Attached files
file | filename |
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EX-32.2 - EX-32.2 - ev3 Inc. | c54401exv32w2.htm |
EX-10.1 - EX-10.1 - ev3 Inc. | c54401exv10w1.htm |
EX-32.1 - EX-32.1 - ev3 Inc. | c54401exv32w1.htm |
EX-31.1 - EX-31.1 - ev3 Inc. | c54401exv31w1.htm |
EX-31.2 - EX-31.2 - ev3 Inc. | c54401exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 4, 2009
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number: 000-51348
ev3 Inc.
(Exact name of registrant as specified in its charter)
Delaware | 32-0138874 | |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
incorporation or organization) |
9600 54th Avenue North, Suite 100
Plymouth, Minnesota 55442
(Address of principal executive offices)
Plymouth, Minnesota 55442
(Address of principal executive offices)
(763) 398-7000
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
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 þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). YES o NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act).
(Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). YES o NO þ
As of October 29, 2009, there were 112,254,796 shares of common stock, par value $0.01 per share,
of the registrant outstanding.
ev3 Inc.
FORM 10-Q
For the Quarterly Period Ended October 4, 2009
FORM 10-Q
For the Quarterly Period Ended October 4, 2009
TABLE OF CONTENTS
Description | Page | |||||||
PART I. | ||||||||
ITEM 1. | ||||||||
1 | ||||||||
2 | ||||||||
3 | ||||||||
4 | ||||||||
ITEM 2. | 19 | |||||||
ITEM 3. | 35 | |||||||
ITEM 4. | 36 | |||||||
PART II. | ||||||||
ITEM 1. | 37 | |||||||
ITEM 1A. | 37 | |||||||
ITEM 2. | 38 | |||||||
ITEM 3. | 38 | |||||||
ITEM 4. | 38 | |||||||
ITEM 5. | 38 | |||||||
ITEM 6. | 39 | |||||||
SIGNATURE PAGE | 40 | |||||||
Exhibit Index | 41 | |||||||
EX-10.1 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 |
This
report contains not only historical information, but also 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, and are subject to the safe harbor created by those
sections. We refer you to the information under the heading Part I. Item 2. Managements
Discussion and Analysis of Financial Condition and Results of OperationsForward-Looking
Statements.
In this report, references to ev3, the company, we, our or us in this report, unless the
context otherwise requires, refer to ev3 Inc. and its subsidiaries.
All trademarks or trade names referred to in this report are the property of their respective
owners.
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
ev3 Inc.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(unaudited)
October 4, | December 31, | |||||||
2009 | 2008 | |||||||
Assets |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 80,504 | $ | 59,652 | ||||
Accounts receivable, less allowances of $8,585 and $8,098, respectively |
79,320 | 72,814 | ||||||
Inventories, net |
45,834 | 47,687 | ||||||
Prepaid expenses and other current assets |
6,630 | 6,970 | ||||||
Total current assets |
212,288 | 187,123 | ||||||
Restricted cash |
3,581 | 1,531 | ||||||
Property and equipment, net |
26,439 | 30,681 | ||||||
Goodwill |
367,311 | 315,654 | ||||||
Intangible assets, net |
261,710 | 185,292 | ||||||
Other assets |
581 | 383 | ||||||
Total assets |
$ | 871,910 | $ | 720,664 | ||||
Liabilities and stockholders equity |
||||||||
Current liabilities |
||||||||
Current portion of long-term debt |
$ | 2,500 | $ | 2,500 | ||||
Accounts payable |
18,590 | 15,657 | ||||||
Accrued compensation and benefits |
28,657 | 29,547 | ||||||
Accrued liabilities |
22,295 | 19,744 | ||||||
Total current liabilities |
72,042 | 67,448 | ||||||
Long-term debt |
4,583 | 6,458 | ||||||
Other long-term liabilities |
58,083 | 6,217 | ||||||
Total liabilities |
134,708 | 80,123 | ||||||
Stockholders equity |
||||||||
Preferred stock, $0.01 par value, 100,000,000 shares authorized, none
issued and outstanding as of October 4, 2009 and December 31, 2008 |
| | ||||||
Common stock, $0.01 par value, 300,000,000 shares authorized,
shares issued and outstanding: 112,182,735 shares at October 4, 2009
and 105,822,444 at December 31, 2008 |
1,122 | 1,058 | ||||||
Additional paid-in capital |
1,824,406 | 1,756,832 | ||||||
Accumulated deficit |
(1,087,745 | ) | (1,116,661 | ) | ||||
Accumulated other comprehensive loss |
(581 | ) | (688 | ) | ||||
Total stockholders equity |
737,202 | 640,541 | ||||||
Total liabilities and stockholders equity |
$ | 871,910 | $ | 720,664 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
1
Table of Contents
ev3 Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(unaudited)
(Dollars in thousands, except per share amounts)
(unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
October 4, 2009 | September 28, 2008 | October 4, 2009 | September 28, 2008 | |||||||||||||
Sales: |
||||||||||||||||
Net product sales |
$ | 112,838 | $ | 100,018 | $ | 322,319 | $ | 296,577 | ||||||||
Research collaboration |
| 7,011 | | 19,426 | ||||||||||||
Net sales |
112,838 | 107,029 | 322,319 | 316,003 | ||||||||||||
Operating expenses: |
||||||||||||||||
Product cost of goods sold |
28,608 | 36,182 | 90,074 | 102,442 | ||||||||||||
Research collaboration |
| 2,100 | | 5,647 | ||||||||||||
Sales, general and administrative |
55,030 | 53,121 | 165,639 | 178,885 | ||||||||||||
Research and development |
12,545 | 12,133 | 36,433 | 37,913 | ||||||||||||
Amortization of intangible assets |
6,802 | 8,101 | 18,444 | 24,285 | ||||||||||||
Contingent consideration |
2,271 | | 2,467 | | ||||||||||||
Intangible asset impairment |
| | | 10,459 | ||||||||||||
Total operating expenses |
105,256 | 111,637 | 313,057 | 359,631 | ||||||||||||
Income (loss) from operations |
7,582 | (4,608 | ) | 9,262 | (43,628 | ) | ||||||||||
Other expense (income): |
||||||||||||||||
Gain on investments, net |
| (142 | ) | (4,072 | ) | (542 | ) | |||||||||
Interest expense (income), net |
140 | 49 | 575 | (307 | ) | |||||||||||
Other (income) expense, net |
(143 | ) | 2,279 | 1,354 | 192 | |||||||||||
Income (loss) before income taxes |
7,585 | (6,794 | ) | 11,405 | (42,971 | ) | ||||||||||
Income tax expense (benefit) |
849 | 516 | (17,511 | ) | 1,531 | |||||||||||
Net income (loss) |
$ | 6,736 | $ | (7,310 | ) | $ | 28,916 | $ | (44,502 | ) | ||||||
Earnings per share: |
||||||||||||||||
Net income (loss) per common share: |
||||||||||||||||
Basic |
$ | 0.06 | $ | (0.07 | ) | $ | 0.27 | $ | (0.43 | ) | ||||||
Diluted |
$ | 0.06 | $ | (0.07 | ) | $ | 0.27 | $ | (0.43 | ) | ||||||
Weighted average shares outstanding: |
||||||||||||||||
Basic |
110,507,687 | 104,474,600 | 107,080,500 | 104,276,029 | ||||||||||||
Diluted |
112,277,954 | 104,474,600 | 107,719,897 | 104,276,029 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
2
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ev3 Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
(Dollars in thousands)
(unaudited)
Nine Months Ended | ||||||||
October 4, 2009 | September 28, 2008 | |||||||
Operating activities |
||||||||
Net income (loss) |
$ | 28,916 | $ | (44,502 | ) | |||
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities: |
||||||||
Depreciation and amortization |
26,873 | 33,016 | ||||||
Contingent consideration |
2,467 | | ||||||
Provision for bad debts and sales returns |
268 | 1,840 | ||||||
Provision for inventory obsolescence |
7,731 | 7,304 | ||||||
Gain on sale or disposal of investments and assets, net |
(4,045 | ) | (426 | ) | ||||
Stock-based compensation expense |
10,949 | 11,682 | ||||||
Intangible asset impairment |
| 10,459 | ||||||
Deferred income taxes |
(18,998 | ) | | |||||
Change in operating assets and liabilities, net of acquired: |
||||||||
Accounts receivable |
(5,852 | ) | (8,550 | ) | ||||
Inventories |
(5,326 | ) | (832 | ) | ||||
Prepaid expenses and other assets |
633 | (194 | ) | |||||
Accounts payable |
812 | (3,431 | ) | |||||
Accrued expenses and other liabilities |
2,939 | (27,822 | ) | |||||
Deferred revenue |
| (9,043 | ) | |||||
Net cash provided by (used in) operating activities |
47,367 | (30,499 | ) | |||||
Investing activities |
||||||||
Proceeds from investments |
4,118 | 9,744 | ||||||
Purchase of investments |
(300 | ) | | |||||
Purchase of property and equipment |
(3,766 | ) | (9,032 | ) | ||||
Purchase of patents and licenses |
(1,792 | ) | (2,250 | ) | ||||
Proceeds from sale of assets |
| 1,061 | ||||||
Acquisitions, net of cash acquired |
(24,735 | ) | (7,627 | ) | ||||
Change in restricted cash |
(1,969 | ) | 771 | |||||
Net cash used in investing activities |
(28,444 | ) | (7,333 | ) | ||||
Financing activities |
||||||||
Proceeds from issuance of debt |
| 10,000 | ||||||
Payments on long-term debt and capital lease obligations |
(2,008 | ) | (10,534 | ) | ||||
Debt issuance costs |
| 180 | ||||||
Proceeds from exercise of stock options |
1,470 | 1,272 | ||||||
Proceeds from employee stock purchase plan |
2,099 | 1,903 | ||||||
Other |
(9 | ) | (341 | ) | ||||
Net cash provided by financing activities |
1,552 | 2,480 | ||||||
Effect of exchange rate changes on cash |
377 | 239 | ||||||
Net increase (decrease) in cash and cash equivalents |
20,852 | (35,113 | ) | |||||
Cash and cash equivalents, beginning of period |
59,652 | 81,060 | ||||||
Cash and cash equivalents, end of period |
$ | 80,504 | $ | 45,947 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
3
Table of Contents
ev3 Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
ev3 Inc. (the Company, we, our or us) is a global endovascular company focused on
identifying and treating peripheral vascular disease, including, in particular, lower extremity
arterial disease and neurovascular disease. We develop, manufacture and market a wide range of
products that include stents, atherectomy plaque excision products, thrombectomy and embolic
protection devices, percutaneous transluminal angioplasty (PTA) balloons and other procedural
support products for the peripheral vascular market and embolic coils, liquid embolics, flow
diversion devices, flow directed and other micro catheters, occlusion balloon systems and neuro
stents for the neurovascular market. We market our products in the United States, Europe, Canada
and other countries through a direct sales force and through distributors in certain other
international markets.
2. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared by us in accordance
with accounting principles generally accepted in the United States of America (U.S.) for interim
financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation
S-X of the Securities and Exchange Commission (SEC). 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, all adjustments (consisting of normal,
recurring adjustments) considered necessary for a fair presentation have been included. The
results of operations for any interim period may not be indicative of results for the full year.
These unaudited consolidated financial statements and notes should be read in conjunction with the
audited consolidated financial statements and the notes thereto included in our annual report on
Form 10-K for the year ended December 31, 2008.
Certain amounts reported in our consolidated financial statements for the previous reporting
periods have been reclassified to conform to the current period presentation.
Our consolidated financial statements include the financial results of Chestnut Medical
Technologies, Inc. (Chestnut) subsequent to the acquisition date of June 23, 2009.
We operate on a manufacturing calendar with our fiscal year ending on December 31. Each quarter is
13 weeks, consisting of one five-week and two four-week periods. Accordingly, the third quarters
of 2009 and 2008 ended on October 4 and September 28, respectively.
We have evaluated all subsequent events through November 3, 2009, the date the financial statements
were issued.
Critical Accounting Policies and Estimates
Except for
the contingent consideration and forward foreign currency contracts
policies as noted below, there have been no material changes
to our critical accounting policies and estimates as described in Note 2 to our consolidated
financial statements included in our annual report on Form 10-K for the year ended December 31,
2008.
Contingent Consideration
Contingent consideration is recorded at the acquisition-date estimated fair value of the contingent
milestone payment for all acquisitions subsequent to January 1, 2009. The fair value of the
contingent milestone consideration is remeasured at the estimated fair value at each reporting
period with the change in fair value included in our consolidated statements of operations.
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Forward Foreign Currency Contracts
We use forward foreign currency contracts to hedge the volatility of foreign currency rates for
foreign cash balances and accounts receivable for which payment is settled in a currency other than
our local operations functional currency. We did not have any forward foreign currency contracts
outstanding at the end of the third quarter of 2009 or at the end of fiscal year 2008. During the
three and nine months ended October 4, 2009, we recorded $1.5 million and $3.1 million of losses,
respectively, as Other (income) expense, net in our consolidated statements of operations
associated with the settlement of our foreign currency contracts.
New Accounting Pronouncements
In the third quarter of 2009, we adopted the Financial Accounting Standards Boards (FASB)
Accounting Standards Codification (ASC) Topic 105 as the single official source of authoritative,
nongovernmental generally accepted accounting principles in the United States. On the effective
date, all then-existing non-SEC accounting literature and reporting standards were superseded and
deemed nonauthoritative. The adoption of this pronouncement did not have a material impact on our
consolidated financial statements; however, the ASC affected the way we reference authoritative
guidance in our consolidated financial statements.
In December 2007, the FASB issued additional guidance on business combinations contained in ASC
Topic 805 (ASC Topic 805) and additional guidance on noncontrolling interests in consolidated
financial statements contained in ASC Topic 810, which are effective for fiscal years beginning
after December 15, 2008. These new standards represent the completion of the FASBs first major
joint project with the International Accounting Standards Board and are intended to improve,
simplify and converge internationally the accounting for business combinations and the reporting of
noncontrolling interests (formerly minority interests) in consolidated financial statements.
ASC Topic 805 changes the method for applying the acquisition method in a number of significant
respects, including the requirement to expense transaction fees and expected restructuring costs as
incurred, rather than including these amounts in the allocated purchase price; the requirement to
recognize the fair value of contingent consideration at the acquisition date, rather than the
expected amount when the contingency is resolved; the requirement to recognize the fair value of
acquired in-process research and development assets at the acquisition date, rather than
immediately expensing; and the requirement to recognize a gain in relation to a bargain purchase
price, rather than reducing the allocated basis of long-lived assets. We adopted these standards at
the beginning of our 2009 fiscal year. The new presentation and disclosure requirements for
pre-existing non-controlling interests are retrospectively applied to all prior period financial
information presented. See Note 5 for further discussion of the impact the adoption of ASC Topic
805 had on our results of operations and financial conditions as a result of our Chestnut
acquisition in the second quarter 2009.
In May 2009, the FASB issued additional guidance on managements assessment of subsequent events.
This guidance is contained in ASC Topic 855 (ASC Topic 855) and clarifies that management must
evaluate, as of each reporting period, events or transactions that occur for potential recognition
or disclosure in the financial statements and the circumstances under which an entity should recognize
events or transactions occurring after the balance sheet date through the date that the financial
statements are issued or are available to be issued. ASC Topic 855 requires the disclosure of the
date through which an entity has evaluated subsequent events and the basis for that date. This
disclosure alerts all users of financial statements that an entity has not evaluated subsequent
events after that date in the set of financial statements being presented. We adopted ASC Topic
855 for the three months ended July 5, 2009. The implementation of ASC Topic 855 did not have a
material impact on our consolidated financial statements.
In April 2008, the FASB issued guidance on the determination of the useful life of intangible
assets, (ASC Topic 350-30-35-1), which amended the factors considered in developing renewal or
extension assumptions used to determine the useful life of recognized intangible assets. ASC Topic
350-30-35-1 requires a consistent approach between the useful life of a recognized intangible asset
and the period of expected cash flows used to measure the fair value of an asset. The ASC Topic
350-30-35-1 also requires enhanced disclosure when an intangible assets expected future cash flows
are affected by an entitys intent and/or ability to renew or extend the arrangement. We adopted
ASC Topic 350-30-35-1 as of January 1, 2009. The adoption did not have a significant impact on our
consolidated financial statements.
5
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3. Fair Value Measurements
The fair value of assets and liabilities is determined on the exchange price which would be
received for an asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between market
participants. The determination of fair value is based upon a three-tier fair value hierarchy,
which prioritizes the inputs used in fair value measurements. The three-tier hierarchy for inputs
used in measuring fair value is as follows:
| Level 1. Observable inputs such as quoted prices in active markets; | ||
| Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and | ||
| Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. |
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of October 4, 2009 and December 31, 2008, we held approximately $51.9 million and $45.6 million,
respectively, in money market accounts measured at fair value on a recurring basis using Level 1
inputs. Our money market accounts are reflected as Cash and cash equivalents in our consolidated
balance sheets.
In the second quarter of 2009, in connection with our acquisition of Chestnut, we entered into an
agreement to pay a contingent milestone-based payment of cash and equity upon the U.S. Food and
Drug Administration (FDA) pre-market approval of the Pipeline Embolization Device (Pipeline).
We have recorded the acquisition-date estimated fair value of the contingent milestone payment of
$37.3 million as a component of the consideration transferred in exchange for the equity interests
of Chestnut using Level 3 inputs. The acquisition-date fair value was measured based on the
probability-adjusted present value of the amount expected to be paid.
The probability adjusted contingent consideration amounts were discounted at 26%, the weighted average cost of capital for the Chestnut transaction.
We remeasure the fair value of the contingent milestone payment at each reporting period using
Level 3 inputs. The fair value of the contingent milestone payment was $39.7 million as of October
4, 2009 and is reflected in Other long-term liabilities in our consolidated balance sheets. The
change in fair value of the contingent milestone payment for the three and nine months ended
October 4, 2009 was $2.3 million and $2.5 million, respectively, and is reflected as Contingent
consideration in our consolidated statements of operations.
The following table presents a summary of the contingent consideration long-term liability and
activity (in thousands) for the periods presented:
Three Months Ended | Nine Months Ended | |||||||
Contingent Consideration: | October 4, 2009 | October 4, 2009 | ||||||
Balance at Beginning of Period |
$ | 37,471 | $ | | ||||
Purchase price contingent consideration |
| 37,275 | ||||||
Change in fair value of contingent consideration |
2,271 | 2,467 | ||||||
Balance as of October 4, 2009 |
$ | 39,742 | $ | 39,742 | ||||
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4. Stock-Based Compensation
The following table presents the stock-based compensation expense (in thousands) recorded in our
consolidated statements of operations for the periods presented:
Stock-Based Compensation Expense: | Three Months Ended | Nine Months Ended | ||||||||||||||
October 4, 2009 | September 28, 2008 | October 4, 2009 | September 28, 2008 | |||||||||||||
Product cost of goods sold |
$ | 251 | $ | 121 | $ | 732 | $ | 596 | ||||||||
Sales, general and administrative |
2,975 | 2,572 | 9,089 | 9,608 | ||||||||||||
Research and development |
400 | 366 | 1,128 | 1,478 | ||||||||||||
Total stock-based compensation expense |
$ | 3,626 | $ | 3,059 | $ | 10,949 | $ | 11,682 | ||||||||
In the nine months ended October 4, 2009, we granted options to purchase an aggregate of 1.9
million shares of our common stock, 756,000 shares of restricted stock and 91,000 restricted stock
units at a weighted average fair value of $2.76, $6.73 and $5.93 per share, respectively, to be
recognized on a straight-line basis over the requisite service period, which, for the substantial
majority of these grants, is four years. As of October 4, 2009, we had outstanding options to
purchase an aggregate of 9.7 million shares of our common stock, of which options to purchase an
aggregate of 5.7 million shares were exercisable. In addition, we have 1.6 million shares of
restricted stock and 292,000 restricted stock units outstanding as of October 4, 2009.
We had $31.2 million of total unrecognized compensation cost related to unvested stock-based
compensation arrangements granted to employees as of October 4, 2009. That cost is expected to be
recognized over a weighted-average period of 2.52 years.
In the nine months ended October 4, 2009, we issued 205,000 shares of common stock upon exercise of
options, 695,000 shares from restricted stock grants, net of cancellations and repurchases, and
401,000 shares under our employee stock purchase plan.
5. Chestnut Medical Acquisition
On June 23, 2009, we acquired Chestnut Medical Technologies, Inc., a privately held,
California-based company focused on developing minimally invasive therapies for interventional
neuroradiology. The transaction broadens our neurovascular product portfolio by adding the Pipeline
Embolization Device for the treatment of cerebral aneurysms and the Alligator Retrieval Device for
foreign body retrieval to our existing neurovascular embolic products and neuro access
technologies.
We acquired 100 percent of the equity interests of Chestnut for total consideration valued at
$116.7 million, consisting of upfront consideration of common stock and cash, as well as an
additional milestone-based contingent payment of up to $75.0 million, payable in a combination of
common stock and equity, upon FDA pre-market approval of the Pipeline device.
The transaction has been accounted for under the acquisition method. Our consolidated financial
statements include the financial results of Chestnut subsequent to the acquisition date of June 23,
2009.
The following table presents the purchase price (in thousands) for the acquisition:
Purchase
Price Consideration |
||||
Equity consideration |
$ | 53,186 | ||
Cash consideration |
26,240 | |||
Total cash and equity |
$ | 79,426 | ||
Contingent consideration |
37,275 | |||
Total purchase price consideration |
$ | 116,701 | ||
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We issued 5,060,510 shares of our common stock, with an estimated fair value of $53.2 million. The
estimated fair value per share of common stock of $10.51 was based on the closing price of our
common stock on June 23, 2009, the date of the acquisition. The cash consideration, net of cash
acquired, was approximately $24.7 million. We have also incurred $1.0 million in direct
acquisition costs, all of which were expensed as incurred.
In addition, we have agreed to pay an additional milestone-based payment of cash and equity upon
the FDA pre-market approval of the Pipeline device. This milestone-based contingent payment could
range from: (1) $75 million upon FDA approval prior to October 1, 2011, (2) $75 million less $3.75
million per month upon FDA approval from October 1, 2011 through December 31, 2012 and (3) no
payment required if FDA approval is not obtained by December 31, 2012. The milestone-based payment
of up to $75.0 million will consist of cash and equity paid in the form of shares of our common
stock ranging from 30% cash and 70% equity to 85% cash and 15% equity, of the total required
payment. We have recorded the acquisition-date estimated fair value of the contingent milestone
payment of $37.3 million as a component of the consideration transferred in exchange for the equity
interests of Chestnut. The acquisition-date fair value was measured based on the
probability-adjusted present value of the consideration expected to be transferred. The fair value
of the contingent milestone payment was remeasured as of October 4, 2009 at $39.7 million and is
reflected in Other long-term liabilities in our consolidated balance sheets. The change in fair
value for the three and nine months ended October 4, 2009 of $2.3 million and $2.5 million,
respectively, is reflected as Contingent consideration in our consolidated statements of
operations.
The assets acquired and liabilities assumed in the Chestnut acquisition were measured and
recognized at their fair values, with limited exceptions, at the date of the acquisition. The
excess of purchase price consideration over the net identifiable assets acquired and liabilities
assumed was recognized as goodwill, and reflect the future cost benefit we expect from leveraging
our commercial operations to market the acquired products. None of the goodwill or intangible
assets resulting from our acquisition of Chestnut are deductible for tax purposes. The following
table summarizes the preliminary value (in thousands) recognized related to the identifiable
intangible assets; tangible assets, net of liabilities assumed; net deferred tax liabilities and
the residual goodwill that were acquired as part of the acquisition of Chestnut:
June 23, | ||||
2009 | ||||
Intangible assets |
$ | 93,070 | ||
Tangible assets acquired, net of liabilities assumed |
821 | |||
Deferred tax liabilities acquired, net |
(29,147 | ) | ||
Goodwill |
51,957 | |||
Estimated value of identifiable tangible and
intangible assets, net deferred tax liabilities and
goodwill |
$ | 116,701 | ||
In connection with the Chestnut acquisition, we recorded deferred tax liabilities of $29.1 million,
which includes $19.0 million related to amortizable intangible assets and $10.1 million related to
indefinite-lived acquired in-process research and development. For additional discussion regarding
deferred tax liabilities, see Note 14.
The following table presents the preliminary allocation of the purchase consideration to
identifiable intangible assets acquired, excluding goodwill and the weighted average amortization
period in total and by major intangible asset class (in thousands):
Weighted Average | ||||||
Fair Value | Amortization | |||||
Intangible Asset Description | Assigned | Period (in years) | ||||
Developed and core technology |
$ | 64,130 | 12 | |||
Customer and distributor relationships |
220 | 3 | ||||
Trademarks and tradenames |
960 | 5 | ||||
Non-compete agreements |
360 | 3 | ||||
Total amortizable intangible assets acquired |
$ | 65,670 | 11 | |||
Acquired in-process research and development |
27,400 | Indefinite | ||||
Total intangible assets acquired (excluding goodwill) |
$ | 93,070 | ||||
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The acquired in-process research and development asset relates to the Pipeline Embolization Device,
which is a new class of embolization device that is designed to divert blood flow away from an
aneurysm in order to provide a complete and durable aneurysm embolization while maintaining patency
of the parent vessel. This asset is recognized and measured at the estimated fair value at the
date of acquisition. As of the date of the acquisition, the in-process project had not yet reached
technological feasibility in the United States and had no alternative use. The primary basis for
determining technological feasibility of the project in the United States is obtaining FDA
regulatory approval to market the device.
The income approach was used to determine the fair value of the acquired in-process research and
development asset. This approach establishes fair value by estimating the after-tax cash flows
attributable to the in-process project over its useful life and then discounting these after-tax
cash flows back to the present value. The costs to complete each project were based on estimated
direct project expenses as well as the remaining labor hours and related overhead costs. In
arriving at the value of the acquired in-process research and development project, we considered
the projects stage of completion, the complexity of the work to be completed, the costs already
incurred, the remaining costs to complete the project, the contribution of core technologies, the
expected introduction date and the estimated useful life of the technology. We expect to incur
approximately $8.0 million of development expense to obtain the regulatory approval required to commercialize the Pipeline
device in the United States. The discount rate used to arrive at the present value of acquired
in-process research and development as of the date of the acquisition was approximately 27% and was
based on the time value of money and medical technology investment risk factors.
The value attributable to this project, which had not yet obtained regulatory approval in the
United States, has been capitalized as an indefinite lived intangible asset. Development costs
incurred on this project after the acquisition are charged to expense as incurred. If the project
is not successful, or completed in a timely manner, we may not realize the financial benefit
expected from this project. Upon completion of development and the obtaining of regulatory
approval in the United States, this asset will be an amortizable intangible asset.
Tangible assets acquired, net of liabilities assumed, were stated at fair value at the date of the
acquisition based on managements assessment and include an inventory step-up.
6. Restructuring
On October 4, 2007, we acquired FoxHollow Technologies, Inc. (FoxHollow), a medical device
company that designs, develops, manufactures and sells medical devices primarily for the treatment
of peripheral artery disease. In conjunction with the acquisition of FoxHollow, our management
began to assess and formulate a plan to restructure certain activities of FoxHollow and to
terminate certain contractual agreements assumed in the acquisition. A significant portion of
these costs related to managements plan to reduce the workforce and included costs for severance
and change of control provisions provided for under certain FoxHollow employment contracts. The
workforce reductions began during the fourth quarter of 2007 and were
completed as of the end of the
third quarter of 2008. The unpaid portion of the workforce reductions represents salary
continuance, which was paid over subsequent periods. We finalized our restructuring costs in
conjunction with our plans to consolidate our manufacturing and other operations including the
closure of our facilities located in Redwood City, California, which we acquired in connection with
our acquisition of FoxHollow. We have completed the relocation of the sales, manufacturing and
research and development activities performed in FoxHollows former Redwood City facilities to our
existing facilities located in Irvine, California and Plymouth, Minnesota. During the first
quarter of 2009, it was determined the estimated salary continuance costs to be incurred were
$300,000 less than the amount previously estimated. An adjustment to the purchase price allocation
was made to reduce the restructuring accrual and the amount allocated to goodwill. In addition, in
the first quarter of 2009, in light of the current economic environment and continued downward
pressures in the California real estate markets, we revised certain sub-lease rental assumptions
related to our vacated leased FoxHollow facilities, which resulted in an increased liability
related to future lease payments of $3.4 million. The changes in assumptions relate to the
additional time it will likely take to find a sub-lessor and the rental rate of the sub-lessor.
Since this adjustment was made as a result of changes in market conditions subsequent to the
acquisition and was made outside of the purchase price allocation period, the adjustment was
included in the determination of net income (loss) for the nine months ended October 4, 2009 and is
reflected in Sales, general, and administrative expenses on the consolidated statement of
operations.
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The following table represents a summary of activity (in thousands) associated with the
FoxHollow restructuring accruals that occurred during the nine months ended October 4, 2009. The
unpaid portion of these costs are included in Accrued compensation and benefits, Accrued
liabilities, and Other long-term liabilities on the consolidated balance sheets for the periods
presented:
Adjustments | ||||||||||||||||||||
Reflected in | ||||||||||||||||||||
Balance at | Adjustments to | Consolidated | Balance at | |||||||||||||||||
December 31, | Purchase Price | Statements of | October 4, | |||||||||||||||||
2008 | Allocation | Operations | Amounts Paid | 2009 | ||||||||||||||||
Workforce reductions |
$ | 670 | $ | (300 | ) | $ | (49 | ) | $ | (321 | ) | $ | | |||||||
Termination of
contractual commitments |
7,495 | | 3,421 | (2,563 | ) | 8,353 | ||||||||||||||
Total |
$ | 8,165 | $ | (300 | ) | $ | 3,372 | $ | (2,884 | ) | $ | 8,353 | ||||||||
7. Inventories, Net
Inventories,
net consist of the following (in thousands):
October 4, 2009 | December 31, 2008 | |||||||
Raw materials |
$ | 11,376 | $ | 10,472 | ||||
Work in-progress |
5,358 | 4,144 | ||||||
Finished goods |
39,385 | 43,408 | ||||||
56,119 | 58,024 | |||||||
Inventory reserve |
(10,285 | ) | (10,337 | ) | ||||
Inventory, net |
$ | 45,834 | $ | 47,687 | ||||
Our consigned inventory balance was $21.0 million and $20.9 million as of October 4, 2009 and
December 31, 2008, respectively.
8. Property and Equipment, Net
Property and equipment, net consist of the following (in thousands):
October 4, 2009 | December 31, 2008 | |||||||
Machinery and equipment |
$ | 31,191 | $ | 29,550 | ||||
Office furniture and equipment |
19,649 | 18,466 | ||||||
Leasehold improvements |
14,902 | 14,131 | ||||||
Construction in progress |
4,290 | 5,670 | ||||||
70,032 | 67,817 | |||||||
Less: |
||||||||
Accumulated depreciation |
(43,593 | ) | (37,136 | ) | ||||
Property and equipment, net |
$ | 26,439 | $ | 30,681 | ||||
Total depreciation expense for property and equipment was $2.8 million and $8.5 million for the
three and nine months ended October 4, 2009, respectively, and $2.8 million and $8.7 million for
the three and nine months ended September 28, 2008, respectively.
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9. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill by operating segment for the nine months ended
October 4, 2009 are as follows (in thousands):
Peripheral | ||||||||||||
Vascular | Neurovascular | Total | ||||||||||
Balance as of December 31, 2008 |
$ | 230,400 | $ | 85,254 | $ | 315,654 | ||||||
Adjustment to goodwill related to
acquisition of
FoxHollow (Note 6) |
(300 | ) | | (300 | ) | |||||||
Goodwill related to acquisition of
Chestnut (Note 5) |
| 51,957 | 51,957 | |||||||||
Balance as of October 4, 2009 |
$ | 230,100 | $ | 137,211 | $ | 367,311 | ||||||
Intangible assets, net consist of the following (in thousands):
Weighted | October 4, 2009 | December 31, 2008 | ||||||||||||||||||||||||||
Average | Gross | Net | Gross | Net | ||||||||||||||||||||||||
Useful Life | Carrying | Accumulated | Carrying | Carrying | Accumulated | Carrying | ||||||||||||||||||||||
(in years) | Amount | Amortization | Amount | Amount | Amortization | Amount | ||||||||||||||||||||||
Patents and licenses |
5.0 | $ | 16,945 | $ | (7,409 | ) | $ | 9,536 | $ | 15,413 | $ | (6,264 | ) | $ | 9,149 | |||||||||||||
Developed technology |
11.0 | 260,147 | (78,559 | ) | 181,588 | 196,016 | (66,312 | ) | 129,704 | |||||||||||||||||||
Trademarks and tradenames |
8.0 | 13,182 | (5,263 | ) | 7,919 | 12,222 | (4,457 | ) | 7,765 | |||||||||||||||||||
Customer relationships |
10.0 | 56,314 | (21,373 | ) | 34,941 | 56,094 | (17,967 | ) | 38,127 | |||||||||||||||||||
Acquired in-process research and development |
| 27,400 | | 27,400 | | | | |||||||||||||||||||||
Distribution rights |
2.5 | | | | 7,966 | (7,419 | ) | 547 | ||||||||||||||||||||
Other intangible assets |
3.0 | 360 | (34 | ) | 326 | | | | ||||||||||||||||||||
Intangible assets, net |
$ | 374,348 | $ | (112,638 | ) | $ | 261,710 | $ | 287,711 | $ | (102,419 | ) | $ | 185,292 | ||||||||||||||
Intangible assets are amortized using methods which approximate the benefit provided by the
utilization of the assets. Patents and licenses, developed technology and trademarks and
tradenames are amortized on a straight-line basis. Customer relationships are amortized using both
straight-line and accelerated methods that approximate the pattern of economic benefit. Acquired
in-process research and development is an indefinite-lived intangible asset until it reaches
technological feasibility, at which time it would become a finite-lived asset and be amortized over
its estimated useful life.
Total amortization of other intangible assets was $6.8 million and $18.4 million for the three and
nine months ended October 4, 2009, respectively, and $8.1 million and $24.3 million for the three
and nine months ended September 28, 2008, respectively.
The estimated amortization expense, inclusive of amortization expense already recorded for the nine
months ended October 4, 2009 and excluding any possible future amortization associated with
acquired in-process research and development which has not reached technological feasibility, for
the next five years ending December 31 is as follows (in thousands):
2009 |
$ | 24,714 | ||
2010 |
25,400 | |||
2011 |
23,841 | |||
2012 |
23,623 | |||
2013 |
23,278 |
10. Intangible Asset Impairment
In the second quarter of 2008, Merck & Co., Inc. (Merck) notified us that it was exercising its
right to terminate the amended and restated collaboration and license agreement, dated September
26, 2006, between Merck and FoxHollow, effective July 22, 2008. Under the terms of the agreement,
which was amended in July 2007 in connection with our acquisition of FoxHollow, Merck had the right
to terminate the agreement if FoxHollows founder and former chief executive officer was no longer
a director of our company other than in the event of his death or disability. As a result of
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this individuals resignation from our board of directors in February 2008, Merck had the right to
terminate the agreement at any time during the six-month period thereafter. Based upon the status
of the ongoing negotiations with Merck, an impairment indicator existed at June 29, 2008. As a
result of the termination of the Merck collaboration and license agreement, we recorded an asset
impairment charge of $10.5 million during the second quarter of 2008 to write-off the remaining
carrying value of the related Merck intangible asset that was established at the time of our
acquisition of FoxHollow.
11. Long-Term Debt
Long-term debt consists of the following (in thousands):
October 4, 2009 | December 31, 2008 | |||||||
Term loan |
$ | 7,083 | $ | 8,958 | ||||
Less: current portion |
(2,500 | ) | (2,500 | ) | ||||
Total long-term debt |
$ | 4,583 | $ | 6,458 | ||||
Our operating subsidiaries, ev3 Endovascular, Inc., ev3 International, Inc., Micro Therapeutics,
Inc. and FoxHollow Technologies, Inc. which we collectively refer to as the borrowers, are
parties to a loan and security agreement with Silicon Valley Bank, which was amended most recently
in December 2008. The amended facility consists of a $50.0 million revolving line of credit and
$10.0 million term loan. The revolving line of credit expires June 25, 2010 and the term loan
matures on June 23, 2012. Pursuant to the terms of the loan agreement, and subject to specified
reserves, we may borrow under the revolving line of credit up to $12.0 million without any
borrowing base limitations. Aggregate borrowings under the revolving line of credit that exceed
$12.0 million will subject the revolving line to borrowing base limitations. These limitations
allow us to borrow, subject to specified reserves, up to 80% of eligible domestic and foreign
accounts receivables plus up to 30% of eligible inventory. Additionally, borrowings against the
eligible inventory may not exceed the lesser of 33% of the amount advanced against accounts
receivable or $10.0 million. As of October 4, 2009, we had $7.1 million in outstanding borrowings
under the term loan and no outstanding borrowings under the revolving line of credit; however, we
had $1.1 million of outstanding letters of credit issued by Silicon Valley Bank, which reduced the
maximum amount available under our revolving line of credit as of October 4, 2009 to $48.9 million.
Borrowings under the revolving line of credit bear interest at a variable annual rate equal to
Silicon Valley Banks prime rate plus 0.5%. Borrowings under the term loan bear interest at a
variable annual rate equal to Silicon Valley Banks prime rate plus 1.0%. Silicon Valley Banks
prime rate at October 4, 2009 was 4.0%. Accrued interest on any outstanding balance under the
revolving line and the term loan is payable monthly in arrears. Principal amounts outstanding
under the term loan are payable in 48 consecutive equal monthly installments on the last day of
each month. We incurred $150,000 of debt issuance costs which are being amortized over the term of
the revolving line of credit.
Both the revolving line of credit and term loan are secured by a first priority security interest
in substantially all of our assets, excluding intellectual property, which is subject to a negative
pledge, and are guaranteed by ev3 Inc. and all of our domestic direct and indirect subsidiaries
that are not borrowers. The loan agreement requires ev3 Inc. to maintain on a consolidated basis a
minimum adjusted quick ratio of at least 0.75 to 1.00, measured as of the last day of each month,
and to maintain minimum consolidated earnings before interest, taxes, depreciation and
amortization, or EBITDA, as adjusted for certain non-cash items, of at least $7.5 million for the
third quarter of 2009 and at least $10.0 million for the fourth quarter of 2009 and each fiscal
quarter thereafter, each measured as of the last calendar day of each such fiscal quarter.
The loan agreement also imposes certain limitations on the borrowers, their subsidiaries and us,
including without limitation, limitations on their ability to: (i) transfer all or any part of
their business or properties; (ii) permit or suffer a change in control; (iii) merge or
consolidate, or acquire any entity; (iv) engage in any material new line of business; (v) incur
additional indebtedness or liens with respect to any of their properties; (vi) pay dividends or
make any other distribution on or purchase of any of their capital stock; (vii) make investments in
other companies; or (viii) engage in related party transactions, subject in each case to certain
exceptions and limitations. The loan agreement requires us to maintain certain operating and
investment accounts with Silicon Valley Bank or its affiliates. The borrowers are required to pay
customary fees with respect to the facility, including a fee on the average unused portion of the
revolving line.
The loan agreement contains customary events of default, including the failure to make required
payment, the failure to comply with certain covenants or other agreements, the occurrence of a
material adverse change, failure to pay certain other indebtedness and certain events of bankruptcy
or insolvency. Upon the occurrence and during the continuation of an
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event of default, amounts due under the loan agreement may be accelerated. We were in compliance
with required covenants at October 4, 2009 and expect to remain in compliance for the foreseeable
future.
Annual maturities of our long-term debt are as follows (in thousands):
Remaining 2009 |
$ | 625 | ||
2010 |
2,500 | |||
2011 |
2,500 | |||
2012 |
1,458 | |||
Total |
$ | 7,083 | ||
12. Other Long-term Liabilities
Other long-term liabilities consist of the following (in thousands):
October 4, 2009 | December 31, 2008 | |||||||
Contingent consideration (see Note 5) |
$ | 39,742 | $ | | ||||
Deferred tax liability (see Note 5 and 14) |
10,149 | | ||||||
Other long-term liabilities |
8,192 | 6,217 | ||||||
Total other long-term liabilities |
$ | 58,083 | $ | 6,217 | ||||
13. Gain on Investments, Net
Gain on investments, net of $4.1 million for the nine months ended October 4, 2009 was attributed
to the divestiture of non-strategic investments.
14. Income Taxes
We use an estimated annual effective tax rate in determining our quarterly provision for income
taxes. We have recorded income tax expense of $849,000 and an income tax benefit of $17.5 million
for the three and nine months ended October 4, 2009, respectively. The income tax benefit for the
nine months ended October 4, 2009 reflects a reduction in the valuation allowance of $19.0 million,
which offsets anticipated foreign income taxes and U.S. alternative minimum tax.
In connection with the Chestnut acquisition, we recorded deferred tax liabilities of $29.1 million,
which includes $19.0 million related to amortizable intangible assets and $10.1 million related to
indefinite-lived acquired in-process research and development. The deferred tax liabilities of
$19.0 million related to the amortizable intangibles reduces our net deferred tax assets by a
similar amount and in a manner that will provide predictable future taxable income over the asset
amortization period. As a result, we reduced our pre-acquisition valuation allowance against
deferred tax assets by $19.0 million, which has been reflected as an income tax benefit in our
consolidated statements of operations. Although the deferred tax liability of $10.1 million related
to acquired in-process research and development also reduces our net deferred tax assets by a
comparable amount, it does so in a manner that does not provide predictable future taxable income
because the related asset is indefinite-lived. Therefore, the valuation allowance against deferred
tax assets was not reduced as a result of this item, and we have reported the net $10.1 million
deferred tax liability under the caption Other long-term liabilities in our consolidated balance
sheet.
We have assessed all available evidence to determine the necessity of maintaining a valuation
allowance for our deferred tax assets. A full valuation allowance has been recorded against our
remaining net deferred tax assets as we have concluded that it is more likely than not that the
deferred tax assets will not be utilized. If it is determined in a future period that it is more
likely than not that the deferred tax assets will be utilized, we will reverse all or part of the
valuation allowance for our deferred tax assets.
For the three and nine months ended September 28, 2008, we recorded income tax expense of $516,000
and $1.5 million, respectively, related to operations in certain foreign jurisdictions.
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15. Other Comprehensive Income (Loss)
The following table provides a reconciliation of net income (loss) to comprehensive income (loss)
(in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
October 4, 2009 |
September 28, 2008 |
October 4, 2009 |
September 28, 2008 |
|||||||||||||
Net income (loss) |
$ | 6,736 | $ | (7,310 | ) | $ | 28,916 | $ | (44,502 | ) | ||||||
Changes in foreign currency translation |
(161 | ) | 137 | 107 | 115 | |||||||||||
Total comprehensive income (loss) |
$ | 6,575 | $ | (7,173 | ) | $ | 29,023 | $ | (44,387 | ) | ||||||
16. Commitments and Contingencies
Operating Leases
We lease various manufacturing and office facilities and certain equipment under operating leases,
which include standard terms of renewal and rent escalation clauses that we account for on a
straight-line basis over the term of the operating lease.
On April 2, 2009, we entered into a lease agreement to rent approximately 75,000 square feet of
space in Plymouth, Minnesota, for an initial term of 80 months beginning on November 1, 2009.
Subject to certain conditions, we may extend the term of the lease for up to two additional terms
of five years at the then market rate for rent. Pursuant to the lease agreement, the monthly
rental payment will be approximately $95,000, subject to annual increases. In addition to base
rent, we will pay a certain percentage of the annual real estate taxes and operating expenses of
the building. We intend to use the new location for our corporate and U.S. peripheral vascular
business headquarters. Our current corporate and U.S. peripheral vascular business headquarters
are located in a 50,000 square foot building in Plymouth, Minnesota and are subject to a lease that
extends to February 28, 2010.
Total non-cancelable minimum lease commitments, including rent expense related to operating leases
for the nine months ended October 4, 2009, are as follows (in thousands):
Years ending December 31: | ||||
2009 |
$ | 7,762 | ||
2010 |
6,955 | |||
2011 |
4,716 | |||
2012 |
3,317 | |||
2013 |
2,912 | |||
Thereafter |
8,423 | |||
$ | 34,085 | |||
Rent expense related to non-cancelable operating leases was $1.5 million and $4.1 million for the
three and nine months ended October 4, 2009, respectively, and $1.6 million and $4.8 million for
the three and nine months ended September 28, 2008, respectively.
During the first quarter of 2009, we recorded an adjustment to our lease termination reserve
associated with three FoxHollow leased facilities located in California which we effectively
abandoned during fiscal year 2008 as part of our consolidation strategy. Future rental expense for
these facilities will be offset by the amortization of the lease termination reserve and sublease
payments received. For additional discussion regarding the termination of these contractual
commitments see Note 6.
Portions of our payments for operating leases are denominated in foreign currencies and were
translated in the table above based on their respective U.S. dollar exchange rates at October 4,
2009. These future payments are subject to foreign currency exchange rate risk.
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Letters of Credit
As of October 4, 2009, we had outstanding commitments of $4.7 million which are supported by
irrevocable standby letters of credit and restricted cash. The letters of credit and restricted
cash support various obligations, such as operating leases, tender arrangements with customers and
automobile leases.
Contingent Consideration
Under the terms of the acquisition agreement relating to our acquisition of Chestnut, we may be
obligated to make an additional milestone-based payment of cash and equity totaling up to $75
million upon the FDA pre-market approval of the Pipeline device. For additional discussion
regarding the contingent consideration, see Note 5.
Other Contingencies
We are from time to time subject to, and are presently involved in, various pending or threatened
legal actions and proceedings, including those that arise in the ordinary course of our business.
Such matters are subject to many uncertainties and to outcomes that are not predictable with
assurance and that may not be known for extended periods of time. We record a liability in our
consolidated financial statements for costs related to claims, including future legal costs,
settlements and judgments, where we have assessed that a loss is probable and an amount can be
reasonably estimated. Our significant legal proceedings are discussed below. While it is not
possible to predict the outcome for most of the legal proceedings discussed below, the costs
associated with such proceedings could have a material adverse effect on our consolidated results
of operations, financial position or cash flows of a future period.
The acquisition agreement relating to our acquisition of Appriva Medical, Inc. contains four
milestones to which payments relate. The first milestone was required by its terms to be achieved
by January 1, 2005 in order to trigger a payment equal to $50 million. The other milestones were
required by their terms to be achieved by either January 1, 2008 or January 1, 2009, and, if
achieved, triggered payments totaling $125 million. We believe that the milestones were not
achieved by the applicable dates and that none of the milestones are payable. On May 20, 2005,
Michael Lesh, as an individual seller of Appriva stock and purporting to represent certain other
sellers of Appriva stock, filed a complaint in the Superior Court of the State of Delaware with
individually specified damages aggregating $70 million and other unspecified damages for several
claims, including breach of the acquisition agreement and the implied covenant of good faith and
fair dealing, fraud, negligent misrepresentation and violation of state securities laws in
connection with the negotiation of the acquisition agreement. On or about November 21, 2005, a
second lawsuit was filed in Delaware Superior Court relating to the acquisition of Appriva Medical,
Inc. The named plaintiff of that action was Appriva Shareholder Litigation Company, LLC, which
according to the complaint was formed for the purpose of pursuing claims against us. That complaint
alleged specified damages in the form of the second milestone payment ($25 million), which was
claimed to be due and payable, and further alleged unspecified damages for several claims,
including misrepresentation, breach of contract, breach of the implied covenant of good faith and
fair dealing and declaratory relief. On November 26, 2008, in a consolidated proceeding, the trial
court granted our motion for summary judgment on the issue of standing and dismissed both
complaints without prejudice. On April 7, 2009, Michael Lesh and Erik Van Der Burg, acting jointly
as the Shareholder Representatives for the former shareholders of Appriva Medical, Inc., filed a
motion to amend their complaints in Superior Court of the State of Delaware. The proposed amended
complaint seeks the recovery of all of the milestone payments and punitive damages. The plaintiffs
assert several claims, including breach of contract, fraudulent inducement and violation of
California securities law. We filed a motion to dismiss the entire amended complaint, but the trial
court has yet to rule on the motion. Because this matter is in the early stages, we cannot
estimate the possible loss or range of loss, if any, associated with its resolution. However, there
can be no assurance that the ultimate resolution of this matter will not result in a material
adverse effect on our business, financial condition, results of operations or cash flows of a
future period.
In July 2006, August 2006 and February 2007, three separate shareholder class action complaints
were filed against FoxHollow and two of its officers in the U.S. District Court for the Northern
District of California. These cases were subsequently consolidated into a single matter. The
plaintiffs are seeking to represent a class of purchasers of FoxHollows common stock from May 13,
2005 to January 26, 2006. The complaints generally allege that false or misleading statements were
made concerning FoxHollows management and seek unspecified monetary damages. On May 27, 2008, the
U.S. District Court dismissed the consolidated case without leave to amend the complaint and
judgment was enforced that day against the plaintiffs. The plaintiffs subsequently filed a notice
of appeal to the United States Court of Appeals for the Ninth Circuit on June 20, 2008. The appeal
is still pending. Because these matters are in early stages and because of the complexity of the
cases, we cannot estimate the possible loss or range of loss, if any, associated with
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their resolution. However, there can be no assurance that the ultimate resolution of these matters
will not result in a material adverse effect on our business, financial condition, results of
operations or cash flows of a future period.
In February 2007, David Martin, FoxHollows former chief operating officer, filed a wrongful
termination and defamation suit against FoxHollow and one of its officers in the Superior Court of
the State of California, San Mateo County. In March 2007, the Superior Court granted Martins
petition to compel arbitration of his claims and arbitration is currently in its initial stages.
The complaint is based on substantially similar facts and circumstances as the class action
complaints and derivative actions described above. Martin generally alleges that he was terminated
from his employment in violation of the covenant of good faith and fair dealing and in retaliation
for actions he had the legal right to take. Martin seeks economic damages in excess of $10 million,
plus non-economic and exemplary damages. On May 1, 2007, the Court granted Martins petition to
compel arbitration. In the third quarter of 2009, the parties have agreed in principle to settle
this dispute and are currently documenting that settlement. Based on such settlement agreement,
the amount of the settlement is probable and estimable and we have made the appropriate provision
in our consolidated financial statements during the third quarter of
2009, which did not have a material adverse effect on our business, financial condition, results
of operations or cash flows.
17. Segment and Geographic Information
Our management, including our chief executive officer who is our chief operating decision maker,
report and manage our operations in two reportable business segments based on similarities in the
products sold, customer base and distribution system. Our peripheral vascular operating segment
contains products that are used primarily in peripheral vascular procedures by radiologists,
vascular surgeons and cardiologists. Our neurovascular operating segment contains products that are
used primarily by neuroradiologists, interventional neurosurgeons and neurosurgeons.
Management measures segment profitability on the basis of gross profit calculated as net sales less
cost of goods sold excluding amortization of intangible assets. Other operating expenses are not
allocated to individual operating segments for internal decision making activities.
We sell our products through a direct sales force in the United States, Europe, Canada and other
countries as well as through distributors in certain other international markets. Our customers
include a broad physician base consisting of vascular surgeons, neurosurgeons, other endovascular
specialists, radiologists, neuroradiologists and cardiologists.
16
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Certain prior year assets have been reclassified to conform to the current year presentation. The
following table presents segment information (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
October 4, | September 28, | October 4, | September 28, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net sales |
||||||||||||||||
Net product sales: |
||||||||||||||||
Peripheral vascular: |
||||||||||||||||
Atherectomy |
$ | 19,607 | $ | 20,992 | $ | 60,024 | $ | 68,624 | ||||||||
Stents |
28,787 | 26,772 | 86,620 | 77,932 | ||||||||||||
Thrombectomy and embolic protection |
7,319 | 6,938 | 23,280 | 19,990 | ||||||||||||
Procedural support and other |
11,898 | 12,184 | 35,902 | 35,243 | ||||||||||||
Total peripheral vascular |
67,611 | 66,886 | 205,826 | 201,789 | ||||||||||||
Neurovascular: |
||||||||||||||||
Embolic products |
28,408 | 18,174 | 69,599 | 53,469 | ||||||||||||
Neuro access and delivery products and other |
16,819 | 14,958 | 46,894 | 41,319 | ||||||||||||
Total neurovascular |
45,227 | 33,132 | 116,493 | 94,788 | ||||||||||||
Total net product sales |
112,838 | 100,018 | 322,319 | 296,577 | ||||||||||||
Research collaboration |
| 7,011 | | 19,426 | ||||||||||||
Total net sales |
$ | 112,838 | $ | 107,029 | $ | 322,319 | $ | 316,003 | ||||||||
Gross profit: |
||||||||||||||||
Peripheral vascular |
$ | 49,830 | $ | 39,480 | $ | 143,961 | $ | 124,442 | ||||||||
Neurovascular |
34,400 | 24,356 | 88,284 | 69,693 | ||||||||||||
Research collaboration |
| 4,911 | | 13,779 | ||||||||||||
Total gross profit (1) |
$ | 84,230 | $ | 68,747 | $ | 232,245 | $ | 207,914 | ||||||||
Operating expense |
76,648 | 73,355 | 222,983 | 251,542 | ||||||||||||
Income (loss) from operations |
$ | 7,582 | $ | (4,608 | ) | $ | 9,262 | $ | (43,628 | ) | ||||||
October 4, | December 31, | |||||||
2009 | 2008 | |||||||
Total assets: |
||||||||
Peripheral vascular |
$ | 539,618 | $ | 545,588 | ||||
Neurovascular |
332,292 | 175,076 | ||||||
Total |
$ | 871,910 | $ | 720,664 | ||||
(1) | Gross profit for internal measurement purposes is defined as net sales less cost of goods sold excluding amortization of intangible assets. |
The following table presents net sales and long-lived assets by geographic area (in
thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
October 4, | September 28, | October 4, | September 28, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Geographic Data |
||||||||||||||||
Net Sales: |
||||||||||||||||
United States |
$ | 68,430 | $ | 70,452 | $ | 197,779 | $ | 208,773 | ||||||||
International |
44,408 | 36,577 | 124,540 | 107,230 | ||||||||||||
Total net sales |
$ | 112,838 | $ | 107,029 | $ | 322,319 | $ | 316,003 | ||||||||
October 4, | December 31, | |||||||
2009 | 2008 | |||||||
Long-lived Assets: |
||||||||
United States |
$ | 25,229 | $ | 29,603 | ||||
International |
1,210 | 1,078 | ||||||
Total long-lived assets |
$ | 26,439 | $ | 30,681 | ||||
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18. Related Party Transaction
During the second quarter 2007, we entered into a distribution agreement with Beijing Lepu Medical
Device, Inc. (Lepu), a Chinese domiciled manufacturer and distributor of interventional
cardiology and peripheral products. The two-year agreement allows Lepu to sell certain of our
embolic protection devices and stents in China. We believe that having access to Lepu and its
sub-distributor network is a strategic way for us to quickly gain access and market share in these
strategic markets. Warburg Pincus Equity Partners, L.P. and certain of its affiliates (Warburg
Pincus), who collectively owned over 50% of our outstanding common stock at the time we entered
into the distribution agreement with Lepu, and together with Vertical Group, L.P. (Vertical),
have two designees on our board of directors, owns an approximate 20% ownership interest in Lepu
and has a designee on Lepus board of directors. Lepu purchased peripheral vascular products from
us that we recognized as net product sales totaling approximately $160,000 and $2.6 million for the
three and nine months ended October 4, 2009, respectively, and $260,000 and $1.7 million for three
and nine months ended September 28, 2008, respectively. As of October 4, 2009 and December 31,
2008, Lepu owed us approximately $77,000 and $364,000, respectively, recorded as Accounts
receivable on the consolidated balance sheets.
19. Net Income (Loss) Per Common Share
Basic net earnings (loss) per share is computed based on the weighted average number of common
shares outstanding. Diluted net earnings (loss) per share is computed based on the weighted
average number of common shares outstanding adjusted, to the extent dilutive, by the number of
additional shares that would have been outstanding had the potentially dilutive common shares been
issued and reduced by the number of shares we could have repurchased with the proceeds from the
potentially dilutive shares. Potentially dilutive shares include options to purchase shares of our
common stock and other share-based awards granted under our share-based compensation plans.
The weighted average number of common shares outstanding for basic and diluted earnings per share
purposes is as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
October 4, | September 28, | October 4, | September 28, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Weighted average number of shares outstanding, basic
|
110,507,687 | 104,474,600 | 107,080,500 | 104,276,029 | ||||||||||||
Common stock equivalents: |
||||||||||||||||
Stock options
|
1,024,527 | | 257,253 | | ||||||||||||
Stock awards
|
745,740 | | 382,144 | | ||||||||||||
Weighted average number of shares outstanding, diluted
|
112,277,954 | 104,474,600 | 107,719,897 | 104,276,029 | ||||||||||||
In connection with our Chestnut acquisition, we may be obligated to make an additional
milestone-based payment of cash and equity totaling up to $75 million upon the FDA pre-market
approval of the Pipeline device. The contingently issuable shares of common stock associated with
the equity portion of the milestone-based contingent payment are not included in our basic or
diluted shares outstanding. For additional discussion regarding our potential milestone-based
contingent payment, see Note 5.
The following potential common shares were excluded from common stock equivalents as their effect
would have been anti-dilutive:
Three Months Ended | Nine Months Ended | |||||||||||||||
October 4, | September 28, | October 4, | September 28, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Stock options
|
5,633,569 | 9,255,611 | 7,267,777 | 9,543,725 | ||||||||||||
Restricted stock awards and restricted stock units
|
167,618 | 1,011,779 | 495,285 | 1,093,897 |
18
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Managements Discussion and Analysis provides material historical and prospective
disclosures intended to enable investors and other users to assess our financial condition and
results of operations. Statements that are not historical are forward-looking and involve risks and
uncertainties discussed under the heading Forward-Looking Statements below. The following
discussion of our results of operations and financial condition should be read in conjunction with
our consolidated financial statements and the related notes thereto included elsewhere in this
report.
Business Overview
We are a leading global endovascular company focused on identifying and treating peripheral
vascular disease, including, in particular, lower extremity arterial disease, and neurovascular
disease. Since our founding in 2000, we have been dedicated to developing innovative, breakthrough
and clinically proven technologies and solutions for the treatment of peripheral vascular and
neurovascular diseases, a strategy that we believe is uncommon in the medical device industry. We
believe our unique approach of focusing on emerging and under-innovated opportunities, which treat
peripheral vascular and neurovascular disease, allows us to compete with smaller companies that
have narrow product lines and lack an international sales force and infrastructure, yet also
compete with larger companies that do not have our focus and agility.
We believe the overall market for endovascular devices will grow as the demand for minimally
invasive treatment of vascular diseases and disorders continues to increase. We intend to
capitalize on this market opportunity by the continued sales execution and introduction of new
products. We expect to originate new products primarily through our internal research and
development and clinical efforts, but we may supplement them with targeted acquisitions or other
external collaborations. Most recently, in June 2009, we acquired Chestnut Medical Technologies,
Inc., a then privately held, California-based company focused on developing minimally invasive
therapies for interventional neuroradiology. This transaction broadened our neurovascular product
portfolio by adding the Pipeline Embolization Device for the treatment of cerebral aneurysms and
the Alligator Retrieval Device for foreign body retrieval to our existing embolic product and neuro
access technologies. In October 2007, we acquired FoxHollow Technologies, Inc. FoxHollows
principal product is the SilverHawk Plaque Excision System, which is a minimally invasive catheter
system that treats peripheral artery disease by removing plaque in order to reopen narrowed or
blocked arteries. Additionally, our growth has been, and will continue to be, impacted by our
expansion and penetration into new geographic markets, the expansion and penetration of our direct
sales organization in existing geographic markets, and our continuing focus to increase the
efficiency of our existing direct sales organization.
Our product portfolio includes a broad spectrum of approximately 100 products consisting of over
1,500 SKUs, including stents, atherectomy plaque excision products, embolic protection and
thrombectomy products, percutaneous transluminal angioplasty, or PTA balloons, and other procedural
support products for the peripheral vascular market and embolic coils, liquid embolics, flow
diversion devices, flow directed and other micro catheters, occlusion balloon systems and neuro
stents for the neurovascular market. As a result of our FoxHollow acquisition, we were engaged in
research collaboration with Merck & Co., Inc. for the analysis of atherosclerotic plaque removed
from patient arteries with the goal of identifying new biomarkers for atherosclerotic disease
progression and new therapies for atherosclerotic disease. Merck terminated our collaboration and
license agreement effective July 22, 2008. We subsequently reached an arrangement with Merck to
accomplish an orderly wind-down of our research collaboration activities during the remainder of
2008.
Our management, including our chief executive officer, who is our chief operating decision maker,
report and manage our operations in two reportable business segments based on similarities in the
products sold, customer base and distribution system. Our peripheral vascular segment contains
products that are used primarily in peripheral vascular procedures by interventional radiologists,
vascular surgeons and interventional cardiologists. Our neurovascular segment contains products
that are used primarily by neuroradiologists, interventional neurologists and neurosurgeons. Our
sales activities and operations are aligned closely with our business segments. We generally have
dedicated peripheral vascular sales teams in the United States, Europe, Canada and other
international countries that target customers who perform primarily peripheral vascular procedures
and separate, dedicated neurovascular sales teams in such countries that are specifically focused
on our neurovascular business customer base.
We have direct sales capabilities in the U.S., Europe, Canada and other countries and have
established distribution relationships in selected international markets. We sell our products
through a direct sales force and independent distributors in over 65 countries. Our sales and
marketing infrastructure included
349 professionals as of October 4, 2009 which consisted of 294 sales professionals in the U.S.,
Europe, Canada and other countries. Our direct sales
19
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representatives accounted for approximately 85% and 86% of our net product sales during the third
fiscal quarter and first nine months of 2009, respectively, with the balance generated by
independent distributors. In the third fiscal quarter of 2009, we began to sell our neurovascular
products in Australia through our direct sales force instead of through a distributor.
Our corporate headquarters is located in Plymouth, Minnesota and the sales, manufacturing, and
research and development activities of our peripheral vascular business are primarily located in
Plymouth and to a lesser extent, in Irvine, California. The sales, manufacturing and research and
development activities of our neurovascular business are primarily located in Irvine, although as a
result of our recent acquisition of Chestnut, we now have a facility in Menlo Park, California for
a portion of our neurovascular business. Outside of the U.S., our primary office is in Paris,
France and we have sales offices in most countries in which we have a direct sales force.
In order to drive sales growth, we have invested heavily throughout our history in not only the
expansion of our global distribution system, but also new product development and clinical trials
to obtain regulatory approvals. A significant portion of our net sales historically has been, and
we expect to continue to be, attributable to new and enhanced products.
During the third quarter of 2009, we launched new products in our neurovascular and peripheral
vascular businesses. In neurovascular, we initiated a controlled launch of our new Pipeline
Embolization Device in Europe and other international markets. Building on the success we have
experienced to date with our Axium coils, we began conducting physician preference testing for two
new versions of the Axium coil, the Axium PGLA and Axium Nylon microfilament coil. We launched our
new Marksman delivery catheter and Alligator Retrieval Device in the U.S. and Europe. We also
introduced access product line extensions, including the HyperGlide 5.0 balloon in the U.S. and
Europe and the HyperGlide 3.0 balloon in the U.S. Since receiving the CE Mark for our Solitaire
FR, or flow restoration, device to treat ischemic stroke in July 2009, we have completed the first
cases in our European physician preference testing. We expect to launch this product in the first
quarter of 2010. In our peripheral vascular business, we launched our new TurboHawk atherectomy
system, which contains a SuperCutter blade designed to treat moderately to severely calcified
lesions in various vessel diameters. We are planning to expand availability for the TurboHawk
Super Cutter to international markets and pursue regulatory clearance in the U.S. for an
endovascular indication. We also plan to launch a Smooth Cutter version of the TurboHawk for
above-the-knee use in treating soft plaque in the first half of 2010. During the third quarter of
2009, we conducted physician preference testing for our TrailBlazer Support Catheters and plan to
launch a full release of the TrailBlazer during the fourth quarter of 2009. We are also preparing
for the launch of our PowerCross 0.018 PTA balloon platform, which we expect to release in the
first quarter of 2010.
We expect to continue to further validate the clinical and competitive benefits of our technology
platforms to drive utilization of our current products and the development of new and enhanced
products. To accomplish this, we have a number of clinical trials underway and others that are
currently in development, including our DURABILITY II trial in the U.S. with the objective of
expanding our EverFlex stents U.S. indication to include treatment of peripheral artery disease;
and our DEFINITIVE trial series designed to expand the clinical evidence supporting the value of
our plaque excision systems to drive increased procedure adoption, expand clinical indications and
support the use of atherectomy as a front-line therapy. In our neurovascular business, we are
planning our Solitaire with Immediate Flow Restoration, or SWIFT, study under a U.S.
investigational device exemption, or IDE, to obtain FDA clearance for our Solitaire neuro stent.
It is our understanding that certain biliary stent manufacturers have received subpoenas from the
U.S. Department of Justice. Based on publicly available information, we believe that these
subpoenas requested information regarding the sales and marketing activities of these
manufacturers biliary stent products and that the Department of Justice is seeking to determine
whether any of these activities violated civil and/or criminal laws, including the Federal False
Claims Act, the Food and Drug Cosmetic Act and the Anti-Kickback Statute in connection with
Medicare and/or Medicaid reimbursement paid to third parties. As of the date of this report, we
have not received a subpoena from the U.S. Department of Justice relating to this investigation. No
assurance can be provided, however, that we will not receive such a subpoena or become the subject
of such an investigation, which could adversely affect our business and stock price.
Summary of Third Fiscal Quarter 2009 Financial Results and Outlook
During our third fiscal quarter 2009, we achieved another quarter of profitability and cash
generation. Our operating results reflect sales growth in both our peripheral vascular and
neurovascular segments, continued expansion of our international business, improvement in our gross
margins and continued expense control. During the remainder of 2009, we intend to remain focused
on attaining our goals of achieving revenue growth equal to or slightly above the growth in
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the markets we compete, sustaining profitability, generating cash and expanding our global position
in the peripheral vascular and neurovascular markets.
Our third fiscal quarter 2009 results and financial condition included the following items of
significance, some of which we expect also may affect our results and financial condition during
the remainder of 2009:
| Net sales of our peripheral vascular products increased 1% to $67.6 million in the third fiscal quarter 2009 compared to the third fiscal quarter 2008 primarily as a result of increased market penetration of our EverFlex family of stents, embolic protection devices and balloon expandable stents, partially offset by a decline in sales of our atherectomy products and sales declines in older generation products. We expect continued penetration with our EverFlex family of stents during the remainder of 2009, although we remain cautious of the current regulatory environment regarding the off-label utilization of devices and increased competition we may experience. During the third fiscal quarter 2009, although our atherectomy sales decreased compared to the third fiscal quarter 2008, we expect the recent launch of our new TurboHawk atherectomy system to have a positive impact on our atherectomy sales going forward. |
| Net sales of our neurovascular products increased 37% to $45.2 million in the third fiscal quarter 2009 compared to the third fiscal quarter 2008 primarily as a result of continued market penetration of our Axium coil and Onyx Liquid Embolic System and the launch of our Pipeline Embolization Device in Europe and other international markets. We began conducting physician preference testing for our Axium PGLA and Nylon microfilament coils. We also launched our Marksman delivery catheter and Alligator Retrieval Device in the U.S. and Europe during the third fiscal quarter 2009. We believe our neurovascular business should benefit from the continued market penetration of the Axium coil and Onyx Liquid Embolic System during the remainder of 2009 and from new product introductions, including our Pipeline and Alligator devices, expanded geographic presence and improved pricing. |
| On a geographic basis, 61% of our net sales for the third fiscal quarter 2009 were generated in the U.S. and 39% were generated outside the U.S. Our international net sales increased 21% to $44.4 million in the third fiscal quarter 2009 compared to the third fiscal quarter 2008 driven by market penetration of the Axium coil and neuro stents, as well as the launch of our Pipeline device. We expect our international business to continue to benefit from our ability to sell our EverCross and NanoCross PTA balloon catheters outside the United States, the recent launch of our Pipeline Embolization Device in Europe and other international markets, and the launch of our Axium PGLA and Nylon microfilament coils, Marksman delivery catheter and Alligator Retrieval Device in Europe. Changes in foreign currency exchange rates had a negative impact on our net sales for the third fiscal quarter 2009 of approximately $1.7 million compared to the third fiscal quarter 2008, principally resulting from the relationship of the U.S. dollar as compared to the euro. We expect foreign currency exchange rates to have a positive impact on our net sales during the fourth fiscal quarter 2009 compared to our net sales during the same period during 2008. |
| Product gross margin increased to 75% in the third fiscal quarter 2009 compared to 64% in the third fiscal quarter 2008 primarily attributable to manufacturing efficiencies, including synergies related to the consolidation of our FoxHollow manufacturing operations, margin improvement associated with selling our own line of PTA balloons, product mix and volume growth. We expect to continue to increase our product gross margins through our focus on manufacturing efficiencies. Product gross margin for internal measurement purposes is defined as net product sales less product cost of goods sold, excluding amortization of intangible assets, divided by net product sales. |
| Sales, general and administrative expenses declined to 49% of net product sales in the third fiscal quarter 2009 compared to 53% in the third fiscal quarter 2008 primarily due to continued expense leverage. We expect our sales, general and administrative expenses as a percentage of net product sales to continue to decline during the remainder of 2009 compared to 2008 primarily as a result of our anticipated continued leverage of our cost structure. We expect to continue to focus on our vital few programs and implement systems and processes to improve our sales execution. |
| Our net income for the third fiscal quarter 2009 was $6.7 million, or $0.06 per basic and diluted common share, compared to a net loss of $7.3 million, or $0.07 per share, in the third fiscal quarter of 2008. |
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| Our cash and cash equivalents were $80.5 million at October 4, 2009, an increase of $20.1 million compared to the end of the second fiscal quarter 2009. This increase was primarily a result of cash provided by operating activities, totaling $20.9 million in the third fiscal quarter 2009. We plan to continue to focus on generating positive cash flow from operations during the remainder of 2009. |
Results of Operations
The following table sets forth, for the periods indicated, our results of operations expressed as
dollar amounts (dollars in thousands, except per share amounts), and the changes between the
specified periods expressed as percent increases or decreases or NM if such increases or
decreases are not material or applicable:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
October 4, | September 28, | Percent | October 4, | September 28, | Percent | |||||||||||||||||||
2009 | 2008 | Change | 2009 | 2008 | Change | |||||||||||||||||||
Results of Operations: |
||||||||||||||||||||||||
Sales: |
||||||||||||||||||||||||
Net product sales |
$ | 112,838 | $ | 100,018 | 12.8 | % | $ | 322,319 | $ | 296,577 | 8.7 | % | ||||||||||||
Research collaboration |
| 7,011 | (100.0 | )% | | 19,426 | (100.0 | )% | ||||||||||||||||
Net sales |
112,838 | 107,029 | 5.4 | % | 322,319 | 316,003 | 2.0 | % | ||||||||||||||||
Operating expenses: |
||||||||||||||||||||||||
Product cost of goods sold (a) |
28,608 | 36,182 | (20.9 | )% | 90,074 | 102,442 | (12.1 | )% | ||||||||||||||||
Research collaboration |
| 2,100 | (100.0 | )% | | 5,647 | (100.0 | )% | ||||||||||||||||
Sales, general and administrative (a) |
55,030 | 53,121 | 3.6 | % | 165,639 | 178,885 | (7.4 | )% | ||||||||||||||||
Research and development (a) |
12,545 | 12,133 | 3.4 | % | 36,433 | 37,913 | (3.9 | )% | ||||||||||||||||
Amortization of intangible assets |
6,802 | 8,101 | (16.0 | )% | 18,444 | 24,285 | (24.1 | )% | ||||||||||||||||
Contingent consideration |
2,271 | | 100.0 | % | 2,467 | | 100.0 | % | ||||||||||||||||
Intangible asset impairment |
| | NM | | 10,459 | (100.0 | )% | |||||||||||||||||
Total operating expenses |
105,256 | 111,637 | (5.7 | )% | 313,057 | 359,631 | (13.0 | )% | ||||||||||||||||
Income (loss) from operations |
7,582 | (4,608 | ) | NM | 9,262 | (43,628 | ) | NM | ||||||||||||||||
Other expense (income): |
||||||||||||||||||||||||
Gain on investments, net |
| (142 | ) | NM | (4,072 | ) | (542 | ) | NM | |||||||||||||||
Interest expense (income), net |
140 | 49 | NM | 575 | (307 | ) | NM | |||||||||||||||||
Other (income) expense, net |
(143 | ) | 2,279 | NM | 1,354 | 192 | NM | |||||||||||||||||
Income (loss) before income taxes |
7,585 | (6,794 | ) | NM | 11,405 | (42,971 | ) | NM | ||||||||||||||||
Income tax expense (benefit) |
849 | 516 | 64.5 | % | (17,511 | ) | 1,531 | NM | ||||||||||||||||
Net income (loss) |
$ | 6,736 | $ | (7,310 | ) | NM | $ | 28,916 | $ | (44,502 | ) | NM | ||||||||||||
Earnings per share: |
||||||||||||||||||||||||
Net income (loss) per common share: |
||||||||||||||||||||||||
Basic |
$ | 0.06 | $ | (0.07 | ) | $ | 0.27 | $ | (0.43 | ) | ||||||||||||||
Diluted |
$ | 0.06 | $ | (0.07 | ) | $ | 0.27 | $ | (0.43 | ) | ||||||||||||||
Weighted average shares outstanding: |
||||||||||||||||||||||||
Basic |
110,507,687 | 104,474,600 | 107,080,500 | 104,276,029 | ||||||||||||||||||||
Diluted |
112,277,954 | 104,474,600 | 107,719,897 | 104,276,029 | ||||||||||||||||||||
(a) | Includes stock-based compensation expenses of: |
Three Months Ended | Nine Months Ended | |||||||||||||||
October 4, | September 28, | October 4, | September 28, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Product cost of goods sold |
$ | 251 | $ | 121 | $ | 732 | $ | 596 | ||||||||
Sales, general and
administrative |
2,975 | 2,572 | 9,089 | 9,608 | ||||||||||||
Research and development |
400 | 366 | 1,128 | 1,478 | ||||||||||||
$ | 3,626 | $ | 3,059 | $ | 10,949 | $ | 11,682 | |||||||||
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The following tables set forth, for the periods indicated, our net sales by segment and geography
expressed as dollar amounts (in thousands) and the changes in net sales between the specified
periods expressed as percentages:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
October 4, | September 28, | Percent | October 4, | September 28, | Percent | |||||||||||||||||||
2009 | 2008 | Change | 2009 | 2008 | Change | |||||||||||||||||||
NET SALES BY SEGMENT: |
||||||||||||||||||||||||
Net product sales: |
||||||||||||||||||||||||
Peripheral vascular: |
||||||||||||||||||||||||
Atherectomy |
$ | 19,607 | $ | 20,992 | (6.6 | )% | $ | 60,024 | $ | 68,624 | (12.5 | )% | ||||||||||||
Stents |
28,787 | 26,772 | 7.5 | % | 86,620 | 77,932 | 11.1 | % | ||||||||||||||||
Thrombectomy and embolic protection |
7,319 | 6,938 | 5.5 | % | 23,280 | 19,990 | 16.5 | % | ||||||||||||||||
Procedural support and other |
11,898 | 12,184 | (2.3 | )% | 35,902 | 35,243 | 1.9 | % | ||||||||||||||||
Total peripheral vascular |
67,611 | 66,886 | 1.1 | % | 205,826 | 201,789 | 2.0 | % | ||||||||||||||||
Neurovascular: |
||||||||||||||||||||||||
Embolic products |
28,408 | 18,174 | 56.3 | % | 69,599 | 53,469 | 30.2 | % | ||||||||||||||||
Neuro access and delivery products and other |
16,819 | 14,958 | 12.4 | % | 46,894 | 41,319 | 13.5 | % | ||||||||||||||||
Total neurovascular |
45,227 | 33,132 | 36.5 | % | 116,493 | 94,788 | 22.9 | % | ||||||||||||||||
Total net product sales |
112,838 | 100,018 | 12.8 | % | 322,319 | 296,577 | 8.7 | % | ||||||||||||||||
Research collaboration |
| 7,011 | (100.0 | )% | | 19,426 | (100.0 | )% | ||||||||||||||||
Total net sales |
$ | 112,838 | $ | 107,029 | 5.4 | % | $ | 322,319 | $ | 316,003 | 2.0 | % | ||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
October 4, | September 28, | Percent | October 4, | September 28, | Percent | |||||||||||||||||||
2009 | 2008 | Change | 2009 | 2008 | Change | |||||||||||||||||||
NET SALES BY GEOGRAPHY: |
||||||||||||||||||||||||
United States |
$ | 68,430 | $ | 70,452 | (2.9 | )% | $ | 197,779 | $ | 208,773 | (5.3 | )% | ||||||||||||
International: |
||||||||||||||||||||||||
Before foreign exchange impact |
46,129 | 36,577 | 26.1 | % | 135,104 | 107,230 | 26.0 | % | ||||||||||||||||
Foreign exchange impact |
(1,721 | ) | | | (10,564 | ) | | | ||||||||||||||||
Total international |
44,408 | 36,577 | 21.4 | % | 124,540 | 107,230 | 16.1 | % | ||||||||||||||||
Total net sales |
$ | 112,838 | $ | 107,029 | 5.4 | % | $ | 322,319 | $ | 316,003 | 2.0 | % | ||||||||||||
23
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Comparison of the Three Months Ended October 4, 2009 to the Three Months Ended September 28, 2008
Net sales. Net sales increased 5% to $112.8 million in the three months ended October 4, 2009
compared to $107.0 million in the three months ended September 28, 2008. Our net sales in the
three months ended October 4, 2009 did not include any research collaboration revenue compared with
$7.0 million of research collaboration revenue for the three months ended September 28, 2008. Net
product sales increased 13% to $112.8 million in the three months ended October 4, 2009 compared to
$100.0 million in the three months ended September 28, 2008 driven by strong growth of our
neurovascular products and in our international markets.
Net sales of peripheral vascular products. Net sales of our peripheral vascular products increased
1% to $67.6 million in the three months ended October 4, 2009 compared to $66.9 million in the
three months ended September 28, 2008. Net sales in our stent product line increased 8% to $28.8
million in the three months ended October 4, 2009 compared to $26.8 million in the three months
ended September 28, 2008. This increase was attributable to increased market penetration of our
EverFlex family of stents and balloon expandable stents. Net sales of our thrombectomy and embolic
protection devices increased 5% to $7.3 million in the three months ended October 4, 2009 compared
to $6.9 million in the three months ended September 28, 2008 largely due to increases in sales of
our embolic protection devices. Net sales of our procedural support and other products declined
2% to $11.9 million in the three months ended October 4, 2009 compared to $12.2 million in the
three months ended September 28, 2008 largely due to the transition from selling Invatec PTA
balloons to selling our own EverCross and NanoCross PTA balloons. With regard to our atherectomy
business, we continued to face competition and recorded an estimate
of $1.0 million for sales returns
resulting from product transitions to our next generation plaque excision devices. Atherectomy
sales declined 7% to $19.6 million in the three months ended October 4, 2009 compared to $21.0
million in the three months ended September 28, 2008.
Net sales of neurovascular products. Net sales of our neurovascular products increased 37% to
$45.2 million in the three months ended October 4, 2009 compared to $33.1 million in the three
months ended September 28, 2008, driven by increases in all product categories. Net sales of our
embolic products increased 56% to $28.4 million in the three months ended October 4, 2009 compared
to $18.2 million in the three months ended September 28, 2008 primarily due to the continued market
penetration of the Axium coil and the Onyx Liquid Embolic System as well as the launch of our
Pipeline Embolization Device in Europe and other international markets. Sales of our neuro access
and delivery products and other increased 12% to $16.8 million in the three months ended October 4,
2009 compared to $14.9 million in the three months ended September 28, 2008 largely as a result of
volume growth across multiple product lines including our catheters, neuro balloons and guidewires.
Research collaboration (revenue). Revenue from our former research collaboration with Merck was
$7.0 million for the three months ended September 28, 2008.
Net sales by geography. Net sales in the U.S. were $68.4 million in the three months ended October
4, 2009 compared to $70.4 million in the three months ended September 28, 2008. Net sales in the
U.S. in the three months ended September 28, 2008 included $7.0 million in research collaboration
revenue from Merck. Net product sales in the U.S. increased in the three months ended October 4,
2009 compared to the three months ended September 28, 2008 primarily as a result of increased
market penetration of our Onyx Liquid Embolic System, embolic protection devices, EverFlex family
of stents and Axium coils. International net sales increased 21% to $44.4 million in the three
months ended October 4, 2009 compared to $36.6 million in the three months ended September 28, 2008
and represented 39% and 37% of our total net product sales during the three months ended October 4,
2009 and September 28, 2008, respectively. International sales growth was driven by an increase in
market penetration of Axium coils and neuro stents and launch of our Pipeline Embolization Device
and PTA balloons. Our international net sales in the three months ended October 4, 2009 included
an unfavorable foreign currency exchange rate impact of approximately $1.7 million principally
resulting from the relationship of the U.S. dollar to the euro in comparison with the prior year.
Product cost of goods sold. As a percentage of net product sales, product cost of goods sold
declined to 25% of net product sales in the three months ended October 4, 2009 compared to 36% of
net product sales in the three months ended September 28, 2008. The improvement in our product
cost of goods sold were driven mainly by improvements in our peripheral vascular business segment
as well the mix of neurovascular products, which generally have lower product cost of goods sold.
In our peripheral vascular segment, product cost of goods sold as a percent of net product sales
declined to 26% in the three months ended October 4, 2009 compared to 41% in the three months ended
September 28, 2008 primarily as a result of improved manufacturing efficiencies, including
synergies related to the consolidation of our FoxHollow manufacturing
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operations, margin improvement associated with selling our own line of PTA balloons and volume
growth. Also contributing to the decline of product cost of goods sold as a percentage of net
product sales in our peripheral vascular segment were additional costs incurred in the three months
ended September 28, 2008 related to the consolidation of our FoxHollow manufacturing operations
that did not recur in the three months ended October 4, 2009. The decrease was partially offset by
an increase in excess and obsolete inventory expense due to product transitions of our plaque
excision systems.
In our neurovascular segment, product cost of goods sold as a percent of net product sales
decreased to 24% in the three months ended October 4, 2009 compared to 26% in the three months
ended September 28, 2008 as a result of cost leverage due to volume growth. The decrease was
partially offset by an increase in excess and obsolete inventory expense as a result of recording
additional reserves due to product transitions of our coil products.
Research collaboration (expense). Expense incurred as a result of our former research
collaboration with Merck was $2.1 million for the three months ended September 28, 2008.
Sales, general and administrative. Sales, general and administrative expense increased 4% to $55.0
million in the three months ended October 4, 2009 compared to $53.1 million in the three months
ended September 28, 2008. Sales, general and administrative expense as a percentage of net product
sales declined to 49% of net product sales in the three months ended October 4, 2009 compared to
53% of net product sales in the three months ended September 28, 2008 primarily due to increased
net product sales and continued sales productivity improvement and expense leverage.
Research and development. Research and development expense increased 3% to $12.5 million in the
three months ended October 4, 2009 compared to $12.1 million in the three months ended September
28, 2008. Research and development expense was 11% of net sales in the three months ended October
4, 2009 and September 28, 2008.
Amortization of intangible assets. Amortization of intangible assets declined 16% to $6.8 million
in the three months ended October 4, 2009 compared to $8.1 million in the three months ended
September 28, 2008 primarily due to certain intangible assets becoming fully amortized and lower
gross intangible balances for certain intangible assets resulting from the impairment charges we
recognized in 2008, partly offset by the amortization of intangible assets purchased in connection
with our acquisition of Chestnut.
Contingent consideration. Under the terms of the agreement and plan of merger with Chestnut, we may
be obligated to make a milestone payment of up to $75 million upon the FDA pre-market approval of
the Pipeline device. The change in fair value of the contingent consideration for the three months
ended October 4, 2009 was $2.3 million. We anticipate we likely will incur significant charges or
recognize significant benefits associated with future changes in fair value of the contingent
consideration. For additional discussion, see Note 3 and Note 5 of our consolidated financial
statements contained elsewhere in this report.
Interest expense (income), net. Interest expense, net was $140,000 in the three months ended
October 4, 2009 compared to $49,000 in the three months ended September 28, 2008. This increase
was due primarily to lower levels of interest income on invested cash balances due to lower
interest rates in the third fiscal quarter 2009 compared to the third fiscal quarter 2008. Interest
expense for the third fiscal quarter 2009 was $267,000 and interest income was $127,000. Interest
expense for the third fiscal quarter 2008 was $311,000 and interest income was $262,000.
Other (income) expense, net. Other income, net was $143,000 in the three months ended October 4,
2009 compared to other expense, net of $2.3 million in the three months ended September 28, 2008.
The other (income) expense, net in each of the three months ended October 4, 2009 and September 28,
2008 was primarily due to net foreign currency exchange rate gains and losses. The volatility of
the U.S. dollar compared to the euro and other currencies positively impacted our foreign
currency-designated accounts receivable in the third fiscal quarter 2009. This impact was reduced
by the loss of $1.5 million incurred on a forward exchange contract we entered into during the
third fiscal quarter 2009 to partially offset our exposure to foreign currency exchange rate
fluctuations. The forward contract was settled prior to the end of the third fiscal quarter 2009.
There were no outstanding forward foreign exchange contracts as of October 4, 2009.
Income tax expense (benefit). We recorded income tax expense of $849,000 for the three months
ended October 4, 2009 compared to income tax expense of $516,000 for the three months ended
September 28, 2008. The 2009 tax expense includes anticipated alternative minimum tax in the U.S.,
income tax in foreign jurisdictions, and income tax in several states. For the three months ended
September 28, 2008, we incurred income tax expense related to certain of our European sales
offices.
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Comparison of the Nine Months Ended October 4, 2009 to the Nine Months Ended September 28, 2008
Net sales. Net sales increased to $322.3 million in the nine months ended October 4, 2009 compared
to $316.0 million in the nine months ended September 28, 2008. Our net sales in the nine months
ended October 4, 2009 did not include any research collaboration revenue compared with $19.4
million of research collaboration revenue for the nine months ended September 28, 2008. Net
product sales increased 9% to $322.3 million in the nine months ended October 4, 2009 compared to
$296.6 million in the nine months ended September 28, 2008 driven by strong results across all
product categories, with the exception of our atherectomy products, which declined as a result of
continued competition.
Net sales of peripheral vascular products. Net sales of our peripheral vascular products increased
2% to $205.8 million in the nine months ended October 4, 2009 compared to $201.8 million in the
nine months ended September 28, 2008. Net sales in our stent product line increased 11% to $86.6
million in the nine months ended October 4, 2009 compared to $77.9 million in the nine months ended
September 28, 2008. This increase was attributable to increased market penetration of our EverFlex
family of stents and balloon expandable stents. Net sales of our atherectomy products decreased
13% to $60.0 million in the nine months ended October 4, 2009 compared to $68.6 million in the nine
months ended September 28, 2008 due to continued competition. Net sales of our thrombectomy and
embolic protection devices increased 16% to $23.3 million in the nine months ended October 4, 2009
compared to $20.0 million in the nine months ended September 28, 2008 largely due to increases in
sales of our embolic protection devices. Net sales of our procedural support and other products
increased 2% to $35.9 million in the nine months ended October 4, 2009 compared to $35.3 million in
the nine months ended September 28, 2008.
Net sales of neurovascular products. Net sales of our neurovascular products increased 23% to
$116.5 million in the nine months ended October 4, 2009 compared to $94.8 million in the nine
months ended September 28, 2008, driven by increases in all product categories. Net sales of our
embolic products increased 30% to $69.6 million in the nine months ended October 4, 2009 compared
to $53.5 million in the nine months ended September 28, 2008 primarily due to the continued market
penetration of the Onyx Liquid Embolic System, Axium coil and neuro stents and the launch of our
Pipeline Embolization Device in Europe and other international markets. Sales of our neuro access
and delivery products and other increased 13% to $46.9 million in the nine months ended October 4,
2009 compared to $41.3 million in the nine months ended September 28, 2008 largely as a result of
volume growth across multiple product lines including our catheters, neuro balloons and guidewires.
Research collaboration (revenue). Revenue from our former research collaboration with Merck was
$19.4 million for the nine months ended September 28, 2008.
Net sales by geography. Net sales in the U.S. were $197.8 million in the nine months ended October
4, 2009 compared to $208.8 million in the nine months ended September 28, 2008. Net sales in the
U.S. in the nine months ended September 28, 2008 included $19.4 million in research collaboration
revenue from Merck. Net product sales in the U.S. increased primarily as a result of increased
market penetration of our Onyx Liquid Embolic System, EverFlex family of stents, and embolic
protection devices. International net sales increased 16% to $124.5 million in the nine months
ended October 4, 2009 compared to $107.2 million in the nine months ended September 28, 2008 and
represented 39% and 36% of our total net product sales during the nine months ended October 4, 2009
and September 28, 2008, respectively. International growth was driven by an increase across all
product categories including market penetration of our Axium coil and neuro stents and launch of
our Pipeline Embolization Device and PTA balloons. Our international net sales in the nine months
ended October 4, 2009 included an unfavorable foreign currency exchange rate impact of
approximately $10.6 million principally resulting from the relationship of the U.S. dollar to the
euro compared to the prior year.
Product cost of goods sold. As a percentage of net product sales, product cost of goods sold
declined to 28% of net product sales in the nine months ended October 4, 2009 compared to 35% of
net product sales in the nine months ended September 28, 2008. The improvement in our product cost
of goods sold was driven mainly by improvements in our peripheral vascular business segment as
well as the mix of neurovascular products sold, which generally have lower product cost of goods sold.
In our peripheral vascular segment, product cost of goods sold as a percent of net product sales
declined to 30% the nine months ended October 4, 2009 compared to 38% in the nine months ended
September 28, 2008 as a result of improved
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manufacturing efficiencies including synergies related to the consolidation of our FoxHollow
manufacturing operations, margin improvement associated with selling our own line of PTA balloons
and volume growth. During the nine months ended September 28, 2008 we also incurred costs related
to the consolidation of our FoxHollow manufacturing operations that did not recur in the nine
months ended October 4, 2009.
In our neurovascular segment, product cost of goods sold as a percent of net product sales declined
to 24% in the nine months ended October 4, 2009 compared to 26% in the nine months ended September
28, 2008 as a result of leverage due to volume growth.
Research
collaboration (expense). Expense incurred as a result of our former research collaboration
with Merck was $5.6 million for the nine months ended September 28, 2008.
Sales, general and administrative. Sales, general and administrative expense declined 7% to $165.6
million in the nine months ended October 4, 2009 compared to $178.9 million in the nine months
ended September 28, 2008 primarily as a result of $7.1 million of synergies related to the
consolidation of our FoxHollow facilities and cost management efforts, including a decrease of
marketing costs of $2.2 million and personnel costs of $1.9 million, slightly offset by $3.4
million of expense recorded in the first quarter 2009 to increase reserves on our vacated FoxHollow
leased facilities. In connection with the resignation of our former chairman, president and chief
executive officer, we made and expensed a lump sum cash payment of $1.3 million and incurred $1.5
million of non-cash stock-based compensation expense in the second fiscal quarter 2008. Sales,
general and administrative expense as a percentage of net product sales declined to 51% of net
product sales in the nine months ended October 4, 2009 compared to 60% of net product sales in the
nine months ended September 28, 2008 primarily due to higher net product sales, improved sales
productivity and continued expense leverage.
Research and development. Research and development expense decreased 4% to $36.4 million in the
nine months ended October 4, 2009 compared to $37.9 million in the nine months ended September 28,
2008. Research and development expense decreased to 11% of net sales in the nine months ended
October 4, 2009 compared to 12% of net sales in the nine months ended September 28, 2008.
Amortization of intangible assets. Amortization of intangible assets decreased to $18.4 million in
the nine months ended October 4, 2009 compared to $24.3 million in the nine months ended September
28, 2008, primarily as a result of lower gross intangible balances for certain intangible assets as
a result of the impairment charges we recognized in 2008 and the full amortization of certain
intangible assets, partially offset by the amortization of intangible assets purchased in
connection with our acquisition of Chestnut.
Contingent consideration. The change in fair value of contingent consideration in connection with
our acquisition of Chestnut was $2.5 million for the nine months ended October 4, 2009. For
additional discussion, see Note 3 and Note 5 of our consolidated financial statements.
Intangible asset impairment. Intangible asset impairment was $10.5 million in the nine months
ended September 28, 2008 as a result of the termination of the Merck collaboration and license
agreement. See Note 10 to our consolidated financial statements.
Gain on investments, net. Gain on investments, net was $4.1 million in the nine months ended
October 4, 2009 and was attributed to a $4.1 million realized gain on the sale of non-strategic
investment assets in the first fiscal quarter 2009.
Interest expense (income), net. Interest expense, net was $575,000 in the nine months ended
October 4, 2009 compared to interest income, net of $307,000 in the nine months ended September 28,
2008. This change was due primarily to lower interest rates on invested cash balances in the nine
months ended October 4, 2009 compared to the same period in the prior year. Interest expense for
the nine months ended October 4, 2009 was $818,000 and interest income was $243,000. Interest
expense for the nine months ended September 28, 2008 was $891,000 and interest income was $1.2
million.
Other (income) expense, net. Other expense, net was $1.4 million in the nine months ended October
4, 2009 compared to $192,000 in the nine months ended September 28, 2008. Other expense, net
in each of the nine months ended October 4, 2009 and September 28, 2008 was primarily due to net
foreign currency exchange rate gains and losses. The volatility of the U.S. dollar compared to the
euro and other currencies negatively impacted our accounts receivable denominated in foreign
currencies during the first fiscal quarter 2009 and positively impacted our foreign
currency-designated accounts receivable during the second and third fiscal quarters 2009. Other
expense, net for the nine months ended October 4, 2009 includes losses of $3.1 million on forward
foreign exchange contracts we entered into during the second and third fiscal
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quarters 2009 to partially offset our exposure to foreign currency exchange rate fluctuations. The
forward contracts were settled prior to the end of the second and third fiscal quarters 2009, and
there were no outstanding forward exchange contracts as of October 4, 2009.
Income tax expense (benefit). We recorded an income tax benefit of $17.5 million for the nine
months ended October 4, 2009 compared to an expense of $1.5 million for the nine months ended
September 28, 2008. In connection with our acquisition of Chestnut, we have established net
deferred tax liabilities which resulted in the reversal of $19.0 million of existing deferred tax
valuation allowance. The reversal of our deferred tax valuation allowance is recorded as a tax
benefit on our consolidated statements of operations. For the nine months ended October 4, 2009,
the tax expense amount also includes anticipated alternative minimum tax, income tax in foreign
jurisdictions, state income tax in several states and income tax expense related to certain of our
European sales offices. For the nine months ended September 28, 2008, we incurred income tax
expense related to certain of our European sales offices.
Liquidity and Capital Resources
October 4, | December 31, | |||||||
Balance Sheet Data | 2009 | 2008 | ||||||
(in thousands) | ||||||||
Cash and cash equivalents |
$ | 80,504 | $ | 59,652 | ||||
Total current assets |
212,288 | 187,123 | ||||||
Total assets |
871,910 | 720,664 | ||||||
Total current liabilities |
72,042 | 67,448 | ||||||
Long-term debt |
4,583 | 6,458 | ||||||
Total liabilities |
134,708 | 80,123 | ||||||
Total stockholders equity |
737,202 | 640,541 |
Cash and cash equivalents. Our cash and cash equivalents available to fund our current operations
were $80.5 million and $59.7 million at October 4, 2009 and December 31, 2008, respectively. We
believe our cash and cash equivalents and current and anticipated financing arrangements will be
sufficient to meet our liquidity requirements through at least the next 12 months. Our cash is
primarily invested in highly liquid prime or treasury money market funds.
Letters of credit and restricted cash. As of October 4, 2009, we had outstanding commitments of
$4.7 million which are supported by irrevocable standby letters of credit and restricted cash. The
letters of credit and restricted cash support various obligations, such as operating leases, tender
arrangements with customers and automobile leases.
Operating activities. Net cash provided by operations during the nine months ended October 4, 2009
was $47.4 million compared to $30.5 million used in operations during the nine months ended
September 28, 2008. We generated cash from operations during the first nine months of 2009 as a
result of our improved operating results and continued working capital management. During the nine
months ended October 4, 2009, our net income included a non-cash income tax benefit of $19.0
million recorded in connection with our acquisition of Chestnut (see Note 5 of our consolidated
financial statements). Our net income also included approximately $37.8 million of non-cash
charges for depreciation and amortization and non-cash stock-based compensation expense as compared
with $44.7 million during the first nine months of 2008. In the nine months ended September 28,
2008, cash used in operations was primarily a result of our net loss and increased working capital
requirements during the prior periods, which contained certain non-recurring items. These
non-recurring items included a reduction of deferred revenue of $9.0 million associated with our
former research collaboration with Merck, an increase in accrued litigation of $15.4 million as a
result of our coil litigation settlement, and $10.5 million related to the Merck asset impairment.
We expect to continue to focus on generating cash from operations during the remainder of 2009.
Investing activities. Cash used in investing activities was $28.4 million during the nine months
ended October 4, 2009 compared to $7.3 million used in investing activities during the nine months
ended September 28, 2008. During the nine months ended October 4, 2009 in connection with the
acquisition of Chestnut, we paid $24.7 million, net of cash received, for the cash portion of the
acquisition consideration to Chestnuts stockholders. During the nine months ended October 4,
2009, we also received $4.1 million in proceeds from the sale of non-strategic investment assets,
increased our restricted cash by $2.0 million and purchased $3.8 million of property and equipment
and $1.8 million of patents and licenses. Cash used in investing activities during the nine months
ended September 28, 2008 was primarily due to purchases of $9.0 million of property and equipment,
$7.5 million paid in connection with an earn-out contingency of a previous acquisition and $2.3
million of payments for patents and licenses, partially offset by $9.7 million in proceeds from the
sale of short-term investments.
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Financing activities. Cash provided by financing activities was $1.6 million during the nine
months ended October 4, 2009 compared to cash provided by financing activities of $2.5 million
during the nine months ended September 28, 2008. During the nine months ended October 4, 2009,
cash provided by financing activities was generated primarily from proceeds of employee stock
purchase plan purchases and exercise of stock options, partially offset by payments on our term
loan with Silicon Valley Bank. Cash provided by financing activities during the nine months ended
September 28, 2008 reflects proceeds from stock option exercises and employee stock purchase plan
purchases.
Contractual cash obligations. Except as noted below, there were no material changes to our
contractual cash obligations as set forth in our annual report on Form 10-K for the year ended
December 31, 2008.
Under the terms of the Chestnut acquisition agreement, we may be obligated to make an additional
milestone-based payment of cash and equity totaling up to $75 million upon the FDA pre-market
approval of the Pipeline device. This milestone-based contingent payment could range from: (1) $75
million upon FDA approval prior to October 1, 2011, (2) $75 million less $3.75 million per month
upon FDA approval from October 1, 2011 through December 31, 2012 and (3) no payment required if FDA
approval is not obtained by December 31, 2012. The milestone-based payment of up to $75 million,
at our election, will consist of cash and equity ranging from 30% cash and 70% equity to 85% cash
and 15% equity, of the total required payment.
On April 2, 2009, we entered into a lease agreement to rent approximately 75,000 square feet of
office space in Plymouth, Minnesota, for our corporate and U.S. peripheral vascular business
headquarters, for an initial term of 80 months which began on November 1, 2009. Subject to certain
conditions, we may extend the term of the lease for up to two additional terms of five years at the
then market rate for rent. Pursuant to the lease agreement, the monthly rental payment will be
approximately $95,000, subject to annual increases. In addition to base rent, we will pay a
certain percentage of the annual real estate taxes and operating expenses of the building.
Financing history. Although we recognized net income during the second and third fiscal quarters
of 2009, prior to such time, we generated significant operating losses including cumulative
non-cash charges of $199.4 million for acquired in-process research and development that have
resulted in an accumulated deficit of $1.1 billion as of October 4, 2009. Historically, our
liquidity needs have been met through public and private offerings, our bank financing with Silicon
Valley Bank, our acquisition of FoxHollow, and more recently, from cash generated from operations.
Credit facility. Our operating subsidiaries, ev3 Endovascular, Inc., ev3 International,
Inc., Micro Therapeutics, Inc. and FoxHollow Technologies, Inc., which we collectively refer to as
the borrowers, are parties to a loan and security agreement, with Silicon Valley Bank, which was
amended most recently in December 2008. The amended facility consists of a $50.0 million revolving
line of credit and a $10.0 million term loan. The revolving line of credit expires on
June 25, 2010 and the term loan matures on June 23, 2012. As of October 4, 2009, we had $7.1
million outstanding under the term loan and no outstanding borrowings under the revolving line of
credit; however, we had $1.1 million of outstanding letters of credit issued by Silicon Valley
Bank, which reduced the maximum amount available under our revolving line of credit to $48.9
million. We refer you to the information contained in Note 11 to our consolidated
financial statements for further discussion of our existing financing arrangements.
Other liquidity information. We refer you to the information contained in Note 16 to our
consolidated financial statements and our annual report on Form 10-K for our fiscal year ended
December 31, 2008 for further discussion of earn-out contingencies and pending and threatened
litigation related thereto as a result of one of our previous acquisitions and a previous
acquisition by FoxHollow.
Our future liquidity and capital requirements will be influenced by numerous factors, including any
future operating losses, the level and timing of future sales and expenditures, the results and
scope of ongoing research and product development programs, working capital to support our sales
growth, receipt of and time required to obtain regulatory clearances and approvals, sales and
marketing programs, acceptance of our products in the marketplace, competing technologies, market
and regulatory developments, acquisitions and the future course of pending and threatened
litigation. We believe our cash and cash equivalents and current and anticipated financing
arrangements will be sufficient to meet our liquidity requirements through at least the next 12
months. However, there is no assurance that additional funding will not be needed or sought prior
to such time. In the event that we require additional working capital to fund future operations and
any future acquisitions, we may sell shares of our common stock or other equity securities, sell
debt securities, or enter into additional credit and financing arrangements with one or more
independent institutional lenders. There is no assurance that any financing transaction will be
available on terms acceptable to us, or at all, or that any financing transaction will
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not be dilutive to our current stockholders. If we require additional working capital, but are not
able to raise additional funds, we may be required to significantly curtail or cease ongoing
operations.
Credit risk. At October 4, 2009, our accounts receivable balance was $79.3 million, compared to
$72.8 million at December 31, 2008. We monitor the creditworthiness of our customers to which we
grant credit terms in the normal course of business. We believe that concentrations of credit risk
with respect to our accounts receivable are limited due to the large number of customers and their
dispersion across many geographic areas. However, a significant amount of our accounts receivable
are with national healthcare systems in many countries. Although we do not currently foresee a
credit risk associated with these receivables, repayment depends upon the financial stability of
the economies of those countries. As of October 4, 2009, no customer represented more than 10% of
our outstanding accounts receivable. From time to time, we offer certain distributors in foreign
markets who meet our credit standards extended payment terms, which may result in a longer
collection period and reduce our cash flow from operations. We have not experienced significant
losses with respect to the collection of accounts receivable from groups of customers or any
particular geographic area nor experienced any material cash flow reductions as a result of
offering extended payment terms.
Related Party Transactions
We refer you to the information contained in Note 18 to our consolidated financial statements.
Critical Accounting Policies and Estimates
Except for
the additional policies noted below, there have been no material changes to our
critical accounting policies and estimates from the information provided in Item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations, included in our annual
report on Form 10-K for the year ended December 31, 2008.
Contingent Consideration
Contingent consideration is recorded at the acquisition-date estimated fair value of the contingent
milestone payment for all acquisitions subsequent to January 1, 2009. The fair value of the
contingent milestone consideration is remeasured at the estimated fair value at each reporting
period with the change in fair value included in our consolidated statements of operations.
Forward Foreign Currency Contracts
We use forward foreign currency contracts to hedge the volatility of foreign currency rates for
foreign cash balances and accounts receivable for which payment is settled in a currency other than
our local operations functional currency. We did not have any forward foreign currency contracts
outstanding at the end of the third quarter of 2009 or at the end of fiscal year 2008. During the
three and nine months ended October 4, 2009, we recorded $1.5 million and $3.1 million of losses,
respectively, as Other (income) expense, net in our consolidated statements of operations
associated with the settlement of our foreign currency contracts.
Seasonality and Quarterly Fluctuations
Our business is seasonal in nature. Historically, demand for our products has been the highest in
our fourth fiscal quarter. We traditionally experience lower sales volumes in our third fiscal
quarter than throughout the rest of the year as a result of the European holiday schedule during
the summer months.
We have experienced and expect to continue to experience meaningful variability in our net sales
and gross profit among quarters, as well as within each quarter, as a result of a number of
factors, including, among other things, the number and mix of products sold in the quarter; the
demand for, and pricing of, our products and the products of our competitors; the timing of or
failure to obtain regulatory approvals for products; costs, benefits and timing of new product
introductions; increased competition; the timing and extent of promotional pricing or volume
discounts; the timing of larger orders by customers and the timing of shipment of such orders;
changes in average selling prices; the availability and cost of components and materials;
fluctuations in foreign currency exchange rates; and restructuring, impairment and other special
charges. In addition, as a result of our recent acquisition of Chestnut, the potential $75 million
milestone payment in connection with such acquisition will be included as a component of
consideration transferred at the acquisition date fair value and will be classified as a liability
on our consolidated balance sheet which will be remeasured at fair value at each reporting date
with changes in fair value recognized as income or expense. Therefore, any change in the fair value
will
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impact our earnings in such reporting period thereby resulting in potential variability in our
earnings until the contingent consideration is resolved. Assuming that we continue to expect to
achieve the regulatory milestone, the accounting impact of the future milestone payment will likely
negatively impact our future quarterly operating results.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined by the rules and regulations of the
Securities and Exchange Commission, that have or are reasonably likely to have a material effect on
our financial condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources. As a result, we are not
materially exposed to any financing, liquidity, market or credit risk that could arise if we had
engaged in these arrangements.
Recently Issued Accounting Pronouncements
In the third quarter of 2009, we adopted the Financial Accounting Standards Boards (FASB)
Accounting Standards Codification (ASC) Topic 105 as the single official source of authoritative,
nongovernmental generally accepted accounting principles in the United States. On the effective
date, all then-existing non-SEC accounting literature and reporting standards were superseded and
deemed nonauthoritative. The adoption of this pronouncement did not have a material impact on our
consolidated financial statements; however, the ASC affected the way we reference authoritative
guidance in our consolidated financial statements.
In December 2007, the FASB issued additional guidance on business combinations contained in ASC
Topic 805 (ASC Topic 805) and additional guidance on noncontrolling interests in consolidated
financial statements contained in ASC Topic 810, which are effective for fiscal years beginning
after December 15, 2008. These new standards represent the completion of the FASBs first major
joint project with the International Accounting Standards Board and are intended to improve,
simplify and converge internationally the accounting for business combinations and the reporting of
noncontrolling interests (formerly minority interests) in consolidated financial statements.
ASC Topic 805 changes the method for applying the acquisition method in a number of significant
respects, including the requirement to expense transaction fees and expected restructuring costs as
incurred, rather than including these amounts in the allocated purchase price; the requirement to
recognize the fair value of contingent consideration at the acquisition date, rather than the
expected amount when the contingency is resolved; the requirement to recognize the fair value of
acquired in-process research and development assets at the acquisition date, rather than
immediately expensing; and the requirement to recognize a gain in relation to a bargain purchase
price, rather than reducing the allocated basis of long-lived assets. We adopted these standards at
the beginning of our 2009 fiscal year. The new presentation and disclosure requirements for
pre-existing non-controlling interests are retrospectively applied to all prior period financial
information presented. See Note 5 for further discussion of the impact the adoption of ASC Topic
805 had on our results of operations and financial conditions as a result of our Chestnut
acquisition in the second quarter of 2009.
In May 2009, the FASB issued additional guidance on managements assessment of subsequent events.
This guidance is contained in ASC Topic 855 (ASC Topic 855) and clarifies that management must
evaluate, as of each reporting period, events or transactions that occur for potential recognition
or disclosure in the financial statements and the circumstances under which an entity should recognize
events or transactions occurring after the balance sheet date through the date that the financial
statements are issued or are available to be issued. ASC Topic 855 requires the disclosure of the
date through which an entity has evaluated subsequent events and the basis for that date. This
disclosure alerts all users of financial statements that an entity has not evaluated subsequent
events after that date in the set of financial statements being presented. We adopted ASC Topic
855 in the second quarter of 2009. The implementation of ASC Topic 855 did not have a material
impact on our consolidated financial statements.
In April 2008, the FASB issued guidance on the determination of the useful life of intangible
assets, (ASC Topic 350-30-35-1), which amended the factors considered in developing renewal or
extension assumptions used to determine the useful life of recognized intangible assets. ASC Topic
350-30-35-1 requires a consistent approach between the useful life of a recognized intangible asset
and the period of expected cash flows used to measure the fair value of an asset. The ASC Topic
350-30-35-1 also requires enhanced disclosure when an intangible assets expected future cash flows
are affected by an entitys intent and/or ability to renew or extend the arrangement. We adopted
ASC Topic 350-30-35-1 as of January 1, 2009. The adoption did not have a significant impact on our
consolidated financial statements.
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Forward-Looking Statements
This quarterly report on Form 10-Q contains not only historical information, but also
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 and are subject to the safe harbor created by
those sections. In addition, we or others on our behalf may make forward-looking statements from
time to time in oral presentations, including telephone conferences and/or web casts open to the
public, in press releases or reports, on our Internet web site or otherwise. All statements other
than statements of historical facts included in this report or expressed by us orally from time to
time that address activities, events or developments that we expect, believe or anticipate will or
may occur in the future are forward-looking statements including, in particular, the statements
about our plans, objectives, strategies, the outcome of contingencies such as legal proceedings,
and prospects regarding, among other things, our financial condition, results of operations and
business. We have identified some of these forward-looking statements in this report with words
like believe, may, could, would, might, forecast, possible, potential, project,
will, should, expect, intend, plan, predict, anticipate, estimate, approximate,
outlook or continue or the negative of these words or other words and terms of similar meaning.
These forward-looking statements may be contained in the notes to our consolidated financial
statements and elsewhere in this report, including under the heading Item 2. Managements
Discussion and Analysis of Financial Condition and Results of Operations.
Forward-looking statements are based on current expectations about future events affecting us and
are subject to uncertainties and factors that affect all businesses operating in a global market as
well as matters specific to us. These uncertainties and factors are difficult to predict and many
of them are beyond our control. The following are some of the uncertainties and factors known to us
that could cause our actual results to differ materially from what we have anticipated in our
forward-looking statements:
| The effect of current worldwide economic conditions on our business, operating results and financial condition, including reduced demand for procedures using our products, the volatility and uncertainty in the capital markets and the availability of credit to our distributors, customers and suppliers; | ||
| Recent history of operating losses, negative cash flow and failure to achieve our goal of sustained profitability; | ||
| Failure of our business strategy, which relies on assumptions about the market for our products; | ||
| Failure to obtain and maintain required regulatory approvals for our products in a cost-effective manner or at all or to comply with other applicable laws and regulations, including without limitation the Federal Anti-Kickback Statute and similar healthcare fraud and abuse laws, the Foreign Corrupt Practices Act and regulations prohibiting the promotion of off-label uses and products for which marketing clearance has not been obtained; | ||
| Fluctuations in foreign currency exchange rates, especially the effect of a stronger U.S. dollar against the euro, and interest rates; | ||
| Lack of market acceptance of new products; | ||
| Lack of demand for our atherectomy products, due in part to increased competition and lack of long-term clinical data regarding their safety and efficacy; | ||
| Failure of our customers or patients to obtain third party reimbursement for their purchases of our products; | ||
| Dependence upon our stents and atherectomy products for a significant portion of our product sales; | ||
| Risk of technological obsolescence, failure to develop innovative and successful new products and technologies and delays in product introduction; | ||
| Risks associated with clinical trials; | ||
| Risks inherent in operating internationally and selling and shipping our products and purchasing our products and components internationally; | ||
| Future additional charges associated with the impairment in the value of our goodwill and other intangible assets; | ||
| Exposure to assertions of intellectual property claims and failure to protect our intellectual property; |
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| Disruption in our ability to manufacture our products; | ||
| Ability of our key suppliers to provide us products or components or raw materials for products resulting in our inability to supply market demand for our products; | ||
| Increases in prices for raw materials; | ||
| Significant and unexpected claims under our EverFlex self-expanding stent worldwide fracture-free guarantee program in excess of our reserves; | ||
| Risks associated with previous and future acquisitions, including the incurrence of additional debt, contingent liabilities and expenses and obligations to make significant milestone payments not currently reflected in our financial statements and the effect of contingent consideration on our operating results; | ||
| Consolidation in the healthcare industry, which could lead to demands for price concessions or to the exclusion of some suppliers from certain of our markets; | ||
| Exposure to adverse side effects from our products and product liability claims; | ||
| Failure to obtain additional capital when needed or on acceptable terms; | ||
| Fluctuations in quarterly operating results as a result of seasonality and other items, such as the number and mix of products sold in the quarter; competition; regulatory actions; the timing of new product introductions; the timing and extent of promotional pricing or volume discounts; the timing of larger orders by customers and the timing of shipment of such orders; field inventory levels; changes in average selling prices; the availability and cost of components and materials; foreign currency exchange rate fluctuations; effect of revenue recognition policies; timing of operating expenses in anticipation of sales; unanticipated expenses; costs related to acquisitions; special charges and fluctuations in investment returns on cash balances; | ||
| Reliance on independent sales distributors and sales associates to market and sell our products in certain countries, their reliance on credit to purchase our products and their recent tendency to reduce their inventories of our products in light of the tightened credit markets; | ||
| Highly competitive nature of the markets in which we sell our products and the introduction of competing products; | ||
| Reliance on our management information systems for inventory management, distribution and other functions and to maintain our research and development and clinical data; | ||
| Failure to comply with our covenants under our loan and security agreement with Silicon Valley Bank or inability to access funds under our revolving line of credit due to borrowing base limitations; | ||
| Changes in and failure to retain or replace senior management or other key employees and the avoidance of business disruption and employee distraction as we continue to execute restructuring activities; | ||
| Adverse changes in applicable laws or regulations, including in particular healthcare and tax laws and regulations; | ||
| Inability to use net operating losses to reduce tax liability if we become profitable; | ||
| Changes in generally accepted accounting principles; | ||
| Effects of pending and threatened litigation; | ||
| Conflicts of interests due to our ownership structure; or | ||
| Ineffectiveness of our internal controls. |
For more information regarding these and other uncertainties and factors that could cause our
actual results to differ materially from what we have anticipated in our forward-looking statements
or otherwise could materially adversely affect our business, financial condition or operating
results, see our annual report on Form 10-K for the fiscal year ended December 31, 2008 under the
heading Part I Item 1A. Risk Factors on pages 31 through 55 of such report and Part II
Item 1A. Risk Factors contained in our subsequent quarterly reports on Form 10-Q, including this
report.
All forward-looking statements included in this report are expressly qualified in their entirety by
the foregoing cautionary statements. We wish to caution readers not to place undue reliance on any
forward-looking statement that speaks only as
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of the date made and to recognize that forward-looking statements are predictions of future
results, which may not occur as anticipated. Actual results could differ materially from those
anticipated in the forward-looking statements and from historical results, due to the uncertainties
and factors described above, as well as others that we may consider immaterial or do not anticipate
at this time. Although we believe that the expectations reflected in our forward-looking statements
are reasonable, we do not know whether our expectations will prove correct. Our expectations
reflected in our forward-looking statements can be affected by inaccurate assumptions we might make
or by known or unknown uncertainties and factors, including those described above. The risks and
uncertainties described above are not exclusive and further information concerning us and our
business, including factors that potentially could materially affect our financial results or
condition, may emerge from time to time. We assume no obligation to update, amend or clarify
forward-looking statements to reflect actual results or changes in factors or assumptions affecting
such forward-looking statements. We advise you, however, to consult any further disclosures we
make on related subjects in our annual reports on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K we file with or furnish to the Securities and Exchange Commission.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks, which are potential losses arising from adverse changes in
market rates and prices, such as interest rates and foreign currency exchange rate fluctuations.
We do not enter into derivatives or other financial instruments for trading or speculative
purposes. We believe we are not exposed to a material market risk with respect to our invested
cash and cash equivalents.
Interest Rate Risk
Borrowings under our revolving line of credit with Silicon Valley Bank bear interest at a variable
annual rate equal to Silicon Valley Banks prime rate plus 0.5%. Borrowings under the term loan
bear interest at a variable annual rate equal to Silicon Valley Banks prime rate plus 1.0%. We
currently do not use interest rate swaps to mitigate the impact of fluctuations in interest rates.
As of October 4, 2009, we had no borrowings under our revolving line of credit and had $7.1 million
in borrowings under the term loan. Based upon this debt level, a 10% increase in the interest rate
on such borrowings would cause us to incur an increase in interest expense of approximately $35,000
on an annual basis.
At October 4, 2009, our cash and cash equivalents were $80.5 million. Based on our annualized
average interest rate, a 10% decrease in the interest rate on such balances would result in a
reduction in interest income of approximately $10,000 on an annual basis.
Foreign Currency Exchange Rate Risk
Fluctuations in the exchange rate between the U.S. dollar and foreign currencies in which we
transact business could adversely affect our financial results. Approximately 26% of our net sales
were denominated in foreign currencies in both the three and nine months ended October 4, 2009. Selling, marketing and administrative costs related to these sales are largely
denominated in the same respective currency, thereby limiting our transaction risk exposure.
However, for sales not denominated in U.S. dollars, if there is an increase in the rate at which a
foreign currency is exchanged for U.S. dollars, it will require more of the foreign currency to
equal a specified amount of U.S. dollars than before the rate increase. In such cases and when we
price our products in the foreign currency, we will receive less in U.S. dollars than we did before
the rate increase went into effect. If we price our products in U.S. dollars and competitors price
their products in local currency, an increase in the relative strength of the U.S. dollar could
result in our price not being competitive in a market where business is transacted in the local
currency.
Approximately 73% and 76% of our net sales denominated in foreign currencies in the three and nine
months ended October 4, 2009, respectively, were derived from European Union countries and were
denominated in the euro. Our principal foreign currency exchange rate risks exist between the U.S.
dollar and the euro. Fluctuations from the beginning to the end of any given reporting period
result in the remeasurement of our foreign currency-denominated cash, receivables and payables,
generating currency transaction gains or losses that impact our non-operating income/expense levels
in the respective period and are reported in other (income) expense, net in our consolidated
financial statements. During the third fiscal quarter of 2009, we entered into a forward exchange
contract to partially hedge our exposure to foreign currency exchange rate fluctuations associated
with our euro-denominated accounts receivable. Net of hedging activities, we recorded a foreign
currency transaction gain of $143,000 and a foreign currency transaction loss of $1.4 million in
the three and nine months ended October 4, 2009, respectively, compared to foreign currency
transaction losses of $2.3 million and $192,000 in the three and nine months ended September 28,
2008, respectively, primarily related to the translation of our foreign currency-denominated net
receivables into U.S. dollars. Our third fiscal quarter 2009 forward contract was settled prior to
the end of the quarter and there were no outstanding forward exchange contracts as of October 4,
2009. We will continue to assess the use of hedging contracts in the future and entered into three
hedges at the beginning of the fourth quarter of 2009 to hedge our balance sheet risk of the euro,
British pound and Canadian dollar. At October 4, 2009, we had euro-denominated accounts receivable
and cash of 22.0 million and 962,000, respectively. A 10% increase in the foreign exchange rate
between the U.S. dollar and the euro as a result of a weakening dollar would have the effect of
approximately a $3.4 million foreign currency transaction gain. A 10% decrease in the foreign
currency exchange rate between the U.S. dollar and the euro as a result of a strengthening dollar
would have the effect of approximately a $3.4 million foreign currency transaction loss.
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended) that are designed to reasonably ensure that
information required to be disclosed by us in the reports we file or submit under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported, within the time
periods specified in the Securities and Exchange Commissions rules and forms and that such
information is accumulated and communicated to our management, including our principal executive
and principal financial officers, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure. In designing and evaluating our disclosure
controls and procedures, we recognize that any controls and procedures, no matter how well designed
and operated can provide only reasonable assurance of achieving the desired control objectives.
Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial
Officer, the effectiveness of the design and operation of our disclosure controls and procedures as
of the end of the period covered in this quarterly report on Form 10-Q. Based on that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of the end of such period to provide reasonable assurance that
information required to be disclosed in our Exchange Act reports is recorded, processed,
summarized, and reported within the time periods specified in the SECs rules and forms, and that
material information relating to our company and our consolidated subsidiaries is made known to
management, including our Chief Executive Officer and Chief Financial Officer, particularly during
the period when our periodic reports are being prepared.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during our
fiscal quarter ended October 4, 2009 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A description of our legal proceedings in Note 16 of our consolidated financial statements included
within this report is incorporated herein by reference.
ITEM 1A. RISK FACTORS
We are affected by risks specific to us as well as factors that affect all businesses operating in
a global market. In addition to the other information set forth in this report, careful
consideration should be taken of the factors described in our annual report on Form 10-K for the
fiscal year ended December 31, 2008 under the heading Part I Item 1A. Risk Factors and the
additional and revised risk factors described in our quarterly report on Form 10-Q for the fiscal
quarter ended July 5, 2009 under the heading Part II Item 1A. Risk Factors and below, any or
all of which could materially adversely affect our business, financial condition or operating
results.
Our business, financial condition, results of operations and cash flows could be significantly and
adversely affected if certain types of healthcare reform programs are adopted in our key markets
and other administration and legislative proposals are enacted into law.
Recently, President Obama and members of Congress have proposed significant reforms to the U.S.
healthcare system. Both the U.S. Senate and House of Representatives have conducted hearings about
healthcare reform. The Obama administrations fiscal year 2010 budget included proposals to limit
Medicare payments, reduce drug spending and increase taxes. In addition, members of Congress have
proposed a single-payer healthcare system, a government health insurance option to compete with
private plans and other expanded public healthcare measures. Most recently, in September 2009, Max
Baucus, the Chairman of the U.S. Senate Finance Committee released a draft of the committees
healthcare reform bill, a bill which included an excise tax on all medical devices, requiring the
medical device industry to contribute $4 billion to healthcare reform each year for a period of 10
years. Various healthcare reform proposals also have emerged at the state level. We cannot predict
what healthcare initiatives, if any, will be implemented at the federal or state level, or the
effect any future legislation or regulation will have on us. However, an expansion in governments
role in the U.S. healthcare industry may lower reimbursements for our products, reduce medical
procedure volumes and adversely affect our business and results of operations, possibly materially.
In addition, if the excise tax contained in the proposed legislation from the U.S. Senate Finance
Committee is enacted into law, our operating results could be materially and adversely affected.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Equity Securities
During the third fiscal quarter ended October 4, 2009, we did not issue any shares of our common
stock or other equity securities of our company that were not registered under the Securities Act
of 1933, as amended.
Issuer Purchases of Equity Securities
The following table sets forth the information with respect to purchases made by or on behalf of
ev3 or any affiliated purchaser (as defined in Rule 10b-18(a)(3) under the Securities Exchange
Act of 1934), of shares of our common stock during the third fiscal quarter ended October 4, 2009.
Total | Total Number of Shares | Maximum Number of | ||||||||||||||
Number of | Average | Purchased as Part of | Shares that May Yet Be | |||||||||||||
Shares | Price Paid | Publicly Announced Plans or | Purchased Under the | |||||||||||||
Period | Purchased (1) | Per Share | Programs (2) | Plans or Programs (2) | ||||||||||||
Month # 1 |
812 | $ | 10.73 | N/A | N/A | |||||||||||
(July 6, 2009 August 9, 2009) |
||||||||||||||||
Month # 2 |
| | N/A | N/A | ||||||||||||
(August 10, 2009 September
6, 2009) |
||||||||||||||||
Month # 3 |
| | N/A | N/A | ||||||||||||
September 7, 2009 October 4,
2009) |
||||||||||||||||
Total: |
812 | $ | 10.73 | N/A | N/A |
(1) | Consists of shares repurchased from employees in connection with the required payment of withholding or employment-related tax obligations due in connection with the vesting of restricted stock awards. | |
(2) | Our Board of Directors has not authorized any repurchase plan or program for purchase of our shares of common stock or other equity securities on the open market or otherwise, other than an indefinite number of shares in connection with the cashless exercise of outstanding stock options and the surrender of shares of common stock upon the issuance or vesting of stock grants to satisfy any required withholding or employment-related tax obligations. |
Except as set forth in the table above, we did not purchase any shares of our common stock or
other equity securities of ours registered pursuant to Section 12 of the Securities Exchange Act of
1934, as amended, during the third fiscal quarter ended October 4, 2009.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM
5. OTHER INFORMATION
Not applicable.
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ITEM 6. EXHIBITS
The following exhibits are being filed or furnished with this quarterly report on Form 10-Q:
Exhibit No. | Description | |||
10.1 | Employment Agreement dated June 11, 2003 between ev3 Europe
SAS and Pascal E.R. Girin, as amended on September 17, 2009
(Filed herewith) |
|||
31.1 | Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 and SEC Rule 13a-14(a)
(Filed herewith) |
|||
31.2 | Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 and SEC Rule 13a-14(a)
(Filed herewith) |
|||
32.1 | Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Furnished herewith) |
|||
32.2 | Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Furnished herewith) |
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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, hereunto duly authorized.
November 3, 2009 | ev3 Inc. |
|||
By: | /s/ Robert J. Palmisano | |||
Robert J. Palmisano | ||||
President and Chief Executive Officer (principal executive officer) |
||||
By: | /s/ Shawn McCormick | |||
Shawn McCormick | ||||
Senior Vice President and Chief Financial Officer (principal financial and accounting officer) |
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ev3 Inc.
QUARTERLY REPORT ON FORM 10-Q
QUARTERLY REPORT ON FORM 10-Q
EXHIBIT INDEX
Exhibit No. | Description | Method of Filing | ||
10.1
|
Employment Agreement dated June 11, 2003 between ev3 Europe SAS and Pascal E.R. Girin, as amended on September 17, 2009 | Filed herewith | ||
31.1
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and SEC Rule 13a-14(a) | Filed herewith | ||
31.2
|
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and SEC Rule 13a-14(a) | Filed herewith | ||
32.1
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | Furnished herewith | ||
32.2
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | Furnished herewith |
41