
International sales represented 31.9% of net sales, compared to
34.8% in the comparable fiscal 2000 period. As a result of the
increased strength of the U.S. dollar, net sales for the quarter
decreased by $2.0 million.
Gross profit increased 0.7% to $41.7 million in the first quarter
of fiscal 2001 from $41.4 million in the same period of fiscal
2000. As a percentage of net sales, gross profit was 53.9% in
each of the three-month periods ended November 30, 2000 and 1999,
respectively.
Research, development and engineering expenses increased by 13.4%
to $6.1 million in the first quarter of fiscal 2001 from $5.4
million in the comparable prior year period. As a percentage of
net sales, these expenses increased in the first quarter of
fiscal 2001 to 7.9%, compared to 7.0% in the same period in
fiscal 2000, due primarily to increased clinical testing of the
LionHeartT, the Company's Left Ventricular Assist System.
-13-
<PAGE>
ARROW INTERNATIONAL, INC.
Selling, general and administrative expenses increased by 0.3% to
$18.3 million during the first quarter of fiscal 2001 from $18.2
million in the same period of fiscal 2000 and decreased as a
percentage of net sales to 23.7% in the first quarter of fiscal
2001 from 23.8% in the comparable period of fiscal 2000.
Increased domestic sales and marketing expenses were offset by
lower international expenses as a result of the increased
strength of the U.S. dollar, relative to currencies in countries
where the Company operates direct sales subsidiaries.
In the first quarter of fiscal 2000, the Company recorded a non-
cash pre-tax special charge of $3.3 million ($2.2 million after
tax or $.10 per basic and diluted common share) related primarily
to a write-down for the in-process research and development
acquired in connection with the Company's acquisition of Sometec,
S.A. (see Note 5 of Notes to Consolidated Financial Statements).
The technology acquired is a compact monitoring device that
measures and monitors the descending aortic blood flow during
anesthesia and intensive care. The device provides real-time
aortic blood flow (a measurement of cardiac output) by using both
pulsed Doppler for measuring blood velocity and M-mode ultrasound
to accurately measure the aortic diameter. The monitoring system
consists of four main components: the main console (monitor), a
transesophagael probe, a disposable jacket and an articulated
probe holder. The monitor provides the physician with a
continuous display of a patient's hemodynamic profile, including
aortic blood flow, heart rate, stroke volume, peak velocity,
acceleration, left ventricular ejection time and systemic
vascular resistance. To facilitate use of this device, a
disposable jacket, containing an acoustic gel, is placed over the
probe utilizing a special vacuum mounting tool supplied with the
jacket. The Company believes that the speed and ease of use of
this new noninvasive measurement technique has the potential of
establishing cardiac output as a frequently used physician tool
with value similar to blood pressure, EKG and pulse oximetry
measurements. In accordance with SFAS No. 2, "Accounting for
Research and Development Costs" and FIN No. 4, "Applicability of
SFAS No. 2 to business combinations accounted for by the Purchase
Method", these costs were charged to expense at the date of
consummation of the acquisition. The value assigned to purchase
Sometec in-process technology was based on a valuation prepared
by an independent third-party appraisal company. Each of the
technologies under development at the date of acquisition was
reviewed for technological feasibility, stage of completeness at
the acquisition date, and scheduled release dates of products
employing the technology to determine whether the technology was
complete or under development. At the acquisition date, the
research and development project was estimated to be 75%
complete. Incomplete development efforts at the time of
acquisition included improved portability, software development
and development of the disposable sheath. The valuation was
based on the estimated cash flows resulting from commercially
viable products discounted to present value using a risk adjusted
after tax discount rate of 22%. The research and development
costs from these projects have commenced. Some of the net cash
inflows from these projects have commenced. However, while the
Company believes these projects will be completed as planned, the
Company cannot assure you that they will be completed on schedule
or once completed, that the new products resulting from these
projects will be successfully introduced into the marketplace.
The Company does not anticipate material adverse changes from
historical pricing, margins and expense levels as a result of the
introduction of the new technologies related to the projects.
-14-
<PAGE>
ARROW INTERNATIONAL, INC.
Principally due to the above factors, operating income increased
in the first quarter of fiscal 2001 by 19.5% to $17.3 million
from $14.4 million in the comparable prior year period.
Other expenses (income), net, increased to $0.7 million of
expense during the first quarter of fiscal 2001 from $0.5 million
of expense in the comparable prior year period. Other expenses
(income), net, consist principally of interest expense and
foreign exchange gains and losses associated with the Company's
direct sales subsidiaries.
As a result of the factors discussed above, income before income
taxes increased during the first quarter of fiscal 2001 by 18.9%
to $16.6 million from $14.0 million in the comparable prior year
period. For the first quarter of fiscal 2001, the Company's
effective income tax rate was 33.0%, a decrease from 34.0% in the
same period of fiscal 2000, principally as a result of
anticipated tax credits and completion of state tax audits.
Net income increased 20.7% to $11.1 million from $9.2 million in
the comparable fiscal 2000 period. As a percentage of net sales,
net income represented 14.4% during the three months ended
November 30, 2000, compared to 12.0% in the comparable prior year
period.
Basic earnings per common share were $.51 and $.40 in the first
quarters of fiscal 2001 and 2000, respectively. Diluted earnings
per share were $.50 and $.40 in the first quarters of fiscal 2001
and 2000, respectively. Weighted average common shares
outstanding decreased to 22,001,538 in the first quarter of
fiscal 2001 from 22,899,232 in the comparable prior year period
as a result of the Company's previously announced share
repurchase program, which remains in effect.
Liquidity and Capital Resources
For the three months ended November 30, 2000, net cash provided
by operations was $13.0 million, a decrease of $8.0 million from
the same period in the prior year, due primarily to higher
accounts receivables. Accounts receivable, net of the allowance
for doubtful accounts, increased by $4.5 million in the three
months ended November 30, 2000, compared to a $0.6 million
decrease in the same period in fiscal 2000. Accounts receivable,
measured in average days sales outstanding during the period, was
92 days at November 30, 2000 and 83 days at November 30, 1999.
The increase in accounts receivable was due primarily to sales to
distributors that had extended payment terms.
Net cash used in the Company's investing activities decreased to
$4.5 million in the three months ended November 30, 2000 from
$17.9 million for the same period in fiscal 2000, due primarily
to the additional cash used in connection with the Company's
acquisition of Sometec S.A. in the first quarter of fiscal 2000.
Financing activities used $7.3 million of net cash in the three
months ended November 30, 2000, due primarily to payments made
against the Company's U.S. revolving credit facility. Financing
activities provided $0.6 million in the same period in fiscal
2000,
-15-
<PAGE>
ARROW INTERNATIONAL, INC.
primarily as a result of increased borrowing related to the
Company's acquisition of Sometec S.A. and increased use of cash
to purchase shares of the Company's common stock in the open
market in connection with its previously announced share
repurchase program. During the three months ended November 30,
2000, the Company did not purchase any shares of its common stock
under this program. As of November 30, 2000, the Company has
expended a total of $36.6 million to fund repurchases of a total
of 1,223,400 shares of its common stock pursuant to this program.
As of November 30, 2000, the Company had U.S. bank credit
facilities providing a total of $65.0 million in available
revolving credit for general business purposes, of which $30.7
million remained unused. In addition, certain of the Company's
foreign subsidiaries had revolving credit facilities totaling the
U.S. dollar equivalent of $23.4 million, of which $10.6 million
remained unused as of November 30, 2000. Combined borrowings
under these facilities decreased $5.0 million and increased $11.9
million during the three months ended November 30, 2000 and 1999,
respectively.
During the three month periods ended November 30, 2000 and 1999,
the percentage of the Company's sales invoiced in currencies
other than U.S. dollars was 22.0% and 24.4%, respectively.
As a partial hedge against adverse fluctuations in exchange
rates, the Company periodically enters into foreign currency
exchange contracts with certain major financial institutions. By
their nature, all such contracts involve risk, including the risk
of nonperformance by counterparties. Accordingly, losses
relating to these contracts could have a material adverse effect
upon the Company's business, financial condition and results of
operations. Based upon the Company's knowledge of the financial
condition of the counterparties to its existing forward
contracts, the Company believes that it does not have any
material exposure to any individual counterparty. The Company's
policy prohibits the use of derivative instruments for
speculative purposes. As of November 30, 2000, outstanding
foreign currency exchange contracts totaling the U.S. dollar
equivalent of $10.5 million mature at various dates through March
2001. The Company expects to continue to utilize foreign
currency exchange contracts to manage its exposure, although
there can be no assurance that the Company's effort in this
regard will be successful.
As part of the Company's purchase of assets of the cardiac assist
division of C.R. Bard, Inc. in December 1998, the Company also
agreed to acquire specified assets and assume specified
liabilities of the Belmont Instruments Corporation for $5.0
million, $3.0 million, of which is planned to be paid in January
2001, with the remaining $2.0 million payable over the next two
years in eight quarterly installments of $0.25 million,
commencing in April 2001.
In October 2000, the Company's Board of Directors approved
spending of up to $10.0 million for the construction of
additional manufacturing capacity at its existing manufacturing
and research facility in the Czech Republic. The approved
spending includes amounts required for construction of the
additional space as well as all equipment required to meet
production needs at such space. This new construction commenced
during the first quarter of fiscal 2001.
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<PAGE>
ARROW INTERNATIONAL, INC.
Based upon its present plans, the Company believes that its
working capital, operating cash flow and available credit
resources will be adequate to repay current portions of long-term
debt, to finance currently planned capital expenditures, stock
repurchases on the open market and to meet the currently
foreseeable liquidity needs of the Company.
During the periods discussed above, the overall effects of
inflation and seasonality on the Company's business were not
significant.
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ARROW INTERNATIONAL, INC.
Item 3. Quantitative and Qualitative Disclosures About Market Risk:
Financial Instruments:
During the three month period ended November 30, 2000 and 1999,
the percentage of the Company's sales invoiced in currencies
other than U.S. dollars was 22.0% and 24.4%, respectively. In
addition, a small part of the Company's cost of goods sold is
denominated in foreign currencies. The Company enters into
foreign currency forward contracts, which are derivative
financial instruments, with major financial institutions to
reduce the effect of these foreign currency risk exposures,
primarily on U.S. dollar cash inflows resulting from the
collection of intercompany receivables denominated in foreign
currencies. Such transactions occur throughout the year and are
probable, but not firmly committed. Forward contracts are marked
to market each accounting period, and the resulting gains or
losses on these contracts are recorded in Other Income / Expense
of the Company's consolidated statements of income. Realized
gains and losses on these contracts are offset by the assets,
liabilities and transactions being hedged. The Company does not
use financial instruments for trading or speculative purposes.
The Company expects to continue to utilize foreign currency
exchange contracts to manage its exposure, although there can be
no assurance that the Company's efforts in this regard will be
successful.
Operations of the Company are also exposed to, in the normal
course of business, fluctuations in interest rates. This
interest rate risk exposure results from changes in short-term
U.S. dollar interest rates.
The Company's exposure to credit risk consists principally of
trade receivables. Hospitals and international dealers account
for a substantial portion of trade receivables and collateral is
generally not required. The risk associated with this
concentration is limited due to the Company's on-going credit
review procedures.
At November 30, 2000, the Company had forward exchange contracts
to sell foreign currencies which mature at various dates through
March 2001. The following table identifies forward exchange
contracts to sell foreign currencies at November 30, 2000 and
August 31, 2000 as follows:
<TABLE>
<CAPTION>
November 30, 2000 August 31, 2000
Notional Fair Market Notional Fair Market
Amounts Value Amounts Value
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Foreign currency: (U.S. Dollar Equivalents)
Japanese yen $3,638 $ 3,644 $2,813 $ 2,766
Canadian dollars 1,509 1,500 1,586 1,597
Greek drachmas 2,242 2,283 2,091 2,104
Mexican peso 1,579 1,580 2,115 2,173
African rand 470 449 923 932
Czech koruna 995 1,008 - -
------- ------- ------ -------
$10,433 $10,464 $9,528 $ 9,572
======= ======= ====== =======
</TABLE>
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<PAGE>
ARROW INTERNATIONAL, INC.
PART II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
The following exhibits will be filed as part of
this Form 10-Q:
Exhibit 27 *Financial Data Schedule
Exhibit 99.1 Cautionary Statement for Purposes
of the Safe Harbor Provisions of
the Private Securities Litigation
Reform Act of 1995
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the
quarter ended November 30, 2000.
*Not deemed filed for purposes of Section 11 of the Securities
Act of 1933, Section 18 of the Securities Exchange Act of 1934
and Section 323 of the Trust Indenture Act of 1939, or otherwise
subject to the liabilities of such sections and not deemed part
of any registration statement to which such exhibit relates.
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<PAGE>
ARROW INTERNATIONAL, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ARROW INTERNATIONAL, INC.
(Registrant)
Date: January 12, 2001 By: /s/ Frederick J. Hirt
-----------------------------
(signature)
Frederick J. Hirt
Vice President-Finance
and Treasurer
(Principal Financial Officer
and Chief Accounting Officer)
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<PAGE>
EXHIBIT INDEX
Exhibit Description
Number of Exhibit Method of Filing
------- ------------ ----------------
27 *Financial Data Schedule EDGAR
99.1 Cautionary Statement for Page 22-26 of this report
Purposes of the Safe
Harbor Provisions of the
Private Securities
Litigation Reform Act of
1995
*Not deemed filed for purposes of Section 11 of the Securities
Act of 1933, Section 18 of the Securities Exchange Act of 1934
and Section 323 of the Trust Indenture Act of 1939, or otherwise
subject to the liabilities of such sections and not deemed part
of any registration statement to which such exhibit relates.
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<PAGE>
EXHIBIT 99.1
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
From time to time, in both written reports and in oral
statements by our senior management, expectations and other
statements are expressed regarding our future performance. These
forward-looking statements are inherently uncertain and investors
must recognize that events could turn out to be different than
such expectations and statements. Key factors impacting our
current and future performance are discussed in our Annual Report
on Form 10-K for our fiscal year ended August 31, 2000 and other
filings with the Securities and Exchange Commission (the
"Commission"). In addition to such information in our Annual
Report on Form 10-K and our other filings with the Commission,
investors should consider the following risk factors in
evaluating us and our business, as well as in reviewing forward-
looking statements contained in our periodic reports filed with
the Commission and in oral statements made by our senior
management. Our actual results could differ materially from such
forward-looking statements due to material risks, uncertainties
and contingencies, including, without limitation, those set forth
below.
Stringent Government Regulation
Our products are subject to extensive regulation by the Food
and Drug Administration (the "FDA") and, in some jurisdictions,
by state, local and foreign governmental authorities. In
particular, we must obtain specific clearance or approval from
the FDA before we can market new products or certain modified
products in the United States. With the exception of one
product, we have, to date, obtained FDA marketing clearance for
our products only through the 510(k) premarket notification
process. Certain of our products under development, including
the LionHeartT, our Left Ventricular Assist System, and future
applications, however, will require approval through the more
vigorous Premarket Approval application ("PMA") process. The
process of obtaining such clearances or approvals can be time
consuming and expensive. We cannot assure you that the FDA will
grant all clearances or approvals sought by us or that FDA review
will not involve delays adversely affecting the marketing and
sale of our products. We are also required to adhere to
applicable regulations setting forth current Good Manufacturing
Practices, which require that we manufacture our products and
maintain our records in a prescribed manner with respect to
manufacturing, testing and control activities. In addition, we
are required to comply with FDA requirements for labeling and
promotion of our products. Failure to comply with applicable
federal, state, local or foreign laws or regulations could
subject us to enforcement action, including product seizures,
recalls, withdrawal of clearances or approvals, and civil and
criminal penalties, any one or more of which could have a
material adverse effect on our business, financial condition and
results of operations. Many of the foreign countries where we
conduct business have adopted medical device laws and regulations
with similar substantive and enforcement provisions. Federal,
state, local and foreign laws and regulations regarding the
development, manufacture and sale of medical devices are subject
to future changes. We cannot assure you that such changes will
not have a material adverse effect on our business, financial
condition and results of operations.
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<PAGE>
Significant Competition and Continual Technological Change
The markets for medical devices are highly competitive. We
currently compete with many companies in the development and
marketing of catheters and related medical devices. Some of our
competitors have access to greater financial and other resources
than us.
Furthermore, the markets for medical devices are
characterized by rapid product development and technological
change. Technological advances by one or more of our current or
future competitors could render our present or future products
obsolete or uneconomical. Our future success will depend upon
our ability to develop new products and technology to remain
competitive with other developers of catheters and related
medical devices. Our business strategy emphasizes the continued
development and commercialization of new products and the
enhancement of existing products for the critical care and
cardiac care markets. We cannot assure you that we will be able
to continue to successfully develop new products and to enhance
existing products, to manufacture these products in a
commercially viable manner, to obtain required regulatory
approvals or to gain satisfactory market acceptance for our
products.
Cost Pressures on Medical Technology and Proposed Health Care
Reform
Our products are purchased principally by hospitals,
hospital networks and hospital buying groups. Although our
products are used primarily for non-optional medical procedures,
we believe that the overall escalating cost of medical products
and services has led and will continue to lead to increased
pressures upon the health care industry to reduce the cost or
usage of certain products and services. In the United States,
these cost pressures have led to increased emphasis on the price
and cost-effectiveness of any treatment regimen and medical
device. In addition, third party payors, such as governmental
programs, private insurance plans and managed care plans, which
are billed by hospitals for such health care services, are
increasingly negotiating the prices charged for medical products
and services and may deny reimbursement if they determine that a
device was not used in accordance with cost-effective treatment
methods as determined by the payor, was experimental, unnecessary
or used for an unapproved indication. In international markets,
reimbursement systems vary significantly by country. Many
international markets have government managed health care systems
that control reimbursement for certain medical devices and
procedures and, in most such markets, there also are private
insurance systems which impose similar cost restraints. We cannot
assure you that hospital purchasing decisions or government or
private third party reimbursement policies in the United States
or in international markets will not adversely affect the
profitability of our products.
In recent years, several comprehensive health care reform
proposals have been introduced in the U.S. Congress. While none
of these proposals have to date been adopted, the intent of these
proposals was, generally, to expand health care coverage
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<PAGE>
for the uninsured and reduce the rate of growth of total health
care expenditures. In addition, certain states have made
significant changes to their Medicaid programs and have adopted
various measures to expand coverage and limit costs.
Implementation of government health care reform and other efforts
to control costs may limit the price of, or the level at which
reimbursement is provided for, our products. Several foreign
countries have recently considered, and in some countries
adopted, similar reforms to limit the growth of health care
costs, including price regulation. We anticipate that Congress,
state legislatures, foreign governments and the private sector
will continue to review and assess alternative health care
delivery and payment systems. We cannot predict what additional
legislation or regulation, if any, relating to the health care
industry may be enacted in the future or what impact the adoption
of any federal, state or foreign health care reform, private
sector reform or market forces may have on our business. We
cannot assure you that any such reforms will not have a material
adverse effect on the medical device industry in general, or on
our business, in particular.
Dependence on Patents and Proprietary Rights
We own numerous U.S. and foreign patents and have several
U.S. and foreign patent applications pending. We also have
exclusive license rights to certain patents held by third
parties. These patents relate to aspects of the technology used
in certain of our products. From time to time, we are subject to
legal actions involving patent and other intellectual property
claims. Successful litigation against us regarding our patents
or infringement of the patent rights of others could have a
material adverse effect on our business, financial condition and
results of operations. In addition, we cannot assure you that
pending patent applications will result in issued patents or that
patents issued to or licensed-in by us will not be challenged or
circumvented by competitors or found to be valid or sufficiently
broad to protect our technology or to provide it with any
competitive advantage. We also rely on trade secrets and
proprietary technology that we seek to protect, in part, through
confidentiality agreements with employees, consultants and other
parties. We cannot assure you that these agreements will not be
breached, that we will have adequate remedies for any breach,
that others will not independently develop substantially
equivalent proprietary information or that third parties will not
otherwise gain access to our trade secrets.
There has been substantial litigation regarding patent and
other intellectual property rights in the medical devices
industry. Historically, litigation has been necessary to enforce
certain patent and trademark rights held by us. Future
litigation may be necessary to enforce patent and other
intellectual property rights belonging to us, to protect our
trade secrets or other know-how owned by us, or to defend ourself
against claimed infringement of the rights of others and to
determine the scope and validity of our and others' proprietary
rights. Any such litigation could result in substantial cost to
and diversion of effort by us. Adverse determinations in any
such litigation could subject us to significant liabilities to
third parties, require us to seek licenses from third parties and
prevent us from manufacturing, selling or using certain of our
products, any one or more of which could have a material adverse
effect on our business, financial condition and results of
operations.
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<PAGE>
Risks Associated with International Operations
We generate significant sales outside the United States and
are subject to risks generally associated with international
operations, such as unexpected changes in regulatory
requirements, tariffs, customs, duties and other trade barriers,
difficulties in staffing and managing foreign operations, longer
payment cycles, problems in collecting accounts receivable,
political risks, fluctuations in currency exchange rates, foreign
exchange controls which restrict or prohibit repatriation of
funds, technology export and import restrictions or prohibitions,
delays from customs brokers or government agencies and
potentially adverse tax consequences resulting from operating in
multiple jurisdictions with different tax laws, any one or more
of which could materially adversely impact the success of our
international operations. As our revenues from international
operations increase, an increasing portion of our revenues and
expenses will be denominated in currencies other than U.S.
dollars and, consequently, changes in exchange rates could have a
greater effect on our future operations. We cannot assure you
that such factors will not have a material adverse effect on our
business, financial condition and results of operations. In
addition, we cannot assure you that laws or administrative
practices relating to regulation of medical devices, taxation,
foreign exchange or other matters of countries within which we
operate will not change. Any such change could also have a
material adverse effect on our business, financial condition and
results of operations.
Potential Product Liability
Our business exposes us to potential product liability risks
which are inherent in the testing and marketing of catheters and
related medical devices. Our products are often used in intensive
care settings with seriously ill patients. In addition, many of
the medical devices manufactured and sold by us are designed to
be implanted in the human body for long periods of time and
component failures, manufacturing flaws, design defects or
inadequate disclosure of product-related risks with respect to
these or other products manufactured or sold by us could result
in an unsafe condition or injury to, or death of, the patient.
The occurrence of such a problem could result in product
liability claims and/or a recall of, or safety alert relating to,
one or more of our products. We cannot assure you that the
product liability insurance maintained by us will be available or
sufficient to satisfy all claims made against us or that we will
be able to obtain insurance in the future at satisfactory rates
or in adequate amounts. Product liability claims or product
recalls in the future, regardless of their ultimate outcome,
could result in costly litigation and could have a material
adverse effect on our business or reputation or on our ability to
attract and retain customers for our products.
Risks Associated with Derivative Financial Instruments
As a partial hedge against adverse fluctuations in exchange
rates, we periodically enter into foreign currency exchange
contracts with certain major financial institutions. By their
nature, all such contracts involve risk, including the risk of
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<PAGE>
nonperformance by counterparties. Accordingly, losses relating
to these contracts could have a material adverse effect upon our
business, financial condition and results of operations. Our
policy prohibits the use of derivative instruments for
speculative purposes.
Dependence on Key Management
Our success depends upon the continued contributions of key
members of our senior management team, certain of whom have been
with us since our inception in 1975. Accordingly, loss of the
services of one or more of these key members of management could
have a material adverse effect on our business. None of these
individuals has an employment agreement with us.
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