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EXCEL - IDEA: XBRL DOCUMENT - AMERICAN MEDICAL SYSTEMS HOLDINGS INC | Financial_Report.xls |
EX-31.1 - EX-31.1 - AMERICAN MEDICAL SYSTEMS HOLDINGS INC | c59618exv31w1.htm |
EX-31.2 - EX-31.2 - AMERICAN MEDICAL SYSTEMS HOLDINGS INC | c59618exv31w2.htm |
EX-32.1 - EX-32.1 - AMERICAN MEDICAL SYSTEMS HOLDINGS INC | c59618exv32w1.htm |
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 October 2, 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 | (I.R.S. Employer Identification No.) | |
incorporation or organization) |
10700 Bren Road West, Minnetonka, Minnesota | 55343 | |
(Address of principal executive offices) | (Zip Code) |
952-930-6000
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 November 1, 2010 there were 76,466,839 shares of the registrants $.01 par value Common
Stock outstanding.
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EX-31.2 | ||||||||
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EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT |
2
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 | Nine Months Ended | |||||||||||||||
October 2, 2010 | October 3, 2009 | October 2, 2010 | October 3, 2009 | |||||||||||||
Net sales |
$ | 124,029 | $ | 123,231 | $ | 395,323 | $ | 373,257 | ||||||||
Cost of sales |
21,963 | 21,284 | 65,795 | 66,234 | ||||||||||||
Gross profit |
102,066 | 101,947 | 329,528 | 307,023 | ||||||||||||
Operating expenses |
||||||||||||||||
Marketing and selling |
42,637 | 42,489 | 136,948 | 128,690 | ||||||||||||
Research and development |
12,630 | 12,434 | 39,976 | 38,411 | ||||||||||||
General and administrative |
10,850 | 10,459 | 35,337 | 32,898 | ||||||||||||
Amortization of intangibles |
3,053 | 3,358 | 9,130 | 10,024 | ||||||||||||
Total operating expenses |
69,170 | 68,740 | 221,391 | 210,023 | ||||||||||||
Operating income |
32,896 | 33,207 | 108,137 | 97,000 | ||||||||||||
Other income (expense) |
||||||||||||||||
Royalty income |
153 | 961 | 508 | 2,768 | ||||||||||||
Interest expense |
(3,329 | ) | (4,674 | ) | (10,867 | ) | (15,050 | ) | ||||||||
Amortization of financing costs |
(3,503 | ) | (4,395 | ) | (10,542 | ) | (12,350 | ) | ||||||||
Gain on extinguishment of debt |
| 5,563 | | 10,125 | ||||||||||||
Gain on sale of non-strategic assets |
| 17,446 | 7,719 | 17,446 | ||||||||||||
Other income (expense) |
1,883 | (324 | ) | 1,852 | 1,098 | |||||||||||
Total other (expense) income |
(4,796 | ) | 14,577 | (11,330 | ) | 4,037 | ||||||||||
Income before income taxes |
28,100 | 47,784 | 96,807 | 101,037 | ||||||||||||
Provision for income taxes |
9,528 | 19,163 | 37,010 | 38,471 | ||||||||||||
Net income |
$ | 18,572 | $ | 28,621 | $ | 59,797 | $ | 62,566 | ||||||||
Net income per share |
||||||||||||||||
Basic net earnings |
$ | 0.24 | $ | 0.39 | $ | 0.79 | $ | 0.85 | ||||||||
Diluted net earnings |
$ | 0.24 | $ | 0.38 | $ | 0.77 | $ | 0.84 | ||||||||
Weighted average common shares used in calculation |
||||||||||||||||
Basic |
76,151 | 74,278 | 75,627 | 73,939 | ||||||||||||
Diluted |
78,545 | 74,998 | 77,643 | 74,456 |
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)
October 2, 2010 | January 2, 2010 | |||||||
(Unaudited) | ||||||||
Assets |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 17,836 | $ | 30,670 | ||||
Short-term investments |
43,941 | 19,868 | ||||||
Accounts receivable, net |
91,561 | 102,590 | ||||||
Inventories, net |
35,254 | 30,276 | ||||||
Deferred income taxes |
15,012 | 14,870 | ||||||
Other current assets |
4,885 | 6,067 | ||||||
Total current assets |
208,489 | 204,341 | ||||||
Property, plant and equipment, net |
42,481 | 44,120 | ||||||
Goodwill |
683,987 | 690,899 | ||||||
Developed and core technology, net |
42,742 | 51,631 | ||||||
Other intangibles, net |
50,713 | 49,937 | ||||||
Other long-term assets, net |
5,347 | 6,223 | ||||||
Total assets |
$ | 1,033,759 | $ | 1,047,151 | ||||
Liabilities and Stockholders Equity |
||||||||
Current liabilities |
||||||||
Accounts payable |
$ | 7,866 | $ | 9,114 | ||||
Income taxes payable |
2,140 | 4,495 | ||||||
Accrued compensation expenses |
25,923 | 29,603 | ||||||
Accrued warranty expense |
2,427 | 2,293 | ||||||
Other accrued expenses |
21,150 | 25,760 | ||||||
Total current liabilities |
59,506 | 71,265 | ||||||
Long-term debt |
259,895 | 346,229 | ||||||
Deferred income taxes |
58,629 | 62,347 | ||||||
Long-term income taxes payable |
18,698 | 18,206 | ||||||
Long-term employee benefit obligations |
3,745 | 3,745 | ||||||
Total liabilities |
400,473 | 501,792 | ||||||
Stockholders equity |
||||||||
Common stock, par value $.01 per share; authorized 200,000,000 shares; issued and outstanding: 76,347,633 shares at October 2, 2010 and 74,715,839 shares at January 2, 2010 |
764 | 747 | ||||||
Additional paid-in capital |
428,851 | 399,468 | ||||||
Accumulated other comprehensive income |
5,111 | 6,381 | ||||||
Retained earnings |
198,560 | 138,763 | ||||||
Total stockholders equity |
633,286 | 545,359 | ||||||
Total liabilities and stockholders equity |
$ | 1,033,759 | $ | 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)
Nine Months Ended | ||||||||
October 2, 2010 | October 3, 2009 | |||||||
Cash flows from operating activities |
||||||||
Net income |
$ | 59,797 | $ | 62,566 | ||||
Adjustments to reconcile net income to net cash
provided by operating activities |
||||||||
Depreciation |
7,202 | 7,290 | ||||||
Amortization of intangibles |
9,130 | 10,024 | ||||||
Amortization of deferred financing costs |
10,542 | 12,350 | ||||||
Excess tax benefit from stock-based compensation |
(1,551 | ) | (486 | ) | ||||
Tax benefit from stock-based compensation |
3,435 | 1,336 | ||||||
Net settlement of derivative contracts |
(970 | ) | 171 | |||||
Change in net deferred income taxes |
(5,061 | ) | 3,708 | |||||
Gain on extinguishment of debt |
| (10,125 | ) | |||||
Gain on sale of non-strategic assets |
(7,719 | ) | (17,446 | ) | ||||
Stock-based compensation |
6,284 | 6,649 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
7,215 | 6,276 | ||||||
Inventories |
(5,142 | ) | 5,714 | |||||
Accounts payable and accrued expenses |
(9,852 | ) | 9,466 | |||||
Other assets |
915 | (308 | ) | |||||
Net cash provided by operating activities |
74,225 | 97,185 | ||||||
Cash flows from investing activities |
||||||||
Purchase of property, plant and equipment |
(5,826 | ) | (3,688 | ) | ||||
Net settlement of derivative contracts |
970 | (171 | ) | |||||
Sale of non-strategic assets, net |
19,043 | 18,982 | ||||||
Purchase of other intangibles |
(2,438 | ) | (5,392 | ) | ||||
Purchase of short-term investments |
(57,516 | ) | (18,743 | ) | ||||
Sale of short-term investments |
33,432 | 30,638 | ||||||
Net cash (used in) provided by investing activities |
(12,335 | ) | 21,626 | |||||
Cash flows from financing activities |
||||||||
Issuance of common stock |
21,211 | 6,416 | ||||||
Excess tax benefit from stock-based compensation |
1,551 | 486 | ||||||
Debt issuance costs |
| (7,697 | ) | |||||
Repurchase of convertible senior subordinated notes |
| (21,125 | ) | |||||
Payments on senior secured credit facility |
(96,963 | ) | (78,173 | ) | ||||
Net cash used in financing activities |
(74,201 | ) | (100,093 | ) | ||||
Effect of currency exchange rates on cash |
(523 | ) | (614 | ) | ||||
Net (decrease) increase in cash and cash equivalents |
(12,834 | ) | 18,104 | |||||
Cash and cash equivalents at beginning of period |
30,670 | 11,642 | ||||||
Cash and cash equivalents at end of period |
$ | 17,836 | $ | 29,746 | ||||
Supplemental disclosure |
||||||||
Cash paid for interest |
$ | 13,984 | $ | 12,353 | ||||
Cash paid for taxes |
$ | 40,414 | $ | 28,915 |
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
third fiscal quarters of 2010 and 2009 are represented by the three month periods ended on October
2, 2010 and October 3, 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 October 2, 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 | Nine Months Ended | |||||||||||||||
(in thousands) | October 2, 2010 | October 3, 2009 | October 2, 2010 | October 3, 2009 | ||||||||||||
Cost of sales |
$ | 237 | $ | 230 | $ | 738 | $ | 716 | ||||||||
Marketing and selling |
486 | 489 | 1,447 | 1,456 | ||||||||||||
Research and development |
295 | 296 | 880 | 885 | ||||||||||||
General and administrative |
1,136 | 1,158 | 3,219 | 3,592 | ||||||||||||
Total stock-based compensation expense |
$ | 2,154 | $ | 2,173 | $ | 6,284 | $ | 6,649 | ||||||||
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.
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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.
Stock option activity under our 2005 Plan and 2000 Plan for the nine months ended October 2, 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 |
1,463,785 | 19.15 | ||||||||||
Exercised |
(1,459,340 | ) | 13.41 | |||||||||
Cancelled or expired |
(306,191 | ) | 17.46 | |||||||||
Balance at October 2, 2010 |
6,859,799 | $ | 16.20 | $ | 24,663 | |||||||
Options exercisable at October 2, 2010 |
3,964,552 | $ | 16.16 | $ | 14,441 | |||||||
The total intrinsic value of options exercised during the three and nine months ended October
2, 2010 was $3.3 million and $11.1 million, respectively. As of October 2, 2010, we had $13.9
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 nine months ended October 2, 2010 was as
follows:
Weighted average | ||||||||
Unvested shares | grant date fair value | |||||||
outstanding | per share | |||||||
Balance at January 2, 2010 |
233,525 | $ | 15.79 | |||||
Granted |
196,520 | 19.43 | ||||||
Vested |
(57,710 | ) | 16.70 | |||||
Cancelled |
(26,450 | ) | 15.94 | |||||
Balance at October 2, 2010 |
345,885 | $ | 17.69 | |||||
As of October 2, 2010, we had $4.7 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 3.0 years.
7
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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 | Nine Months Ended | |||||||||||||||
(in thousands, except per share data) | October 2, 2010 | October 3, 2009 | October 2, 2010 | October 3, 2009 | ||||||||||||
Net income |
$ | 18,572 | $ | 28,621 | $ | 59,797 | $ | 62,566 | ||||||||
Weighted-average shares outstanding for basic net income per share |
76,151 | 74,278 | 75,627 | 73,939 | ||||||||||||
Dilutive effect of stock options, restricted shares and convertible notes |
2,394 | 720 | 2,016 | 517 | ||||||||||||
Adjusted weighted-average shares outstanding for diluted net income per share |
78,545 | 74,998 | 77,643 | 74,456 | ||||||||||||
Net income per share |
||||||||||||||||
Basic net earnings |
$ | 0.24 | $ | 0.39 | $ | 0.79 | $ | 0.85 | ||||||||
Diluted net earnings |
$ | 0.24 | $ | 0.38 | $ | 0.77 | $ | 0.84 |
There were 1,606,543 and 1,555,994 weighted shares outstanding for the three and nine month
periods ended October 2, 2010, respectively, that were excluded from the diluted earnings per share
computation because the impact would have been anti-dilutive. For the three and nine month periods
ended October 3, 2009, there were 4,411,863 and 5,981,657 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 October 2, 2010 and January 2, 2010:
(in thousands) | October 2, 2010 | January 2, 2010 | ||||||
Raw materials |
$ | 9,288 | $ | 10,117 | ||||
Work in process |
4,277 | 3,399 | ||||||
Finished goods |
26,440 | 21,791 | ||||||
Obsolescence reserve |
(4,751 | ) | (5,031 | ) | ||||
Net inventories |
$ | 35,254 | $ | 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 nine months ended October 2, 2010 and October
3, 2009 are presented below:
Three Months Ended | Nine Months Ended | |||||||||||||||
(in thousands) | October 2, 2010 | October 3, 2009 | October 2, 2010 | October 3, 2009 | ||||||||||||
Balance, beginning of period |
$ | 2,409 | $ | 2,469 | $ | 2,293 | $ | 3,287 | ||||||||
Provisions for warranty |
316 | 313 | 1,170 | 1,276 | ||||||||||||
Claims processed |
(298 | ) | (353 | ) | (1,036 | ) | (2,134 | ) | ||||||||
Balance, end of period |
$ | 2,427 | $ | 2,429 | $ | 2,427 | $ | 2,429 | ||||||||
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 nine months ended October 2, 2010 and October 3,
2009 was:
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Three Months Ended | ||||||||
(in thousands) | October 2, 2010 | October 3, 2009 | ||||||
Net income |
$ | 18,572 | $ | 28,621 | ||||
Foreign currency translation gain, net of taxes
of ($60) and $0, respectively |
3,029 | 927 | ||||||
Fair value adjustment on derivatives designated as cash flow hedges,
net of taxes of $1,791 and $822, respectively |
(2,949 | ) | (1,321 | ) | ||||
Reclassification adjustments on cash flow hedges settled and included
in net income, net of tax of $117 and ($582), respectively |
(192 | ) | 1,071 | |||||
Unrealized (loss) gain on available-for-sale securities, net of taxes
of $43 and ($48), respectively |
(69 | ) | 80 | |||||
Comprehensive income |
$ | 18,391 | $ | 29,378 | ||||
Nine Months Ended | ||||||||
(in thousands) | October 2, 2010 | October 3, 2009 | ||||||
Net income |
$ | 59,797 | $ | 62,566 | ||||
Foreign currency translation (loss) gain, net of taxes
of $31 and ($7), respectively |
(1,004 | ) | 2,221 | |||||
Fair value adjustment on derivatives designated as cash flow hedges,
net of taxes of ($14) and $1,735, respectively |
22 | (2,867 | ) | |||||
Reclassification adjustments on cash flow hedges settled and included
in net income, net of tax of $164 and ($1,144), respectively |
(272 | ) | 1,891 | |||||
Unrealized (loss) gain on available-for-sale securities, net of taxes
of $10 and ($123), respectively |
(16 | ) | 209 | |||||
Comprehensive income |
$ | 58,527 | $ | 64,020 | ||||
The after-tax components of accumulated other comprehensive income (loss) as of October 2,
2010 and January 2, 2010, were as follows:
Net Unrealized | ||||||||||||||||||||
Loss on | Net Unrealized | Total | ||||||||||||||||||
Derivative | Foreign | Gain on | Accumulated | |||||||||||||||||
Instruments | Post-retirement | Currency | Available-for- | Other | ||||||||||||||||
Qualifying as | Plan Liability | Translation | Sale | Comprehensive | ||||||||||||||||
(in thousands) | Hedges | Adjustment | Adjustment | Investments | Income | |||||||||||||||
Balance at January 2, 2010 |
$ | (1,289 | ) | $ | (24 | ) | $ | 7,500 | $ | 194 | $ | 6,381 | ||||||||
Balance at October 2, 2010 |
$ | (1,539 | ) | $ | (24 | ) | $ | 6,496 | $ | 178 | $ | 5,111 | ||||||||
8. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for the nine month period ended October 2, 2010
were:
Nine Months Ended | ||||
(in thousands) | October 2, 2010 | |||
Goodwill, beginning of the period |
$ | 690,899 | ||
Allocation of goodwill to sale of non-strategic assets |
(6,400 | ) | ||
Effect of currency translation |
(512 | ) | ||
Goodwill, end of the period |
$ | 683,987 | ||
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
9
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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, 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:
October 2, 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 | $ | (90,211 | ) | $ | 42,742 | $ | 137,553 | $ | (85,922 | ) | $ | 51,631 | ||||||||||
Other intangibles |
||||||||||||||||||||||||
Amortized |
||||||||||||||||||||||||
Patents |
11,275 | (9,637 | ) | 1,638 | 11,510 | (9,693 | ) | 1,817 | ||||||||||||||||
Licenses |
18,129 | (9,964 | ) | 8,165 | 15,913 | (9,034 | ) | 6,879 | ||||||||||||||||
Trademarks |
2,233 | (2,123 | ) | 110 | 2,208 | (1,767 | ) | 441 | ||||||||||||||||
Total amortized other
intangible assets |
31,637 | (21,724 | ) | 9,913 | 29,631 | (20,494 | ) | 9,137 | ||||||||||||||||
Unamortized |
||||||||||||||||||||||||
Trademarks |
40,800 | | 40,800 | 40,800 | | 40,800 | ||||||||||||||||||
Total other intangibles |
72,437 | (21,724 | ) | 50,713 | 70,431 | (20,494 | ) | 49,937 | ||||||||||||||||
Total intangible assets |
$ | 205,390 | $ | (111,935 | ) | $ | 93,455 | $ | 207,984 | $ | (106,416 | ) | $ | 101,568 | ||||||||||
The estimated amortization expense for currently-owned intangibles, as presented above, for
the years 2010 through 2014 is $12.1 million, $11.5 million, $9.2 million, $9.2 million and $7.0
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 $7.9 million has been paid as of October
2, 2010, and the remaining $1.1 million is structured to be paid out within the next six months.
All payments related to the patents are included in licenses and will be amortized over 7.5 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 October 2, 2010 and
January 2, 2010, there were $28.3 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 October 2, 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
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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.
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.
We have used cash provided by our operating activities, along with the proceeds from the sale of
Her Option® in the first quarter of 2010, to pay down our debt during 2010. Amortization and other
prepayments of $31.1 million and $97.0 million were made during the three and nine months ended
October 2, 2010, respectively. During the third quarter of 2009, we sold our Ovion female
sterilization assets and technology for $23.6 million and we used the proceeds to pay down our
debt. Amortization and other prepayments of $49.1 million and $78.2 million were made during the
three and nine months ended October 3, 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 on a straight-line method, which approximates the effective interest
method. Upon payment of the prepayments described above, a pro rata portion of the related fees
and debt issuance costs of $0.4 million and $1.3 million was immediately charged to amortization of
financing costs in three and nine months ended October 2, 2010, respectively, and $0.9 million and
$1.4 million was immediately charged to amortization of financing costs in the three and nine
months ended October 3, 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 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
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Notes. The 2036 Notes have the same rank as our convertible notes that are due in 2041, which are
discussed below.
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 October 2, 2010 and January 2, 2010, and is recorded in additional paid-in capital.
As of October 2, 2010, the principal amount of the liability component, its unamortized discount,
and its net carrying amount were $62.0 million, $9.3 million and $52.7 million, respectively. The
unamortized discount will be amortized over a remaining period of 2.7 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 nine months ended October 2, 2010 and October 3, 2009. During the three and nine
months ended October 2, 2010, we recognized $0.5 million and $1.5 million, respectively, of
interest expense representing the contractual interest coupon on our 2036 Notes, and $0.7 million
and $2.1 million, respectively, of amortization expense related to the discount on the liability
component. During the three and nine months ended October 3, 2009, we recognized $2.2 million and
$7.5 million, resepectively, of interest expense representing the contractual interest coupon on
our 2036 Notes, and $3.0 million and $9.7 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.
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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 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 on a straight line basis, which
approximates the effective interest 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 October 2, 2010 and January 2, 2010,
and is recorded in additional paid-in capital. As of October 2, 2010, the principal amount of the
liability component, its unamortized discount, and its net carrying amount were $250.0 million,
$70.5 million and $179.5 million, respectively. The unamortized discount will be amortized over a
remaining period of 6.0 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 $250.0 million, $76.7 million and $173.3 million, respectively. The effective interest rate
on the liability component was 10.2% each of the the three and nine months ended October 2, 2010
and October 3, 2009. During the three and nine months ended October 2, 2010, we recognized $2.5
million and $7.5 million, respectively, of interest expense representing the contractual interest
coupon on our 2041 Notes, and $2.1 million and $6.2 million of amortization expense related to the
discount on the liability component. During the three and nine months ended October 3, 2009, we
recognized $0.4 million, of interest expense representing the contractual interest coupon on our
2041 Notes, and $0.2 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.
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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.
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 nine month periods ended October 2, 2010 and October 3, 2009,
the balance sheets as of October 2, 2010 and January 2, 2010, and the statements of cash flows for
each of the nine month periods ended October 2, 2010 and October 3, 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 October 2, 2010 | ||||||||||||||||||||
American | ||||||||||||||||||||
Medical | Non- | |||||||||||||||||||
Systems | Guarantor | Guarantor | Consolidated | |||||||||||||||||
Holdings, Inc. | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||
Net sales |
$ | | $ | 115,517 | $ | 23,552 | $ | (15,040 | ) | $ | 124,029 | |||||||||
Cost of sales |
| 21,973 | 14,762 | (14,772 | ) | 21,963 | ||||||||||||||
Gross profit |
| 93,544 | 8,790 | (268 | ) | 102,066 | ||||||||||||||
Operating expenses |
||||||||||||||||||||
Marketing and selling |
| 33,467 | 9,170 | | 42,637 | |||||||||||||||
Research and development |
| 12,715 | (85 | ) | | 12,630 | ||||||||||||||
General and administrative |
| 10,850 | | | 10,850 | |||||||||||||||
Amortization of intangibles |
| 3,053 | | | 3,053 | |||||||||||||||
Total operating expenses |
| 60,085 | 9,085 | | 69,170 | |||||||||||||||
Operating income |
| 33,459 | (295 | ) | (268 | ) | 32,896 | |||||||||||||
Other (expense) income |
||||||||||||||||||||
Royalty income |
| 153 | | | 153 | |||||||||||||||
Interest expense |
(2,979 | ) | (342 | ) | (32 | ) | 24 | (3,329 | ) | |||||||||||
Amortization of financing costs |
(3,050 | ) | (453 | ) | | | (3,503 | ) | ||||||||||||
Gain on extinguishment of debt |
| | | | | |||||||||||||||
Gain on sale of non-strategic
assets |
| | | | | |||||||||||||||
Other income |
| 1,779 | 69 | 35 | 1,883 | |||||||||||||||
Total other (expense) income |
(6,029 | ) | 1,137 | 37 | 59 | (4,796 | ) | |||||||||||||
(Loss) income before income taxes |
(6,029 | ) | 34,596 | (258 | ) | (209 | ) | 28,100 | ||||||||||||
Provision (benefit) for income taxes |
(2,273 | ) | 11,900 | (20 | ) | (79 | ) | 9,528 | ||||||||||||
Equity in earnings of subsidiary |
22,458 | (238 | ) | | (22,220 | ) | | |||||||||||||
Net income (loss) |
$ | 18,702 | $ | 22,458 | $ | (238 | ) | $ | (22,350 | ) | $ | 18,572 | ||||||||
14
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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)
Nine Months Ended October 2, 2010 | ||||||||||||||||||||
American | ||||||||||||||||||||
Medical | Non- | |||||||||||||||||||
Systems | Guarantor | Guarantor | Consolidated | |||||||||||||||||
Holdings, Inc. | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||
Net sales |
$ | | $ | 361,684 | $ | 84,524 | $ | (50,885 | ) | $ | 395,323 | |||||||||
Cost of sales |
| 64,804 | 50,398 | (49,407 | ) | 65,795 | ||||||||||||||
Gross profit |
| 296,880 | 34,126 | (1,478 | ) | 329,528 | ||||||||||||||
Operating expenses |
||||||||||||||||||||
Marketing and selling |
| 106,135 | 30,813 | | 136,948 | |||||||||||||||
Research and development |
| 39,834 | 142 | | 39,976 | |||||||||||||||
General and administrative |
| 35,337 | | | 35,337 | |||||||||||||||
Amortization of intangibles |
| 9,130 | | | 9,130 | |||||||||||||||
Total operating expenses |
| 190,436 | 30,955 | | 221,391 | |||||||||||||||
Operating income |
| 106,444 | 3,171 | (1,478 | ) | 108,137 | ||||||||||||||
Other (expense) income |
||||||||||||||||||||
Royalty income |
| 508 | | | 508 | |||||||||||||||
Interest expense |
(8,969 | ) | (1,883 | ) | (87 | ) | 72 | (10,867 | ) | |||||||||||
Amortization of financing costs |
(8,906 | ) | (1,636 | ) | | | (10,542 | ) | ||||||||||||
Gain on extinguishment of debt |
| | | | | |||||||||||||||
Gain on sale of non-strategic
assets |
| 7,719 | | | 7,719 | |||||||||||||||
Other income (expense) |
| 2,188 | (263 | ) | (73 | ) | 1,852 | |||||||||||||
Total other (expense) income |
(17,875 | ) | 6,896 | (350 | ) | (1 | ) | (11,330 | ) | |||||||||||
(Loss) income before income taxes |
(17,875 | ) | 113,340 | 2,821 | (1,479 | ) | 96,807 | |||||||||||||
Provision (benefit) for income taxes |
(6,741 | ) | 43,222 | 1,087 | (558 | ) | 37,010 | |||||||||||||
Equity in earnings of subsidiary |
71,852 | 1,734 | | (73,586 | ) | | ||||||||||||||
Net income |
$ | 60,718 | $ | 71,852 | $ | 1,734 | $ | (74,507 | ) | $ | 59,797 | |||||||||
15
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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 October 3, 2009 | ||||||||||||||||||||
American | ||||||||||||||||||||
Medical | Non- | |||||||||||||||||||
Systems | Guarantor | Guarantor | Consolidated | |||||||||||||||||
Holdings, Inc. | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||
Net sales |
$ | | $ | 115,207 | $ | 23,770 | $ | (15,746 | ) | $ | 123,231 | |||||||||
Cost of sales |
| 21,203 | 15,643 | (15,562 | ) | 21,284 | ||||||||||||||
Gross profit |
| 94,004 | 8,127 | (184 | ) | 101,947 | ||||||||||||||
Operating expenses |
||||||||||||||||||||
Marketing and selling |
| 32,831 | 9,658 | | 42,489 | |||||||||||||||
Research and development |
| 12,450 | (16 | ) | | 12,434 | ||||||||||||||
General and administrative |
| 10,459 | | | 10,459 | |||||||||||||||
Amortization of intangibles |
| 3,358 | | | 3,358 | |||||||||||||||
Total operating expenses |
| 59,098 | 9,642 | | 68,740 | |||||||||||||||
Operating income |
| 34,906 | (1,515 | ) | (184 | ) | 33,207 | |||||||||||||
Other (expense) income |
||||||||||||||||||||
Royalty income |
| 961 | | | 961 | |||||||||||||||
Interest expense |
(2,609 | ) | (2,058 | ) | (41 | ) | 34 | (4,674 | ) | |||||||||||
Amortization of financing costs |
(3,290 | ) | (1,105 | ) | | | (4,395 | ) | ||||||||||||
Gain on extinguishment of debt |
5,563 | | | | 5,563 | |||||||||||||||
Gain on sale of non-strategic
assets |
| 17,446 | | | 17,446 | |||||||||||||||
Other (expense) income |
| (545 | ) | 236 | (15 | ) | (324 | ) | ||||||||||||
Total other (expense) income |
(336 | ) | 14,699 | 195 | 19 | 14,577 | ||||||||||||||
(Loss) income before income taxes |
(336 | ) | 49,605 | (1,320 | ) | (165 | ) | 47,784 | ||||||||||||
Provision (benefit) for income taxes |
(127 | ) | 19,813 | (460 | ) | (63 | ) | 19,163 | ||||||||||||
Equity in earnings of subsidiary |
28,932 | (860 | ) | | (28,072 | ) | | |||||||||||||
Net income (loss) |
$ | 28,723 | $ | 28,932 | $ | (860 | ) | $ | (28,174 | ) | $ | 28,621 | ||||||||
16
Table of Contents
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)
Nine Months Ended October 3, 2009 | ||||||||||||||||||||
American | ||||||||||||||||||||
Medical | Non- | |||||||||||||||||||
Systems | Guarantor | Guarantor | Consolidated | |||||||||||||||||
Holdings, Inc. | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||
Net sales |
$ | | $ | 340,272 | $ | 79,111 | $ | (46,126 | ) | $ | 373,257 | |||||||||
Cost of sales |
| 65,623 | 46,960 | (46,349 | ) | 66,234 | ||||||||||||||
Gross profit |
| 274,649 | 32,151 | 223 | 307,023 | |||||||||||||||
Operating expenses |
||||||||||||||||||||
Marketing and selling |
| 100,368 | 28,322 | | 128,690 | |||||||||||||||
Research and development |
| 38,434 | (23 | ) | | 38,411 | ||||||||||||||
General and administrative |
| 32,898 | | | 32,898 | |||||||||||||||
Amortization of intangibles |
| 10,024 | | | 10,024 | |||||||||||||||
Total operating expenses |
| 181,724 | 28,299 | | 210,023 | |||||||||||||||
Operating income |
| 92,925 | 3,852 | 223 | 97,000 | |||||||||||||||
Other (expense) income |
||||||||||||||||||||
Royalty income |
| 2,768 | | | 2,768 | |||||||||||||||
Interest expense |
(7,858 | ) | (7,168 | ) | (156 | ) | 132 | (15,050 | ) | |||||||||||
Amortization of financing
costs |
(10,052 | ) | (2,298 | ) | | | (12,350 | ) | ||||||||||||
Gain on extinguishment of debt |
10,125 | | | | 10,125 | |||||||||||||||
Gain on sale of non-strategic
assets |
| 17,446 | 17,446 | |||||||||||||||||
Other income (expense) |
| 813 | 396 | (111 | ) | 1,098 | ||||||||||||||
Total other (expense) income |
(7,785 | ) | 11,561 | 240 | 21 | 4,037 | ||||||||||||||
(Loss) income before income taxes |
(7,785 | ) | 104,486 | 4,092 | 244 | 101,037 | ||||||||||||||
Provision (benefit) for income taxes |
(2,936 | ) | 39,893 | 1,424 | 90 | 38,471 | ||||||||||||||
Equity in earnings of subsidiary |
67,261 | 2,668 | | (69,929 | ) | | ||||||||||||||
Net income |
$ | 62,412 | $ | 67,261 | $ | 2,668 | $ | (69,775 | ) | $ | 62,566 | |||||||||
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 October 2, 2010 | ||||||||||||||||||||
American | ||||||||||||||||||||
Medical | Non- | |||||||||||||||||||
Systems | Guarantor | Guarantor | Consolidated | |||||||||||||||||
Holdings, Inc. | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||
Assets |
||||||||||||||||||||
Current assets |
||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | 2,974 | $ | 14,862 | $ | | $ | 17,836 | ||||||||||
Short-term investments |
10,097 | 33,735 | 109 | | 43,941 | |||||||||||||||
Accounts receivable, net |
639,946 | 49,531 | 28,647 | (626,563 | ) | 91,561 | ||||||||||||||
Inventories, net |
| 33,018 | 8,403 | (6,167 | ) | 35,254 | ||||||||||||||
Deferred income taxes |
| 14,017 | 995 | | 15,012 | |||||||||||||||
Other current assets |
| 3,465 | 1,420 | | 4,885 | |||||||||||||||
Total current assets |
650,043 | 136,740 | 54,436 | (632,730 | ) | 208,489 | ||||||||||||||
Property, plant and equipment, net |
| 41,224 | 1,257 | | 42,481 | |||||||||||||||
Goodwill |
| 621,793 | 86,215 | (24,021 | ) | 683,987 | ||||||||||||||
Developed and core technology, net |
| 42,742 | | | 42,742 | |||||||||||||||
Other intangibles, net |
| 50,713 | | | 50,713 | |||||||||||||||
Investment in subsidiaries |
263,530 | 45,788 | | (309,318 | ) | | ||||||||||||||
Other long-term assets, net |
4,557 | 103 | 687 | | 5,347 | |||||||||||||||
Total assets |
$ | 918,130 | $ | 939,103 | $ | 142,595 | $ | (966,069 | ) | $ | 1,033,759 | |||||||||
Liabilities and Stockholders Equity |
||||||||||||||||||||
Current liabilities |
||||||||||||||||||||
Accounts payable |
$ | (2,009 | ) | $ | 578,883 | $ | 75,523 | $ | (644,531 | ) | $ | 7,866 | ||||||||
Income taxes payable |
(3,113 | ) | 5,737 | (484 | ) | | 2,140 | |||||||||||||
Accrued compensation expenses |
| 21,299 | 4,624 | | 25,923 | |||||||||||||||
Accrued warranty expense |
| 2,456 | (29 | ) | | 2,427 | ||||||||||||||
Other accrued expenses |
1,006 | 16,406 | 3,738 | | 21,150 | |||||||||||||||
Total current liabilities |
(4,116 | ) | 624,781 | 83,372 | (644,531 | ) | 59,506 | |||||||||||||
Non-current liabilities |
||||||||||||||||||||
Long-term debt |
232,199 | 27,696 | | | 259,895 | |||||||||||||||
Intercompany loans payable |
| | 12,220 | (12,220 | ) | | ||||||||||||||
Deferred income taxes |
56,761 | 653 | 1,215 | | 58,629 | |||||||||||||||
Long-term income taxes payable |
| 18,698 | | | 18,698 | |||||||||||||||
Long-term employee benefit obligations |
| 3,745 | | | 3,745 | |||||||||||||||
Total non-current liabilities |
288,960 | 50,792 | 13,435 | (12,220 | ) | 340,967 | ||||||||||||||
Total liabilities |
284,844 | 675,573 | 96,807 | (656,751 | ) | 400,473 | ||||||||||||||
Stockholders equity |
||||||||||||||||||||
Common stock |
764 | | 128 | (128 | ) | 764 | ||||||||||||||
Additional paid-in capital |
428,851 | 3,424 | 57,659 | (61,083 | ) | 428,851 | ||||||||||||||
Accumulated other comprehensive income |
5,110 | (468 | ) | 6,497 | (6,028 | ) | 5,111 | |||||||||||||
Retained earnings (deficit) |
198,561 | 260,574 | (18,496 | ) | (242,079 | ) | 198,560 | |||||||||||||
Total stockholders equity |
633,286 | 263,530 | 45,788 | (309,318 | ) | 633,286 | ||||||||||||||
Total liabilities and stockholders equity |
$ | 918,130 | $ | 939,103 | $ | 142,595 | $ | (966,069 | ) | $ | 1,033,759 | |||||||||
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)
Nine Months Ended October 2, 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 |
$ | (22,762 | ) | $ | 95,524 | $ | 1,463 | $ | | $ | 74,225 | |||||||||
Cash flows from investing activities |
||||||||||||||||||||
Purchase of property, plant and equipment |
| (5,588 | ) | (238 | ) | | (5,826 | ) | ||||||||||||
Purchase of other intangibles |
| (2,438 | ) | | | (2,438 | ) | |||||||||||||
Sale of non-strategic assets, net |
| 19,043 | | | 19,043 | |||||||||||||||
Purchase of short-term investments |
| (57,284 | ) | (232 | ) | | (57,516 | ) | ||||||||||||
Sale of short-term investments |
| 32,737 | 695 | | 33,432 | |||||||||||||||
Net settlement of derivative contracts |
| 970 | | 970 | ||||||||||||||||
Net cash (used in) provided by investing activities |
| (12,560 | ) | 225 | | (12,335 | ) | |||||||||||||
Cash flows from financing activities |
||||||||||||||||||||
Issuance of common stock |
21,211 | | | | 21,211 | |||||||||||||||
Excess tax benefit from stock-based compensation |
1,551 | | | | 1,551 | |||||||||||||||
Payments on senior secured credit facility |
| (96,963 | ) | | | (96,963 | ) | |||||||||||||
Repurchase of convertible senior subordinated notes |
| | | | | |||||||||||||||
Net cash provided by (used in) financing activities |
22,762 | (96,963 | ) | | | (74,201 | ) | |||||||||||||
Effect of exchange rates on cash |
| | (523 | ) | | (523 | ) | |||||||||||||
Net (decrease) increase in cash and cash equivalents |
| (13,999 | ) | 1,165 | | (12,834 | ) | |||||||||||||
Cash and cash equivalents at beginning of period |
| 16,973 | 13,697 | | 30,670 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | | $ | 2,974 | $ | 14,862 | $ | | $ | 17,836 | ||||||||||
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)
Nine Months Ended October 3, 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 |
$ | 21,920 | $ | 69,205 | $ | 6,060 | $ | | $ | 97,185 | ||||||||||
Cash flows from investing activities |
||||||||||||||||||||
Purchase of property, plant and equipment |
| (3,391 | ) | (297 | ) | | (3,688 | ) | ||||||||||||
Sale of non-strategic assets, net |
| 18,982 | | 18,982 | ||||||||||||||||
Purchase of other intangibles |
| (5,392 | ) | | | (5,392 | ) | |||||||||||||
Purchase of short-term investments |
| (18,149 | ) | (594 | ) | | (18,743 | ) | ||||||||||||
Sale of short-term investments |
| 30,500 | 138 | | 30,638 | |||||||||||||||
Net settlement of derivative contracts |
| (171 | ) | | | (171 | ) | |||||||||||||
Net cash provided by (used in) investing activities |
| 22,379 | (753 | ) | | 21,626 | ||||||||||||||
Cash flows from financing activities |
||||||||||||||||||||
Issuance of common stock |
6,416 | | | | 6,416 | |||||||||||||||
Excess tax benefit from stock-based compensation |
486 | | | | 486 | |||||||||||||||
Debt issuance costs |
(7,697 | ) | | | | (7,697 | ) | |||||||||||||
Payments on senior secured credit facility |
| (78,173 | ) | | | (78,173 | ) | |||||||||||||
Repurchase of convertible senior subordinated notes |
(21,125 | ) | | | | (21,125 | ) | |||||||||||||
Net cash (used in) financing activities |
(21,920 | ) | (78,173 | ) | | | (100,093 | ) | ||||||||||||
Effect of exchange rates on cash |
| | (614 | ) | | (614 | ) | |||||||||||||
Net increase in cash and cash equivalents |
| 13,411 | 4,693 | | 18,104 | |||||||||||||||
Cash and cash equivalents at beginning of period |
| 3,143 | 8,499 | | 11,642 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | | $ | 16,554 | $ | 13,192 | $ | | $ | 29,746 | ||||||||||
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 October 2, 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 |
$ | 27,289 | $ | | $ | | ||||||
Available-for-sale securities |
542 | | | |||||||||
Other short-term investments |
| 110 | | |||||||||
Commercial paper |
| 16,000 | | |||||||||
Total Assets |
$ | 27,831 | $ | 16,110 | $ | | ||||||
Liabilities |
||||||||||||
Derivatives |
$ | | $ | 3,285 | $ | | ||||||
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 October 2, 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, which have
maturities of three months or less. The carrying amount is a reasonable estimate of fair value and
these investments have been classified as Level 2.
Commercial paper: We hold commercial paper that has a maturity of six months or less with a highly
rated financial institution. Our commercial paper is classified as Level 2 in the fair value
hierarchy because it is carried at amortized cost, which is a reasonable approximation of fair
value.
Derivatives: The fair value of various foreign exchange forward contracts as of October 2, 2010
includes liabilities of $3.3 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 nine months ended
October 2, 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. At
October 2, 2010, our incremental borrowing rate was consistent with our current rate under our
existing Credit Facility, which results in the same principle value and fair value in the table
below.
The following table summarizes the principal outstanding and estimated fair values of our long-term
debt, including current maturities (in thousands):
October 2, 2010 | January 2, 2010 | |||||||||||||||
(in thousands) | Principal | Fair Value | Principal | Fair Value | ||||||||||||
2036 Notes |
$ | 61,985 | $ | 69,622 | $ | 61,985 | $ | 70,270 | ||||||||
2041 Notes |
250,000 | 310,400 | 250,000 | 304,983 | ||||||||||||
Credit Facility |
28,374 | 28,374 | 125,307 | 123,230 | ||||||||||||
$ | 340,359 | $ | 408,396 | $ | 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.
In addition, we have foreign currency exchange forward contract derivatives outstanding at October
2, 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 fourteen months. The
notional amount of the foreign exchange forward contracts designated as cash flow hedges was $51.4
million and $48.4 million at October 2, 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 October 2, 2010
and January 2, 2010 was $25.0 million and $10.9 million, respectively. The associated underlying
transactions are expected to occur within the next three months. We have no interest rate swap
contracts outstanding as of October 2, 2010.
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 nine months ended October 2, 2010 or October 3, 2009. Amounts due
from counterparties (unrealized hedge gains) or
23
Table of Contents
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 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 Value of Derivative Instruments | ||||||||||||||||||||
Assets | Liabilities | |||||||||||||||||||
Balance Sheet | October 2, | January 2, | Balance Sheet | October 2, | January 2, | |||||||||||||||
(in thousands) | Location | 2010 | 2010 | Location | 2010 | 2010 | ||||||||||||||
Derivatives designated
as hedging instruments |
||||||||||||||||||||
Interest rate swap contracts |
Other current assets |
$ | | $ | | Other accrued expenses |
$ | | $ | 299 | ||||||||||
Foreign exchange forward
contracts |
Other current assets |
| | Other accrued expenses |
2,366 | 1,650 | ||||||||||||||
Total derivatives designated
as hedging instruments |
$ | | $ | | $ | 2,366 | $ | 1,949 | ||||||||||||
Derivatives not designated
as hedging instruments |
||||||||||||||||||||
Foreign exchange forward
contracts |
Other current assets | $ | | $ | 10 | Other accrued expenses | $ | 919 | $ | | ||||||||||
Total derivatives |
$ | | $ | 10 | $ | 3,285 | $ | 1,949 | ||||||||||||
At October 2, 2010, approximately $2.0 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.
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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.
The Effect of Derivative Instruments on the Consolidated Statement of Operations
For the Three Months Ended October 2, 2010 and October 3, 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 | October 2, 2010 | October 3, 2009 | (Effective Portion) | October 2, 2010 | October 3, 2009 | |||||||||||||
Interest rate swap contracts |
$ | 4 | $ | 612 | Interest expense | $ | (4 | ) | $ | (772 | ) | |||||||
Foreign exchange contracts |
(5,053 | ) | (1,102 | ) | Other income (expense) | 313 | (880 | ) | ||||||||||
Total |
$ | (5,049 | ) | $ | (490 | ) | $ | 309 | $ | (1,652 | ) | |||||||
Derivatives not | Location of Gain (Loss) | Amount of Gain (Loss) Recognized | ||||||||
Designated as | Recognized in Income | in Income on Derivatives | ||||||||
Hedging Instruments | on Derivatives | October 2, 2010 | October 3, 2009 | |||||||
Foreign exchange contracts |
Other expense | $ | (1,054 | ) | $ | (306 | ) | |||
For the Nine Months Ended October 2, 2010 and October 3, 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 | October 2, 2010 | October 3, 2009 | (Effective Portion) | October 2, 2010 | October 3, 2009 | |||||||||||||
Interest rate swap contracts |
$ | 291 | $ | 1,773 | Interest expense | $ | (302 | ) | $ | (2,683 | ) | |||||||
Foreign exchange contracts |
(691 | ) | (3,340 | ) | Other income (expense) | 738 | (352 | ) | ||||||||||
Total |
$ | (400 | ) | $ | (1,567 | ) | $ | 436 | $ | (3,035 | ) | |||||||
Derivatives not | Location of Gain (Loss) | Amount of Gain (Loss) Recognized | ||||||||
Designated as | Recognized in Income | in Income on Derivatives | ||||||||
Hedging Instruments | on Derivatives | October 2, 2010 | October 3, 2009 | |||||||
Foreign exchange contracts |
Other expense | $ | (318 | ) | $ | (512 | ) | |||
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 nine month periods ended October 2, 2010 or October 3, 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 | Nine Months Ended | |||||||||||||||
(in thousands) | October 2, 2010 | October 3, 2009 | October 2, 2010 | October 3, 2009 | ||||||||||||
United States |
||||||||||||||||
Net sales |
$ | 92,906 | $ | 92,262 | $ | 288,086 | $ | 271,336 | ||||||||
Long-lived assets |
807,623 | 828,248 | 807,623 | 828,248 | ||||||||||||
International |
||||||||||||||||
Net sales |
$ | 31,123 | $ | 30,969 | $ | 107,237 | $ | 101,921 | ||||||||
Long-lived assets |
17,647 | 18,067 | 17,647 | 18,067 |
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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 our 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 stock-based compensation 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 our 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 $124.0 million and $395.3 million in the three and nine month periods ended
October 2, 2010, respectively, compared to $123.2 million and $373.3 million in the three and nine
months ended October 3, 2009, respectively. In the three and nine months ended October 2, 2010,
mens health contributed $55.2 million and $181.0 million, or 45 percent and 46 percent of total
net sales, respectively; BPH therapy contributed $26.9 million and $82.0 million, or 22 percent and
21 percent of total net sales, respectively; and womens health contributed $41.2 million and
$128.4 million, respectively, which is 33 percent of total net sales in both periods.
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. We launched the new MoXy
Liquid Cooled Fiber the last week of the third quarter of 2010. The MoXy Liquid Cooled
Fiber is designed to be used with the GreenLight XPS (Xcelerated Performance System)
that we launched late in the second quarter of 2010. In addition, in our female continence product
line, we recently launched 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.
We generated net income of $18.6 million and $59.8 million in the three and nine month periods
ended October 2, 2010, compared to $28.6 million and $62.6 million in the three and nine month
periods ended October 3, 2009. Prior year net income includes the gain on sale of our Ovion female
sterilization assets and technology (Ovion technology) of $17.4 million and the $5.6 million gain
on the extinguishment of $250.0 million of our 2036 Notes for $250.0 million of our 2041 Notes,
both of which occurred in the third quarter of 2009.
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We continue to focus on managing our working capital, controlling costs, and driving operating
leverage throughout our business. Cash provided by operating activities totaled $74.2 million for
the nine months ended October 2, 2010, compared to $97.2 million in the nine months ended October
3, 2009. We also retired $97.0 million and $99.3 million of debt in the nine months ended October
2, 2010 and October 3, 2009, respectively. Finally, operating income increased to $108.1 million
compared to $97.0 million in the nine months ended October 2, 2010 and October 3, 2009,
respectively, which is an increase of 11.5 percent.
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 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 nine month periods ended October 2, 2010 compared to the three and nine month periods ended
October 3, 2009.
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
October 2, | October 3, | October 2, | October 3, | |||||||||||||||||||||||||||||
(in thousands) | 2010 | 2009 | $ Increase | % Increase | 2010 | 2009 | $ Increase | % Increase | ||||||||||||||||||||||||
Net Sales |
||||||||||||||||||||||||||||||||
Mens health |
$ | 55,177 | $ | 54,666 | $ | 511 | 0.9 | % | $ | 181,018 | $ | 171,090 | $ | 9,928 | 5.8 | % | ||||||||||||||||
BPH therapy |
26,890 | 27,686 | (796 | ) | -2.9 | % | 81,977 | 81,159 | 818 | 1.0 | % | |||||||||||||||||||||
Womens health |
41,192 | 38,848 | 2,344 | 6.0 | % | 128,431 | 113,617 | 14,814 | 13.0 | % | ||||||||||||||||||||||
Sub-total |
123,259 | 121,200 | 2,059 | 1.7 | % | 391,426 | 365,866 | 25,560 | 7.0 | % | ||||||||||||||||||||||
Uterine health (a) |
770 | 2,031 | (1,261 | ) | -62.1 | % | 3,897 | 7,391 | (3,494 | ) | -47.3 | % | ||||||||||||||||||||
Total |
$ | 124,029 | $ | 123,231 | $ | 798 | 0.6 | % | $ | 395,323 | $ | 373,257 | $ | 22,066 | 5.9 | % | ||||||||||||||||
Geography |
||||||||||||||||||||||||||||||||
United States |
$ | 92,136 | $ | 90,231 | $ | 1,905 | 2.1 | % | $ | 284,189 | $ | 263,946 | $ | 20,243 | 7.7 | % | ||||||||||||||||
International |
31,123 | 30,969 | 154 | 0.5 | % | 107,237 | 101,920 | 5,317 | 5.2 | % | ||||||||||||||||||||||
Sub-total |
123,259 | 121,200 | 2,059 | 1.7 | % | 391,426 | 365,866 | 25,560 | 7.0 | % | ||||||||||||||||||||||
United States-Uterine health (a) |
770 | 2,031 | (1,261 | ) | -62.1 | % | 3,897 | 7,391 | (3,494 | ) | -47.3 | % | ||||||||||||||||||||
Total |
$ | 124,029 | $ | 123,231 | $ | 798 | 0.6 | % | $ | 395,323 | $ | 373,257 | $ | 22,066 | 5.9 | % | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
Percent of net sales | October 2, 2010 | October 3, 2009 | October 2, 2010 | October 3, 2009 | ||||||||||||||||||||||||||||
Mens health |
44.5 | % | 44.4 | % | 45.8 | % | 45.8 | % | ||||||||||||||||||||||||
BPH therapy |
21.7 | % | 22.5 | % | 20.7 | % | 21.7 | % | ||||||||||||||||||||||||
Womens health |
33.2 | % | 31.5 | % | 32.5 | % | 30.4 | % | ||||||||||||||||||||||||
Sub-total |
99.4 | % | 98.4 | % | 99.0 | % | 98.0 | % | ||||||||||||||||||||||||
Uterine health (a) |
0.6 | % | 1.6 | % | 1.0 | % | 2.0 | % | ||||||||||||||||||||||||
Total |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||||||||||||
Geography |
||||||||||||||||||||||||||||||||
United States |
74.9 | % | 74.9 | % | 72.9 | % | 72.7 | % | ||||||||||||||||||||||||
International |
25.1 | % | 25.1 | % | 27.1 | % | 27.3 | % | ||||||||||||||||||||||||
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 nine 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. |
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The following table compares revenue, expense, and other income (expense) for the three and
nine months ended October 2, 2010 and October 3, 2009:
Three Months Ended | $ Increase | % Increase | Nine Months Ended | $ Increase | % Increase | |||||||||||||||||||||||||||
(in thousands) | October 2, 2010 | October 3, 2009 | (Decrease) | (Decrease) | October 2, 2010 | October 3, 2009 | (Decrease) | (Decrease) | ||||||||||||||||||||||||
Net sales |
$ | 124,029 | $ | 123,231 | $ | 798 | 0.6 | % | $ | 395,323 | $ | 373,257 | $ | 22,066 | 5.9 | % | ||||||||||||||||
Cost of sales |
21,963 | 21,284 | 679 | 3.2 | % | $ | 65,795 | 66,234 | (439 | ) | -0.7 | % | ||||||||||||||||||||
Gross profit |
102,066 | 101,947 | 119 | 0.1 | % | 329,528 | 307,023 | 22,505 | 7.3 | % | ||||||||||||||||||||||
Operating expenses |
||||||||||||||||||||||||||||||||
Marketing and selling |
42,637 | 42,489 | 148 | 0.3 | % | 136,948 | 128,690 | 8,258 | 6.4 | % | ||||||||||||||||||||||
Research and development |
12,630 | 12,434 | 196 | 1.6 | % | 39,976 | 38,411 | 1,565 | 4.1 | % | ||||||||||||||||||||||
General and administrative |
10,850 | 10,459 | 391 | 3.7 | % | 35,337 | 32,898 | 2,439 | 7.4 | % | ||||||||||||||||||||||
Amortization of intangibles |
3,053 | 3,358 | (305 | ) | -9.1 | % | 9,130 | 10,024 | (894 | ) | -8.9 | % | ||||||||||||||||||||
Total operating expenses |
69,170 | 68,740 | 430 | 0.6 | % | 221,391 | 210,023 | 11,368 | 5.4 | % | ||||||||||||||||||||||
Operating income |
32,896 | 33,207 | (311 | ) | -0.9 | % | 108,137 | 97,000 | 11,137 | 11.5 | % | |||||||||||||||||||||
Royalty income |
153 | 961 | (808 | ) | -84.1 | % | 508 | 2,768 | (2,260 | ) | -81.6 | % | ||||||||||||||||||||
Interest expense |
(3,329 | ) | (4,674 | ) | (1,345 | ) | -28.8 | % | (10,867 | ) | (15,050 | ) | (4,183 | ) | -27.8 | % | ||||||||||||||||
Amortization of financing costs |
(3,503 | ) | (4,395 | ) | (892 | ) | -20.3 | % | (10,542 | ) | (12,350 | ) | (1,808 | ) | -14.6 | % | ||||||||||||||||
Gain on extinguishment of debt |
| 5,563 | 5,563 | -100.0 | % | | 10,125 | 10,125 | -100.0 | % | ||||||||||||||||||||||
Gain on sale of non-strategic assets |
| 17,446 | 17,446 | -100.0 | % | 7,719 | 17,446 | 9,727 | -55.8 | % | ||||||||||||||||||||||
Other income (expense) |
1,883 | (324 | ) | 2,207 | n/a | 1,852 | 1,098 | 754 | 68.7 | % | ||||||||||||||||||||||
Income before income taxes |
28,100 | 47,784 | (19,684 | ) | -41.2 | % | 96,807 | 101,037 | (4,230 | ) | -4.2 | % | ||||||||||||||||||||
Provision for income taxes |
9,528 | 19,163 | (9,635 | ) | -50.3 | % | 37,010 | 38,471 | (1,461 | ) | -3.8 | % | ||||||||||||||||||||
Net income |
$ | 18,572 | $ | 28,621 | $ | (10,049 | ) | -35.1 | % | $ | 59,797 | $ | 62,566 | $ | (2,769 | ) | -4.4 | % | ||||||||||||||
Percent of Sales | Percent of Sales | |||||||||||||||||||||||||||||||
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||||||||||
October 2, 2010 | October 3, 2009 | October 2, 2010 | October 3, 2009 | |||||||||||||||||||||||||||||
Net sales |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||||||||||||
Cost of sales |
17.7 | % | 17.3 | % | 16.6 | % | 17.7 | % | ||||||||||||||||||||||||
Gross profit |
82.3 | % | 82.7 | % | 83.4 | % | 82.3 | % | ||||||||||||||||||||||||
Operating expenses |
||||||||||||||||||||||||||||||||
Marketing and selling |
34.4 | % | 34.5 | % | 34.6 | % | 34.5 | % | ||||||||||||||||||||||||
Research and development |
10.2 | % | 10.1 | % | 10.1 | % | 10.3 | % | ||||||||||||||||||||||||
General and administrative |
8.7 | % | 8.5 | % | 8.9 | % | 8.8 | % | ||||||||||||||||||||||||
Amortization of intangibles |
2.5 | % | 2.7 | % | 2.3 | % | 2.7 | % | ||||||||||||||||||||||||
Total operating expenses |
55.8 | % | 55.8 | % | 56.0 | % | 56.3 | % | ||||||||||||||||||||||||
Operating income |
26.5 | % | 26.9 | % | 27.4 | % | 26.0 | % | ||||||||||||||||||||||||
Royalty income |
0.1 | % | 0.8 | % | 0.1 | % | 0.7 | % | ||||||||||||||||||||||||
Interest expense |
-2.7 | % | -3.8 | % | -2.7 | % | -4.0 | % | ||||||||||||||||||||||||
Amortization of financing costs |
-2.8 | % | -3.6 | % | -2.7 | % | -3.3 | % | ||||||||||||||||||||||||
Gain on extinguishment of debt |
0.0 | % | 4.5 | % | 0.0 | % | 2.7 | % | ||||||||||||||||||||||||
Gain on sale of non-strategic assets |
0.0 | % | 14.2 | % | 2.0 | % | 4.7 | % | ||||||||||||||||||||||||
Other income |
1.5 | % | -0.3 | % | 0.5 | % | 0.3 | % | ||||||||||||||||||||||||
Income before taxes |
22.7 | % | 38.8 | % | 24.5 | % | 27.1 | % | ||||||||||||||||||||||||
Provision for income taxes |
7.7 | % | 15.6 | % | 9.4 | % | 10.3 | % | ||||||||||||||||||||||||
Net income |
15.0 | % | 23.2 | % | 15.1 | % | 16.8 | % | ||||||||||||||||||||||||
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Comparison of the Three Months Ended October 2, 2010 to the Three Months Ended October 3, 2009
Net sales. Net sales of $124.0 million in the third quarter of 2010 represented an increase of 0.6
percent compared to $123.2 million in the third quarter of 2009. The strengthening of the U.S.
dollar in the third quarter of 2010, as compared to the third quarter of 2009, reduced revenue
approximately $1.4 million. Growth in our business continues to be driven by the success of
innovative products, including recent product launches. The growth in sales was offset by a
softening of procedure volume in the U.S. and a decline in the sale of Greenlight
fibers due to the delay in the launch of the MoXy Liquid Cooled Fiber until the last week of the
third quarter.
Mens health products. Net sales of mens health products increased 0.9 percent to $55.2 million
in the third quarter of 2010 compared to $54.7 million in the third quarter of 2009. This includes
the negative impact of foreign currency exchange rates of approximately $0.8 million. Overall
growth was led by the AMS 800® Artificial Urinary Sphincter in our continence product
line, while we experienced flat sales in our erectile restoration product line.
BPH therapy products. Net sales from BPH therapy products decreased by 2.9 percent to $26.9
million in the third quarter of 2010 compared to $27.7 million in the same period in 2009. This
includes the negative impact of foreign currency exchange rates of approximately $0.3 million. We
experienced strong sales of our Greenlight consoles, which was offset by a decrease in
the sale of Greenlight HPS® fibers during the quarter in anticipation of the launch of our new
MoXy Liquid Cooled Fibers in the last week of the third quarter.
Womens health products. Net sales of our womens health products increased 6.0 percent to $41.2
million in the third quarter of 2010 compared to $38.8 million in the third quarter of 2009. This
includes the negative impact of foreign currency exchange rates of approximately $0.3 million. We
experienced strong growth in our pelvic floor repair product line driven by both the
Elevate® posterior and Elevate® anterior products. Sales from our female
continence product line were relatively consistent with the same period last year, with growth from
the recent launch of our MiniArc® Precise single incision sling, partially offset by a decline in
procedure volume, particularly in the United States.
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 $0.8 million in the three months ended October 2, 2010 resulted from the product
supply agreement that is part of the divestiture agreement. We estimate that the product supply
agreement will result in approximately $0.3 million in sales during the fourth quarter of 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 2.1 percent to
$92.1 million in the third quarter of 2010 compared to $90.2 million in the third quarter of 2009.
International net sales increased 0.5 percent to $31.1 million in the third quarter of 2010
compared to $31.0 million in the third quarter of 2009, which includes the negative impact of
approximately $1.4 million in foreign currency exchange rate changes, caused by the strengthening
of the U.S. dollar. International sales represented 25.1 percent of our total net sales in both the
third quarter of 2010 and 2009.
Gross profit. Gross profit decreased slightly to 82.3 percent of sales in the third quarter of
2010, from 82.7 percent in the third quarter of 2009, mainly due to the impact of foreign currency
rate fluctuations on revenue and product mix, with higher capital sales compared to the same period
the previous year; capital sales have a lower gross profit than our other products. Future gross
profit will continue to depend upon product and geographic mix, production levels, labor costs, raw
material costs and the impact of foreign currency rate fluctuations.
Marketing and selling. Marketing and selling expenses as a percentage of sales decreased slightly
to 34.4 percent in the third quarter of 2010 compared to 34.5 percent in the comparable prior year
period. We will continue to make investments in existing and new geographies in order to drive
revenue growth and geographic market 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 revenue increased to 10.2 percent in
the third quarter of 2010 compared to 10.1 percent in the same period of 2009. These ratios are
consistent with our long-term goal for spending on research and development of approximately ten
percent of sales.
General and administrative. General and administrative expenses increased to $10.9 million in the
third quarter of 2010 compared to $10.5 million in the third quarter of 2009 and as a percentage of
sales were 8.7 and 8.5 percent in the third quarter of 2010 and third quarter of 2009,
respectively. Our objective remains to leverage general and administrative expense as a percentage
of sales.
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Amortization of intangibles. Amortization of intangibles as a percentage of sales decreased to 2.5
percent in the third quarter of 2010 from 2.7 percent in the third quarter of 2009. The three month
period ended October 2, 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. Royalty income in
the third quarter of 2010 was $0.2 million, compared to approximately $1.0 million in the same
period last year, due to the termination of a royalty agreement in connection with 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 $1.3 million in the third 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. During the three months ended October 2, 2010 and October
3, 2009, we used interest rate swap contracts designated as cash flow hedges of the floating rate
interest payments for a portion of our borrowings under the Credit Facility. These contracts
matured during the third quarter of 2010, and we had no outstanding interest rate swap contracts as
of October 2, 2010. Including the impact of interest rate swap contracts, our weighted average
interest rate on the credit facility was 2.6 percent and 4.4 percent for the three months ended
October 2, 2010 and October 3, 2009, respectively. Average borrowings during the third quarter of
2010 on the Credit Facility were $39.3 million, compared to $186.5 million in the third quarter of
2009. Average borrowings on our 2036 Notes were $62.0 million and $276.3 million for the three
months ended October 2, 2010 and October 3, 2009, respectively. Average borrowings on our 2041
Notes, which we issued in late September of 2009 in exchange for 2036 Notes, was $250.0 million for
the three months ended October 2, 2010.
Amortization of financing costs. Amortization of financing costs in the third quarter of 2010 and
in the third quarter of 2009 was $3.5 million and $4.4 million, respectively, and was comprised of
the incremental non-cash interest cost of our convertible notes and amortization of the costs
associated with the issuance of the Credit Facility and convertible notes. The lower amortization
in the third quarter of 2010 was due to the impact of debt prepayments made on our Credit Facility
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 extinguishment of debt. On September 21, 2009, we exchanged $250.0 million in principal of
the 2036 Notes for $250.0 million in principal of 2041 Notes. We accounted for this transaction as
an extinguishment of debt in accordance with U.S. GAAP, and we recorded a pre-tax gain on
extinguishment of $5.6 million in the third quarter of 2009.
Gain on sale of non-strategic assets. During the third quarter of 2009, we sold our Ovion
technology for $23.6 million. The consideration, less the carrying value of the intangible asset
and related disposal costs, resulted in a pre-tax gain of $17.4 million. The transaction included
termination of a royalty agreement, and as a result, royalty income was reduced by approximately
$0.5 million per quarter beginning in the fourth quarter of 2009. In addition, as a result of this
asset sale agreement, and separate agreements completed with third parties, we eliminated all
existing and potential obligations and liabilities under previous agreements associated with the
Ovion technology.
Other income (expense). Other income totaled $1.9 million in the third quarter of 2010 compared to
other (expense) of $0.3 million in 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 the fluctuations
in foreign currencies against the U.S. dollar on foreign denominated inter-company receivables and
payables, along with an increase in other income due to a reduction in a contingent liability
related to a former entity that we disposed of in early 2007.
Provision for income taxes. Our effective income tax rate was 33.9 percent and 40.1 percent for
the third quarter of 2010 and third quarter of 2009, respectively. The decrease in the third
quarter of 2010 effective tax rate is due to the release of a reserve for uncertain tax benefits
related to the closure of a statute of limitations for fiscal year 2006. In addition, we incurred
non-deductible expenses related to the sale of our Ovion technology in the third quarter of 2009
that increased our effective income tax rate that quarter.
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Comparison of the Nine Months Ended October 2, 2010 to the Nine Months Ended October 3, 2009
Net sales. Net sales of $395.3 million in the first nine months of 2010 represented an increase of
5.9 percent compared to the first nine months of 2009. The weakening of the U.S. dollar in the
first nine months of 2010, as compared to the same period in 2009, increased revenue approximately
$1.4 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 the new
GreenLight XPS console launched late in the second quarter of 2010.
Mens health products. Net sales of mens health products increased 5.8 percent to $181.0 million
in the first nine months of 2010 compared to $171.1 million in the first nine months of 2009. This
includes the positive impact of foreign currency exchange rates of approximately $0.7 million. 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 1.0 percent to $82.0 million
in the first nine months of 2010 compared to $81.2 million in the same period in 2009. We
experienced strong sales of the GreenLight XPS console, which was launched
in the second quarter of 2010, offset by a decrease in sales of GreenLight fibers
during the third quarter of 2010 largely attributable to the anticipation of the launch of our new
MoXy Liquid Cooled Fiber in the last week of the third quarter of 2010.
Womens health products. Net sales of our womens health products increased 13.0 percent to $128.4
million in the first nine months of 2010 compared to $113.6 million in the first nine months of
2010. This includes the positive impact of foreign currency exchange rates of approximately $0.6
million. We experienced strong growth in our pelvic floor repair product line driven both by
Elevate® anterior and posterior. In addition, the female continence product line contributed
modest sales growth in the United States, which was largely 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 nine month period ended October 2, 2010 includes approximately six weeks of
end-customer net sales of $1.2 million from that product in addition to sales of approximately $2.7
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 $0.3 million in
sales during the fourth quarter of 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 7.7 percent to
$284.2 million in the first nine months of 2010 compared to $263.9 million in the first nine 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 5.2 percent to $107.2 million in the first nine months of 2010 compared to $101.9
million in the first nine months of 2009. International growth was led by our mens health
products, fueled by strong growth coming from AMS 800® Artificial Urinary Sphincter in
our male continence product line.
Gross profit. Gross profit improved to 83.4 percent of sales in the first nine months of 2010 from
82.3 percent in the first nine 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 the impact of
foreign currency rate fluctuations.
Marketing and selling. Marketing and selling expenses as a percentage of sales were consistent at
34.6 percent in the first nine months of 2010 compared to 34.5 percent in the first nine months of
2009. We have made 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 first nine months of 2010 compared to 10.3 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 increased to $35.3 million in the
first nine months of 2010 compared to $32.9 million in the first nine months of 2009. The increase
is primarily due to increased
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salaries and legal expenses. General and administrative expenses as a percentage of sales were 8.9
and 8.8 percent during the nine months ending October 2, 2010 and October 3, 2009, respectively.
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 2.3 percent in the first nine
months of 2010 compared to 2.7 percent in the first nine months of 2009. The nine month period
ended October 2, 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. Royalty income in
the first nine months of 2010 decreased approximately $2.3 million compared to the first nine
months of 2009 due to the termination of a royalty agreement in connection with 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 $4.2 million in the first nine 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. During the nine months ended October 2, 2010 and October
3, 2009, we used interest rate swap contracts designated as cash flow hedges of the floating rate
interest payments for a portion of our borrowings under the Credit Facility. These contracts
matured during the third quarter of 2010, and we had no outstanding interest rate swap contracts as
of October 2, 2010. Including the impact of interest rate swap contracts, our weighted average
interest rate on the credit facility was 3.1 percent and 4.7 percent for the first nine months of
2010 and the first nine months of 2009, respectively. Average borrowings during the first nine
months of 2010 on the Credit Facility were $69.7 million, compared to $209.6 million in the first
nine months of 2009. Average borrowings on our 2036 Notes were $62.0 million and $306.8 million for
the nine months ended October 2, 2010 and October 3, 2009, respectively. Average borrowings on our
2041 Notes, which we issued in late September of 2009 in exchange for 2036 Notes, was $250.0
million for the nine months ended October 2, 2010.
Amortization of financing costs. Amortization of financing costs in the first nine months of 2010
and in the first nine months of 2009 was $10.5 million and $12.4 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 our debt. The lower amortization in the
first nine months of 2010 was due to the impact of prepayments made on our Credit Facility during
2009 and 2010, which resulted in a decrease in average borrowings. We recognize a pro rata portion
of the related debt discount and debt issuance costs when we retire debt.
Gain on extinguishment of debt. During the first nine months of 2009, we repurchased 2036 Notes
with a principal amount of $27.3 million and we recorded a pre-tax gain on extinguishment of debt
of $4.6 million. In addition, on September 21, 2009, we exchanged $250.0 million in principal of
the 2036 Notes for $250.0 million in principal of the 2041 Notes. We accounted for this transaction
as an extinguishment of debt in accordance with U.S. GAAP, and we recorded a pre-tax gain on
extinguishment of $5.6 million in the third quarter of 2009.
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 (expense). Other income increased by $0.8 million in the first nine 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, along with
an increase in other income due to a reduction of a contingent liability related to a former entity
that we disposed of in early 2007.
Provision for income taxes. Our effective income tax rate was 38.2 percent and 38.1 percent for
the nine months ended October 2, 2010 and October 3, 2009, respectively. Our effective tax rate for
the nine months ended October 2, 2010 included a non-deductible goodwill write-off in the first
quarter of 2010 related to the sale of our Her Option® product line partially offset by the release
of reserves for certain matters related to the closure of a statute
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of limitations for fiscal year 2006. Our effective tax rate for the nine months ended October 3,
2009 was also elevated due to the non-deductible expenses incurred in connection with the sale of
the Ovion technology in the third quarter of 2009.
Liquidity and Capital Resources
Cash and cash equivalents was $17.8 million as of October 2, 2010, compared to $30.7 million as of
January 2, 2010. In addition, short-term investments were $43.9 million as of October 2, 2010,
compared to $19.9 million as of January 2, 2010. Short-term investments consist mostly of highly
liquid money market funds and commercial paper that have not experienced any negative impact on
liquidity or a decline in principal value. Overall, cash, cash equivalents and short-term
investments increased $11.2 million as of October 2, 2010 compared to January 2, 2010.
Cash flows from operating activities. Cash provided by operating activities was $74.2 million in
the first nine months of 2010, versus $97.2 million provided during the comparable period of 2009,
which is a decrease of $23.0 million. The main driver of the decrease is related to changes in
current liabilities, where $9.9 million of cash was used during the first nine months of 2010 to
reduce accounts payable, income taxes payable, accrued compensation and other accrued expenses;
compared to cash provided by changes in current liabilities of $9.5 million during the comparable
period of 2009. This year over year change results in a decrease of $19.4 million in cash provided
related to changes in current liabilities.
Cash flows from investing activities. Cash used in investing activities was $12.3 million during
the first nine months of 2010, compared to cash provided by investing activities of $21.6 million
in the first nine months of 2009. Net cash provided by the sale of the Her Option® product line was
$19.0 million and the proceeds were used to pay down our debt. We also increased our purchases of
short-term investments during the first nine months of 2010 compared to the comparable period of
2009 resulting in a balance in short-term investments of $43.9 million at the end of the third
quarter of 2010 compared to $19.9 million at the end of the third quarter of 2009.
Cash flows from financing activities. Cash used for financing activities was $74.2 million during
the first nine months of 2010, versus $100.1 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 $97.0 million and $78.2 million for the first nine
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 $21.2 million and $6.4 million during the first nine
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.
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 nine-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
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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 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:
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If the average | ||||||||||||||||||||||||
market price | The number of common share equivalents potentially included in the computation of | |||||||||||||||||||||||
of our stock is: | of diluted EPS would be (1): | Percent Dilution (2) | ||||||||||||||||||||||
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 | 0.5 | % | 2.3 | % | 2.8 | % | ||||||||||||
$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: |
( | Principal Amount
|
x | Market price of stock |
| Principal Amount |
) | = | Potentially dilutive shares included in EPS |
|||||
Market price of stock |
(2) | The percent dilution is based on 76,347,633 outstanding shares as of October 2, 2010. |
For the three and nine months ended October 2, 2010, our Convertible Notes had a dilutive
effect on our net income per share calculation and 1,156,776 and 746,191 shares were included in
the calculation of diluted earnings per share, for the three and nine months periods, respectively.
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 October 2, 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) | 1.85:1.00 | ||||||
Senior Leverage Ratio (2) |
2.00:1.00 (maximum) | 0.15:1.00 | ||||||
Interest Coverage Ratio (3) |
4.00:1.00 (minimum) | 11.94:1.00 | ||||||
Fixed Charge Coverage Ratio (4) |
1.50:1.00 (minimum) | 2.21:1.00 | ||||||
Maximum Capital Expenditures (5) |
$20.0 million | $5.8 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, D.C. 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. As of October 2, 2010 we have $28.3 million outstanding of
term loans outstanding under the Credit Facility. Based on a sensitivity analysis, as of October 2,
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 $0.3 million over the next 12 months.
As of October 2, 2010, we had no interest rate swap contracts outstanding to mitigate this risk,
due to the relatively small exposure remaining on these term loans.
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, Australian dollars,
and Brazilian real. 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 nine month periods ended October 2, 2010, revenues from sales to customers
outside the United States were 25.1 percent and 27.1 percent of total consolidated revenues.
International accounts receivable was 43.4 percent, inventory was 6.3 percent, cash and short-term
investments was 24.2 percent, and accounts payable was 27.9 percent of total consolidated accounts
for each of these items as of October 2, 2010. The reported results of our operations are
influenced by the 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 $1.7 million during the three and nine months ended
October 2, 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 October 2, 2010, our net investment in foreign subsidiaries translated into
dollars using the period end exchange rate was $35.1 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 $3.5 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, 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
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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.
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 October 2, 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 third quarter ended October 2, 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
As previously disclosed in the Quarterly Report on Form 10-Q for the period ended July 3, 2010, we
were advised in July 2010 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 AMS, 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 | ||
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
|
Financial statements from the Quarterly Report on Form 10-Q of the Company for the quarter ended October 2, 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 |
* | Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are furnished and should not be deemed filed under the Securities Exchange Act of 1934. |
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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 |
||||||||
November 8, 2010
|
By | /s/ Anthony P. Bihl, III
|
||||||
President and Chief Executive Officer | ||||||||
(Principal Executive Officer) | ||||||||
November 8, 2010
|
By | /s/ 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 October 2, 2010
Item No. |
Item | Method of Filing | ||
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
|
Financial statements from the Quarterly Report on Form 10-Q of the Company for the quarter ended October 2, 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 |
* | Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are furnished and should not be deemed filed under the Securities Exchange Act of 1934. |
44