THERAGENICS CORP - FORM 10-Q

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - THERAGENICS CORP	Financial_Report.xls
EX-31.1 - EXHIBIT 31.1 - THERAGENICS CORP	ex31-1.htm
EX-32.2 - EXHIBIT 32.2 - THERAGENICS CORP	ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - THERAGENICS CORP	ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - THERAGENICS CORP	ex31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013

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 No. 001-14339

THERAGENICS CORPORATION®

(Exact name of registrant as specified in its charter)

Delaware		58-1528626
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

5203 Bristol Industrial Way
Buford, Georgia		30518
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (770) 271-0233

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES x NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 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).

YES x NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or 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 o

Accelerated Filer o

Non Accelerated Filer o

Smaller Reporting Company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES o NO x

As of May 6, 2013 the number of shares of $0.01 par value common stock outstanding was 31,061,883.

THERAGENICS CORPORATION

TABLE OF CONTENTS

		Page No.

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Condensed Consolidated Statements of Comprehensive Earnings (Loss) for the quarters ended March 31, 2013 and 2012		3

Condensed Consolidated Balance Sheets – March 31, 2013 and December 31, 2012		4

Condensed Consolidated Statements of Cash Flows for the quarters ended March 31, 2013 and 2012		5

Notes to Condensed Consolidated Financial Statements		6

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		14

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		23

ITEM 4. CONTROLS AND PROCEDURES		23

PART II. OTHER INFORMATION		24

ITEM 1. LEGAL PROCEEDINGS		24

ITEM 1A. RISK FACTORS		24

ITEM 6. EXHIBITS		25

SIGNATURES		26

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

THERAGENICS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS)

(UNAUDITED)

(Amounts in thousands, except per share data)

	Quarter Ended March 31,
	2013			2012
REVENUE
Product sales	$	19,212		$	20,979
License and fee income		661			604
		19,873			21,583
COST OF SALES		12,848			12,974

GROSS PROFIT		7,025			8,609

OPERATING EXPENSES
Selling, general and administrative		5,678			5,901
Amortization of purchased intangibles		861			855
Research and development		280			277
Medical device excise tax		193			—
Gain on disposal of assets		(4	)		—
		7,008			7,033

EARNINGS FROM OPERATIONS		17			1,576

OTHER INCOME (EXPENSE)
Interest income		27			38
Interest expense		(136	)		(164	)
Other		—			1
		(109	)		(125	)

EARNINGS (LOSS) BEFORE INCOME TAXES		(92	)		1,451

Income tax expense (benefit)		(58	)		517

NET EARNINGS (LOSS)	$	(34	)	$	934

EARNINGS PER SHARE:
Basic	$	0.00		$	0.03
Diluted	$	0.00		$	0.03

WEIGHTED AVERAGE SHARES
Basic		29,065			33,533
Diluted		29,065			33,941

COMPREHENSIVE EARNINGS (LOSS)
Net earnings (loss)	$	(34	)	$	934
Other comprehensive earnings (loss), net of taxes
Reclassification adjustment for gain included in net earnings (loss)		—			(1	)
Unrealized gains on securities arising during the period		—			57
Total other comprehensive earnings		—			56
Total comprehensive earnings (loss)	$	(34	)	$	990

The accompanying notes are an integral part of these statements.

THERAGENICS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except per share data)

	March 31, 2013 (Unaudited)		December 31, 2012
ASSETS CURRENT ASSETS
Cash and cash equivalents	$	15,767	$	23,589
Marketable securities		18,327		11,319
Trade accounts receivable, less allowance of $571 in 2013 and $592 in 2012		10,264		8,946
Inventories		15,588		15,382
Deferred income tax asset		1,006		1,008
Refundable income taxes		—		290
Prepaid expenses and other current assets		1,067		1,014
TOTAL CURRENT ASSETS		62,019		61,548

Property and equipment, net		31,846		32,370
Intangible assets, net		10,125		11,020
Deferred income tax asset		1,067		717
Other assets		70		70

TOTAL ASSETS	$	105,127	$	105,725


LIABILITIES & SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES
Accounts payable	$	1,895		$	1,622
Accrued salaries, wages and payroll taxes		1,826			2,929
Income taxes payable		23			—
Other current liabilities		1,014			1,020
TOTAL CURRENT LIABILITIES		4,758			5,571

Long-term borrowings		22,000			22,000
Asset retirement obligations		887			871
Other long-term liabilities		292			356
TOTAL LIABILITIES		27,937			28,798

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS’ EQUITY
Common stock, authorized 100,000 shares of $0.01 par value, issued 35,812 in 2013 and 34,829 in 2012		358			348
Additional paid-in capital		75,995			75,708
Retained earnings		11,198			11,232
Accumulated other comprehensive gain		21			21
Common stock in treasury, at cost – 4,762 shares		(10,382	)		(10,382	)
TOTAL SHAREHOLDERS’ EQUITY		77,190			76,927

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	105,127		$	105,725

The accompanying notes are an integral part of these statements.

THERAGENICS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(Amounts in thousands)

	Quarter Ended March 31,
	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss)	$	(34	)	$	934
Adjustments to reconcile net earnings (loss) to net cash provided (used) by operating activities:
Depreciation and amortization		2,004			1,983
Deferred income taxes		(348	)		(383	)
Provision for allowances		272			21
Share-based compensation		280			196
Change in fair value of interest rate swaps		—			(28	)
Decommissioning retirement liability		16			16
Gain on sale of marketable securities		—			(1	)
Gain on sale of equipment		(4	)		—
Changes in assets and liabilities:
Trade accounts receivable		(1,344	)		(246	)
Inventories		(452	)		(1,134	)
Prepaid expenses and other current assets		(53	)		26
Accounts payable		273			583
Accrued salaries, wages and payroll taxes		(1,103	)		(1,047	)
Refundable income taxes net of income taxes payable		288			914
Other current liabilities		(8	)		319
Other		(64	)		230
Net cash provided (used) by operating activities		(277	)		2,383

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases and construction of property and equipment		(527	)		(329	)
Cash paid for acquisition of Core Oncology customer base		—			(4,086	)
Proceeds from sale of property and equipment		8			—
Purchases of marketable securities		(9,008	)		(1,708	)
Maturities of marketable securities		1,965			1,634
Proceeds from sales of marketable securities		—			189
Net cash used by investing activities		(7,562	)		(4,300	)

CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of borrowings		—			(834	)
Employee stock purchase plan		17			17
Net cash provided (used) by financing activities		17			(817	)

NET DECREASE IN CASH AND CASH EQUIVALENTS	$	(7,822	)	$	(2,734	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		23,589			29,553
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	15,767		$	26,819

SUPPLEMENTARY CASH FLOW DISCLOSURE:
Interest paid	$	108		$	182
Income taxes paid (received), net	$	2		$	(15	)

NON-CASH INVESTING AND FINANCING ACTIVITIES:
Assets acquired from the Core transaction	$	—		$	5,241
Liability for property and equipment acquired	$	27		$	39

The accompanying notes are an integral part of these statements.

THERAGENICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2013

(Unaudited)

NOTE A - BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS

The accompanying unaudited interim condensed consolidated financial statements reflect the consolidated operations of Theragenics Corporation and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated. The terms “Company”, “we”, “us”, or “our” mean Theragenics Corporation and all entities included in our consolidated financial statements. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) and, therefore, do not include all information and disclosures normally included in our annual consolidated financial statements.

To prepare financial statements in accordance with GAAP, we must make certain estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and the related disclosure of contingent assets and liabilities at the date of the financial statements. Actual amounts may differ from these estimated amounts. In our opinion, these interim financial statements include all adjustments (including normal recurring accruals) considered necessary for a fair presentation.

Our consolidated results of operations for the interim periods presented herein are not necessarily indicative of the results that may be expected for a full year. These interim financial statements and notes should be read in conjunction with our audited consolidated financial statements and notes for the year ended December 31, 2012 included in the Form 10-K Annual Report that we filed with the SEC.

We are a medical device company serving the surgical products and cancer treatment markets, operating in two business segments. Our surgical products business consists of wound closure, vascular access, and specialty needle products. Wound closure includes sutures, needles, and other surgical products. Vascular access includes introducers, guidewires, and related products. Specialty needles include coaxial, biopsy, spinal and disposable veress needles, access trocars, implanters, introducer products and other needle based products. Our surgical products segment serves a number of markets and applications, including among other areas, interventional cardiology, interventional radiology, vascular surgery, orthopedics, plastic surgery, dental surgery, urology, veterinary medicine, pain management, endoscopy, and spinal surgery. Our brachytherapy business manufactures, custom loads, markets and distributes “seeds” used primarily in the minimally invasive treatment of localized prostate cancer. Our brachytherapy product line includes our palladium-103 based TheraSeed® device and our iodine-125 based AgX100® device.

NOTE B – ACQUISITION OF CORE ONCOLOGY’S PROSTATE BRACHYTHERAPY CUSTOMER BASE

On February 17, 2012, we acquired Core Oncology’s prostate brachytherapy customer base. This transaction has substantially increased our share of the iodine-125 segment of the prostate brachytherapy market. In addition to the customer base, we also acquired certain packaging technologies, equipment related to the packaging technologies, and certain existing component inventory. We did not acquire Core’s facilities, manufacturing equipment or processes, or Core’s employees.

The total purchase price for the acquired assets is equal to one times the actual revenue generated from the acquired customers over the twelve-month period from September 2012 to August 2013 (the “Earn-Out Period”), in excess of a $2.5 million Threshold Amount. We paid $5.3 million (including transaction costs) through March 31, 2013 for this transaction, primarily consisting of prepayment of a portion of the earn-out at closing in February 2012 plus subsequent earn-out payments. Quarterly earn-out payments based on actual revenue recognized from the acquired customers are due through August 2013; however, based on our current estimates, we do not expect to make any additional earn-out payments. No such earn-out payments were made in the first quarter of 2013.

THERAGENICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2013

(Unaudited)

NOTE C – FINANCIAL INSTRUMENTS AND FAIR VALUE

Financial Instruments

We are exposed to certain risks relating to our ongoing business operations. Prior to June 1, 2012 when our interest rate swaps expired, we managed our interest rate risk using interest rate swaps associated with outstanding borrowings under our credit agreement since our interest rates are floating rates based on LIBOR. Our interest rate swaps were intended to convert a portion of our floating rate debt to a fixed rate. We did not use interest rate swaps for speculative or trading purposes. Subsequent to June 1, 2012 we have held no interest rate swaps or other derivative financial instruments. Our interest rate swaps were recorded as either assets or liabilities at fair value on our consolidated balance sheets. We entered into interest rate swaps that were designed to hedge our interest rate risk but were not designated as “hedging instruments”, as defined under guidance issued by the Financial Accounting Standards Board (“FASB”). Changes in the fair value of these instruments were recognized as adjustments to interest expense in our consolidated statements of comprehensive earnings (loss).

A roll forward of the notional value of our interest rate swaps is as follows (in thousands):

	Quarter Ended March 31,
	2013		2012
Balance, beginning of the period	$	—	$	7,667
New contracts		—		—
Matured contracts		—		(834	)
Balance, end of the period	$	—	$	6,833

The following table includes information about gains and losses recognized on our interest rate swaps not designated as hedging instruments in our condensed consolidated statements of comprehensive earnings (loss) (in thousands):

	Quarter Ended March 31,					Location of Loss (Gain) Recognized in Income
	2013		2012			Location of Loss (Gain) Recognized in Income
Periodic settlements	$	—	$	31		Interest expense
Change in fair value	$	—	$	(28	)	Interest expense

Financial Instruments Measured at Fair Value on a Recurring Basis

We measure fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. In accordance with guidance issued by the FASB, we use a three-level fair value hierarchy to prioritize the inputs used to measure fair value. The hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

●

Level 1 – Quoted prices in active markets for identical assets or liabilities.

●

Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

●

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

THERAGENICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2013

(Unaudited)

We had the following assets measured at fair value on a recurring basis subject to disclosure requirements (in thousands):

	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
March 31, 2013
Money market funds	$	477	$	—	$	—	$	477
Marketable securities		18,327		—		—		18,327
Total assets	$	18,804	$	—	$	—	$	18,804

December 31, 2012
Money market funds	$	477	$	—	$	—	$	477
Marketable securities		11,319		—		—		11,319
Total assets	$	11,796	$	—	$	—	$	11,796

Financial Instruments Not Measured at Fair Value

Our financial instruments not measured at fair value consist of cash and cash equivalents, trade accounts receivable, and accounts payable, the carrying value of each approximating fair value due to the nature of these accounts. Our financial instruments not measured at fair value also include borrowings under our credit agreement. We estimate the fair value of outstanding borrowings under our credit agreement based on the current market rates applicable to borrowers with credit profiles similar to us. We estimate that the carrying value of our borrowings approximates fair value at March 31, 2013.

Other Fair Value Measurements

There were no nonfinancial assets or nonfinancial liabilities measured at fair value at March 31, 2013 or December 31, 2012.

NOTE D - INVENTORIES

Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (“FIFO”) method. Market is replacement cost or net realizable value. We estimate reserves for inventory obsolescence based on our judgment of future realization. Inventories were comprised of the following (in thousands):

	March 31, 2013			December 31, 2012
Raw materials	$	6,901		$	6,806
Work in process		4,188			4,024
Finished goods		4,567			4,344
Spare parts and supplies		926			956
		16,582			16,130
Allowance for obsolete inventory		(994	)		(748	)
Inventories, net	$	15,588		$	15,382

THERAGENICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2013

(Unaudited)

NOTE E – INCOME TAXES

Our effective income tax rates include federal and state income taxes. For the quarter ended March 31, 2012 our effective tax rate was 36%. For the quarter ended March 31, 2013, we recorded a tax benefit at a rate of 63%. The effective tax rate for the quarter ended March 31, 2013 was impacted by the American Taxpayer Relief Act of 2012, which was signed into law on January 2, 2013 and retroactively reinstated the research tax credit. Although the reinstatement of this tax credit is retroactive to January 1, 2012, the enactment of this legislation in 2013 precluded us from recording the benefit in 2012. As a result, our income tax provision was reduced by approximately $32,000 in the first quarter of 2013 to recognize the 2012 benefit of this tax credit that would have otherwise been recorded in 2012.

NOTE F - SHARE-BASED COMPENSATION

Restricted Stock

A summary of activity in non-vested restricted stock awards during the quarter ended March 31, 2013 follows (shares in thousands):

	Shares		Weighted average grant date fair value
Non-vested at December 31, 2012	1,126		$	1.57
Granted	970			1.46
Vested	(285	)		1.51
Forfeited	—			—
Non-vested at March 31, 2013	1,811		$	1.52

During the quarter ended March 31, 2013, we granted 970,300 shares of restricted stock (with a grant date fair value of $1.46 per share based on the market price of the underlying common stock at the grant date) to executive officers in connection with long-term incentive compensation programs. The restricted stock vests ratably over four years.

Non-cash compensation expense related to restricted stock totaled approximately $242,000 and $122,000 for the quarters ended March 31, 2013 and 2012, respectively. As of March 31, 2013, there was approximately $2,054,000 of unrecognized compensation cost related to the restricted shares, which is expected to be recognized over a weighted average period of 2.3 years. The total fair value of restricted stock vested during the quarters ended March 31, 2013 and 2012 was approximately $441,000 and $232,000, respectively.

NOTE G - DISTRIBUTION AGREEMENTS AND MAJOR CUSTOMERS

Brachytherapy Seed Distribution Agreements

Our brachytherapy seed business sells our TheraSeed® and AgX100® devices directly to healthcare providers and to third-party distributors. Under our TheraSeed® third-party distribution agreements, we are the exclusive palladium-103 seed supplier for the treatment of prostate cancer for each distributor, and each distributor has the non-exclusive right to sell TheraSeed® in the U.S. and Canada. Certain agreements also provide distributors with rights to distribute TheraSeed® for the treatment of solid localized tumors other than in the prostate and with rights to distribute to certain locations outside of North America. Such applications (non-prostate and outside of North America) have not been material. Our principal non-exclusive distribution agreement is with C. R. Bard (“Bard”). Our agreement with Bard (the “Bard Agreement”) provides for automatic one year extensions of the term, unless either party gives notice of its intent not to renew at least twelve months prior to the end of the current term. The current term expires December 31, 2014 and will be automatically extended for one additional year unless either party gives notice of its intent not to extend by December 31, 2013.

THERAGENICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2013

(Unaudited)

Major Customers

Sales to Bard under the Bard Agreement represented approximately 23% and 29% of total brachytherapy seed segment revenue for the quarters ended March 31, 2013 and 2012, respectively. No other single distributor represented 10% or more of brachytherapy seed segment revenues in the first quarter of 2013 or 2012.

Accounts receivable from Bard represented approximately18% of brachytherapy accounts receivable at March 31, 2013. At December 31, 2012, accounts receivable from Bard under the Bard Agreement represented approximately 16% of brachytherapy accounts receivable.

One surgical products customer represented 10% of surgical products accounts receivable.

NOTE H - SEGMENT REPORTING

We are a medical device company serving the surgical product and cancer treatment markets, operating in two business segments. Our surgical products business consists of wound closure, vascular access, and specialty needle products. Our brachytherapy seed business manufactures, custom loads, markets, and distributes “seeds” used primarily in the minimally invasive treatment of localized prostate cancer. Our brachytherapy product line includes our palladium-103 TheraSeed® device and our iodine-125 AgX100® device.

The following tables provide certain information for these segments (in thousands):

	Quarter Ended March 31,
	2013			2012
Revenues
Surgical products	$	14,483		$	15,494
Brachytherapy seed		5,719			6,320
Intersegment eliminations		(329	)		(231	)
	$	19,873		$	21,583
Earnings (loss) from operations
Surgical products	$	(335	)	$	199
Brachytherapy seed		399			1,380
Intersegment eliminations		(47	)		(3	)
	$	17		$	1,576
Capital expenditures
Surgical products	$	412		$	272
Brachytherapy seed		115			57
	$	527		$	329
Depreciation and amortization
Surgical products	$	1,236		$	1,229
Brachytherapy seed		768			754
	$	2,004		$	1,983

We evaluate business segment performance based on segment revenue and segment earnings (loss) from operations. Earnings (loss) from operations by segment do not include interest expense, interest income, other income and expense, or provisions for income taxes. Intersegment eliminations are for surgical products segment sales transactions. Corporate expenses are allocated based upon the relative revenue for each segment.

THERAGENICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2013

(Unaudited)

Supplemental information related to significant assets follows (in thousands):

	March 31, 2013			December 31, 2012
Identifiable assets
Surgical products	$	69,965		$	70,361
Brachytherapy seed		61,577			62,474
Corporate investment in subsidiaries		111,439			111,439
Intersegment eliminations		(137,854	)		(138,549	)
	$	105,127		$	105,725
Intangible assets
Surgical products	$	5,958		$	6,644
Brachytherapy seed		4,167			4,376
	$	10,125		$	11,020

Information regarding revenue by geographic regions follows (in thousands):

	Quarter Ended March 31,
	2013		2012
Product sales
United States	$	16,012	$	18,948
Europe		2,203		1,509
Other foreign countries		997		522
		19,212		20,979

License and fee income
United States		268		247
Canada		393		357
		661		604
	$	19,873	$	21,583

Foreign sales are attributed to countries based on the location of the customer. The license fees attributed to Canada are with Nordion, a Canadian based company, for the license of our TheraSphere® product. Less than 10% of all foreign product sales are related to the brachytherapy segment. Substantially all of our long-lived assets are located within the United States.

THERAGENICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2013

(Unaudited)

NOTE I – EARNINGS PER SHARE

Basic earnings per share represents net earnings divided by the weighted average shares outstanding. Diluted earnings per share represents net earnings divided by weighted average shares outstanding adjusted for the incremental dilution of outstanding stock options and awards. A reconciliation of weighted average common shares outstanding to weighted average common shares outstanding assuming dilution for the periods presented follows (in thousands, except per share data):

	Quarter Ended March 31,
	2013			2012

Net earnings (loss)	$	(34	)	$	934

Weighted average common shares outstanding		29,065			33,533
Incremental common shares issuable under stock options and awards		—			408
Weighted average common shares outstanding assuming dilution		29,065			33,941

Earnings per share
Basic	$	0.00		$	0.03
Diluted	$	0.00		$	0.03

For the quarters ended March 31, 2013 and 2012, approximately 3,135,000 and 1,077,000 stock options and awards, respectively, were not included in the computation of diluted earnings per share because their effect is antidilutive.

NOTE J – CONTINGENCIES

Litigation and claims

From time to time we may be a party to claims that arise in the ordinary course of business, none of which, in our view, is expected to have a material adverse effect on our consolidated financial position or results of operations.

NOTE K – RESTRUCTURING

On May 8, 2013, our Board of Directors approved a restructuring of our vascular access manufacturing operations. This primarily includes our introducer and guidewire products produced under our Galt brand and produced for our OEM and distributor customers. We intend to retain the Galt brand and the full line of Galt labeled products, private label products, and bulk non-sterile products currently being produced at our Garland, Texas facility.

THERAGENICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2013

(Unaudited)

This restructuring plan is expected to be implemented over the 20 month period through December 2014. Expected expenses and savings are as follows:

●

Incremental expenses of $3.7 to $4.1 million, consisting primarily of severance related expenses and project implementation costs. The operations at our Garland, Texas plant will be transitioned out over the 20 month period. Accordingly, these incremental expenses related to the restructuring will be recorded over the 20 month restructuring period. No significant non-cash charges are expected to be recorded related to this restructuring.

●

Capital expenditures of approximately $2.5 to $2.7 million. We will own this new capital equipment located in Latin America at our independent suppliers’ facilities. We will also transfer our existing equipment from our Garland, Texas facility to our independent suppliers and to our facility in North Attleboro, Massachusetts.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Theragenics Corporation is a medical device company serving the surgical products and cancer treatment markets, operating in two business segments. The terms “Company”, “we”, “us”, or “our” mean Theragenics Corporation and all entities included in our consolidated financial statements.

Our surgical products business consists of wound closure, vascular access, and specialty needle products. Wound closure includes sutures, needles and other surgical products. Vascular access includes introducers, guidewires, and related products. Specialty needles include coaxial, biopsy, spinal and disposable veress needles, access trocars, implanters, introducer products, and other needle based products. This segment serves a number of markets and applications, including among other areas, interventional cardiology, interventional radiology, vascular surgery, orthopedics, plastic surgery, dental surgery, urology, veterinary medicine, pain management, endoscopy, and spinal surgery. Our surgical products business sells our devices and components primarily to original equipment manufacturers (“OEMs”) and to a network of distributors.

Our brachytherapy business manufactures, custom loads, markets and distributes “seeds” used primarily in the minimally invasive treatment of localized prostate cancer. Our brachytherapy product line includes our palladium-103 based TheraSeed® device and our iodine-125 based AgX100® device. Physicians, hospitals and other healthcare providers, primarily located in the United States, utilize our devices. We maintain an in-house sales force that sells TheraSeed® and AgX100® directly to physicians. We also sell our TheraSeed® and AgX100® devices to non-exclusive third party distributors. We manufacture the TheraSeed® and the AgX100® devices.

Restructuring of Vascular Access Manufacturing Operations

Commencing in the second quarter of 2013 and through December 2014, we will begin to transfer a significant portion of our vascular access manufacturing to independent suppliers located in Latin America. A small portion of the current production will be transferred to our specialty needle manufacturing facility located in North Attleboro, Massachusetts. By the end of 2014, we expect this transition to be completed and our manufacturing plant located in Garland, Texas to be closed. With the exception of certain sales, marketing, and customer service positions, substantially all of the 205 jobs currently located at the Garland, Texas facility will be eliminated over the 20 month restructuring period through December 2014.

We believe the offshore outsourcing of our vascular access manufacturing will significantly reduce our costs, allowing us to remain competitive in a highly competitive medical device industry. This outsourcing will also allow us to better respond to our customers’ needs and macroeconomic issues such as increased regulation, new taxes and decreased demand across the medical device industry. We expect to continue to invest and expand our product offerings in the business.

This restructuring plan is expected to be implemented over the 20 month period through December 2014. Expected expenses and savings are as follows:

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Incremental expenses of $3.7 to $4.1 million, consisting primarily of severance expenses and project implementation costs. The operations at our Garland, Texas plant will be transitioned out over the 20 month period. Accordingly, these incremental expenses related to the restructuring will be recorded over the 20 month restructuring period. No significant non-cash charges are expected to be recorded related to this restructuring.

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Subsequent to completion of the restructuring in 2014, our net operating savings are expected to be $3.3 to $3.6 million annually.

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As noted above, expenses related to the restructuring will be incurred in 2013 and 2014. However, we also expect some cost reductions as the restructuring is implemented. We expect cost savings totaling approximately $2.4 to $2.8 million during 2013 and 2014.

Our estimated and expected incremental expenses related to the restructuring, capital expenditures and net savings are significant estimates. These estimates are subject to change and actual results may be materially different.

Medical Device Tax

Significant reforms to the U.S. healthcare system were adopted in the form of the Patient Protection and Affordable Care Act of 2010 (the “PPACA”). See our discussion below under "Other Regulatory Developments". The PPACA requires us to, among other things, pay a 2.3% excise tax on certain U.S. medical device sales beginning in 2013. During the quarter ended March 31, 2013, we recorded a medical device excise tax of $193,000. Some commentators have suggested that medical device companies can expect to experience an increase in the usage of their products beginning in 2014 as the PPACA provides healthcare coverage to all Americans, including approximately 30 million Americans currently uninsured. However, many of our products are typically used for the treatment of patients who are currently covered under Medicare. Accordingly, we do not expect to experience a material increase in sales as a result of this provision of the PPACA.

Results of Operations

Revenue

Following is a summary of revenue by segment (in thousands):

	Quarter Ended March 31,
	2013			2012			Change ($)
Revenues by segment:
Surgical products
Product sales	$	14,465		$	15,483		$	(1,018	)
License and fee income		18			11			7
Total surgical products		14,483			15,494			(1,011	)

Brachytherapy seed
Product sales		5,076			5,727			(651	)
License and fee income		643			593			50
Total brachytherapy seed		5,719			6,320			(601	)

Intersegment eliminations		(329	)		(231	)		(98	)

Consolidated
Product sales		19,212			20,979			(1,767	)
License and fee income		661			604			57
Total consolidated	$	19,873		$	21,583		$	(1,710	)

Surgical Products Segment

Revenue in our surgical products business decreased 7% in the first quarter of 2013 from the first quarter of 2012. Our revenue was affected by the variability in the ordering patterns of our larger customers. It has been reported that the medical device industry experienced sluggish demand in the first quarter, a result in part of overall declining procedures and a trend of fewer patient visits to physicians. We believe this industry trend has affected our customers and, in turn, short-term demand for our products. In addition, many customers, as well as others in the medical device industry, are seeking to reduce costs. We were also affected in the first quarter by pricing pressure, as well as customers either outsourcing production offshore or producing products internally in an effort to reduce costs. We expect this variability and unpredictable customer behavior to continue through 2013.

Open orders in our surgical products segment were $13.4 million on March 31, 2013 compared to $12.5 million at December 31, 2012. Open orders represent orders from customers for future delivery that we believe to be firm. Open orders are not guaranteed shipments, and they are subject to cancellation or delay. Backlog in our surgical products business was $261,000 at March 31, 2013 and $411,000 at December 31, 2012. Backlog represents orders included in open orders, but for which we have missed promised shipment dates. The reduction in backlog was primarily a result of addressing the shortages of supply of certain animal-based materials utilized in some of our wound closure products that existed at December 31, 2012. We expect our open orders and backlog to continue to vary based on changes in ordering patterns of our larger customers, changes in customer behavior and changes in availability of raw materials.

We announced the launch of three new product lines during the first four months of 2013. We launched the Synergy™ peripherally inserted central catheter (PICC) product line and our line of TorxTM transitionless guidewires for the vascular access market. We also launched our “PLUS” line of antibacterial sutures for the veterinary market. While sales of these new products are not expected to be material in 2013, each of these new products is expected to provide our surgical products business with access to new markets and new customers. These new products are generally expected to carry a higher gross profit margin than we are currently realizing in our surgical products business.

A significant portion of the products in our surgical business continue to be sold to OEMs and a network of distributors. Ordering patterns and behaviors of these customers vary and are difficult to predict. Accordingly, surgical products revenue continues to be subject to fluctuation, especially on a quarter-to-quarter basis. In addition, revenue has been and will continue to be affected by our customers’ and potential customers’ efforts to manage their supply chains and reduce costs. All of these factors may cause the fluctuations in our results to be even more volatile from period to period.

Brachytherapy Seed Segment

We sell our TheraSeed® palladium-103 device, our AgX100® iodine-125 device, and other brachytherapy related products directly to healthcare providers and to third-party distributors. We also custom load brachytherapy seeds in prescription loaded needles, custom strands and other configurations.

Our brachytherapy product sales decreased 9% in the first quarter of 2013 from the first quarter of 2012, with TheraSeed® sales declining $1.2 million. In May 2012, the U.S. Preventive Services Task Force recommended against routine PSA screenings for healthy men without symptoms. We believe this recommendation has led to a decline in PSA screening. In addition, we believe there has been an increase in “active surveillance”, a practice where no immediate medical treatment is provided; but the physician and patient closely monitor the patient’s cancer for signs that the cancer is growing. We believe that declines in PSA screenings has led to a decline in the number of men diagnosed with prostate cancer. Both a decline in the number of PSA screenings and an increase in the proportion of men diagnosed with prostate cancer but not seeking immediate medical treatment would in turn lead to a decline in the number of procedures to treat prostate cancer, including brachytherapy procedures. Incremental sales of $435,000 to the acquired Core customers and revenue from our new Oncura custom loading agreement, which was announced in December 2012, partially offset the overall decline in revenue we experienced.

The prostate brachytherapy industry in the United States continues to experience pressure from newer forms of treatment. Some newer forms of treatment have increased their market share, especially those with Medicare reimbursement levels that are higher than reimbursement levels for brachytherapy. These newer forms of alternative treatments include Intensity Modulated Radiation Therapy (“IMRT”) and robotic surgery. In addition to treatment options that enjoy favorable reimbursement rates, we believe brachytherapy seed volume and revenue are also affected by disruptive pricing from other brachytherapy providers and uncertainties surrounding reimbursement.

We have non-exclusive distribution agreements in place for our TheraSeed® and AgX100® seed devices. Under our third party TheraSeed® distribution agreements, we are the exclusive palladium-103 seed supplier for the treatment of prostate cancer for each distributor, and each distributor has the non-exclusive right to sell TheraSeed® in the U.S. and Canada. Certain agreements also provide distributors with the right to distribute TheraSeed® for the treatment of solid localized tumors other than in the prostate and with rights to distribute to certain locations outside of North America. Such applications (non-prostate and outside of North America) have not been material and are not expected to become material in the near future. Our principal non-exclusive distribution agreement is with C.R. Bard (“Bard”). Our agreement with Bard provides for automatic one year extensions of the term, unless either party gives notice of its intent not to renew at least twelve months prior to the end of the current term. The current term expires December 31, 2014 and will be automatically extended for one additional year unless either party gives notice of its intent not to extend by December 31, 2013. Sales to Bard by our brachytherapy segment represented 23% and 29% of brachytherapy seed segment revenue in the first quarter of 2013 and 2012, respectively.

We also currently have other non-exclusive distributors (other than Bard) for our TheraSeed® and AgX100® devices. We may pursue additional distribution agreements in an effort to increase market share. We may also have opportunities to enter certain markets outside of the United States with our AgX100® device.

On an annual basis, the Center for Medicare and Medicaid Services (“CMS”) establishes and fixes the per seed rate at which Medicare reimburses hospitals for the purchase of brachytherapy seeds. CMS reimbursement policies have led to pricing pressure from hospitals and other healthcare providers and have had an adverse effect on our brachytherapy revenue. We believe our brachytherapy revenue may continue to be adversely affected by CMS’ reimbursement policies for brachytherapy seeds and favorable CMS reimbursement rates enjoyed by alternative, less proven technologies for early stage prostate cancer treatment.

License fees in our brachytherapy segment increased $50,000 or 8% in the first quarter of 2013 over the comparable 2012 period. License fees include fees from the licensing of our TheraSphere® product, a medical device used for the treatment of liver cancer. License fees also include fees related to the licensing of certain intellectual property related to an expandable brachytherapy delivery system that we developed. This agreement provides for a minimal non-refundable initial license fee and non-refundable, continuing royalties based upon sales and subject to certain minimums.

Operating income (loss) and costs and expenses

Following is a summary of operating income (loss) by segment (in thousands):

	Quarter Ended March 30,
	2013			2012			Change ($)

Surgical products	$	(335	)	$	199		$	(534	)
Brachytherapy seed		399			1,380			(981	)
Intersegment eliminations		(47	)		(3	)		(44	)

Consolidated	$	17		$	1,576		$	(1,559	)

Surgical Products Segment

In the first quarter of 2013, we incurred a loss from operations of $335,000 in our surgical products segment compared to operating income of $199,000 in the first quarter of 2012. Our gross profit margins on sales were 33% in the quarter ended March 31, 2013 compared to 35% in the quarter ended March 31, 2012. Gross margin in the first quarter of 2013 was affected by product mix, as well as lower volumes to cover the fixed portion of our manufacturing expenses. Also affecting results in the first quarter of 2013 was $135,000 of expense for the medical device excise tax, which was effective on January 1, 2013. Over time, we plan to increase margins by integrating and outsourcing manufacturing processes, improving efficiencies and introducing newer and higher margin products, such as the new product lines launched thus far in 2013 discussed in “Revenue – Surgical Products Segment” above. In May 2013 we announced the restructuring of our vascular access manufacturing operations. This restructuring is intended to significantly reduce our manufacturing costs. See “Restructuring of Vascular Access Manufacturing Operations” above.

Selling, general and administrative (“SG&A”) costs were 27% of revenue in both the first quarter of 2013 and 2012.

Research and development (“R&D”) expenses were $280,000 and $277,000 in the first quarter of 2013 and 2012, respectively. Our R&D program is intended to focus on product extensions, next generation products, and new products that are complementary to our current product lines and that support our customers’ product lines. Our R&D program is directed toward 510(k) products that have an established market and not on products that require lengthy and expensive clinical trials. Looking forward, our quarterly results are expected to be affected by the timing of these investments. We recently introduced three new product lines. See our discussion under “Revenue - Surgical Products Segment” above.

Looking forward, we expect a number of items to continue to affect the profitability in our surgical products business including, among other things:

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incremental expenses and capital expenditures related to the restructuring of our vascular access manufacturing operations, cost reductions and improvements to profitability resulting from the restructuring, and timing of the restructuring,

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ordering patterns of our larger OEM and distributor customers,

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costs incurred to address significant changes in demand,

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continued investments in infrastructure, R&D, products, and companies as we make investments to support anticipated future growth and to develop products to address growth opportunities,

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changes in product mix and sales channels, with sales through OEM channels generally carrying a relatively lower gross profit margin and sales through distributor channels generally carrying a somewhat higher gross profit margin,

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continued pricing pressure from customers,

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the medical device tax under the PPACA,

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potential changes in the 510(k) application process and other changes in FDA and governmental regulations,

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the implementation and efficiencies to be gained from our corporate-wide ERP system,

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manufacturing outsourcing activities,

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the increasing scale of our surgical products business, and

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trends of consumers making fewer visits to doctors’ offices and the effect on demand for medical devices.

Brachytherapy Seed Segment

Operating income in our brachytherapy segment was $399,000 in the first quarter of 2013 compared to $1.4 million in the first quarter of 2012. Manufacturing expenses related to our TheraSeed® palladium-103 based device tend to be fixed in nature and, accordingly, the $1.2 million decline in TheraSeed® revenue had a significant effect on operating income in the 2013 period. Operating income in our brachytherapy seed business is expected to continue to be highly dependent on TheraSeed® sales levels due to the high fixed cost component of our manufacturing operations. Revenue from the acquired Core customers and the Oncura custom loading agreement partially offset the decline in TheraSeed® sales and contributed to operating income in 2013, though margins on iodine-125 based devices and custom loading are lower than on our TheraSeed® devices. Also affecting results in the first quarter of 2013 was $58,000 of expense for the medical device excise tax, which was effective January 1, 2013.

Non-operating income/expense

A summary of our interest expense is as follows (in thousands):

	Quarter Ended March 31,
	2013		2012
Interest paid or accrued, including loan fees	$	136	$	200
Fair value adjustment		—		(28	)
Interest capitalized		—		(8	)
Total interest expense	$	136	$	164

Interest expense paid or accrued, including loan fees, is related to our effective interest rates and the level of our outstanding borrowings under our credit agreement. Fair value adjustments were related to our interest rate swaps, which matured in June 2012. Such fair value adjustments were unrealized gains and reflected the period to period changes in the estimated fair value of our swaps. Interest capitalized related to the development of our ERP system. The effective interest rate under our Credit Agreement was 1.96% at March 31, 2013.

Income tax expense

Our effective income tax rates include federal and state income taxes. For the quarter ended March 31, 2012, our effective tax rate was 36%. For the quarter ended March 31, 2013, we recorded a tax benefit at a rate of 63%. The effective tax rate for the first quarter of 2013 was impacted by the American Taxpayer Relief Act of 2012, which was signed into law on January 2, 2013 and retroactively reinstated the research tax credit. Although the reinstatement of this tax credit is retroactive to January 1, 2012, the enactment of this legislation in 2013 precluded us from recording the benefit in 2012. As a result, our income tax provision was reduced by approximately $32,000 in the first quarter of 2013 to recognize the 2012 benefit of this tax credit that would have otherwise been recorded in 2012.

Future tax rates can be affected by, among other things, tax credits, tax expense for items unrelated to actual taxable income (such as the write-off of deferred tax assets associated with share-based compensation), changes in tax regulations, changes in statutory tax rates, changes in the tax jurisdictions in which we must file income tax returns, and many other items that affect the taxability and deductibility of our revenue and expenses and for which we cannot currently predict.

Critical Accounting Policies and Estimates

The preparation of financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The SEC defines “critical accounting policies” as those that require application of our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Our significant accounting policies are more fully described in the notes to our consolidated financial statements included in our Form 10-K for the year ended December 31, 2012. Certain accounting policies, as more fully described under “Critical Accounting Policies and Estimates” included in the Management’s Discussion and Analysis of our 2012 Form 10-K, are those which we believe are most critical in fully understanding and evaluating our reported financial results, and are areas in which our judgment in selecting an available alternative might produce a materially different result. There have been no significant changes to our critical accounting policies since December 31, 2012 other than described as follows:

Restructuring expenses. Restructuring charges will be recorded upon the approval of a formal management plan and included in the operating results of the period in which such plan is approved and any restructuring liabilities are incurred. We expect restructuring expenses to consist primarily of severance related costs. Severance related liabilities will be measured initially at the communication date based on the fair value of the liability as of the estimated termination date and recognized ratably over the required future service period.

To estimate severance related restructuring charges, we will make assumptions and estimates regarding, among other things, the number of employees that will be terminated and that will fulfill the required service period to earn the severance. Changes to these assumptions and estimates could result in a material increase or reversal of the restructuring liabilities and related costs we record as we execute the restructuring plan.

Liquidity and Capital Resources

We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Significant factors affecting the management of our liquidity are: cash flows generated from operating activities, capital expenditures, operational investments to support growth (such as research and development programs), and acquisitions of businesses and technologies.

We had cash, cash equivalents, and marketable securities of $34.1 million at March 31, 2013 compared to $34.9 million at December 31, 2012.

Cash used by operations was $277,000 for the first quarter of 2013. In the first quarter of 2012 cash provided by operations was $2.4 million. Cash provided by operations consists of net earnings plus non-cash expenses such as depreciation, amortization, deferred income taxes and changes in balance sheet items such as accounts receivable, inventories, prepaid expenses and payables. The decrease in cash from operations is primarily due to the decline in net earnings and an increase in accounts receivable. The increase in accounts receivable from December 31, 2012 is primarily a result of the timing within the quarter of sales and receipt of payments from customers.

Cash used by investing activities was $7.6 million for the first quarter of 2013, consisting primarily of net purchases of marketable securities. For the first quarter of 2012, cash used by investing activities was $4.3 million consisting primarily of cash used for the acquisition of the Core customer base. We have not made and do not expect to make additional remaining earn-out payments for the acquisition of the Core customer base in 2013. However, we may make additional earn-out payments, which could be material, depending upon the actual amount of revenue generated from the acquired customers during the earn-out period. Capital expenditures, net of the acquisition of the Core customer base in 2012, totaled $527,000 and $329,000 during the first quarter of 2013 and 2012, respectively.

For 2013, we expect our capital expenditures to be $2.0 to $2.5 million, exclusive of capital expenditures related to the restructuring of our vascular access manufacturing operations. These capital expenditures in 2013 will be intended to support growth in the surgical products segment and maintain the brachytherapy segment. However, the timing and amounts of capital expenditures are subject to fluctuation depending upon opportunities we may identify. All capital expenditures will be funded from cash on hand.

Cash used by financing activities in the first quarter of 2012 included $834,000 of principal repayments on our outstanding borrowings in accordance with the terms of our credit facility. No such payment was required in the first quarter of 2013.

On May 8, 2013, our Board of Directors approved a restructuring of our vascular access manufacturing operations. During 2013 and 2014, cash will be required for the implementation of this restructuring, which will be funded from cash on hand. See “Restructuring of Vascular Access Manufacturing Operations” above.

We may also continue to use cash for increased marketing and support activities in our brachytherapy seed business and in the pursuit of additional diversification efforts such as product development, the purchase of technologies, products, companies, and other strategic initiatives. We believe that current cash, cash equivalents, and investment balances and cash from future operations will be sufficient to meet our current short-term anticipated working capital and capital expenditure requirements. However, any disruption or instability in the U.S. and global financial markets and worldwide economies may hinder our ability to take advantage of opportunities for long-term growth in our businesses. In the event additional financing becomes necessary, we may choose to raise those funds through other means of financing as appropriate.

Credit Agreement

We have a Credit Agreement with a financial institution that provides for up to $40 million of borrowings under a revolving credit facility (the “Revolver”). The Revolver matures on October 10, 2015 with interest on outstanding borrowings payable at the London Interbank Offered Rate (“LIBOR”) plus 1.75%. Our interest rate as of March 31, 2013 was 1.96%. The Revolver also provides for a $5 million sub-limit for trade and stand-by letters of credit. As of March 31, 2013, borrowings of $22.0 million were outstanding under the Revolver, and letters of credit totaling $946,000, representing decommission funding required by the Georgia Department of Natural Resources, were outstanding under the Credit Agreement.

The Credit Agreement is unsecured, but provides for a lien to be established on substantially all of our assets upon certain events of default. The Credit Agreement contains representations and warranties, as well as affirmative, reporting and negative covenants customary for financings of this type. Among other things, the Credit Agreement restricts the incurrence of certain additional debt and certain capital expenditures, and requires the maintenance of certain financial ratios, including a minimum fixed charge coverage ratio, a maximum senior liabilities to tangible net worth ratio, and the maintenance of minimum liquid assets of $10 million, as all such ratios and terms are defined in the Credit Agreement. We were in compliance with all covenants as of March 31, 2013.

Other Regulatory Developments

Significant reforms to the healthcare system were adopted in the form of the Patient Protection and Affordable Care Act (the “PPACA”). The PPACA includes provisions that, among other things, reduce and/or limit Medicare reimbursement to certain providers, require all individuals to have health insurance (with limited exceptions) and impose new and/or increased taxes. Specifically, the law requires the medical device industry to subsidize healthcare reform in the form of a 2.3% excise tax on the U.S. sales of most medical devices beginning in 2013 as noted above in “Overview – Medical Device Tax”. The Medical Device Tax will have a material impact on our consolidated results of operations, cash flows, and financial condition. Other provisions of the PPACA, such as requirements relating to employee health insurance, can be expected to increase our operating costs.

CMS has published final regulations that would implement provisions in PPACA related to disclosure of payments made by manufacturers to physicians and teaching hospitals, effective April 2013. Because we manufacture a number of devices that are covered by the regulations, all payments that we make to physicians and teaching hospitals would be subject to this reporting requirement even if the payment relates to a device that is not considered a covered device. The tracking and reporting of these payments could have an adverse impact on our business and/or consolidated results of operations and financial condition and on our relationships with customers and potential customers.

In addition to the PPACA, various healthcare reform proposals have also emerged at the state level. Like the PPACA, these proposals could reduce medical procedure volumes and impact the demand for our products or the prices at which we sell our products. The impact of these proposals could have a material adverse effect on our business and/or consolidated results of operations and financial condition.

The American Taxpayer Relief Act (ATRA) of 2012, known as the fiscal cliff deal, was enacted on January 2, 2013. This Act delayed until March 1, 2013 the automatic spending cuts of nearly $1 trillion over the next 10 years that were included under the Budget Control Act of 2011. These spending cuts include a 2% cut to Medicare providers and suppliers. Medicaid is exempt from these cuts. Any cuts to Medicare reimbursement which affect our products could have a material adverse effect on our business and/or our consolidated results of operations and financial condition.

Forward Looking and Cautionary Statements

This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, without limitation, statements regarding the restructuring of our vascular access manufacturing operations, sales, marketing and distribution efforts, ordering patterns of customers, effects of healthcare reform, third-party reimbursement, CMS policy, sales mix, effectiveness and continuation of non-exclusive distribution agreements, anticipated growth in the surgical products business segment, the increasing scale of our surgical products business, future cost of sales and gross margins, R&D efforts and expenses, investment in additional personnel, infrastructure and capital assets, SG&A expenses, potential new products and opportunities, future results in general, plans and strategies for continuing diversification, valuation of marketable securities and cash equivalents we may hold, and the sufficiency of our liquidity and capital resources.

In addition, there are substantial risks inherent in the medical device business. Our business involves the design, development, manufacture, packaging, distribution and sale of life-sustaining medical devices. These devices are often used on, or permanently or temporarily implanted in, patients in clinically demanding circumstances, such as operating rooms, emergency units, intensive care and critical care settings, among others. These circumstances, among other factors, can cause the products to become associated with adverse clinical events, including patient mortality and injury, and could lead to product liability claims and other litigation, product withdrawals, warning letters, recalls, field corrections or regulatory enforcement actions relating to one or more of our products, any of which could have a material adverse effect on our business, results of operations, financial condition and/or liquidity.

Because actual results are affected by these and other risks and uncertainties, we caution investors that actual results may differ materially from those expressed or implied. It is not possible to predict or identify all risks and uncertainties, but the most significant factors, in addition to those addressed above and those under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012, that could adversely affect our business or cause the actual results to differ materially from those expressed or implied include, but are not limited to:

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the ability to achieve manufacturing or administrative efficiencies, including gross margin benefits from our manufacturing processes and supply chain programs or in connection with the integration of acquired businesses;

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the ability to implement the restructuring of our vascular access manufacturing operations within our costt estimates and timetable; realize the expected net savings from the restructuring; our ability to retain customers and market share during the restructuring period; and the ability of the independent suppliers to manufacture our products in accordance with our quality specifications and in the quantities we require;

	●		the effects of negative publicity concerning our products, which could result in product withdrawals or decreased product demand and which could reduce market or governmental acceptance of our products;
	●		the reduction in the number of procedures using our devices caused by customers’ cost-containment pressures or preferences for alternate therapies;

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the ability to implement, and realize the benefits of, our plans to invest in our business, including our plans for new product development;

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internal factors, such as retention of key employees;

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damage to a facility where our products are manufactured or from which they are distributed, which could render us unable to manufacture or distribute one or more products and may require us to reduce the output of products at the damaged facility thereby making it difficult to meet product shipping targets;

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the potential impairment of our intangible assets resulting from insufficient cash flow generated from such assets specifically, or our business more broadly, so as to not allow us to justify the carrying value of the assets;

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the ability to obtain appropriate levels of product liability insurance on reasonable terms;

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the trend of consolidation in the medical device industry as well as among our customers, resulting in potentially greater pricing pressures and more significant and complex contracts than in the past;

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development of new products or technologies by competitors having superior performance compared to our current products or products under development which could negatively impact sales of our products or render one or more of our products obsolete;

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technological advances, patents and registrations obtained by competitors that would have the effect of excluding us from new market segments or preventing us from selling a product or including key features in our products;

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attempts by competitors to gain market share through aggressive marketing programs;

	●		reprocessing by third-party reprocessors of our products designed and labeled for single use;
	●		the ability to obtain regulatory approval for products on a timely basis and to launch products on a timely basis within cost estimates;

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lengthy and costly regulatory approval processes, which may result in lost market opportunities and/or delayed product launches;

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the suspension or revocation of authority to manufacture, market or distribute existing products;

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the imposition of additional or different regulatory requirements, such as those affecting manufacturing and labeling;

	●		performance, efficacy, quality or safety concerns for existing products, whether scientifically justified or not, that may lead to product discontinuations, product withdrawals, recalls, field corrections, regulatory enforcement actions, litigation or declining sales;
	●		FDA inspections resulting in Form-483 notices and/or warning letters identifying deficiencies in our manufacturing practices and/or quality systems; warning letters identifying violations of FDA regulations that could result in product holds, recalls, restrictions on future clearances by the FDA and/or civil penalties;

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the failure to obtain, limitations on the use of, or the loss of, patent and other intellectual property rights, and the failure of efforts to protect our intellectual property rights against infringement and legal challenges that can increase our costs;

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difficulties obtaining necessary components or raw materials used in our products and/or price increases from our suppliers of critical components or raw materials;

	●		customers that may limit the number of manufacturers or vendors from which they will purchase products, which can result in our inability to sell products to or contract with large hospital systems, integrated delivery networks or group purchasing organizations;
	●		the impact of continued healthcare cost containment;

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new laws and judicial decisions related to healthcare availability, healthcare reform, payment for healthcare products and services or the marketing and distribution of products, including legislative or administrative reforms to the United States Medicare and Medicaid systems or other United States or international reimbursement systems in a manner that would significantly reduce or eliminate reimbursements for procedures that use our products;

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changes in the FDA and/or foreign regulatory approval processes that may delay or prevent the approval of new products and result in lost market opportunity;

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the impact of more vigorous compliance and enforcement activities affecting the healthcare industry in general or the company in particular;

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changes in the tax laws affecting our business, such as the medical device tax;

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changes in the environmental laws or standards affecting our business;

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changes in laws that could require facility upgrades or process changes and could affect production rates and output;

	●		compliance costs and potential penalties and remediation obligations in connection with environmental laws, including regulations regarding air emissions, waste water discharges and solid waste;
	●		disputes over legal proceedings;

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product liability claims;

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claims asserting securities law violations;

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claims asserting, and/or subpoenas seeking information regarding, violations of law in connection with federal and/or state healthcare programs;

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derivative shareholder actions;

	●		claims and subpoenas asserting antitrust violations;
	●		environmental claims, including risks relating to accidental contamination or injury from the use of hazardous materials in our manufacturing, sterilization and research activities and the potential for us to be held liable for any resulting damages;

	●		commercial disputes, including disputes over distribution agreements, license agreements, manufacturing/supply agreements, development/research agreements, acquisition or sale agreements, and insurance policies;
	●		domestic and international business conditions;

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political or economic instability in foreign countries;

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interest rates;

●

changes in the rate of inflation;

	●		instability of global financial markets and economies; and
	●		other factors beyond our control, including catastrophes, both natural and man-made, earthquakes, floods, fires, explosions, acts of terrorism or war.

These and other risks and uncertainties are described herein and in other information contained in our publicly available SEC filings and press releases. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date such statements were first made. Except to the extent required by federal securities laws, we undertake no obligation to publicly release the result of any revisions to these forward-looking statements to reflect events or circumstances after the date hereof, or to reflect the occurrence of unanticipated events.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The quantitative and qualitative disclosures about market risk are discussed in Item 7A in our 2012 Annual Report on Form 10-K. There have been no material changes in information since the information reported in the 10-K for the year ended December 31, 2012.

Item 4. Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2013, the end of the period covered by this report.

No changes in our internal control over financial reporting were identified as having occurred during the quarter ended March 31, 2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we are subject to certain legal proceedings and claims in the ordinary course of business. We currently are not aware of any such legal proceedings or claims that we believe will have, individually or in aggregate, a material adverse effect on our business, financial condition, or operating results.

Item 1A. Risk Factors

In addition to the other information set forth in this report, the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012, which could materially affect our business, financial condition or future results, should be carefully considered. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 6. Exhibits

Exhibit No.		Title

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document.

101.SCH		XBRL Taxonomy Extension Schema Document.

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF		XBRL Taxomony Extension Definition Linkbase Document.

101.LAB		XBRL Taxonomy Extension Label Linkbase Document.

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.

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.

	REGISTRANT:
	THERAGENICS CORPORATION
Date: May 13, 2013	By:	/s/ M. Christine Jacobs
		M. Christine Jacobs Chief Executive Officer

Date: May 13, 2013		By:	/s/ Francis J. Tarallo
			Francis J. Tarallo Chief Financial Officer

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