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EXCEL - IDEA: XBRL DOCUMENT - AMERICAN MEDICAL SYSTEMS HOLDINGS INC | Financial_Report.xls |
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EX-31.1 - EX-31.1 - AMERICAN MEDICAL SYSTEMS HOLDINGS INC | c58324exv31w1.htm |
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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 3, 2010
or
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: 00030733
AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware | 41-1978822 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
10700 Bren Road West, Minnetonka, Minnesota | 55343 | |
(Address of principal executive offices) | (Zip Code) |
952-930-6000
(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.
þ Yes
o No
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 (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to
submit and post such files).
þ Yes
o No
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.
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). o Yes þ No
As of August 2, 2010 there were 75,997,564 shares of the registrants $.01 par value Common Stock
outstanding.
TABLE OF CONTENTS
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
American Medical Systems Holdings, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
(In thousands, except per share data)
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
July 3, 2010 | July 4, 2009 | July 3, 2010 | July 4, 2009 | |||||||||||||
Net sales |
$ | 136,368 | $ | 126,388 | $ | 271,294 | $ | 250,026 | ||||||||
Cost of sales |
22,805 | 21,608 | 43,832 | 44,950 | ||||||||||||
Gross profit |
113,563 | 104,780 | 227,462 | 205,076 | ||||||||||||
Operating expenses |
||||||||||||||||
Marketing and selling |
46,114 | 42,853 | 94,311 | 86,201 | ||||||||||||
Research and development |
13,837 | 13,166 | 27,346 | 25,977 | ||||||||||||
General and administrative |
11,797 | 11,660 | 24,487 | 22,439 | ||||||||||||
Amortization of intangibles |
3,030 | 3,401 | 6,077 | 6,666 | ||||||||||||
Total operating expenses |
74,778 | 71,080 | 152,221 | 141,283 | ||||||||||||
Operating income |
38,785 | 33,700 | 75,241 | 63,793 | ||||||||||||
Other (expense) income |
||||||||||||||||
Royalty income |
47 | 874 | 355 | 1,807 | ||||||||||||
Interest expense |
(3,584 | ) | (4,966 | ) | (7,538 | ) | (10,376 | ) | ||||||||
Amortization of financing costs |
(3,346 | ) | (3,974 | ) | (7,039 | ) | (7,955 | ) | ||||||||
Gain on extinguishment of debt |
| | | 4,562 | ||||||||||||
Gain on sale of non-strategic assets |
| | 7,719 | | ||||||||||||
Other (expense) income |
485 | 767 | (31 | ) | 1,422 | |||||||||||
Total other (expense) income |
(6,398 | ) | (7,299 | ) | (6,534 | ) | (10,540 | ) | ||||||||
Income before income taxes |
32,387 | 26,401 | 68,707 | 53,253 | ||||||||||||
Provision for income taxes |
11,820 | 9,536 | 27,482 | 19,308 | ||||||||||||
Net income |
$ | 20,567 | $ | 16,865 | $ | 41,225 | $ | 33,945 | ||||||||
Net income per share |
||||||||||||||||
Basic net earnings |
$ | 0.27 | $ | 0.23 | $ | 0.55 | $ | 0.46 | ||||||||
Diluted net earnings |
$ | 0.26 | $ | 0.23 | $ | 0.53 | $ | 0.46 | ||||||||
Weighted average common shares used in calculation |
||||||||||||||||
Basic |
75,612 | 73,919 | 75,364 | 73,778 | ||||||||||||
Diluted |
78,185 | 74,502 | 77,177 | 74,258 |
The accompanying notes are an integral part of the consolidated financial statements.
3
Table of Contents
American Medical Systems Holdings, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share data)
(In thousands, except share and per share data)
July 3, 2010 | January 2, 2010 | |||||||
(Unaudited) | ||||||||
Assets |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 23,604 | $ | 30,670 | ||||
Short-term investments |
44,466 | 19,868 | ||||||
Accounts receivable, net |
89,689 | 102,590 | ||||||
Inventories, net |
33,457 | 30,276 | ||||||
Deferred income taxes |
13,036 | 14,870 | ||||||
Other current assets |
8,474 | 6,067 | ||||||
Total current assets |
212,726 | 204,341 | ||||||
Property, plant and equipment, net |
42,578 | 44,120 | ||||||
Goodwill |
682,684 | 690,899 | ||||||
Developed and core technology, net |
45,245 | 51,631 | ||||||
Other intangibles, net |
50,477 | 49,937 | ||||||
Other long-term assets, net |
5,615 | 6,223 | ||||||
Total assets |
$ | 1,039,325 | $ | 1,047,151 | ||||
Liabilities and Stockholders Equity |
||||||||
Current liabilities |
||||||||
Accounts payable |
$ | 9,790 | $ | 9,114 | ||||
Income taxes payable |
3,159 | 4,495 | ||||||
Accrued compensation expenses |
24,232 | 29,603 | ||||||
Accrued warranty expense |
2,409 | 2,293 | ||||||
Other accrued expenses |
21,899 | 25,760 | ||||||
Total current liabilities |
61,489 | 71,265 | ||||||
Long-term debt |
287,445 | 346,229 | ||||||
Deferred income taxes |
60,173 | 62,347 | ||||||
Long-term income taxes payable |
18,802 | 18,206 | ||||||
Long-term employee benefit obligations |
3,745 | 3,745 | ||||||
Total liabilities |
431,654 | 501,792 | ||||||
Stockholders equity |
||||||||
Common stock, par value $.01 per share; authorized 200,000,000 shares;
issued and outstanding: 75,972,968 shares at July 3, 2010 and
74,715,839 shares at January 2, 2010 |
760 | 747 | ||||||
Additional paid-in capital |
421,630 | 399,468 | ||||||
Accumulated other comprehensive income |
5,293 | 6,381 | ||||||
Retained earnings |
179,988 | 138,763 | ||||||
Total stockholders equity |
607,671 | 545,359 | ||||||
Total liabilities and stockholders equity |
$ | 1,039,325 | $ | 1,047,151 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
4
Table of Contents
American Medical Systems Holdings, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
(In thousands)
(Unaudited)
Six Months Ended | ||||||||
July 3, 2010 | July 4, 2009 | |||||||
Cash flows from operating activities |
||||||||
Net income |
$ | 41,225 | $ | 33,945 | ||||
Adjustments to reconcile net income to net cash provided by operating
activities |
||||||||
Depreciation |
4,959 | 4,867 | ||||||
Amortization of intangibles |
6,077 | 6,666 | ||||||
Amortization of deferred financing costs |
7,039 | 7,955 | ||||||
Excess tax benefit from stock-based
compensation |
(825 | ) | (310 | ) | ||||
Tax benefit from stock-based compensation |
2,276 | 733 | ||||||
Settlement of derivative contracts |
(1,277 | ) | 51 | |||||
Change in net deferred income taxes |
(3,461 | ) | 1,422 | |||||
Gain on extinguishment of debt |
| (4,562 | ) | |||||
Gain on sale of non-strategic assets |
(7,719 | ) | | |||||
Stock-based compensation |
4,130 | 4,476 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
6,635 | 2,527 | ||||||
Inventories |
(4,037 | ) | 4,529 | |||||
Accounts payable and accrued expenses |
(7,182 | ) | (3,475 | ) | ||||
Other assets |
2,041 | 1,024 | ||||||
Net cash provided by operating activities |
49,881 | 59,848 | ||||||
Cash flows from investing activities |
||||||||
Purchase of property, plant and equipment |
(3,546 | ) | (2,462 | ) | ||||
Net proceeds from settlement of derivative contracts |
1,277 | (51 | ) | |||||
Sale of non-strategic assets, net |
19,070 | | ||||||
Purchase of other intangibles |
(1,657 | ) | (5,000 | ) | ||||
Purchase of short-term investments |
(41,374 | ) | (18,684 | ) | ||||
Sale of short-term investments |
16,766 | 30,500 | ||||||
Net cash (used in) provided by investing activities |
(9,464 | ) | 4,303 | |||||
Cash flows from financing activities |
||||||||
Issuance of common stock |
17,206 | 3,908 | ||||||
Excess tax benefit from exercise of stock options |
825 | 310 | ||||||
Repurchase of convertible senior subordinated notes |
| (21,125 | ) | |||||
Payments on senior secured credit facility |
(65,874 | ) | (29,111 | ) | ||||
Net cash used in financing activities |
(47,843 | ) | (46,018 | ) | ||||
Effect of currency exchange rates on cash |
360 | (156 | ) | |||||
Net (decrease) increase in cash and cash equivalents |
(7,066 | ) | 17,977 | |||||
Cash and cash equivalents at beginning of period |
30,670 | 11,642 | ||||||
Cash and cash equivalents at end of period |
$ | 23,604 | $ | 29,619 | ||||
Supplemental disclosure |
||||||||
Cash paid for interest |
$ | 8,628 | $ | 9,226 | ||||
Cash paid for taxes |
$ | 29,097 | $ | 19,846 |
The accompanying notes are an integral part of the consolidated financial statements.
5
Table of Contents
AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
1. Basis of Presentation
We have prepared the consolidated financial statements included in this Quarterly Report on Form
10-Q without audit, pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC). Certain information and footnote disclosures normally included in financial statements
prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) have been
condensed or omitted pursuant to these rules and regulations. The year-end balance sheet was
derived from audited financial statements, but does not include all disclosures required by U.S.
GAAP. These unaudited consolidated interim financial statements should be read in conjunction with
our consolidated financial statements and related notes included in our Annual Report on Form 10-K
for the fiscal year ended January 2, 2010. All amounts presented in tables are in thousands,
except per share data.
These statements reflect, in managements opinion, all adjustments (which include only normal,
recurring adjustments) necessary for a fair presentation of the financial position and the results
of operations and cash flows for the periods presented. The results of operations for any interim
period may not be indicative of results for the full year.
We have a 52 or 53 week fiscal year ending on the Saturday nearest December 31. Accordingly, the
second fiscal quarters of 2010 and 2009 are represented by the three month periods ended on July 3,
2010 and July 4, 2009, respectively.
2. Recently Issued Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update
(ASU) 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangementsa
consensus of the FASB Emerging Issues Task Force (ASU 2009-13). ASU 2009-13 will separate
multiple-deliverable arrangements in more circumstances than under existing U.S. GAAP and will
establish a selling price hierarchy for determining the selling price of a deliverable. In
addition, it will replace the term fair value in the revenue allocation guidance with selling
price to clarify the allocation of revenue is based on entity-specific assumptions rather than
assumptions of a market place participant, eliminate the use of the residual method for allocation,
and expand on-going disclosure requirements. ASU 2009-13 is effective for fiscal years beginning
on or after June 15, 2010 and can be applied prospectively or retrospectively. We plan to adopt
this updated accounting guidance for multiple-deliverable revenue arrangements on a prospective
basis for our fiscal year beginning on January 2, 2011, and the adoption is not expected to have a
material impact on our consolidated financial position or results of operations.
3. Stock-Based Compensation
At July 3, 2010, the 2005 Stock Incentive Plan, as amended and restated (2005 Plan), is our one
active stock-based employee compensation plan under which new awards may be granted. Awards under
the 2005 Plan include incentive stock options, non-qualified option grants and restricted stock.
Amounts recognized in our financial statements related to stock-based compensation were as follows:
Three Months Ended | Six Months Ended | |||||||||||||||
(in thousands) | July 3, 2010 | July 4, 2009 | July 3, 2010 | July 4, 2009 | ||||||||||||
Cost of sales |
$ | 253 | $ | 245 | $ | 501 | $ | 486 | ||||||||
Marketing and selling |
510 | 512 | 961 | 967 | ||||||||||||
Research and development |
300 | 302 | 585 | 589 | ||||||||||||
General and administrative |
1,238 | 1,201 | 2,083 | 2,434 | ||||||||||||
Total stock-based
compensation expense |
$ | 2,301 | $ | 2,260 | $ | 4,130 | $ | 4,476 | ||||||||
Options granted under the 2005 Plan generally become exercisable for twenty-five percent of the
shares on the first anniversary date of the grant and 6.25 percent at the end of each quarter
thereafter. Options are granted with an exercise price equal to the fair market value of the
common stock on the date of the grant.
Options granted under our 2005 Plan generally have a stated expiration, if not exercised or earlier
terminated, seven
years after the date of grant. Options that were granted under our 2000 Equity Incentive Plan
(2000 Plan) generally have a stated expiration, if not exercised or earlier terminated, ten years
after the date of grant.
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Stock option activity under our 2005 Plan and 2000 Plan for the six months ended July 3, 2010 was
as follows:
Weighted average | Aggregate | |||||||||||
Options | exercise price | Intrinsic | ||||||||||
outstanding | per share | Value | ||||||||||
(in thousands) | ||||||||||||
Balance at January 2, 2010 |
7,161,545 | $ | 15.08 | |||||||||
Granted |
1,118,850 | 18.77 | ||||||||||
Exercised |
(1,152,016 | ) | 14.08 | |||||||||
Cancelled or expired |
(263,164 | ) | 17.78 | |||||||||
Balance at July 3, 2010 |
6,865,215 | $ | 15.74 | $ | 43,959 | |||||||
Options exercisable at July 3, 2010 |
4,084,516 | $ | 15.84 | $ | 25,783 | |||||||
The total intrinsic value of options exercised during the three and six months ended July 3, 2010
was $5.0 million and $7.8 million, respectively. As of July 3, 2010, we had $13.5 million of
unrecognized compensation cost, net of estimated forfeitures, related to unvested stock options
granted under our 2005 Plan. We expect that cost to be recognized over a weighted average period
of 2.8 years.
Restricted stock awards are granted under the 2005 Plan. Restricted stock awards are subject to
forfeiture if employment or service terminates prior to the release of the restrictions.
Restricted stock generally vest over a three or four year period. During the vesting period,
ownership of the shares cannot be transferred. Restricted stock is considered issued and
outstanding at the grant date and has the same dividend and voting rights as other common stock.
We recognize compensation expense for the fair value of the restricted stock grants issued based on
the closing stock price on the date of grant. The 2005 Plan does not designate the specific number
of shares available for restricted stock grants, as these are issued from the full pool of shares
available under the plan. The option pool is reduced by two shares for each restricted share
granted.
Restricted stock activity under our 2005 Plan for the six months ended July 3, 2010 was as follows:
Unvested Shares | Weighted average | |||||||
outstanding | grant date fair value | |||||||
Balance at January 2, 2010 |
233,525 | $ | 15.79 | |||||
Granted |
120,480 | 18.83 | ||||||
Vested |
(30,647 | ) | 16.08 | |||||
Cancelled |
(13,850 | ) | 15.89 | |||||
Balance at July 3, 2010 |
309,508 | 16.94 | ||||||
As of July 3, 2010, we had $3.9 million of unrecognized compensation cost, net of estimated
forfeitures, related to unvested restricted stock awards granted under our 2005 Plan. We expect
that cost to be recognized over a weighted average period of 2.9 years.
4. Earnings per Share
The following table presents information necessary to calculate basic and diluted net income per
common share and common share equivalents.
Three Months Ended | Six Months Ended | |||||||||||||||
(in thousands, except per share data) | July 3, 2010 | July 4, 2009 | July 3, 2010 | July 4, 2009 | ||||||||||||
Net income |
$ | 20,567 | $ | 16,865 | $ | 41,225 | $ | 33,945 | ||||||||
Weighted-average shares outstanding for basic net income per share |
75,612 | 73,919 | 75,364 | 73,778 | ||||||||||||
Dilutive effect of stock options, restricted shares and convertible notes |
2,573 | 583 | 1,813 | 480 | ||||||||||||
Adjusted weighted-average shares outstanding for diluted net income per share |
78,185 | 74,502 | 77,177 | 74,258 | ||||||||||||
Net income per share |
||||||||||||||||
Basic net earnings |
$ | 0.27 | $ | 0.23 | $ | 0.55 | $ | 0.46 | ||||||||
Diluted net earnings |
$ | 0.26 | $ | 0.23 | $ | 0.53 | $ | 0.46 |
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There were 1,293,589 and 1,463,345 weighted shares outstanding for the three and six month periods
ended July 3, 2010, respectively, that were excluded from the diluted earnings per share
computation because the impact would have been anti-dilutive. For the three and six month periods
ended July 4, 2009, there were 5,158,598 and 6,145,702 weighted shares outstanding, respectively,
that were excluded from the diluted earnings per share computation because the impact would have
been anti-dilutive.
5. Inventories
Inventories consist of the following as of July 3, 2010 and January 2, 2010:
(in thousands) | July 3, 2010 | January 2, 2010 | ||||||
Raw materials |
$ | 9,147 | $ | 10,117 | ||||
Work in process |
4,122 | 3,399 | ||||||
Finished goods |
24,680 | 21,791 | ||||||
Obsolescence reserve |
(4,492 | ) | (5,031 | ) | ||||
Net inventories |
$ | 33,457 | $ | 30,276 | ||||
6. Warranties
Many of our products are sold with warranty coverage for periods ranging from one year up to the
patients lifetime. The warranty allowance is our estimate of the expected future cost of honoring
current warranty obligations. Factors influencing this estimate include historical claim rates,
changes in product performance or deviations in product performance against our reliability
commitments, the frequency of use of a prosthetic implant by the patient, patients performance
expectations and changes in the terms of our policies.
Changes in the warranty balance during the three and six months ended July 3, 2010 and July 4, 2009
are presented below:
Three Months Ended | Six Months Ended | |||||||||||||||
(in thousands) | July 3, 2010 | July 4, 2009 | July 3, 2010 | July 4, 2009 | ||||||||||||
Balance, beginning of period |
$ | 2,203 | $ | 2,865 | $ | 2,293 | $ | 3,287 | ||||||||
Provisions for warranty |
520 | 155 | 854 | 963 | ||||||||||||
Claims processed |
(314 | ) | (551 | ) | (738 | ) | (1,781 | ) | ||||||||
Balance, end of period |
$ | 2,409 | $ | 2,469 | $ | 2,409 | $ | 2,469 | ||||||||
7. Comprehensive Income
Comprehensive income is the sum of net income as reported and other comprehensive income (loss).
Other comprehensive income (loss) resulted from foreign currency translation adjustments, gains
(losses) on derivative instruments qualifying as hedges, and gains (losses) on available-for-sale
investments. For more information on derivatives, see Note 11, Derivative Instruments and Hedging
Activities. Comprehensive income for the three and six months ended July 3, 2010 and July 4, 2009
was:
8
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Three Months Ended | ||||||||
(in thousands) | July 3, 2010 | July 4, 2009 | ||||||
Net income |
$ | 20,567 | $ | 16,865 | ||||
Foreign currency translation (loss) gain, net of taxes
of $13 and ($56), respectively |
(2,602 | ) | 2,669 | |||||
Fair value adjustment on derivatives designated as cash flow hedges,
net of taxes of ($1,195) and $1,065, respectively |
1,962 | (1,828 | ) | |||||
Reclassification adjustments on cash flow hedges settled and included
in net income, net of taxes of $185 and ($431), respectively |
(304 | ) | 634 | |||||
Unrealized (loss) gain on available-for-sale securities, net of taxes
of $58 and ($63), respectively |
(95 | ) | 109 | |||||
Comprehensive income |
$ | 19,528 | $ | 18,449 | ||||
Six Months Ended | ||||||||
(in thousands) | July 3, 2010 | July 4, 2009 | ||||||
Net income |
$ | 41,225 | $ | 33,945 | ||||
Foreign currency translation (loss) gain, net of taxes
of $29 and ($7), respectively |
(4,033 | ) | 1,295 | |||||
Fair value adjustment on derivatives designated as cash flow hedges,
net of taxes of ($1,805) and $913, respectively |
2,970 | (1,546 | ) | |||||
Reclassification adjustments on cash flow hedges settled and included
in net income, net of taxes of $49 and ($562), respectively |
(79 | ) | 820 | |||||
Unrealized gain on available-for-sale securities, net of taxes
of ($32) and ($75), respectively |
54 | 129 | ||||||
Comprehensive income |
$ | 40,137 | $ | 34,643 | ||||
The after-tax components of accumulated other comprehensive income (loss) as of July 3, 2010 and
January 2, 2010, were as follows:
Net | ||||||||||||||||||||
Unrealized | ||||||||||||||||||||
(Loss) Gain | Net | Total | ||||||||||||||||||
on Derivative | Post- | Foreign | Unrealized | Accumulated | ||||||||||||||||
Instruments | retirement | Currency | Gain on | Other | ||||||||||||||||
Qualifying as | Plan Liability | Translation | Available-for- | Comprehensive | ||||||||||||||||
(in thousands) | Hedges | Adjustment | Adjustment | sale Investments | Income | |||||||||||||||
Balance at January 2, 2010 |
$ | (1,289 | ) | $ | (24 | ) | $ | 7,500 | $ | 194 | $ | 6,381 | ||||||||
Balance at July 3, 2010 |
$ | 1,602 | $ | (24 | ) | $ | 3,467 | $ | 248 | $ | 5,293 | |||||||||
8. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for the six month period ended July 3, 2010 were:
Six Months Ended | ||||
(in thousands) | July 3, 2010 | |||
Goodwill, beginning of the period |
$ | 690,899 | ||
Allocation of goodwill to sale of non-strategic assets |
(6,400 | ) | ||
Effect of currency translation |
(1,815 | ) | ||
Goodwill, end of the period |
$ | 682,684 | ||
During the first quarter of 2010, we sold the Her Option® Global Endometrial Ablation product line
for $20.5 million and used the proceeds to pay down our debt. The final sale price after
adjustment based on working capital balances at the time of sale was $19.5 million. We allocated a
portion of our goodwill to the sale based on the relative fair value of the Her Option® product
line and our remaining business. The consideration, less goodwill,
9
Table of Contents
the carrying value of tangible
and intangible assets and related disposal costs resulted in a pre-tax gain of $7.7 million, which
is included in gain on sale of non-strategic assets in the Consolidated Statements of Operations.
As the majority of the goodwill that was allocated to the Her Option® product line had no tax
basis, we recorded a $5.1 million tax provision against the gain resulting in an effective tax rate
of 65.7 percent of the gain on sale of Her Option®.
The following table provides additional information concerning intangible assets:
July 3, 2010 | January 2, 2010 | |||||||||||||||||||||||
Gross carrying | Accumulated | Net book | Gross carrying | Accumulated | Net book | |||||||||||||||||||
(in thousands) | amount | amortization | value | amount | amortization | value | ||||||||||||||||||
Developed and core technology |
$ | 132,953 | $ | (87,708 | ) | $ | 45,245 | $ | 137,553 | $ | (85,922 | ) | $ | 51,631 | ||||||||||
Other intangibles
Amortized |
||||||||||||||||||||||||
Patents |
11,196 | (9,539 | ) | 1,657 | 11,510 | (9,693 | ) | 1,817 | ||||||||||||||||
Licenses |
17,423 | (9,623 | ) | 7,800 | 15,913 | (9,034 | ) | 6,879 | ||||||||||||||||
Trademarks |
2,233 | (2,013 | ) | 220 | 2,208 | (1,767 | ) | 441 | ||||||||||||||||
Total amortized other
intangible assets |
30,852 | (21,175 | ) | 9,677 | 29,631 | (20,494 | ) | 9,137 | ||||||||||||||||
Unamortized
Trademarks |
40,800 | | 40,800 | 40,800 | | 40,800 | ||||||||||||||||||
Total other intangibles |
71,652 | (21,175 | ) | 50,477 | 70,431 | (20,494 | ) | 49,937 | ||||||||||||||||
Total intangible assets |
$ | 204,605 | $ | (108,883 | ) | $ | 95,722 | $ | 207,984 | $ | (106,416 | ) | $ | 101,568 | ||||||||||
The estimated amortization expense for currently-owned intangibles, as presented above, for the
years 2010 through 2014 is $12.0 million, $11.3 million, $9.1 million, $9.0 million and $6.9
million, respectively.
During the second quarter of 2009, we purchased a license for the exclusive rights to certain
patents through the year 2018 for $9.0 million, of which $7.2 million has been paid as of July 3,
2010, and the remaining $1.8 million is structured to be paid out within the next year, in
quarterly intervals. All payments related to the patents are included in licenses and will be
amortized over 7.7 years, which is the remaining useful life of the patents.
9. Debt
Senior Secured Credit Facility
On July 20, 2006, in conjunction with the Laserscope acquisition, our wholly-owned subsidiary,
American Medical Systems, Inc. (AMS), entered into a credit and guarantee agreement (the Credit
Facility) with CIT Healthcare LLC, as agent, and certain lenders from time to time party thereto.
AMS and each majority-owned domestic subsidiary of AMS are parties to the Credit Facility as
guarantors of all of the obligations of AMS arising under the Credit Facility. Each of the
subsidiary guarantors is 100 percent owned by us and the guarantees are joint and several. The
obligations of AMS and each of the guarantors arising under the Credit Facility are secured by a
first priority security interest granted to the agent on substantially all of their respective
assets, including a mortgage on the AMS facility in Minnetonka, Minnesota.
The six-year senior secured Credit Facility consists of (i) term loan debt and (ii) a revolving
credit facility of up to $65.0 million which is available to fund ongoing working capital needs,
including future capital expenditures and permitted acquisitions. As of July 3, 2010 and January
2, 2010, there were $59.4 million and $125.3 million, respectively, of term loans outstanding under
the Credit Facility.
At our option, term loans under the Credit Facility (other than swing line loans) bear interest at
a variable rate based on LIBOR or an alternative variable rate based on the greater of the prime
rate or the federal funds effective rate plus 0.5 of 1.0 percent (Federal Funds Rate) plus an
applicable margin. The applicable margin for term loans based on LIBOR is 2.25 percent per annum,
while the applicable margin for term loans based on the prime rate or the Federal Funds Rate is
1.25 percent per annum. As of July 3, 2010, all debt under the Credit Facility had a variable
interest rate based on the LIBOR index. The applicable margin for loans under the revolving credit
facility is determined by reference to our total leverage ratio, as defined in the Credit Facility.
In addition to initial Credit
Facility fees and reimbursement of agent expenses, we are obligated to pay commitment fees on the
revolving credit facility.
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The term loans amortize 1.0 percent of the current principal balance quarterly from December 2006
through September 2011 and the remaining 95 percent will amortize December 2011 through July 2012.
In addition, mandatory prepayments are due under the Credit Facility equal to (i) 50 percent of
Excess Cash Flow (defined generally as net income, plus depreciation and amortization and other
non-cash charges including in-process research and development (IPR&D), plus decreases or minus
increases in working capital, minus capital expenditures (to the extent not financed) and
amortization payments with respect to the term loan, and any other indebtedness permitted under the
loan documents), (ii) 100 percent of the net proceeds of any asset sale (subject to a limited
reinvestment option and a $2.5 million exception), (iii) 100 percent of the net proceeds of any
debt (including convertible securities) or preferred stock issuance, and (iv) 50 percent of the net
proceeds of any other equity issuance. Amounts due under the Credit Facility may also be
voluntarily prepaid without premium or penalty.
During the first quarter of 2010, we sold the Her Option® product line for $20.5 million and used
the proceeds to pay down our debt. Amortization and other prepayments of $20.1 million and $65.8
million were made during the three and six months ended July 3, 2010, respectively. Amortization
and other prepayments of $20.5 million and $29.1 million were made during the three and six months
ended July 4, 2009, respectively.
The Credit Facility contains affirmative and negative covenants and other limitations (subject to
various carve-outs and baskets). The covenants limit: (a) the making of investments, the amount of
capital expenditures, the payment of dividends and other payments with respect to capital, the
disposition of material assets other than in the ordinary course of business, and mergers and
acquisitions under certain conditions, (b) transactions with affiliates unless such transactions
are completed in the ordinary course of business and upon fair and reasonable terms, (c) the
incurrence of liens and indebtedness, and (d) substantial changes in the nature of the companies
business. The Credit Facility also contains financial covenants which require us to maintain
predetermined ratio levels related to leverage, interest coverage, fixed charges, and a limit on
capital expenditures. In addition, the Credit Facility contains customary events of default,
including payment and covenant defaults and material inaccuracy of representations. The Credit
Facility further permits the taking of customary remedial action upon the occurrence and
continuation of an event of default, including the acceleration of obligations then outstanding
under the Credit Facility.
Fees of $10.5 million are classified as debt discount and are being accreted to amortization of
financing costs using the effective interest method over a six year period. Additional debt
issuance costs of approximately $2.4 million are recorded as other long term assets and are being
amortized over six years using the straight-line method. Upon payment of the prepayments described
above, a pro rata portion of the related fees and debt issuance costs of $0.3 million and $1.0
million was immediately charged to amortization of financing costs in three and six months ended
July 3, 2010, respectively, and $0.4 million and $0.5 million was immediately charged to
amortization of financing costs in the three and six months ended July 4, 2009, respectively.
Amendment of Credit Facility
On August 12, 2009, we entered into a Consent and Second Amendment to our Credit Facility, which
allowed us to exchange a portion of our existing convertible senior subordinated notes for new
convertible senior subordinated notes as discussed below. On October 29, 2007, we entered into a
First Amendment of our Credit Facility to modify certain financial covenant ratios as defined in
the Credit Facility (the First Amendment). Pursuant to the terms of the First Amendment, certain
of the financial tests and covenants were amended and restated, including the interest coverage
ratio, the total leverage ratio, the fixed charge coverage ratio, and the prior year maximum
consolidated capital expenditures.
Convertible Senior Subordinated Notes Due 2036
On June 27, 2006, we issued convertible senior subordinated notes with a stated maturity of July 1,
2036 (the 2036 Notes). The 2036 Notes bear a fixed interest rate of 3.25 percent per year, payable
semiannually. The 2036 Notes are our direct, unsecured, senior subordinated obligations, rank
junior to the senior secured Credit Facility and will rank junior in right of payment to all of our
future senior secured debt as provided in the indenture for the 2036 Notes. The 2036 Notes have
the same rank as our convertible notes that are due in 2041, which are discussed below.
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In March 2009, we repurchased 2036 Notes with a principal amount of $27.3 million in exchange for a
cash payment of $21.1 million. In connection with this transaction, we recorded a pre-tax gain on
extinguishment of debt of $4.6 million.
On September 21, 2009, we exchanged $250.0 million in principal of the 2036 Notes for $250.0
million in principal of new convertible senior subordinated notes with a stated maturity of
September 15, 2041 (the 2041 Notes). Further information on the 2041 Notes is provided
following this section.
We separately account for the liability and equity components of our 2036 Notes in a manner that
reflects our nonconvertible borrowing rate. The equity component of our 2036 Notes was $45.4
million as of July 3, 2010 and January 2, 2010, and is recorded in additional paid-in capital. As
of July 3, 2010, the principal amount of the liability component, its unamortized discount, and its
net carrying amount were $62.0 million, $10.1 million and $51.9 million, respectively. The
unamortized discount will be amortized over a remaining period of 3.0 years and the amortization
expense is included in amortization of financing costs on the Consolidated Statements of
Operations. As of January 2, 2010, the principal amount of the liability component, its
unamortized discount, and its net carrying amount were $62.0 million, $11.5 million and $50.5
million, respectively. The effective interest rate on the liability component was 9.5% for each of
the three and six months ended July 3, 2010 and July 4, 2009. During the three and six months
ended July 3, 2010, we recognized $0.5 million and $1.0 million, respectively, of interest expense
representing the contractual interest coupon on our 2036 Notes, and $0.7 million and $1.4 million,
respectively, of amortization expense related to the discount on the liability component. During
the three and six months ended July 4, 2009, we recognized $2.5 million and $5.2 million,
resepectively, of interest expense representing the contractual interest coupon on our 2036 Notes,
and $3.3 million and $6.7 million, respectively of amortization expense related to the discount on
the liability component.
In addition to regular interest on the 2036 Notes, we will also pay contingent interest beginning
July 1, 2011 at 0.25% of the average trading price of the 2036 Notes, if the average trading price
for the five consecutive trading days immediately before the last trading day preceding the
relevant six-month period equals or exceeds 120 percent of the principal amount of the 2036 Notes.
Our 2036 Notes are convertible under the following circumstances for cash and shares of our common
stock, if any, at a conversion rate of 51.5318 shares of our common stock per $1,000 principal
amount of 2036 Notes (which is equal to an initial conversion price of approximately $19.406 per
share), subject to adjustment: (1) when, during any fiscal quarter, the last reported sale price of
our common stock is greater than 130% of the conversion price for at least 20 trading days in the
30 trading-day period ending on the last trading day of the preceding fiscal quarter; (2) during
the five trading days immediately after any five consecutive trading-day period in which the
trading price of a 2036 Note for each day of that period was less than 98% of the product of the
closing price of our common stock and the applicable conversion rate; (3) if specified
distributions to holders of our common stock occur; (4) if we call the 2036 Notes for redemption;
(5) if an event or change occurs that results in conversion according to the Indenture; or (6)
during the 60 days prior to, but excluding, any scheduled repurchase date or maturity date. Upon
conversion, we would be required to satisfy up to 100 percent of the principal amount of the 2036
Notes solely in cash, with any amounts above the principal amount to be satisfied in shares of our
common stock. If a holder elects to convert its 2036 Notes in connection with a designated event
or change that occurs prior to July 1, 2013, we will pay, to the extent described in the Indenture,
a make whole premium by increasing the conversion rate applicable to such 2036 Notes. Conversion of
our 2036 Notes into common stock could result in dilution to our stockholders. From time to time,
our 2036 Notes hold a fair value below their conversion rate. Any redemption due to the trading
price discount, described in (2) above, would be subject to the restrictions imposed by the Credit
Facility and would occur at the lower of market or conversion value, which would likely be
substantially below the par value of the debt. All of the above conversion rights will be subject
to certain limitations imposed by our Credit Facility.
We have the right to redeem for cash all or a portion of the 2036 Notes on or after July 6, 2011 at
specified redemption prices as provided in the Indenture plus accrued and unpaid interest and
contingent interest. Holders of the 2036 Notes may require us to purchase all or a portion of their
2036 Notes for cash on July 1, 2013; July 1, 2016; July 1, 2021; July 1, 2026; and July 1, 2031 or
in the event of a designated event or change, at a purchase price equal to 100 percent of the
principal amount of the 2036 Notes to be repurchased plus accrued and unpaid interest and
contingent interest.
Convertible Senior Subordinated Notes Due 2041
On September 21, 2009, we exchanged $250.0 million in principal amount of our 2036 Notes for newly
issued 2041 Notes. The 2041 Notes bear a fixed interest rate of 4.0 percent per year, payable
semiannually. The 2041 Notes are
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our direct, unsecured, senior subordinated obligations, rank junior to the senior secured Credit
Facility and will rank junior in right of payment to all of our future senior debt as provided in
the indenture for the 2041 Notes. The 2041 Notes have the same rank as our 2036 Notes.
Similar to our 2036 Notes, we separately account for the liability and equity components of our
2041 Notes in a manner that reflects our nonconvertible borrowing rate. The excess of the principal
amount of the liability component over its carrying amount is treated as debt discount and
amortized using the effective interest method. In addition, debt issuance costs of approximately
$7.7 million were allocated to the liability and equity components of the 2041 Notes.
Approximately $5.3 million of the debt issuance costs were allocated to the liability component,
recorded in other long-term assets, and are being amortized using the straight line method over
seven years (representing the time period until the first put date under the 2041 Notes).
Approximately $2.4 million of the debt issuance costs were allocated to the equity component and
are treated as equity issuance costs and are not amortized.
The equity component of our 2041 Notes was $76.4 million as of July 3, 2010 and January 2, 2010,
and is recorded in additional paid-in capital. As of July 3, 2010, the principal amount of the
liability component, its unamortized discount, and its net carrying amount were $250.0 million,
$72.6 million and $177.4 million, respectively. The unamortized discount will be amortized over a
remaining period of 6.2 years and the amortization expense is included in amortization of
financing costs on the Consolidated Statements of Operations. As of January 2, 2010, the
principal amount of the liability component, its unamortized discount, and its net carrying amount
were $250.0 million, $76.7 million and $173.3 million, respectively. The effective interest rate
on the liability component was 10.2% for the three and six months ended July 3, 2010. During the
three and six months ended July 3, 2010, we recognized $2.5 million and $4.9 million, respectively,
of interest expense representing the contractual interest coupon on our 2041 Notes, and $2.1
million and $4.1 million of amortization expense related to the discount on the liability
component.
In addition to regular interest on the 2041 Notes, we will also pay contingent interest beginning
September 15, 2016 at 0.75% of the average trading price of the 2041 Notes, if the average trading
price for the five trading days immediately before the first trading day preceding the relevant
six-month period equals or exceeds 130 percent of the principal amount of the 2041 Notes.
Our 2041 Notes are convertible under the following circumstances for cash and shares of our common
stock, if any, at a conversion rate of 51.5318 shares of our common stock per $1,000 principal
amount of 2041 Notes (which is equal to an initial conversion price of approximately $19.406 per
share), subject to adjustment: (1) when, during any fiscal quarter commencing after January 2, 2010
(and only during such fiscal quarter), the last reported sale price of our common stock for at
least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days
ending on the last trading day of the preceding calendar quarter is greater than or equal to 130%
of the applicable conversion price on the applicable trading day; (2) during the five business day
period after any five consecutive trading day period in which the trading price per $1,000
principal amount of 2041 Notes for each day of that period was less than 98% of the product of the
last reported sale price of our common stock and the applicable conversion rate; (3) if we call the
2041 Notes for redemption; (4) if specified distributions to holders of our common stock occur; (5)
if an event or change occurs that results in conversion according to the Indenture; or (6) during
the 60 days prior to, but excluding, any scheduled repurchase date or maturity date. Upon
conversion, we would be required to satisfy up to 100 percent of the principal amount of the 2041
Notes solely in cash, with any amounts above the principal amount to be satisfied in shares of our
common stock. If a holder elects to convert its 2041 Notes in connection with a designated event
or change, we will pay, to the extent described in the Indenture, a make whole premium by
increasing the conversion rate applicable to such 2041 Notes. Conversion of our 2041 Notes into
common stock could result in dilution to our stockholders. Similar to our 2036 Notes, from time to
time, our 2041 Notes may hold a fair value below their conversion rate. Any redemption due to the
trading price discount, described in (2) above, would be subject to the restrictions imposed by the
Credit Facility and would occur at the lower of market or conversion value, which would likely be
substantially below the par value of the debt. All of the above conversion rights will be subject
to certain limitations imposed by our Credit Facility.
If certain conditions are met, we will have the right to redeem for cash all or a portion of the
2041 Notes on or after September 15, 2016 at specified redemption prices as provided in the
Indenture plus accrued and unpaid interest and contingent interest. Holders of the 2041 Notes may
require us to purchase all or a portion of their 2041 Notes for cash on September 15, 2016 or in
the event of a designated event or change, at a purchase price equal to 100 percent of the
principal amount of the 2041 Notes to be repurchased plus accrued and unpaid interest and
contingent interest.
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Supplemental Guarantor Information
The 2036 Notes and the 2041 Notes (Convertible Notes) are fully and unconditionally guaranteed on
an unsecured senior subordinated basis by four of our significant domestic subsidiaries: American
Medical Systems, Inc., AMS Sales Corporation, AMS Research Corporation and Laserscope (the
Guarantor Subsidiaries). Each of the Guarantor Subsidiaries is 100 percent owned by us. The
guarantees are joint and several, and are subordinated in right of payment to the guaranteed
obligations of our significant domestic subsidiaries under our senior Credit Facility.
The following supplemental condensed consolidating financial information presents the statements of
operations for each of the three and six month periods ended July 3, 2010 and July 4, 2009, the
balance sheets as of July 3, 2010 and January 2, 2010, and the statements of cash flows for each of
the six month periods ended July 3, 2010 and July 4, 2009, for the Guarantor Subsidiaries as a
group, and separately for our non-Guarantor Subsidiaries as a group. In the condensed
consolidating financial statements, we and the Guarantor Subsidiaries account for investment in
wholly-owned subsidiaries using the equity method.
American Medical Systems Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
Notes to Consolidated Financial Statements (Continued)
Condensed Consolidating Statement of Operations
(In thousands)
(In thousands)
Three Months Ended July 3, 2010 | ||||||||||||||||||||
American | ||||||||||||||||||||
Medical | Non- | |||||||||||||||||||
Systems | Guarantor | Guarantor | Consolidated | |||||||||||||||||
Holdings, Inc. | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||
Net sales |
$ | | $ | 123,309 | $ | 31,305 | $ | (18,246 | ) | $ | 136,368 | |||||||||
Cost of sales |
| 22,256 | 18,299 | (17,750 | ) | 22,805 | ||||||||||||||
Gross profit |
| 101,053 | 13,006 | (496 | ) | 113,563 | ||||||||||||||
Operating expenses |
||||||||||||||||||||
Marketing and selling |
| 35,008 | 11,106 | | 46,114 | |||||||||||||||
Research and development |
| 13,604 | 233 | | 13,837 | |||||||||||||||
General and administrative |
| 11,797 | | | 11,797 | |||||||||||||||
Amortization of intangibles |
| 3,030 | | | 3,030 | |||||||||||||||
Total operating expenses |
| 63,439 | 11,339 | | 74,778 | |||||||||||||||
Operating income |
| 37,614 | 1,667 | (496 | ) | 38,785 | ||||||||||||||
Other (expense) income |
||||||||||||||||||||
Royalty income |
| 47 | | | 47 | |||||||||||||||
Interest expense |
(2,979 | ) | (605 | ) | (24 | ) | 24 | (3,584 | ) | |||||||||||
Amortization of financing
costs |
(2,977 | ) | (369 | ) | | | (3,346 | ) | ||||||||||||
Gain on extinguishment of
debt |
| | | | | |||||||||||||||
Other income (expense) |
| 671 | (112 | ) | (74 | ) | 485 | |||||||||||||
Total other (expense) income |
(5,956 | ) | (256 | ) | (136 | ) | (50 | ) | (6,398 | ) | ||||||||||
(Loss) income before income taxes |
(5,956 | ) | 37,358 | 1,531 | (546 | ) | 32,387 | |||||||||||||
Provision for income taxes |
(2,245 | ) | 13,718 | 553 | (206 | ) | 11,820 | |||||||||||||
Equity in earnings of subsidiary |
24,618 | 978 | | (25,596 | ) | | ||||||||||||||
Net income |
$ | 20,907 | $ | 24,618 | $ | 978 | $ | (25,936 | ) | $ | 20,567 | |||||||||
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American Medical Systems Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
Notes to Consolidated Financial Statements (Continued)
Condensed Consolidating Statement of Operations
(In thousands)
(In thousands)
Six Months Ended July 3, 2010 | ||||||||||||||||||||
American | ||||||||||||||||||||
Medical | Non- | |||||||||||||||||||
Systems | Guarantor | Guarantor | Consolidated | |||||||||||||||||
Holdings, Inc. | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||
Net sales |
$ | | $ | 246,167 | $ | 60,972 | $ | (35,845 | ) | $ | 271,294 | |||||||||
Cost of sales |
| 42,831 | 35,636 | (34,635 | ) | 43,832 | ||||||||||||||
Gross profit |
| 203,336 | 25,336 | (1,210 | ) | 227,462 | ||||||||||||||
Operating expenses |
||||||||||||||||||||
Marketing and selling |
| 72,668 | 21,643 | | 94,311 | |||||||||||||||
Research and development |
| 27,119 | 227 | | 27,346 | |||||||||||||||
General and administrative |
| 24,487 | | | 24,487 | |||||||||||||||
Amortization of intangibles |
| 6,077 | | | 6,077 | |||||||||||||||
Total operating expenses |
| 130,351 | 21,870 | | 152,221 | |||||||||||||||
Operating income |
| 72,985 | 3,466 | (1,210 | ) | 75,241 | ||||||||||||||
Other (expense) income |
||||||||||||||||||||
Royalty income |
| 355 | | | 355 | |||||||||||||||
Interest expense |
(5,990 | ) | (1,541 | ) | (55 | ) | 48 | (7,538 | ) | |||||||||||
Amortization of financing costs |
(5,855 | ) | (1,184 | ) | | | (7,039 | ) | ||||||||||||
Gain on sale of non-strategic
assets |
| 7,719 | | | 7,719 | |||||||||||||||
Gain on extinguishment of debt |
| | | | | |||||||||||||||
Other income (expense) |
| 409 | (332 | ) | (108 | ) | (31 | ) | ||||||||||||
Total other (expense) income |
(11,845 | ) | 5,758 | (387 | ) | (60 | ) | (6,534 | ) | |||||||||||
(Loss) income before income taxes |
(11,845 | ) | 78,743 | 3,079 | (1,270 | ) | 68,707 | |||||||||||||
Provision for income taxes |
(4,466 | ) | 31,320 | 1,107 | (479 | ) | 27,482 | |||||||||||||
Equity in earnings of subsidiary |
49,395 | 1,972 | | (51,367 | ) | | ||||||||||||||
Net income |
$ | 42,016 | $ | 49,395 | $ | 1,972 | $ | (52,158 | ) | $ | 41,225 | |||||||||
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American Medical Systems Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
Notes to Consolidated Financial Statements (Continued)
Condensed Consolidating Statement of Operations
(In thousands)
(In thousands)
Three Months Ended July 4, 2009 | ||||||||||||||||||||
American | ||||||||||||||||||||
Medical | Non- | |||||||||||||||||||
Systems | Guarantor | Guarantor | Consolidated | |||||||||||||||||
Holdings, Inc. | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||
Net sales |
$ | | $ | 113,514 | $ | 28,043 | $ | (15,169 | ) | $ | 126,388 | |||||||||
Cost of sales |
| 20,814 | 16,282 | (15,488 | ) | 21,608 | ||||||||||||||
Gross profit |
| 92,700 | 11,761 | 319 | 104,780 | |||||||||||||||
Operating expenses |
||||||||||||||||||||
Marketing and selling |
| 33,639 | 9,214 | | 42,853 | |||||||||||||||
Research and development |
| 13,198 | (32 | ) | | 13,166 | ||||||||||||||
General and administrative |
| 11,660 | | | 11,660 | |||||||||||||||
Amortization of intangibles |
| 3,401 | | | 3,401 | |||||||||||||||
Total operating expenses |
| 61,898 | 9,182 | | 71,080 | |||||||||||||||
Operating income |
| 30,802 | 2,579 | 319 | 33,700 | |||||||||||||||
Other (expense) income |
||||||||||||||||||||
Royalty income |
| 874 | | | 874 | |||||||||||||||
Interest expense |
(2,548 | ) | (2,414 | ) | (52 | ) | 48 | (4,966 | ) | |||||||||||
Amortization of financing
costs |
(3,292 | ) | (682 | ) | | | (3,974 | ) | ||||||||||||
Gain on extinguishment of
debt |
| | | | | |||||||||||||||
Other income (expense) |
| 468 | 327 | (28 | ) | 767 | ||||||||||||||
Total other (expense) income |
(5,840 | ) | (1,754 | ) | 275 | 20 | (7,299 | ) | ||||||||||||
(Loss) income before income taxes |
(5,840 | ) | 29,048 | 2,854 | 339 | 26,401 | ||||||||||||||
Provision for income taxes |
(2,202 | ) | 10,617 | 994 | 127 | 9,536 | ||||||||||||||
Equity in earnings of subsidiary |
20,291 | 1,860 | | (22,151 | ) | | ||||||||||||||
Net income |
$ | 16,653 | $ | 20,291 | $ | 1,860 | $ | (21,939 | ) | $ | 16,865 | |||||||||
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American Medical Systems Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
Notes to Consolidated Financial Statements (Continued)
Condensed Consolidating Statement of Operations
(In thousands)
(In thousands)
Six Months Ended July 4, 2009 | ||||||||||||||||||||
American | ||||||||||||||||||||
Medical | Non- | |||||||||||||||||||
Systems | Guarantor | Guarantor | Consolidated | |||||||||||||||||
Holdings, Inc. | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||
Net sales |
$ | | $ | 225,065 | $ | 55,341 | $ | (30,380 | ) | $ | 250,026 | |||||||||
Cost of sales |
| 44,420 | 31,317 | (30,787 | ) | 44,950 | ||||||||||||||
Gross profit |
| 180,645 | 24,024 | 407 | 205,076 | |||||||||||||||
Operating expenses |
||||||||||||||||||||
Marketing and selling |
| 67,537 | 18,664 | | 86,201 | |||||||||||||||
Research and development |
| 25,984 | (7 | ) | | 25,977 | ||||||||||||||
General and administrative |
| 22,439 | | | 22,439 | |||||||||||||||
Amortization of intangibles |
| 6,666 | | | 6,666 | |||||||||||||||
Total operating expenses |
| 122,626 | 18,657 | | 141,283 | |||||||||||||||
Operating income |
| 58,019 | 5,367 | 407 | 63,793 | |||||||||||||||
Other (expense) income |
||||||||||||||||||||
Royalty income |
| 1,807 | | | 1,807 | |||||||||||||||
Interest expense |
(5,249 | ) | (5,110 | ) | (115 | ) | 98 | (10,376 | ) | |||||||||||
Amortization of financing
costs |
(6,762 | ) | (1,193 | ) | | | (7,955 | ) | ||||||||||||
Gain on extinguishment of
debt |
4,562 | | | | 4,562 | |||||||||||||||
Other income (expense) |
| 1,358 | 160 | (96 | ) | 1,422 | ||||||||||||||
Total other (expense) income |
(7,449 | ) | (3,138 | ) | 45 | 2 | (10,540 | ) | ||||||||||||
(Loss) income before income taxes |
(7,449 | ) | 54,881 | 5,412 | 409 | 53,253 | ||||||||||||||
Provision for income taxes |
(2,809 | ) | 20,080 | 1,884 | 153 | 19,308 | ||||||||||||||
Equity in earnings of subsidiary |
38,329 | 3,528 | | (41,857 | ) | | ||||||||||||||
Net income |
$ | 33,689 | $ | 38,329 | $ | 3,528 | $ | (41,601 | ) | $ | 33,945 | |||||||||
17
Table of Contents
American Medical Systems Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
Notes to Consolidated Financial Statements (Continued)
Condensed Consolidating Balance Sheet
(In thousands)
(In thousands)
As of July 3, 2010 | ||||||||||||||||||||
American | ||||||||||||||||||||
Medical | Non- | |||||||||||||||||||
Systems | Guarantor | Guarantor | Consolidated | |||||||||||||||||
Holdings, Inc. | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||
Assets |
||||||||||||||||||||
Current assets |
||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | 11,014 | $ | 12,590 | $ | | $ | 23,604 | ||||||||||
Short-term investments |
23,961 | 20,392 | 113 | | 44,466 | |||||||||||||||
Accounts receivable, net |
623,858 | 47,417 | 28,879 | (610,465 | ) | 89,689 | ||||||||||||||
Inventories, net |
| 31,484 | 7,283 | (5,310 | ) | 33,457 | ||||||||||||||
Deferred income taxes |
| 12,055 | 981 | | 13,036 | |||||||||||||||
Other current assets |
| 6,887 | 1,587 | | 8,474 | |||||||||||||||
Total current assets |
647,819 | 129,249 | 51,433 | (615,775 | ) | 212,726 | ||||||||||||||
Property, plant and equipment, net |
| 41,356 | 1,222 | | 42,578 | |||||||||||||||
Goodwill |
| 621,792 | 84,913 | (24,021 | ) | 682,684 | ||||||||||||||
Developed and core technology, net |
| 45,245 | | | 45,245 | |||||||||||||||
Other intangibles, net |
| 50,477 | | | 50,477 | |||||||||||||||
Investment in subsidiaries |
244,283 | 42,405 | | (286,688 | ) | | ||||||||||||||
Other long-term assets, net |
4,751 | 223 | 641 | | 5,615 | |||||||||||||||
Total assets |
$ | 896,853 | $ | 930,747 | $ | 138,209 | $ | (926,484 | ) | $ | 1,039,325 | |||||||||
Liabilities and Stockholders Equity |
||||||||||||||||||||
Current liabilities |
||||||||||||||||||||
Accounts payable |
$ | 890 | $ | 561,507 | $ | 74,970 | $ | (627,577 | ) | $ | 9,790 | |||||||||
Accrued compensation expenses |
| 20,596 | 3,636 | | 24,232 | |||||||||||||||
Accrued warranty expense |
| 2,437 | (28 | ) | | 2,409 | ||||||||||||||
Income taxes payable |
(2,048 | ) | 4,948 | 259 | | 3,159 | ||||||||||||||
Other accrued expenses |
3,028 | 15,242 | 3,629 | | 21,899 | |||||||||||||||
Total current liabilities |
1,870 | 604,730 | 82,466 | (627,577 | ) | 61,489 | ||||||||||||||
Non-current liabilities |
||||||||||||||||||||
Long-term debt |
229,343 | 58,102 | | | 287,445 | |||||||||||||||
Intercompany loans payable |
| | 12,219 | (12,219 | ) | | ||||||||||||||
Deferred income taxes |
57,969 | 1,085 | 1,119 | | 60,173 | |||||||||||||||
Long-term income taxes payable |
| 18,802 | | | 18,802 | |||||||||||||||
Long-term employee benefit obligations |
| 3,745 | | | 3,745 | |||||||||||||||
Total non-current liabilities |
287,312 | 81,734 | 13,338 | (12,219 | ) | 370,165 | ||||||||||||||
Total liabilities |
289,182 | 686,464 | 95,804 | (639,796 | ) | 431,654 | ||||||||||||||
Stockholders equity |
||||||||||||||||||||
Common stock |
760 | | 128 | (128 | ) | 760 | ||||||||||||||
Additional paid-in capital |
421,630 | 3,424 | 57,659 | (61,083 | ) | 421,630 | ||||||||||||||
Accumulated other comprehensive income |
5,292 | 2,744 | 2,876 | (5,619 | ) | 5,293 | ||||||||||||||
Retained earnings (deficit) |
179,989 | 238,115 | (18,258 | ) | (219,858 | ) | 179,988 | |||||||||||||
Total stockholders equity |
607,671 | 244,283 | 42,405 | (286,688 | ) | 607,671 | ||||||||||||||
Total liabilities and stockholders equity |
$ | 896,853 | $ | 930,747 | $ | 138,209 | $ | (926,484 | ) | $ | 1,039,325 | |||||||||
18
Table of Contents
American Medical Systems Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
Notes to Consolidated Financial Statements (Continued)
Condensed Consolidating Balance Sheet
(In thousands)
(In thousands)
As of January 2, 2010 | ||||||||||||||||||||
American | ||||||||||||||||||||
Medical | Non- | |||||||||||||||||||
Systems | Guarantor | Guarantor | Consolidated | |||||||||||||||||
Holdings, Inc. | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||
Assets |
||||||||||||||||||||
Current assets |
||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | 16,973 | $ | 13,697 | $ | | $ | 30,670 | ||||||||||
Short-term investments |
4,834 | 14,489 | 545 | | 19,868 | |||||||||||||||
Accounts receivable, net |
614,392 | 58,359 | 29,772 | (599,933 | ) | 102,590 | ||||||||||||||
Inventories, net |
| 27,750 | 6,853 | (4,327 | ) | 30,276 | ||||||||||||||
Deferred income taxes |
| 13,466 | 1,404 | | 14,870 | |||||||||||||||
Other current assets |
| 4,947 | 1,120 | | 6,067 | |||||||||||||||
Total current assets |
619,226 | 135,984 | 53,391 | (604,260 | ) | 204,341 | ||||||||||||||
Property, plant and equipment, net |
| 42,661 | 1,459 | | 44,120 | |||||||||||||||
Goodwill |
| 628,193 | 86,727 | (24,021 | ) | 690,899 | ||||||||||||||
Developed and core technology, net |
| 51,631 | | | 51,631 | |||||||||||||||
Other intangibles, net |
| 49,937 | | | 49,937 | |||||||||||||||
Investment in subsidiaries |
190,818 | 45,579 | | (236,397 | ) | | ||||||||||||||
Other long-term assets, net |
5,133 | 839 | 251 | | 6,223 | |||||||||||||||
Total assets |
$ | 815,177 | $ | 954,824 | $ | 141,828 | $ | (864,678 | ) | $ | 1,047,151 | |||||||||
Liabilities and Stockholders Equity |
||||||||||||||||||||
Current liabilities |
||||||||||||||||||||
Accounts payable |
$ | (5,058 | ) | $ | 558,217 | $ | 72,015 | $ | (616,060 | ) | $ | 9,114 | ||||||||
Accrued compensation expenses |
| 24,350 | 5,253 | | 29,603 | |||||||||||||||
Accrued warranty expense |
| 2,293 | | | 2,293 | |||||||||||||||
Income taxes payable |
(13,272 | ) | 16,371 | 1,396 | | 4,495 | ||||||||||||||
Other accrued expenses |
3,885 | 17,826 | 4,049 | | 25,760 | |||||||||||||||
Total current liabilities |
(14,445 | ) | 619,057 | 82,713 | (616,060 | ) | 71,265 | |||||||||||||
Non-current liabilities |
||||||||||||||||||||
Long-term debt |
223,876 | 122,353 | | | 346,229 | |||||||||||||||
Intercompany loans payable |
| | 12,221 | (12,221 | ) | | ||||||||||||||
Deferred income taxes |
60,387 | 645 | 1,315 | | 62,347 | |||||||||||||||
Long-term income taxes payable |
| 18,206 | | | 18,206 | |||||||||||||||
Long-term employee benefit obligations |
| 3,745 | | | 3,745 | |||||||||||||||
Total non-current liabilities |
284,263 | 144,949 | 13,536 | (12,221 | ) | 430,527 | ||||||||||||||
Total liabilities |
269,818 | 764,006 | 96,249 | (628,281 | ) | 501,792 | ||||||||||||||
Stockholders equity |
||||||||||||||||||||
Common stock |
747 | | 9 | (9 | ) | 747 | ||||||||||||||
Additional paid-in capital |
399,468 | 3,424 | 57,540 | (60,964 | ) | 399,468 | ||||||||||||||
Accumulated other comprehensive income |
6,381 | (202 | ) | 7,137 | (6,935 | ) | 6,381 | |||||||||||||
Retained earnings (deficit) |
138,763 | 187,596 | (19,107 | ) | (168,489 | ) | 138,763 | |||||||||||||
Total stockholders equity |
545,359 | 190,818 | 45,579 | (236,397 | ) | 545,359 | ||||||||||||||
Total liabilities and stockholders equity |
$ | 815,177 | $ | 954,824 | $ | 141,828 | $ | (864,678 | ) | $ | 1,047,151 | |||||||||
19
Table of Contents
American Medical Systems Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
Notes to Consolidated Financial Statements (Continued)
Condensed Consolidating Statement of Cash Flows
(In thousands)
(In thousands)
Six Months Ended July 3, 2010 | ||||||||||||||||||||
American | ||||||||||||||||||||
Medical | Non- | |||||||||||||||||||
Systems | Guarantor | Guarantor | Consolidated | |||||||||||||||||
Holdings, Inc. | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||
Cash flows from operating activities |
||||||||||||||||||||
Net cash (used in) provided by operating activities |
$ | (18,031 | ) | $ | 69,662 | $ | (1,750 | ) | $ | | $ | 49,881 | ||||||||
Cash flows from investing activities |
||||||||||||||||||||
Purchase of property, plant and equipment |
| (3,412 | ) | (134 | ) | | (3,546 | ) | ||||||||||||
Purchase of other intangibles |
| (1,657 | ) | | | (1,657 | ) | |||||||||||||
Sale of non-strategic assets, net |
| 19,070 | | | 19,070 | |||||||||||||||
Purchase of short-term investments |
| (41,142 | ) | (232 | ) | | (41,374 | ) | ||||||||||||
Sale of short-term investments |
| 16,117 | 649 | | 16,766 | |||||||||||||||
Settlement of derivative contracts, net |
| 1,277 | | | 1,277 | |||||||||||||||
Net cash provided by (used in) investing activities |
| (9,747 | ) | 283 | | (9,464 | ) | |||||||||||||
Cash flows from financing activities |
||||||||||||||||||||
Intercompany notes |
| | | | | |||||||||||||||
Issuance of common stock |
17,206 | | | 17,206 | ||||||||||||||||
Excess tax benefit from stock-based compensation |
825 | | | | 825 | |||||||||||||||
Payments on senior secured credit facility |
| (65,874 | ) | | | (65,874 | ) | |||||||||||||
Repurchase of convertible senior subordinated notes |
| | | | ||||||||||||||||
Net cash provided by (used in) financing activities |
18,031 | (65,874 | ) | | | (47,843 | ) | |||||||||||||
Effect of exchange rates on cash |
| | 360 | | 360 | |||||||||||||||
Net (decrease) in cash and cash equivalents |
| (5,959 | ) | (1,107 | ) | | (7,066 | ) | ||||||||||||
Cash and cash equivalents at beginning of period |
| 16,973 | 13,697 | | 30,670 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | | $ | 11,014 | $ | 12,590 | $ | | $ | 23,604 | ||||||||||
20
Table of Contents
American Medical Systems Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
Notes to Consolidated Financial Statements (Continued)
Condensed Consolidating Statement of Cash Flows
(In thousands)
(In thousands)
Six Months Ended July 4, 2009 | ||||||||||||||||||||
American | ||||||||||||||||||||
Medical | Non- | |||||||||||||||||||
Systems | Guarantor | Guarantor | Consolidated | |||||||||||||||||
Holdings, Inc. | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||
Cash flows from operating activities |
||||||||||||||||||||
Net cash provided by operating activities |
$ | 16,907 | $ | 35,477 | $ | 7,464 | $ | | $ | 59,848 | ||||||||||
Cash flows from investing activities |
||||||||||||||||||||
Purchase of property, plant and equipment |
| (2,259 | ) | (203 | ) | | (2,462 | ) | ||||||||||||
Purchase of other intangibles |
| (5,000 | ) | | | (5,000 | ) | |||||||||||||
Purchase of short-term investments |
| (18,134 | ) | (550 | ) | | (18,684 | ) | ||||||||||||
Sale of short-term investments |
| 30,500 | | | 30,500 | |||||||||||||||
Settlement of derivative contracts, net |
| (51 | ) | | | (51 | ) | |||||||||||||
Net cash provided by (used in) investing activities |
| 5,056 | (753 | ) | | 4,303 | ||||||||||||||
Cash flows from financing activities |
||||||||||||||||||||
Intercompany notes |
| 3,089 | (3,089 | ) | | | ||||||||||||||
Issuance of common stock |
3,908 | | | | 3,908 | |||||||||||||||
Excess tax benefit from stock-based compensation |
310 | | | | 310 | |||||||||||||||
Payments on senior secured credit facility |
| (29,111 | ) | | | (29,111 | ) | |||||||||||||
Repurchase of convertible senior subordinated notes |
(21,125 | ) | | | | (21,125 | ) | |||||||||||||
Net cash used in financing activities |
(16,907 | ) | (26,022 | ) | (3,089 | ) | | (46,018 | ) | |||||||||||
Effect of exchange rates on cash |
| | (156 | ) | | (156 | ) | |||||||||||||
Net increase in cash and cash equivalents |
| 14,511 | 3,466 | | 17,977 | |||||||||||||||
Cash and cash equivalents at beginning of period |
| 3,143 | 8,499 | | 11,642 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | | $ | 17,654 | $ | 11,965 | $ | | $ | 29,619 | ||||||||||
21
Table of Contents
10. Fair Value Measurements
Generally accepted accounting principles define and establish a framework for measuring fair value
and providing disclosure about fair value measurements. Furthermore, U.S. GAAP specifies a
hierarchy of valuation techniques based upon whether the inputs to those valuation techniques
reflect assumptions other market participants would use based upon market data obtained from
independent sources (observable inputs) or reflect our own assumptions of market participant
valuation (unobservable inputs). We have categorized our financial assets and liabilities, based
on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy.
If the inputs used to measure the financial instruments fall within different levels of the
hierarchy, the categorization is based on the lowest level input that is significant to the fair
value measurement of the instrument.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table summarizes our financial assets measured at fair value on a recurring basis as
of July 3, 2010 (in thousands):
Fair Value Measurements at Reporting Date Using | ||||||||||||
Quoted Prices in | Significant Other | Significant | ||||||||||
Active Markets for | Observable | Unobservable | ||||||||||
Description | Identical Assets (Level 1) | Inputs (Level 2) | Inputs (Level 3) | |||||||||
Assets |
||||||||||||
Money market funds |
$ | 43,646 | $ | | $ | | ||||||
Available-for-sale securities |
707 | | | |||||||||
Other short-term investments |
| 113 | | |||||||||
Derivatives |
| 2,823 | | |||||||||
Total |
$ | 44,353 | $ | 2,936 | $ | | ||||||
Liabilities |
||||||||||||
Derivatives |
$ | | $ | 485 | $ | | ||||||
Money market funds: Our money market funds are highly liquid investments with a maturity of three
months or less. These assets are classified within Level 1 of the fair value hierarchy because the
money market funds are valued using quoted market prices in active markets.
Available-for-sale securities: As of July 3, 2010, our available-for-sale securities included
common stock of Iridex Corporation. These securities are valued using quoted market prices
multiplied by the number of shares owned.
Other short-term investments: Other short-term investments consist of short-term bonds.
Investments for which quoted market prices are available are categorized as Level 1 in the fair
value hierarchy. For the remaining investments, which have maturities of three months or less, the
carrying amount is a reasonable estimate of fair value and these have been classified as Level 2.
Derivatives: The fair value of various foreign exchange forward contracts as of July 3, 2010
includes assets of $2.8 million, reported in other current assets, and liabilities of $0.5 million,
reported in other accrued expenses. We measure our derivatives at fair value on a recurring basis
using significant observable inputs, which is Level 2 as defined in the fair value hierarchy.
Refer to Note 11, Derivative Instruments and Hedging Activities, for more information regarding our
derivatives.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Fair value measurements of non-financial assets and liabilities are primarily used in the
impairment analysis of goodwill and other intangible assets. We review goodwill and other
intangible assets for impairment annually, during the fourth quarter of each fiscal year, or as
circumstances indicate the possibility of impairment. During the three and six months ended July 3,
2010, we had no significant measurements of assets or liabilities at fair value on a nonrecurring
basis subsequent to their initial recognition.
22
Table of Contents
Fair Value of Debt
The fair value of the Convertible Notes (see Note 9, Debt) was estimated using quoted market
prices. The fair value of the Credit Facility was estimated using a discounted cash flow analysis
based on our current estimated incremental borrowing rate for a similar borrowing arrangement.
The following table summarizes the principal outstanding and estimated fair values of our long-term
debt, including current maturities (in thousands):
July 3, 2010 | January 2, 2010 | |||||||||||||||
Principal | Fair Value | Principal | Fair Value | |||||||||||||
2036 Notes |
$ | 61,985 | $ | 74,958 | $ | 61,985 | $ | 70,270 | ||||||||
2041 Notes |
250,000 | 329,375 | 250,000 | 304,983 | ||||||||||||
Credit Facility |
59,433 | 58,662 | 125,307 | 123,230 | ||||||||||||
$ | 371,418 | $ | 462,995 | $ | 437,292 | $ | 498,483 | |||||||||
11. Derivative Instruments and Hedging Activities
We are exposed to certain risks relating to our ongoing business operations. We use derivatives to
mitigate a portion of our exposure to volatility in interest and foreign currency exchange rates.
Interest rate swaps are used to manage interest rate risk associated with our floating rate debt.
Foreign exchange forward contracts are used to manage the currency risk associated with forecasted
sales to and receivables from certain subsidiaries, denominated in their local currencies. We
hedge only exposures in the ordinary course of business.
We account for our derivative instruments at fair value provided we meet certain documentary and
analytical requirements to qualify for hedge accounting treatment. Hedge accounting creates the
potential for a Consolidated Statement of Operations match between the changes in fair values of
derivatives and the changes in cost of the associated underlying transactions, in this case
interest expense and translation gain or loss. Derivatives held by us are designated as hedges of
specific exposures at inception, with an expectation that changes in the fair value will
essentially offset the change in the underlying exposure. Discontinuance of hedge accounting is
required whenever it is subsequently determined that an underlying transaction is not going to
occur, with any gains or losses recognized in the Consolidated Statement of Operations at such
time, with any subsequent changes in fair value recognized currently in earnings. Fair values of
derivatives are determined based on quoted prices for similar contracts.
The interest rate swap contract outstanding at July 3, 2010 is designated as a cash flow hedge of
the floating rate interest payments for a portion of our borrowings under the Credit Facility. The
portion of borrowings subject to this swap contract is $30.0 million. This contract has a
remaining term of two months. In addition, we have foreign currency exchange forward contract
derivatives outstanding at July 3, 2010 which are designated as cash flow hedges of currency
fluctuations for a portion of our forecasted sales to certain subsidiaries, denominated in Euros,
British pounds, Canadian dollars and Australian dollars. These contracts have remaining terms
between one and seventeen months. The notional amount of the foreign exchange forward contracts
designated as cash flow hedges was $52.6 million and $48.4 million at July 3, 2010 and January 2,
2010, respectively. We have also entered into foreign exchange forward contracts to manage a
portion of our exposure to foreign exchange rate fluctuations on certain inter-company receivables
denominated in Euros, British pounds, Brazilian real, Canadian dollars and Australian dollars.
These contracts are not designated as an accounting hedge, and the notional amount of these
contracts at July 3, 2010 and January 2, 2010 was $26.6 million and $10.9 million, respectively.
The associated underlying transactions are expected to occur within the next month.
The effective portion of the change in fair value of the interest rate swap and foreign currency
exchange contracts is reported in accumulated other comprehensive income, a component of
stockholders equity, and is being recognized as an adjustment to interest expense or other
(expense) income, respectively, over the same period the related expenses are recognized in
earnings. Ineffectiveness would occur when changes in the market value of the hedged transactions
are not completely offset by changes in the market value of the derivatives. Gains and losses on
derivatives representing hedge ineffectiveness or hedge components excluded from the assessment of
effectiveness are recognized currently in earnings when incurred. No ineffectiveness was
recognized during the three or six months ended July 3, 2010 or July 4, 2009. Amounts due from
counterparties (unrealized hedge gains) or owed to counterparties (unrealized hedge losses) are
included in accounts receivable, net or other accrued expenses, respectively. Cash receipts or
payments related to our derivatives are generally classified in the Consolidated
23
Table of Contents
Statements of Cash Flows as cash flows from operating activities, consistent with the related items being hedged,
unless the derivative is not designated as a hedge or if hedge accounting is discontinued, in which
case the receipts or payments are classified as cash flows from investing activities.
Information on the location and amounts of derivative fair values in the Consolidated Balance Sheets is presented in the table below.
Fair Values of Derivative Instruments | ||||||||||||||||||||||||
Asset Derivatives | Liability Derivatives | |||||||||||||||||||||||
July 3, 2010 | January 2, 2010 | July 3, 2010 | January 2, 2010 | |||||||||||||||||||||
Balance | Balance | Balance | Balance | |||||||||||||||||||||
Sheet | Fair | Sheet | Fair | Sheet | Fair | Sheet | Fair | |||||||||||||||||
(in thousands) | Location | Value | Location | Value | Location | Value | Location | Value | ||||||||||||||||
Derivatives designated as hedging instruments |
||||||||||||||||||||||||
Interest rate swap contracts |
Other current assets | $ | | Other current assets | $ | | Other accrued expenses | $ | 5 | Other accrued expenses | $ | 299 | ||||||||||||
Foreign exchange forward contracts |
Other current assets | 2,823 | Other current assets | | Other accrued expenses | 308 | Other accrued expenses | 1,650 | ||||||||||||||||
Total derivatives designated as hedging instruments |
$ | 2,823 | $ | | $ | 313 | $ | 1,949 | ||||||||||||||||
Derivatives not designated as hedging instruments |
||||||||||||||||||||||||
Foreign exchange forward contracts |
Other current assets | $ | | Other current assets | $ | 10 | Other accrued expenses | $ | 172 | Other accrued expenses | $ | | ||||||||||||
Total derivatives not designated as hedging instruments |
$ | | $ | 10 | $ | 172 | $ | | ||||||||||||||||
Total derivatives |
$ | 2,823 | $ | 10 | $ | 485 | $ | 1,949 | ||||||||||||||||
At July 3, 2010, approximately $2.3 million of the existing gain on the foreign exchange
forward contracts designated as a cash flow hedge that are in an asset position, and approximately
$0.3 million of the existing loss on the foreign exchange forward contracts designated as a cash
flow hedge that are in a liability position, all of which are included in accumulated other
comprehensive income, are expected to be reclassified into earnings within the next twelve months.
We are exposed to credit losses in the event of non-performance by counterparties on these
financial instruments, and although no assurances can be given, we do not expect any of the
counterparties to fail to meet its obligations. The credit exposure related to these financial
instruments is represented by the fair value of contracts with a positive fair value at the
reporting date. To manage credit risks, we enter into derivative instruments with high quality
financial institutions, which we monitor regularly and take action where possible to mitigate risk.
Information on the location and amounts of derivative gains and losses recorded in other
comprehensive income (OCI) and recorded in the Consolidated Statements of Operations is presented
in the table below.
24
Table of Contents
The Effect of Derivative Instruments on the Consolidated Statement of Operations
For the Three Months Ended July 3, 2010 and July 4, 2009
(in thousands)
(in thousands)
Location of Gain | ||||||||||||||||||
Derivatives in | Amount of Gain (Loss) | (Loss) Reclassified | Amount of Gain (Loss) Reclassified | |||||||||||||||
Cash Flow | Recognized in OCI on Derivatives | from Accumulated | from Accumulated OCI into Income | |||||||||||||||
Hedging | (Effective Portion) | OCI into Income | (Effective Portion) | |||||||||||||||
Relationships | July 3, 2010 | July 4, 2009 | (Effective Portion) | July 3, 2010 | July 4, 2009 | |||||||||||||
Interest rate swap contracts |
$ | 89 | $ | 533 | Interest expense | $ | (78 | ) | $ | (877 | ) | |||||||
Foreign exchange contracts |
2,579 | (2,362 | ) | Other income (expense) | 567 | (188 | ) | |||||||||||
Total |
$ | 2,668 | $ | (1,829 | ) | $ | 489 | $ | (1,065 | ) | ||||||||
Derivatives not | Location of Gain (Loss) | Amount of Gain (Loss) Recognized | ||||||||
Designated as | Recognized in Income | in Income on Derivatives | ||||||||
Hedging Instruments | on Derivatives | July 3, 2010 | July 4, 2009 | |||||||
Foreign exchange contracts |
Other income (expense) | $ | 454 | $ | (559 | ) | ||||
For the Six Months Ended July 3, 2010 and July 4, 2009
(in thousands)
(in thousands)
Location of Gain | ||||||||||||||||||
Derivatives in | Amount of Gain (Loss) | (Loss) Reclassified | Amount of Gain (Loss) Reclassified | |||||||||||||||
Cash Flow | Recognized in OCI on Derivatives | from Accumulated | from Accumulated OCI into Income | |||||||||||||||
Hedging | (Effective Portion) | OCI into Income | (Effective Portion) | |||||||||||||||
Relationships | July 3, 2010 | July 4, 2009 | (Effective Portion) | July 3, 2010 | July 4, 2009 | |||||||||||||
Interest rate swap contracts |
$ | 286 | $ | 1,162 | Interest expense | $ | (297 | ) | $ | (1,911 | ) | |||||||
Foreign exchange contracts |
4,361 | (2,238 | ) | Other income (expense) | 425 | 529 | ||||||||||||
Total |
$ | 4,647 | $ | (1,076 | ) | $ | 128 | $ | (1,382 | ) | ||||||||
Derivatives not | Location of Gain (Loss) | Amount of Gain (Loss) Recognized | ||||||||
Designated as | Recognized in Income | in Income on Derivatives | ||||||||
Hedging Instruments | on Derivatives | July 3, 2010 | July 4, 2009 | |||||||
Foreign exchange contracts |
Other income (expense) | $ | 736 | $ | (206 | ) | ||||
12. Industry Segment Information and Foreign Operations
Since our inception, we have operated in the single industry segment of developing, manufacturing,
selling and marketing medical devices.
We distribute products through our direct sales force and independent sales representatives in the
United States, Canada, Australia, Brazil and Western Europe. Additionally, we distribute products
through foreign independent distributors, primarily in Europe, Asia and South America, who then
sell the products to medical institutions. No customer or distributor accounted for ten percent or
more of net sales during the three and six month periods ended July 3, 2010 or July 4, 2009.
Foreign subsidiary sales are predominantly to customers in Western Europe, Canada, Australia and
Brazil and our foreign subsidiary assets are located in the same countries.
The following table presents net sales and long-lived assets (excluding deferred taxes) by
geographical territory. No individual foreign countrys net sales or long-lived assets accounted
for more than ten percent of consolidated net sales or consolidated long-lived assets.
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Three Months Ended | Six Months Ended | |||||||||||||||
(in thousands) | July 3, 2010 | July 4, 2009 | July 3, 2010 | July 4, 2009 | ||||||||||||
United States |
||||||||||||||||
Net sales |
$ | 96,870 | $ | 89,405 | $ | 195,180 | $ | 179,075 | ||||||||
Long-lived assets |
810,337 | 829,172 | 810,337 | 829,172 | ||||||||||||
International |
||||||||||||||||
Net sales |
39,498 | 36,983 | 76,114 | 70,951 | ||||||||||||
Long-lived assets |
16,262 | 17,550 | 16,262 | 17,550 |
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Managements Discussion and Analysis of Financial Condition and Results of Operations
contains forward-looking statements. Any statements not of historical fact may be considered
forward-looking statements. These statements by their nature involve substantial risks and
uncertainties, and actual results may differ materially from those expressed in such
forward-looking statements as a result of many factors, including, but not limited to, those
discussed under the heading Forward-Looking Statements at the end of this item of the report.
Critical Accounting Policies and Estimates
Managements discussion and analysis of financial condition and results of operations are based
upon the consolidated financial statements, which have been prepared in accordance with U.S.
generally accepted accounting principles. The preparation of these financial statements requires
us to make estimates and judgments that affect (1) the reported amounts of assets, liabilities,
revenues, and expenses and (2) the related disclosure of contingent assets and liabilities. At
each balance sheet date, we evaluate our estimates, including but not limited to, those related to
accounts receivable and sales return obligations, inventories, long-lived assets, warranty, legal
contingencies, valuation of share-based payments and income taxes. We base our estimates on
historical experience and on various other assumptions that we believe to be reasonable under the
circumstances. The critical accounting policies that are most important in fully understanding and
evaluating the financial condition and results of operations are discussed in our Form 10-K for the
year ended January 2, 2010.
Overview
We are a world leader in developing and delivering innovative medical technology solutions to
physicians treating mens and womens pelvic health conditions, thereby recognized as a technology
leader in the markets we serve. Our growth is fueled by a robust pipeline of innovative products
for significant, under-penetrated markets. We have a diverse product portfolio, which treats mens
incontinence, erectile dysfunction, and benign prostatic hyperplasia (BPH), and treats womens
incontinence and pelvic floor prolapse. We estimate there are as many as 1.6 billion incidences of
these conditions in the global markets we serve, with many people suffering from multiple
conditions. Treatment options for these conditions vary considerably depending on the severity of
the condition. Approximately 350 million of these men and women have conditions sufficiently
severe so as to profoundly diminish their quality of life and significantly impact their
relationships. Our addressable market is contained within this group of patients. Our product
development and acquisition strategies have focused on expanding our product offering for surgical
solutions, including less-invasive solutions for surgeons and their patients. Our primary physician
customers include urologists, gynecologists, urogynecologists and colorectal surgeons.
Our net sales were $136.4 million and $271.3 million in the three and six month periods ended July
3, 2010, respectively, compared to $126.4 million and $250.0 million in the three and six months
ended July 4, 2009, respectively. In the three and six months ended July 3, 2010, mens health
contributed $61.4 million and $125.8 million, or 45 percent and 46 percent of total net sales,
respectively; BPH therapy contributed $29.2 million and $55.1 million, or 21 percent and 20 percent
of total net sales, respectively; and womens health contributed $44.5 million and $87.2 million,
or 33 percent and 32 percent of total net sales, respectively.
We are making additional investments in support of long-term growth, to expand the market globally,
and to strengthen our marketing, physician training, and regulatory functions outside the U.S. We
also maintain our strong commitment to product innovation. Late in the second quarter of 2010 we
launched the new GreenLight XPS (Xcelerated Performance System) Laser Therapy System,
and we also received U.S. Food and Drug Administration (FDA) 510(k) clearance for the
MoXy Liquid Cooled Fiber designed to be used with the new GreenLight XPS.
In addition, in our female continence product line, we received FDA 510(k) clearance for the
MiniArc® Precise Single-Incision Sling System for the treatment of female stress urinary
incontinence (SUI). MiniArc® Precise is the next generation of the MiniArc® sling, the number one
selling single-incision sling in the United States.
Our focus on managing our working capital, controlling costs, and driving operating leverage
throughout our business continues to provide positive results. We generated net income of $20.6
million and $41.2 million in the three and six months ended July 3, 2010, compared to $16.9 million
and $33.9 million in the three and six month periods ended July 4, 2009. Cash provided by operating
activities totaled $49.9 million for the six months ended July 3, 2010, compared to $59.8 million
in the six months ended July 4, 2009. We also retired $65.9 million and $56.4 million of debt in
the six months ended July 3, 2010 and July 4, 2009, respectively.
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Based on our areas of competitive strength, our strategy is to expand the reach of our products
and address unmet needs in both established and new pelvic health markets. We determined that our
Ovion female sterilization assets and technology (Ovion technology) and our Her Option® global
endometrial cryoablation product line did not fit our long-term strategy. During the third quarter
of 2009, we sold our Ovion technology for $23.6 million (see our Annual Report on Form 10-K for
fiscal 2009, Notes to Consolidated Financial Statements No. 5, Goodwill and Intangible Assets).
In February of 2010, we sold the Her Option® product line for $20.5 million (see Notes to
Consolidated Financial Statements No. 8, Goodwill and Intangible Assets). We used the net
proceeds from these sales to pay down our debt. The sale of these non-strategic assets will allow
us to concentrate our efforts and resources on improving and expanding the global reach of our
products to restore quality of life to men and women through innovative, life-changing solutions.
We maintain a website at www.AmericanMedicalSystems.com. We are not including the information
contained on our website as a part of, nor incorporating it by reference into, this Quarterly
Report on Form 10-Q. We make available free of charge on our website our Quarterly Reports on Form
10-Q, Annual Reports on Form 10-K, Current Reports on Form 8-K, and amendments to these reports, as
soon as reasonably practicable after we electronically file such material with, or furnish such
material to, the Securities and Exchange Commission.
Results of Operations
The following table provides product category and geography details of our net sales for the three
and six month periods ended July 3, 2010 compared to the three and six month periods ended July 4,
2009.
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
(in thousands) | July 3, 2010 | July 4, 2009 | $ Increase | % Increase | July 3, 2010 | July 4, 2009 | $ Increase | % Increase | ||||||||||||||||||||||||
Net Sales |
||||||||||||||||||||||||||||||||
Mens health |
$ | 61,361 | $ | 56,967 | $ | 4,394 | 7.7 | % | $ | 125,841 | $ | 116,424 | $ | 9,417 | 8.1 | % | ||||||||||||||||
BPH therapy |
29,176 | 28,084 | 1,092 | 3.9 | % | 55,087 | 53,473 | 1,614 | 3.0 | % | ||||||||||||||||||||||
Womens health |
44,491 | 38,467 | 6,024 | 15.7 | % | 87,239 | 74,769 | 12,470 | 16.7 | % | ||||||||||||||||||||||
Sub-total |
135,028 | 123,518 | 11,510 | 9.3 | % | 268,167 | 244,666 | 23,501 | 9.6 | % | ||||||||||||||||||||||
Uterine health (a) |
1,340 | 2,870 | (1,530 | ) | -53.3 | % | 3,127 | 5,360 | (2,233 | ) | -41.7 | % | ||||||||||||||||||||
Total |
$ | 136,368 | $ | 126,388 | $ | 9,980 | 7.9 | % | $ | 271,294 | $ | 250,026 | $ | 21,268 | 8.5 | % | ||||||||||||||||
Geography |
||||||||||||||||||||||||||||||||
United States |
$ | 95,530 | $ | 86,535 | $ | 8,995 | 10.4 | % | $ | 192,053 | $ | 173,715 | $ | 18,338 | 10.6 | % | ||||||||||||||||
International |
39,498 | 36,983 | 2,515 | 6.8 | % | 76,114 | 70,951 | 5,163 | 7.3 | % | ||||||||||||||||||||||
Sub-total |
135,028 | 123,518 | 11,510 | 9.3 | % | 268,167 | 244,666 | 23,501 | 9.6 | % | ||||||||||||||||||||||
United States-Uterine health (a) |
1,340 | 2,870 | (1,530 | ) | -53.3 | % | 3,127 | 5,360 | (2,233 | ) | -41.7 | % | ||||||||||||||||||||
Total |
$ | 136,368 | $ | 126,388 | $ | 9,980 | 7.9 | % | $ | 271,294 | $ | 250,026 | $ | 21,268 | 8.5 | % | ||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
July 3, 2010 | July 4, 2009 | July 3, 2010 | July 4, 2009 | |||||||||||||||||||||||||||||
Percent of net sales |
||||||||||||||||||||||||||||||||
Mens health |
45.0 | % | 45.1 | % | 46.4 | % | 46.6 | % | ||||||||||||||||||||||||
BPH therapy |
21.4 | % | 22.2 | % | 20.3 | % | 21.4 | % | ||||||||||||||||||||||||
Womens health |
32.6 | % | 30.4 | % | 32.2 | % | 29.9 | % | ||||||||||||||||||||||||
Sub-total |
99.0 | % | 97.7 | % | 98.8 | % | 97.9 | % | ||||||||||||||||||||||||
Uterine health (a) |
1.0 | % | 2.3 | % | 1.2 | % | 2.1 | % | ||||||||||||||||||||||||
Total |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||||||||||||
Geography |
||||||||||||||||||||||||||||||||
United States |
71.0 | % | 70.7 | % | 71.9 | % | 71.6 | % | ||||||||||||||||||||||||
International |
29.0 | % | 29.3 | % | 28.1 | % | 28.4 | % | ||||||||||||||||||||||||
Total |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||||||||||||
(a) | The uterine health product line, Her Option ® was sold in February, 2010. Revenues in the first six months of 2010 consist of end-customer revenue earned prior to the date of sale, in addition to revenue earned as part of the product supply agreement, which was part of the divestiture agreement with CooperSurgical, Inc. |
28
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The following table compares revenue, expense, and other income (expense) for the three and six
months ended July 3, 2010 and July 4, 2009:
Three Months Ended | $ Increase | % Increase | Six Months Ended | $ Increase | % Increase | |||||||||||||||||||||||||||
(in thousands) | July 3, 2010 | July 4, 2009 | (Decrease) | (Decrease) | July 3, 2010 | July 4, 2009 | (Decrease) | (Decrease) | ||||||||||||||||||||||||
Net sales |
$ | 136,368 | $ | 126,388 | $ | 9,980 | 7.9 | % | $ | 271,294 | $ | 250,026 | $ | 21,268 | 8.5 | % | ||||||||||||||||
Cost of sales |
$ | 22,805 | $ | 21,608 | 1,197 | 5.5 | % | $ | 43,832 | $ | 44,950 | (1,118 | ) | -2.5 | % | |||||||||||||||||
Gross profit |
113,563 | 104,780 | 8,783 | 8.4 | % | 227,462 | 205,076 | 22,386 | 10.9 | % | ||||||||||||||||||||||
Operating expenses |
||||||||||||||||||||||||||||||||
Marketing and selling |
46,114 | 42,853 | 3,261 | 7.6 | % | 94,311 | 86,201 | 8,110 | 9.4 | % | ||||||||||||||||||||||
Research and development |
13,837 | 13,166 | 671 | 5.1 | % | 27,346 | 25,977 | 1,369 | 5.3 | % | ||||||||||||||||||||||
General and administrative |
11,797 | 11,660 | 137 | 1.2 | % | 24,487 | 22,439 | 2,048 | 9.1 | % | ||||||||||||||||||||||
Amortization of intangibles |
3,030 | 3,401 | (371 | ) | -10.9 | % | 6,077 | 6,666 | (589 | ) | -8.8 | % | ||||||||||||||||||||
Total operating expenses |
74,778 | 71,080 | 3,698 | 5.2 | % | 152,221 | 141,283 | 10,938 | 7.7 | % | ||||||||||||||||||||||
Operating income |
38,785 | 33,700 | 5,085 | 15.1 | % | 75,241 | 63,793 | 11,448 | 17.9 | % | ||||||||||||||||||||||
Royalty income |
47 | 874 | (827 | ) | -94.6 | % | 355 | 1,807 | (1,452 | ) | -80.4 | % | ||||||||||||||||||||
Interest expense |
(3,584 | ) | (4,966 | ) | (1,382 | ) | -27.8 | % | (7,538 | ) | (10,376 | ) | (2,838 | ) | -27.4 | % | ||||||||||||||||
Amortization of financing costs |
(3,346 | ) | (3,974 | ) | (628 | ) | -15.8 | % | (7,039 | ) | (7,955 | ) | (916 | ) | -11.5 | % | ||||||||||||||||
Gain on extinguishment of debt |
| | | n/a | | 4,562 | 4,562 | n/a | ||||||||||||||||||||||||
Gain on sale of non-strategic assets |
| | | n/a | 7,719 | | | n/a | ||||||||||||||||||||||||
Other income |
485 | 767 | (282 | ) | -36.8 | % | (31 | ) | 1,422 | (1,453 | ) | -102.2 | % | |||||||||||||||||||
Income before taxes |
32,387 | 26,401 | 5,986 | 22.7 | % | 68,707 | 53,253 | 15,454 | 29.0 | % | ||||||||||||||||||||||
Provision for income taxes |
11,820 | 9,536 | 2,284 | 24.0 | % | 27,482 | 19,308 | 8,174 | 42.3 | % | ||||||||||||||||||||||
Net income |
$ | 20,567 | $ | 16,865 | $ | 3,702 | 22.0 | % | $ | 41,225 | $ | 33,945 | $ | 7,280 | 21.4 | % | ||||||||||||||||
Percent of Sales | Percent of Sales | |||||||||||||||||||||||||||||||
For the Three Months Ended | For the Six Months Ended | |||||||||||||||||||||||||||||||
July 3, 2010 | July 4, 2009 | July 3, 2010 | July 4, 2009 | |||||||||||||||||||||||||||||
Net sales |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||||||||||||
Cost of sales |
16.7 | % | 17.1 | % | 16.2 | % | 18.0 | % | ||||||||||||||||||||||||
Gross profit |
83.3 | % | 82.9 | % | 83.8 | % | 82.0 | % | ||||||||||||||||||||||||
Operating expenses |
||||||||||||||||||||||||||||||||
Marketing and selling |
33.8 | % | 33.9 | % | 34.8 | % | 34.5 | % | ||||||||||||||||||||||||
Research and development |
10.1 | % | 10.4 | % | 10.1 | % | 10.4 | % | ||||||||||||||||||||||||
General and administrative |
8.7 | % | 9.2 | % | 9.0 | % | 9.0 | % | ||||||||||||||||||||||||
Amortization of intangibles |
2.2 | % | 2.7 | % | 2.2 | % | 2.7 | % | ||||||||||||||||||||||||
Total operating expenses |
54.8 | % | 56.2 | % | 56.1 | % | 56.5 | % | ||||||||||||||||||||||||
Operating income |
28.4 | % | 26.7 | % | 27.7 | % | 25.5 | % | ||||||||||||||||||||||||
Royalty income |
0.0 | % | 0.7 | % | 0.1 | % | 0.7 | % | ||||||||||||||||||||||||
Interest expense |
-2.6 | % | -3.9 | % | -2.8 | % | -4.1 | % | ||||||||||||||||||||||||
Amortization of financing costs |
-2.5 | % | -3.1 | % | -2.6 | % | -3.2 | % | ||||||||||||||||||||||||
Gain on extinguishment of debt |
0.0 | % | 0.0 | % | 0.0 | % | 1.8 | % | ||||||||||||||||||||||||
Gain on sale of non-strategic assets |
0.0 | % | 0.0 | % | 2.8 | % | 0.0 | % | ||||||||||||||||||||||||
Other income |
0.4 | % | 0.6 | % | 0.0 | % | 0.6 | % | ||||||||||||||||||||||||
Income before taxes |
23.7 | % | 20.9 | % | 25.3 | % | 21.3 | % | ||||||||||||||||||||||||
Provision for income taxes |
8.7 | % | 7.5 | % | 10.1 | % | 7.7 | % | ||||||||||||||||||||||||
Net income |
15.1 | % | 13.3 | % | 15.2 | % | 13.6 | % | ||||||||||||||||||||||||
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Comparison of the Three Months Ended July 3, 2010 to the Three Months Ended July 4, 2009
Net sales. Net sales of $136.4 million in the second quarter of 2010 represented an increase of
7.9 percent compared to $126.4 million in the second quarter of 2009. The weakening of the U.S.
dollar in the second quarter of 2010, as compared to the second quarter of 2009, increased sales
approximately $0.3 million. Growth in our business continues to be driven by the success of
innovative products, most recently our womens health pelvic floor repair products, such as
Elevate® anterior and Elevate® posterior, and in BPH therapy, the launch of the new
GreenLight XPS (Xcelerated Performance System) laser therapy system
(GreenLight XPS) late in the second quarter.
Mens health products. Net sales of mens health products increased 7.7 percent to $61.4 million
in the second quarter of 2010, compared to $57.0 million in the second quarter of 2009. The
increase in mens health was driven by strong sales of the AMS 700® MS in
our erectile restoration product line and the AMS 800® Artificial Urinary Sphincter in
our male continence product line.
BPH therapy products. Net sales from BPH therapy products increased 3.9 percent to $29.2 million
in the second quarter of 2010, compared to $28.1 million in the same period in 2009. The increase
was largely driven by strong sales of our GreenLight XPS console, which was launched
late in the quarter, partially offset by a decrease in sales of Greenlight® fibers,
primarily in the European market.
Womens health products. Net sales of our womens health products increased 15.7 percent to $44.5
million in the second quarter of 2010, compared to $38.5 million in the second quarter of 2009. We
experienced strong growth in our pelvic floor repair product line driven by both Elevate® anterior
and Elevate® posterior. The female continence product line contributed modest but improving sales
growth, particularly in the U.S., driven by the MiniArc® Single-Incision Sling, which
was partially offset by declines in certain international markets.
Uterine health products. We sold the Her Option® Global Endometrial Ablation product line on
February 16, 2010 (see Notes to Consolidated Financial Statements No. 8, Goodwill and Intangible
Assets). Sales of $1.3 million in the three months ended July 3, 2010 resulted from the product
supply agreement that is part of the divestiture agreement. We estimate the product supply
agreement will result in approximately $0.5 to $1.0 million in sales during the second half of
fiscal year 2010.
Net sales by geography and foreign exchange effects. Net sales in the United States, excluding the
Her Option® product line that was sold during the first quarter of 2010, increased 10.4 percent to
$95.5 million in the second quarter of 2010 compared to $86.5 million in the second quarter of
2009. Growth in domestic sales was led by our Womens health products. International net sales
increased by 6.8 percent to $39.5 million in the second quarter of 2010 compared to $37.0 million
in the second quarter of 2009. International growth was led by our male continence product line.
Gross profit. Gross profit improved to 83.3 percent of sales in the second quarter of 2010, from
82.9 percent in the second quarter of 2009. We realized higher margins primarily due to the impact
of ongoing manufacturing efficiencies and cost reduction programs. Future gross profit will
continue to depend upon product and geographic mix, production levels, labor costs, raw material
costs and our ability to manage overhead costs.
Marketing and selling. As a percentage of sales, marketing and selling expenses were consistent at
33.8 percent in the second quarter of 2010 compared to 33.9 percent in the same period in the prior
year. This is the result of improved leveraging of sales expenses, offset by investments in
marketing efforts to support product launches and geographic expansion.
Research and development. Research and development includes costs to develop and improve current
and possible future products plus the costs for regulatory and clinical activities for these
products. Research and development expenses as a percentage of sales were consistent at 10.1
percent in the second quarter of 2010 compared to 10.4 percent in the same period of 2009. These
ratios are in line with our long-term goal for spending on research and development of
approximately ten percent of sales.
General and administrative. General and administrative expenses as a percentage of sales decreased
to 8.7 percent in the second quarter of 2010 from 9.2 percent in the second quarter of 2009,
primarily as the second quarter of 2009 included certain incremental compensation related expenses.
Our objective remains to leverage general and administrative expense as a percentage of sales.
Amortization of intangibles. Amortization of intangibles as a percentage of sales decreased to 2.2
percent in the second quarter of 2010 from 2.7 percent in the second quarter of 2009. The three
month period ended July 3, 2010 reflects a decrease in amortization expense over the same period of
2009 primarily due to the sale of our Ovion technology in the third quarter of 2009 and the sale of
the Her Option® product line in the first quarter of 2010, as intangible assets were disposed of in
these transactions, thereby reducing on-going amortization expense.
30
Table of Contents
Royalty income. Our royalty income is from licensing our intellectual property. We do not
directly influence sales of the products on which these royalties are based and cannot give any
assurance as to future income levels. Royalty income in the second quarter of 2010 was minimal,
compared to approximately $0.9 million in the same period last year due to the sale of our Ovion
technology in the third quarter of 2009 and the expiration of other royalty contracts.
Interest expense. Interest expense decreased by $1.4 million in the second quarter of 2010 from
the comparable period in 2009 mainly due to the impact of debt prepayments made over the past year.
Interest expense includes interest incurred on our 2036 Notes, which carry a fixed interest rate
of 3.25 percent, the interest incurred on our 2041 Notes, which carry a fixed interest rate of 4.00
percent, and the interest incurred on our Credit Facility, which generally carries a floating
interest rate of LIBOR plus 2.25 percent. We have an interest rate swap contract outstanding at
July 3, 2010 that is designated as a cash flow hedge of the floating rate interest payments for a
portion of our borrowings under the Credit Facility. At July 3, 2010, the portion of borrowings
subject to this swap contract is $30.0 million, with a remaining term of two months. Including the
impact of interest rate swaps, our weighted average interest rate on the credit facility was 3.0
percent and 4.4 percent for the three months ended July 3, 2010 and July 4, 2009, respectively.
Average borrowings during the second quarter of 2010 on the Credit Facility were $68.6 million,
compared to $214.1 million in the second quarter of 2009. Average borrowings on our 2036 Notes were
$62.0 million and $312 million for the three months ended July 3, 2010 and July 4, 2009,
respectively. Average borrowings on our 2041 Notes, which we issued in September of 2009 in
exchange for 2036 Notes, were $250.0 million for the three months ended July 3, 2010.
Amortization of financing costs. Amortization of financing costs in the second quarter of 2010 and
in the second quarter of 2009 was $3.3 million and $4.0 million, respectively, and was comprised of
the incremental non-cash interest cost of our 2036 Notes and 2041 Notes, and amortization of the
costs associated with the issuance of the Credit Facility, the 2036 Notes and the 2041 Notes. The
lower amortization in the second quarter of 2010 was due to the impact of prepayments made over the
past year, as we recognize a pro rata portion of the related debt discount and debt issuance costs
when we retire debt.
Other income. Other income decreased by $0.3 million in the second quarter of 2010 compared to the
same period in 2009. The primary cause of the change in other income relates to the impact of our
foreign currency hedge transactions and fluctuations in foreign currencies against the U.S. dollar
on foreign denominated inter-company receivables and payables.
Provision for income taxes. Our effective income tax rate was 36.5 percent and 36.1 percent for
the second quarter of 2010 and second quarter of 2009, respectively. The increase in the current
quarter effective tax rate is primarily due to the expiration of the federal research and
development credit as of December 31, 2009, partially offset by our domestic manufacturing tax
incentives.
Comparison of the Six Months Ended July 3, 2010 to the Six Months Ended July 4, 2009
Net sales. Net sales in the six months ended July 3, 2010 of $271.3 million represents an increase
of 8.5 percent compared to the first six months ended July 4, 2009 of $250.0 million. Growth in our
business continues to be driven by the success of innovative products, particularly our Elevate®
anterior and Elevate® posterior pelvic floor repair products and by the strength in our mens
health erectile restoration products, and most recently the new GreenLight XPS console
launched late in the second quarter.
Mens health products. Net sales of mens health products increased 8.1 percent to $125.8 million
in the first six months of 2010 compared to $116.4 million in the first six months of 2009. This
includes the positive impact of foreign currency exchange rates of approximately $1.5 million.
Strong sales of our AMS 700® MS, in our erectile restoration product line,
and AMS 800® Artificial Urinary Sphincter, in our male continence product line, led the
overall growth in the mens health products.
BPH therapy products. Net sales from BPH therapy products increased 3.0 percent to $55.1 million
in the first six months of 2010 compared to $53.5 million in the same period in 2009. This includes
the positive impact of foreign currency exchange rates of approximately $0.6 million. The increase
was driven by sales of our GreenLight® consoles and other laser therapy products,
partially offset by a decrease in sales of GreenLight® fibers in our European markets.
Womens health products. Net sales of our womens health products increased 16.7 percent to $87.2
million in the first six months of 2010 compared to $74.8 million in the first six months of 2009.
This includes the positive impact of foreign currency exchange rates of approximately $0.8 million.
We experienced strong growth in our pelvic floor repair product line driven both by Elevate®
anterior and Elevate® posterior. In addition, the female continence
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product line contributed modest sales growth in the U.S., which was partially offset by declines in
certain international markets.
Uterine health products. We sold the Her Option® Global Endometrial Ablation product line on
February 16, 2010 (see Notes to Consolidated Financial Statements No. 8, Goodwill and Intangible
Assets), and thus the six month period ended July 3, 2010 includes approximately six weeks of
end-customer net sales of $1.2 million from that product in addition to sales of approximately $1.9
million after February 16, 2010 from the product supply agreement that is part of the divestiture
agreement. We estimate the product supply agreement will result in approximately $0.5 to $1.0
million in sales during the second half of fiscal year 2010.
Net sales by geography and foreign exchange effects. Net sales in the United States, excluding the
Her Option® product line that was sold during the first quarter of 2010, increased 10.6 percent to
$192.1 million in the first six months of 2010 compared to $173.7 million in the first six months
of 2009. Growth in domestic sales was led by our womens health products with the highest growth
coming from Elevate® anterior in our pelvic floor repair product line. International net sales
increased by 7.3 percent to $76.1 million in the first six months of 2010 compared to $71.0 million
in the first six months of 2009. International growth was led by our mens health products with the
highest growth coming from AMS 800® Artificial Urinary Sphincter in our male continence
product line.
Gross profit. Gross profit improved to 83.8 percent of sales in the first six months of 2010 from
82.0 percent in the first six months of 2009. We realized higher margins through a combination of
factors, primarily due to the impact of ongoing manufacturing efficiencies and cost reduction
programs. Margins also increased due to improved reliability on our laser therapy products, which
resulted in lower warranty and service costs. Future gross profit will continue to depend upon
product and geographic mix, production levels, labor costs, raw material costs and our ability to
manage overhead costs.
Marketing and selling. Marketing and selling expenses as a percentage of sales increased to 34.8
percent in the first six months of 2010 compared to 34.5 percent in the first six months of 2009.
We have made investments in this area compared to the prior year mainly as a result of additional
headcount and product evaluation expenses and marketing investments to support geographic
expansion.
Research and development. Research and development includes costs to develop and improve current
and possible future products plus the costs for regulatory and clinical activities for these
products. Research and development expenses as a percentage of sales were consistent at 10.1
percent in the first six months of 2010 compared to 10.4 percent in the same period of 2009. These
ratios are in line with our long-term goal for spending on research and development of
approximately ten percent of sales.
General and administrative. General and administrative expenses as a percentage of sales of 9.0
percent were flat compared to the comparable prior period. The impact of incremental compensation
related expenses in 2009 was offset by increased patent litigation costs in 2010, resulting in
relatively consistent spending levels as a percent of revenue between years. Our objective remains
to leverage general and administrative expense as a percentage of sales.
Amortization of intangibles. Amortization of intangibles includes amortization expense on our
definite-lived intangible assets, consisting of patents, licenses and developed technology.
Amortization of intangibles decreased as percentage of sales to 2.2 percent in the first six months
of 2010 compared to 2.7 percent in the first six months of 2009. The six month period ended July 3,
2010 reflects a decrease in amortization expense over the same period of 2009 primarily due to the
sale of our Ovion technology in the third quarter of 2009 and the sale of the Her Option® product
line in the first quarter of 2010, as intangible assets were disposed of in these transactions,
thereby reducing on-going amortization expense.
Royalty income. Our royalty income is from licensing our intellectual property. We do not
directly influence sales of the products on which these royalties are based and cannot give any
assurance as to future income levels. Royalty income in the first six months of 2010 decreased
approximately $1.5 million compared to the first six months of 2009 due to the sale of our Ovion
technology in the third quarter of 2009 and the expiration of other royalty contracts.
Interest expense. Interest expense decreased by $2.8 million in the first six months of 2010 from
the comparable period in 2009 mainly due to the impact of debt prepayments made over the past year.
Interest expense includes interest incurred on our 2036 Notes, which carry a fixed interest rate
of 3.25 percent, the interest incurred on our 2041 Notes, which carry a fixed interest rate of 4.00
percent, and the interest incurred on our Credit Facility, which generally carries a floating
interest rate of LIBOR plus 2.25 percent. We have an interest rate swap contract outstanding at
July 3, 2010 that is designated as a cash flow hedge of the floating rate interest payments for a
portion of our borrowings under the Credit Facility. At July 3, 2010, the portion of borrowings
subject to this swap contract is $30.0 million, with a remaining term of two months. Including the
impact of interest rate swaps, our weighted
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average interest rate on the credit facility was 3.2 percent and 4.5 percent for the first six
months of 2010 and the first six months of 2009, respectively. Average borrowings during the first
six months of 2010 on the Credit Facility were $84.9 million, compared to $221.1 million in the
first six months of 2009. Average borrowings on our 2036 Notes were $62.0 million and $322.0
million for the six months ended July 3, 2010 and July 4, 2009, respectively. Average borrowings on
our 2041 Notes, which we issued in September of 2009 in exchange for 2036 Notes, were $250.0
million for the six months ended July 3, 2010.
Amortization of financing costs. Amortization of financing costs in the first six months of 2010
and in the first six months of 2009 was $7.0 million and $8.0 million, respectively, and was
comprised of the incremental non-cash interest cost of our 2036 Notes and 2041 Notes, and
amortization of the costs associated with the issuance of the Credit Facility, the 2036 Notes and
the 2041 Notes. The lower amortization in the first six months of 2010 was due to the impact of
prepayments made over the past year, as we recognize a pro rata portion of the related debt
discount and debt issuance costs when we retire debt.
Gain on sale of non-strategic assets. During the first quarter of 2010, we sold the Her Option®
Global Endometrial Ablation product line for $20.5 million. The final sale price after adjustment
based on working capital balances at the time of sale was $19.5 million. We allocated a portion of
our goodwill to the sale based on the relative fair value of the Her Option® product line and our
remaining business. The consideration, less goodwill, the carrying value of tangible and
intangible assets and related disposal costs resulted in a pre-tax gain of $7.7 million.
Other income. Other income decreased by $1.5 million in the first six months of 2010 compared to
the same period in 2009. The primary cause of the change in other income relates to the impact of
our foreign currency hedge transactions and fluctuations in foreign currencies against the U.S.
dollar on foreign denominated inter-company receivables and payables.
Provision for income taxes. Our effective income tax expense rate was 40.0 percent and 36.3
percent for the six months ended July 3, 2010 and July 4, 2009, respectively. The increase in the
effective tax rate is primarily due to the sale of the Her Option® product line in the first
quarter of 2010, which had an effective tax rate of 65.7 percent on the pre-tax gain, as the
majority of the goodwill allocated to the sale had no tax basis.
Liquidity and Capital Resources
Cash and cash equivalents was $23.6 million as of July 3, 2010, compared to $30.7 million as of
January 2, 2010. In addition, short-term investments were $44.5 million as of July 3, 2010,
compared to $19.9 million as of January 2, 2010. Short-term investments consist mostly of highly
liquid money market funds that have not experienced any negative impact on liquidity or a decline
in principal value. Overall, cash, cash equivalents and short-term investments increased $17.5
million in the first six months of 2010 compared to January 2, 2010.
Cash flows from operating activities. Cash provided by operating activities was $49.9 million in
the first six months of 2010, versus $59.8 million provided during the comparable period of 2009,
which is a decrease of $9.9 million. The main driver of the decrease is related to inventory,
where $4.0 million of cash was used to build inventory during the first six months of 2010 compared
to cash provided by reducing inventory of $4.5 million during the comparable period of 2009; this
year over year change results in a decrease of $8.5 million in cash provided related to changes in
inventory. The primary reason for the $4.0 million of cash used for inventory in the first six
months of 2010 is an increase in BPH therapy inventory mainly due to the build phase for the
recently launched GreenLight XPS console. The remaining decrease of $1.4 million of
cash provided by operating activities was a result of normal operating fluctuations in accounts
receivable, accounts payable, accrued expenses, and other operating assets.
Cash flows from investing activities. Cash used in investing activities was $9.5 million during
the first six months of 2010, compared to cash provided by investing activities of $4.3 million in
the first six months of 2009. Net cash provided by the sale of the Her Option® product line was
$19.1 million and the proceeds were used to pay down our debt. We also increased our purchases of
short-term investments during the first six months of 2010 compared to the comparable period of
2009 resulting in a balance in short-term investments of $44.5 million at the end of the second
quarter of 2010 compared to $19.7 million at the end of the second quarter of 2009.
Cash flows from financing activities. Cash used for financing activities was $47.8 million during
the first six months of 2010, versus $46.0 million used in the same period of 2009. The majority
of cash was used for repayment of long-term debt in both periods. Cash used for repayment of
long-term debt under our Credit Facility was $65.9 million and $29.1 million for the first six
months of 2010 and 2009, respectively. In addition, we repurchased 2036 Notes with a principal
amount of $27.3 million for a cash payment of $21.1 million during the first quarter of 2009. Cash
received from the issuance of common stock was $17.2 million and $3.9 million during the first six
months of 2010 and 2009, respectively, which was the result of stock option exercises and employee
purchases of common stock through our employee stock purchase plan.
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2036 Notes. We issued our 2036 Notes with a stated maturity of July 1, 2036 pursuant to an
Indenture dated as of June 27, 2006 as supplemented by the first supplemental indenture dated
September 6, 2006 (the 2036 Notes Indenture) between us, certain of our significant domestic
subsidiaries, as guarantors of the 2036 Notes, and U.S. Bank National Association, as trustee for
the benefit of the holders of the 2036 Notes, which specifies the terms of the 2036 Notes. The
2036 Notes bear interest at the rate of 3.25 percent per year, payable semiannually. The 2036
Notes are our direct, unsecured, senior subordinated obligations, rank junior to our Credit
Facility and will rank junior in right of payment to all of our future senior secured debt as
provided in the 2036 Notes Indenture. The 2036 Notes have the same rank as our 2041 Notes.
In addition to regular interest on the 2036 Notes, we will also pay contingent interest beginning
July 1, 2011 at 0.25% of the average trading price of the 2036 Notes, if the average trading price
for the five consecutive trading days immediately before the last trading day preceding the
relevant six-month period equals or exceeds 120 percent of the principal amount of the 2036 Notes.
The 2036 Notes are convertible under certain circumstances for cash and shares of our common stock,
if any, at a conversion rate of 51.5318 shares of our common stock per $1,000 principal amount of
2036 Notes (which is equal to an initial conversion price of approximately $19.406 per share),
subject to adjustment. Upon conversion, we would be required to satisfy up to 100 percent of the
principal amount of the 2036 Notes solely in cash, with any amounts above the principal amount to
be satisfied in shares of our common stock.
If a holder elects to convert its 2036 Note in connection with a designated event or change that
occurs prior to July 1, 2013, we will pay, to the extent described in the 2036 Notes Indenture, a
make whole premium by increasing the conversion rate applicable to such 2036 Notes. All of the
above conversion rights will be subject to certain limitations imposed by our Credit Facility.
We may also redeem the 2036 Notes on or after July 6, 2011 at specified redemption prices as
provided in the 2036 Notes Indenture plus accrued and unpaid interest and contingent interest.
Holders of the 2036 Notes may require us to purchase all or a portion of their 2036 Notes for cash
on July 1, 2013, July 1, 2016, July 1, 2021, July 1, 2026, and July 1, 2031 or in the event of a
designated event or change, at a purchase price equal to 100 percent of the principal amount of the
2036 Notes to be repurchased plus accrued and unpaid interest and contingent interest.
2041 Notes. We issued our 2041 Notes with a stated maturity of September 15, 2041 pursuant to an
Indenture dated as of September 21, 2009 (the 2041 Notes Indenture) between us, certain of our
significant domestic subsidiaries, as guarantors of the 2041 Notes, and U.S. Bank National
Association, as trustee for the benefit of the holders of the 2041 Notes, which specifies the terms
of the 2041 Notes. The 2041 Notes bear interest at the rate of 4.00 percent per year, payable
semiannually. The 2041 Notes are our direct, unsecured, senior subordinated obligations, rank
junior to our Credit Facility and will rank junior in right of payment to all of our future senior
debt as provided in the 2041 Notes Indenture. The 2041 Notes have the same rank as our 2036 Notes.
In addition to regular interest on the 2041 Notes, we will also pay contingent interest beginning
September 15, 2016 at 0.75% of the average trading price of the 2041 Notes, if the average trading
price for the five consecutive trading days immediately before the first day of such semiannual
period equals or exceeds 130 percent of the principal amount of the 2041 Notes. The 2041 Notes are
convertible under certain circumstances for cash and shares of our common stock, if any, at a
conversion rate of 51.5318 shares of our common stock per $1,000 principal amount of 2041 Notes
(which is equal to an initial conversion price of approximately $19.406 per share), subject to
adjustment. Upon conversion, we would be required to satisfy up to 100 percent of the principal
amount of the 2041 Notes solely in cash, with any amounts above the principal amount to be
satisfied in shares of our common stock.
If a holder elects to convert its 2041 Note in connection with a designated event or change, we
will pay, to the extent described in the 2041 Notes Indenture, a make whole premium by increasing
the conversion rate applicable to such 2041 Notes. All of the above conversion rights will be
subject to certain limitations imposed by our Credit Facility.
We may also redeem the 2041 Notes on or after September 15, 2016 at specified redemption prices as
provided in the 2041 Notes Indenture plus accrued and unpaid interest and contingent interest.
Holders of the 2041 Notes may require us to purchase all or a portion of their 2041 Notes for cash
on September 15, 2016 or in the event of a designated event or change, at a purchase price equal to
100 percent of the principal amount of the 2041 Notes to be repurchased plus accrued and unpaid
interest and contingent interest.
2036 Notes and 2041 Notes Potential Dilution. Prior to conversion, our 2036 Notes and 2041
Notes (Convertible Notes) represent potentially dilutive common share equivalents that must be
considered in our calculation of diluted
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earnings per share (EPS). When there is a net loss, common share equivalents are excluded from the
computation because they have an anti-dilutive effect. In addition, when the conversion price of
our 2036 Notes and 2041 Notes is greater than the average market price of our stock during any
period, the effect would be anti-dilutive and we would exclude the 2036 Notes and 2041 Notes from
the EPS computation. However, when the average market price of our stock during any period is
greater than the conversion price of the 2036 Notes and 2041 Notes, the impact is dilutive and the
2036 Notes and 2041 Notes will affect the number of common share equivalents used in the diluted
EPS calculation. The degree to which the 2036 Notes and 2041 Notes are dilutive increases as the
market price of our stock increases.
The following table illustrates the number of common share equivalents that would potentially be
included in weighted average common shares for the calculation of diluted EPS, assuming various
market prices of our stock:
If the average | The number of common share equivalents potentially included in the computation of | |||||||||||||||||||||||||||||||||||||||
market price | of diluted EPS would be (1): | Percent Dilution (2) | ||||||||||||||||||||||||||||||||||||||
of our stock is: | 2036 Notes | 2041 Notes | Total | 2036 Notes | 2041 Notes | Total | ||||||||||||||||||||||||||||||||||
$ | 19.00 | | (anti-dilutive) | | (anti-dilutive) | | (anti-dilutive) | 0.0 | % | 0.0 | % | 0.0 | % | |||||||||||||||||||||||||||
$ | 20.00 | 0.1 | million | 0.4 | million | 0.5 | million | 0.1 | % | 0.5 | % | 0.6 | % | |||||||||||||||||||||||||||
$ | 22.50 | 0.4 | million | 1.8 | million | 2.2 | million | 0.6 | % | 2.3 | % | 2.9 | % | |||||||||||||||||||||||||||
$ | 25.00 | 0.7 | million | 2.9 | million | 3.6 | million | 0.9 | % | 3.7 | % | 4.6 | % | |||||||||||||||||||||||||||
$ | 27.50 | 0.9 | million | 3.8 | million | 4.7 | million | 1.2 | % | 4.8 | % | 6.0 | % | |||||||||||||||||||||||||||
$ | 30.00 | 1.1 | million | 4.5 | million | 5.6 | million | 1.5 | % | 5.6 | % | 7.1 | % |
(1) | Common share equivalents are calculated using the treasury stock method. The formula to calculate the potentially dilutive shares related to our Convertible Notes is as follows: |
(2) | The percent dilution is based on 75,972,968 outstanding shares as of July 3, 2010. |
For the three and six months ended July 3, 2010, our Convertible Notes had a dilutive effect on
our net income per share calculation and were included in the calculation of diluted earnings per
share.
Credit Facility. On July 20, 2006, our wholly-owned subsidiary, American Medical Systems, Inc.
(AMS), entered into a senior secured Credit Facility. AMS and each majority-owned domestic
subsidiary of AMS are parties to the Credit Facility as guarantors of all of the obligations of AMS
arising under the Credit Facility. The obligations of AMS and each of the guarantors arising under
the Credit Facility are secured by a first priority security interest on substantially all of their
respective assets, including a mortgage on the AMS facility in Minnetonka, Minnesota.
The six-year senior secured Credit Facility consists of (i) term loan debt and (ii) a revolving
credit facility of up to $65.0 million which is available to fund ongoing working capital needs,
including future capital expenditures and permitted acquisitions.
Our Credit Facility contains affirmative and negative covenants and other limitations (subject
to various carve-outs and baskets) regarding us, AMS, and in some cases, the subsidiaries of AMS.
The covenants limit: (a) investments, capital expenditures, dividend payments, the disposition of
material assets other than in the ordinary course of business, and mergers and acquisitions under
certain conditions, (b) transactions with affiliates, unless such transactions are completed in the
ordinary course of business and upon fair and reasonable terms, (c) liens and indebtedness, and (d)
substantial changes in the nature of our business. Our Credit Facility contains customary
financial covenants for secured credit facilities, consisting of maximum total and senior debt
leverage ratios and minimum interest coverage and fixed charge coverage ratios. These financial
covenants adjust from time to time during the term of the Credit Facility. The covenants and
restrictions contained in the Credit Facility could limit our ability to fund our business, make
capital expenditures, and make acquisitions or other investments in the future.
On August 12, 2009, we entered into a Consent and Second Amendment to our Credit Facility,
which allowed us to exchange a portion of our existing convertible senior subordinated notes for
new convertible senior subordinated notes. On October 29, 2007, we entered into a First Amendment
of our Credit Facility to modify certain financial covenant ratios as defined in the Credit
Facility (the First Amendment). Pursuant to the terms of the First Amendment, certain of the
financial tests and covenants were amended and restated, including the interest coverage ratio, the
total leverage ratio, the fixed charge coverage ratio, and the maximum consolidated capital
expenditures.
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As of July 3, 2010, we were in compliance with all financial covenants as defined in our Credit
Facility which are summarized as follows:
Financial Covenant | Required Covenant | Actual Result | ||||||
Total Leverage Ratio (1) |
3.00:1.00 (maximum) | 2.02 | ||||||
Senior Leverage Ratio (2) |
2.00:1.00 (maximum) | 0.32 | ||||||
Interest Coverage Ratio (3) |
4.00:1.00 (minimum) | 10.95 | ||||||
Fixed Charge Coverage Ratio (4) |
1.50:1.00 (minimum) | 2.25 | ||||||
Maximum Capital Expenditures (5) |
$20.0 million | $ | 3.5 | million |
(1) | Total outstanding debt to Consolidated Adjusted EBITDA for the trailing four quarters. | |
(2) | Total outstanding senior secured debt to Consolidated Adjusted EBITDA for the trailing four quarters. | |
(3) | Ratio of Consolidated Adjusted EBITDA for the trailing four quarters to cash interest expense for such period. | |
(4) | Ratio of Consolidated Adjusted EBITDA for the trailing four quarters to fixed charges (cash interest expense, scheduled principal payments on debt, capital expenditures, income taxes paid, earn-out and milestone payments) for such period. | |
(5) | Limit of capital expenditures for the full year. |
The ratios are based on EBITDA, on a rolling four quarters, calculated with certain adjustments
(Consolidated Adjusted EBITDA). Consolidated Adjusted EBITDA is a non-GAAP financial measure that
is defined in our Credit Facility as earnings before interest, income taxes, depreciation,
amortization, and other non-cash items reducing net income including IPR&D and stock compensation
charges, less other non-cash items increasing net income. Consolidated Adjusted EBITDA should not
be considered an alternative measure of our net income, operating performance, cash flow or
liquidity. It is provided as additional information relative to compliance with our debt
covenants.
Any failure to comply with any of these financial and other affirmative and negative covenants
would constitute an event of default under the Credit Facility, entitling a majority of the bank
lenders to, among other things, terminate future credit availability under the Credit Facility,
increase the interest rate on outstanding debt, and accelerate the maturity of outstanding
obligations under the Credit Facility.
Additional Information
We are currently subject to the informational requirements of the Securities Exchange Act of 1934,
as amended. As a result, we are required to file periodic reports and other information with the
SEC, such as annual, quarterly, and current reports, and proxy and information statements. You are
advised to read this Form 10-Q in conjunction with the other reports, proxy statements, and other
documents we file with or furnish to the SEC from time to time. If you would like more information
regarding our Company, you may read and copy the reports, proxy and information statements and
other documents we file with or furnish to the SEC, at prescribed rates, at the SECs public
reference room at 100 F. Street, NE, Room 1580, Washington, DC 20549. You may obtain information
regarding the operation of the SECs public reference rooms by calling the SEC at 1-800-SEC-0330.
Our SEC filings are also available to the public free of charge at the SECs website. The address
of this website is http://www.sec.gov.
We also make all of our SEC filings, such as our annual, quarterly and current reports and proxy
statements, available to the public free from charge on our website www.AmericanMedicalSystems.com.
Our website is not intended to be, and is not, a part of this quarterly report on Form 10-Q. We
place our SEC filings on our website on the same day as we file such material with the SEC. In
addition, we will provide electronic or paper copies of our SEC filings (excluding exhibits) to any
of our stockholders free of charge upon receipt of a written request for any such filing. All
requests for our SEC filings should be sent to the attention of Investor Relations at American
Medical Systems Holdings, Inc., 10700 Bren Road West, Minnetonka, Minnesota 55343.
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
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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, project, will, should, expect, intend,
plan, predict, anticipate, estimate, 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
Managements Discussion and Analysis of Financial Condition and Results of Operations.
Forward-looking statements are based on managements beliefs, certain assumptions and current
expectations 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:
successfully competing against competitors; physician acceptance, endorsement, and use of our
products; potential product recalls or technological obsolescence; health care reform legislation
in the U.S.; successfully managing increased debt leverage and related credit facility financial
covenants; the impact of worldwide economic conditions on our operations; the disruption in global
financial markets potential impact on the ability of our counterparties to perform their
obligations and our ability to obtain future financing; factors impacting the stock market and
share price and its impact on the dilution of convertible securities; ability of our manufacturing
facilities to meet customer demand; reliance on single or sole-sourced suppliers; loss or
impairment of a principal manufacturing facility; clinical and regulatory matters; timing and
success of new product introductions; patient acceptance of our products and therapies; changes in
and adoption of reimbursement rates; adequate protection of our intellectual property rights;
product liability claims; and currency and other economic risks inherent in selling our products
internationally.
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 January 2, 2010 under the
heading Part I Item 1A. Risk Factors, and Part II Item 1A. Risk Factors contained in
our quarterly reports on Form 10-Q for our 2010 fiscal quarters.
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 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. 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 SEC.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We use derivatives to mitigate our exposure to volatility in interest and foreign currency exchange
rates. We hedge only exposures in the ordinary course of business.
Interest Rates
We have interest rate risk as a result of the floating LIBOR index that is used to determine the
interest rates on our Credit Facility. We use derivatives to mitigate a portion of our exposure to
volatility in interest rates. The interest rate swap contract outstanding at July 3, 2010 is
designated as a cash flow hedge of the floating rate interest payments for a portion of our
borrowings under the Credit Facility. The portion of borrowings subject to this swap contract is
$30.0 million. This contract has a remaining term of two months. Based on a sensitivity analysis,
as of July 3, 2010, an instantaneous and sustained 100-basis-point increase in interest rates
affecting our floating rate debt obligations, and assuming that we take no counteractive measures,
would result in a decrease in income before income taxes of approximately $0.5 million over the
next 12 months. The estimated impact to income takes into account the mitigating effect of the
interest rate swap agreement. The notional amount of the contract amortizes over its term, and the
amount of floating rate debt hedged in the future will depend on prepayments and additional
contracts.
Currency
Our operations outside of the United States are maintained in their local currency, with the
significant currencies consisting of Euros, British pounds, Canadian dollars and Australian
dollars. All assets and liabilities of our international subsidiaries are translated to U.S.
dollars at period-end exchange rates. Translation adjustments arising from the use of differing
exchange rates are included in accumulated other comprehensive income in stockholders equity.
Gains and losses on foreign currency transactions and short-term inter-company receivables from
foreign subsidiaries are included in other (expense) income.
During the three and six month periods ended July 3, 2010, revenues from sales to customers outside
the United States were 29.0 percent and 28.1 percent of total consolidated revenues. International
accounts receivable was 43.8 percent, inventory was 5.9 percent, cash and short-term investments
was 18.7 percent, and accounts payable was 28.8 percent of total consolidated accounts for each of
these items as of July 3, 2010. The reported results of our foreign operations will be influenced
by their translation into U.S. dollars by currency movements against the U.S. dollar. The result
of a uniform 10 percent strengthening in the value of the U.S. dollar relative to each of the
currencies in which our revenues and expenses are denominated would have resulted in a decrease in
net income of approximately $0.5 million and $1.0 million during the three and six months ended
July 3, 2010.
We have entered into various foreign exchange forward contracts to manage a portion of our exposure
to foreign exchange rate fluctuations on our forecasted sales to and receivables from certain
subsidiaries. At July 3, 2010, our net investment in foreign subsidiaries translated into dollars
using the period end exchange rate was $32.6 million and the potential loss in fair value resulting
from a hypothetical 10 percent strengthening in the value of the U.S. dollar currency exchange rate
amounts to $3.3 million. Actual amounts may differ.
Credit Risk
Credit risk on financial instruments arises from the potential for counterparties to default on
their obligations to us. Recent economic events, including failures of financial service companies
and the related liquidity crisis, have considerably disrupted the capital and credit markets. Our
credit risk consists of trade receivables, cash and cash equivalents, short-term investments,
derivative instruments, lending commitments and insurance relationships in the ordinary course of
business.
The carrying value of accounts receivable approximates fair value due to the relatively short
periods to maturity on these instruments. Accounts receivable are primarily due from hospitals and
clinics located mainly in the United States and Western Europe. Although we do not require
collateral from our customers, concentrations of credit risk in the United States are mitigated by
a large number of geographically dispersed customers. We do not presently anticipate losses in
excess of allowances provided associated with trade receivables, although collection could be
impacted by the underlying economies of the countries.
We place cash, cash equivalents, short-term investments and derivative instruments with high
quality financial institutions, which we monitor regularly and take action where possible to
mitigate risk. We do not hold investments in auction rate securities, mortgage backed securities,
collateralized debt obligations, individual corporate bonds,
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special investment vehicles or any other investments which have been directly impacted by the
recent financial crisis. To date, all previous lending commitments remain available to us, and we
have not incurred any charges specific to the increased volatility in credit markets and credit
risk. Insurance programs are with carriers that remain highly rated and we have no significant
pending claims. Further, we do not expect our current or future credit risk exposures to have a
significant impact on our operations. However, there can be no assurance that our business will not
have any adverse impact from credit risk in the future.
Inflation
We do not believe that inflation has had a material effect on our results of operations in recent
years and periods. There can be no assurance, however, that our business will not be adversely
affected by inflation in the future.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive
Officer (CEO) and Chief Financial Officer (CFO), we evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Exchange Act of 1934). Based on that evaluation, our CEO and CFO concluded that our disclosure
controls and procedures were effective as of July 3, 2010.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection
with the above-referenced evaluation by management of the effectiveness of our internal control
over financial reporting that occurred during the second quarter ended July 3, 2010, 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
In July 2010, we were advised by the Office of Inspector General (OIG) of the United States
Department of Health and Human Services that the OIG had closed, without action as to the Company,
the investigation in connection with which we had received a document subpoena in May 2009.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors disclosed in Part I Item 1A. of our
Annual Report on Form 10-K for the year ended January 2, 2010, except as disclosed in our Quarterly
Report on Form 10-Q for the quarter ended April 3, 2010.
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ITEM 6. EXHIBITS
Item | ||||
No. | Item | Method of Filing | ||
10.1
|
Summary of Director Compensation (Version Modified April 2010). | Incorporated by reference to Exhibit 10.11 of the Companys Form 10-Q for the Fiscal Quarter Ended April 3, 2010 (File No. 000-30733). | ||
10.2
|
Form of Restricted Stock Award for Directors under the 2005 Stock Incentive Plan. | Incorporated by reference to Exhibit 10.12 of the Companys Form 10-Q for the Fiscal Quarter Ended April 3, 2010 (File No. 000-30733). | ||
31.1
|
Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | Filed with this Quarterly Report on Form 10-Q. | ||
31.2
|
Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | Filed with this Quarterly Report on Form 10-Q. | ||
32.1
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | Filed with this Quarterly Report on Form 10-Q. | ||
101.1
|
Financial statements from the Quarterly Report on Form 10-Q of the Company for the quarter ended July 3, 2010, formatted in eXtensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Operations, (ii) the Consolidated Balance Sheets, (iii) the Consolidated Statements of Cash Flows, and (iv) the Notes to Consolidated Financial Statements, tagged as blocks of text. | Filed Electronically |
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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 thereunto duly authorized.
AMERICAN MEDICAL SYSTEMS | ||||||
HOLDINGS, INC. | ||||||
August 10, 2010
|
By | /s/ Anthony P. Bihl, III | ||||
Date
|
Anthony P. Bihl, III | |||||
President and Chief Executive Officer | ||||||
(Principal Executive Officer) | ||||||
August 10, 2010
|
By | /s/ Mark A. Heggestad | ||||
Date
|
Mark A. Heggestad | |||||
Executive Vice President and Chief Financial Officer | ||||||
(Principal Financial and Accounting Officer) |
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AMERICAN MEDICAL SYSTEMS HOLDINGS, INC.
EXHIBIT INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the Fiscal Quarter Ended July 3, 2010
For the Fiscal Quarter Ended July 3, 2010
Item | ||||
No. | Item | Method of Filing | ||
10.1
|
Summary of Director Compensation (Version Modified April 2010). | Incorporated by reference to Exhibit 10.11 of the Companys Form 10-Q for the Fiscal Quarter Ended April 3, 2010 (File No. 000-30733). | ||
10.2
|
Form of Restricted Stock Award for Directors under the 2005 Stock Incentive Plan. | Incorporated by reference to Exhibit 10.12 of the Companys Form 10-Q for the Fiscal Quarter Ended April 3, 2010 (File No. 000-30733). | ||
31.1
|
Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | Filed with this Quarterly Report on Form 10-Q. | ||
31.2
|
Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | Filed with this Quarterly Report on Form 10-Q. | ||
32.1
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | Filed with this Quarterly Report on Form 10-Q. | ||
101.1
|
Financial statements from the Quarterly Report on Form 10-Q of the Company for the quarter ended July 3, 2010, formatted in eXtensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Operations, (ii) the Consolidated Balance Sheets, (iii) the Consolidated Statements of Cash Flows, and (iv) the Notes to Consolidated Financial Statements, tagged as blocks of text. | Filed Electronically |
43