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 January 2, 2016

 

OR

___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period From ________ to ________

 

Commission File Number 0-11392

 

SPAN-AMERICA MEDICAL SYSTEMS, INC.

(Exact name of Registrant as specified in its charter)

 

	South Carolina	57-0525804
	(State or other jurisdiction of	(I.R.S. Employer
	incorporation or organization)	Identification Number)

 

70 Commerce Center

                  Greenville, South Carolina 29615                 

(Address of Principal Executive Offices) (Zip Code)

 

Registrant's telephone number, including area code: (864) 288-8877

 

                                                           Not Applicable                                                          

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   X     No ___

 

Indicate 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). Yes   X    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 the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ___      Accelerated filer ___  Non-accelerated filer   X      Smaller reporting company___

         (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).

Yes ___ No   X  

 

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date.

Common Stock, No Par Value – 2,725,468 shares as of February 15, 2016

 

 

INDEX

 

SPAN-AMERICA MEDICAL SYSTEMS, INC.

 

 

PART I. FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements (Unaudited)
	Consolidated Balance Sheets – January 2, 2016 and October 3, 2015	3
	Consolidated Statements of Comprehensive Income – Three Months Ended January 2, 2016 and January 3, 2015	4
	Consolidated Statements of Cash Flows – Three Months Ended January 2, 2016 and January 3, 2015	5
	Notes to Consolidated Financial Statements – January 2, 2016	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	18
Item 4.	Controls and Procedures	19
PART II. OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	20
Item 6.	Exhibits	21
SIGNATURES		22
OFFICER CERTIFICATIONS		23

 

 

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

 

Span-America Medical Systems, Inc.

Consolidated Balance Sheets

 

 

Note: The Balance Sheet at October 3, 2015, has been derived from the audited financial statements at that date.

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

Span-America Medical Systems, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

(1) Dividends per share for the three months ended January 3, 2015 included a special dividend of $1.00 per share declared on November 12, 2014 and paid on January 7, 2015 to shareholders of record on December 17, 2014.

 

 

Span-America Medical Systems, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

January 2, 2016

 

 

 

 

 

 

 

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

 

The statements contained in this Quarterly Report that are not historical facts are forward-looking statements that involve risks and uncertainties. We wish to caution the reader that these forward-looking statements, such as our expectations for future sales and earnings results or future expense changes compared with previous periods, are only predictions. These forward-looking statements may be generally identified by the use of forward-looking words and phrases, such as “will,” “intends,” “would,” “estimates,” “continues,” “may,” “believes,” “anticipates,” “should,” “optimistic” and “expects,” and are based on our current expectations or beliefs concerning future events that involve risks and uncertainties. Actual events or results may differ materially as a result of risks and uncertainties facing our Company, including Span-Canada, as described in (a) “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended October 3, 2015, (b) other risks referenced in our Securities and Exchange Commission filings or (c) other unanticipated risks. We disclaim any obligation to update publicly any forward-looking statement, whether as a result of new information, future events or otherwise.

 

RESULTS OF OPERATIONS

 

Overview

When comparing the first quarter of fiscal 2016 with the same quarter of fiscal 2015, please note that the first quarter this fiscal year included one less week of operations than the first quarter last fiscal year. Fiscal year 2016 will be a normal 52-week year for Span-America, but fiscal year 2015 was a 53-week year, and the additional week fell into the first quarter of fiscal year 2015. Having one less week of operations in the first quarter this fiscal year compared with the same quarter last fiscal year had the most effect on sales and expenses related to our medical and industrial product lines. It had little relative impact on our consumer business because the large seasonal promotion completed in the first quarter this fiscal year overshadowed the effect of having one less week of operations.

 

Total sales for the first quarter of fiscal 2016 increased by 36% to $21.5 million compared with $15.7 million in the first quarter of last fiscal year due to higher sales volume of consumer bedding products within our custom products segment, which more than offset a sales decrease in our medical segment.

 

Sales in the medical segment decreased 11% to $11.4 million in the first quarter this fiscal year compared with $12.8 million in the first quarter of fiscal 2015 due primarily to lower sales volumes of beds and therapeutic support surfaces during the quarter. In the custom products segment, first quarter fiscal 2016 sales increased 248% to $10.1 million compared with the same quarter last year because of higher sales of consumer bedding products resulting from a large customer’s seasonal promotion completed in November 2015.

 

 

Net income for the first quarter increased by 18% to $1.1 million compared with $970,000 in the first quarter last fiscal year. The first quarter earnings growth was the result of higher sales volume of our consumer bedding products. Earnings per share increased by 28% to $0.42 per diluted share compared with $0.32 per diluted share in the first quarter last fiscal year. The growth rate in earnings per share was higher than the growth rate of net income because of a reduction in the number of shares outstanding at the beginning of the first quarter of fiscal 2016 as a result of previously announced stock repurchases.

 

Medical Sales – First Quarter Fiscal 2016

Total medical sales decreased 11% in the first quarter to $11.4 million compared with $12.8 million in the same quarter last year. The $1.4 million decrease in medical sales was about evenly divided between our medical beds and pressure management product lines. At Span-Canada, our sales of medical beds and in-room furnishing products decreased by 21% to $2.7 million in the first quarter of fiscal 2016 compared with $3.4 million in the same quarter last year. Most of the decrease in our Span-Canada sales was related to a relatively large order from a customer in British Columbia that we shipped in the first quarter last fiscal year, which was not repeated in the first quarter this fiscal year.

 

Among our pressure management product lines, sales in the first quarter this fiscal year were down by 8% to $8.7 million compared with $9.4 million in the first quarter last fiscal year. Sales of therapeutic support surfaces, our largest product line, were down by 5% to $6.1 million compared with $6.5 million in the first quarter last fiscal year. Likewise, sales of our other pressure management product lines as a group decreased by 12% during the quarter to $2.6 million compared with $2.9 million in the fiscal year-earlier quarter. The sales declines among our pressure management product lines were caused by slightly lower demand for these products combined with having one less week of production and sales in the first quarter this fiscal year compared with the same quarter last fiscal year as described above. The slight drop off in demand for our medical products in the first quarter of fiscal 2016 is being compared to unusually strong and broad-based demand in the first quarter of fiscal 2015.

 

Custom Products Sales – First Quarter Fiscal 2016

Our custom products segment consists of two product lines: consumer bedding products and specialty industrial products. Total sales in the custom products segment increased by 248% to $10.1 million in the first quarter of fiscal 2016 compared with $2.9 million in the first quarter last fiscal year. The sales increase came entirely from our consumer bedding products, where sales increased 384% to $9.2 million compared with $1.9 million in the same quarter last fiscal year. There were two events that caused the large increase in consumer sales. First, as we have reported in the past, we participated in a seasonal promotion of consumer products in the first quarter of fiscal 2016, which added approximately $6.1 million in sales in the first quarter of fiscal 2016. Second, also as previously reported, we regained a consumer customer late in the first quarter of fiscal 2015 that we had lost in the second quarter of fiscal 2014. As a result, we had this business for the full three months in the first quarter of fiscal 2016 compared with only one month in the first quarter of fiscal 2015. This regained business added approximately $1.5 million in consumer products sales in the first quarter of fiscal 2016. The combination of the seasonal promotion and the regained business added approximately $7.5 million in new consumer sales during the first quarter of fiscal 2016.

 

 

The other part of the custom products segment is made up of our industrial product lines. Industrial sales were down 10% in the first quarter of fiscal 2016 to $901,000 compared with $1.0 million in the first quarter of fiscal 2015. Most of the industrial sales decline came from a customer in the watersports market. Industrial sales to customers in the packaging market were down slightly in the first quarter, while our sales of industrial products to the automotive market were up slightly compared with the first quarter of fiscal 2015.

 

Gross Profit

Our gross profit level increased by 1% to $5.5 million compared with $5.4 million in the first quarter last fiscal year. However, our gross margin percentage decreased significantly in the first quarter to 25.6% compared with 34.7% in the same quarter last fiscal year. There are two reasons for these changes in our gross profit and margin: a less profitable overall sales mix and a decline in medical sales. First, because of the large sales volume from the seasonal promotion of consumer products, our sales mix in the first quarter this year was shifted significantly toward the lower-margin consumer business. Consumer sales made up 43% of total sales in the first quarter of fiscal 2016 compared with only 12% in the first quarter of fiscal 2015. Our consumer products have historically had much lower gross margins than our medical products. Second, medical sales in the first quarter this fiscal year decreased by 11%, which contributed to an 8% decline in our medical gross profit level. This decline in medical gross profit offset most of the increase in consumer gross profit, leaving us with a relatively small increase in total gross profit level and a large decrease in gross margin percentage in the first quarter of fiscal 2016 compared with the first quarter of fiscal 2015.

 

Selling, Research & Development and Administrative Expenses

Selling and marketing expenses decreased by 8% during the first quarter this fiscal year to $2.5 million compared with $2.8 million in the first quarter last fiscal year due primarily to lower expenses in the categories of commissions and shipping costs, which are directly tied to sales and related to the decline in medical sales volume during the first quarter.

 

R&D expenses increased by 5% to $294,000 due to normal quarter-to-quarter fluctuations in our product development costs in the medical segment.

 

Administrative expenses increased by 4% to $1.1 million during the first quarter primarily because of increases in compensation costs, recruiting fees and professional fees.

 

Operating Income

Operating income for the first quarter of fiscal 2016 increased by 16% to $1.6 million compared with $1.3 million in the first quarter of fiscal 2015 due primarily to the combination of the large increase in consumer sales, the small increase in gross profit level and the decrease in selling and marketing expenses.

 

Non-Operating Income and Expenses

Net non-operating income in the first quarter of fiscal 2016 increased by 63% to $108,000 compared with $66,000 in the first quarter last fiscal year. The increase was entirely the result of foreign currency gains from the normal operations of our Canadian business as a result of the strengthening of the U.S. dollar relative to the Canadian dollar during the first quarter of fiscal 2016 compared with the same quarter in fiscal 2015.

 

 

Net Income and Dividends

Net income for the first quarter of fiscal 2016 increased by 18% to $1.1 million compared with $970,000 in the first quarter last fiscal year due to the large increase in consumer sales volume, the decrease in selling and marketing expenses and the increase in non-operating income. Earnings per share for the first quarter grew at a faster rate than net income, increasing by 28% to $0.42 per diluted share because of the previously announced stock repurchase approved by the Board in late September 2015. The repurchase is discussed in more detail below under “Liquidity and Capital Resources” and “Issuer Purchases of Equity Securities.”

 

During the first quarter of fiscal 2016, we paid dividends of $436,000, or 38% of net income, which consisted of one regular quarterly dividend of $0.16 per share. During the same period last fiscal year, we paid dividends of $444,000, or 46% of net income, which consisted of one regular quarterly dividend of $0.15 per share. The dividend of $0.16 per share paid in the first quarter this year was an increase of 6.7% over the dividend of $0.15 per share paid in the same quarter last year.

 

In addition to the regular quarterly dividend payment declared and paid in the first quarter of last fiscal year, the Board also declared a special dividend of $1.00 per share, which the Company paid on January 7, 2015 (during the second quarter of fiscal year 2015) to shareholders of record on December 17, 2014. The special dividend amount of $2,962,000 was shown as a current liability on our January 3, 2015 balance sheet.

 

Our revolving credit agreement previously included a covenant that restricted dividend payments to 50% of net income, but that covenant was eliminated from the renewed agreement in May 2015. However, prior to this credit agreement renewal, the lending bank waived any event of default in connection with the $1.00 per share special dividend declared during the first quarter of fiscal 2015. See the discussion below under “Liquidity and Capital Resources” regarding the current terms and conditions of our revolving credit agreement.

 

Outlook

We remain optimistic about the outlook for Span-America for fiscal year 2016. We expect to report a slight increase in sales and earnings in the second quarter this fiscal year compared with the same quarter last fiscal year based on our current order demand. We continue to expand our core medical business with new products, enhancements to existing products and by bundling sales of our medical bed frames with our therapeutic support services. We believe this combination will attract new customers and generate higher sales to existing customers.

 

We expect that our earnings per share during the remainder of fiscal year 2016 will benefit from the Board’s authorization in September 2015 to repurchase approximately 9% of the Company’s outstanding shares. The repurchase of 261,310 shares from former director Robert Johnston and his affiliate, The Jerry Zucker Revocable Trust, was completed in early October 2015. The repurchase lowered our number of shares outstanding, and as a result, will be accretive to our per share earnings for the remainder of fiscal year 2016.

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash provided by operations during the first quarter of fiscal 2016 decreased by 98% to $23,000, compared with $975,000 in the first quarter of fiscal 2015. The significant decrease was primarily the result of changes in working capital accounts related to the large seasonal promotion of consumer products that was begun in August 2015 and completed in November 2015. As a result of the promotion, we had unusually large changes in accounts receivable, inventory, accounts payable and accrued and sundry liabilities from fiscal year-end 2015 to the end of our first quarter of fiscal 2016. The net effect of these changes was to reduce our cash flow from operations by $1.0 million in the first quarter of fiscal 2016 compared to the $130,000 reduction in cash flow resulting from the changes in accounts receivable, inventory, accounts payable and accrued and sundry liabilities during the first quarter of fiscal 2015. The changes in these accounts are discussed in more detail below. Because of the timing of the cash flows related to the seasonal promotion, our cash flow from operations was lower than usual in the first quarter of fiscal 2016 and will likely be higher than usual in the second quarter of fiscal 2016. Our primary uses of cash during the first quarter of fiscal 2016 were dividend payments of $436,000, stock repurchases of $210,000 and equipment purchases of $182,000.

 

Working capital increased by 13% to $12.8 million at the end of the first quarter of fiscal 2016 compared with $11.4 million at fiscal year-end 2015. Likewise, the current ratio at the end of the first quarter of fiscal 2016 increased to 3.1 from 2.6 at fiscal year-end 2015. The increases in working capital and current ratio were caused primarily by the $1.4 million (35%) reduction in accounts payable from fiscal year-end 2015 to the end of the first quarter of fiscal 2016. The reduction in accounts payable was related to the seasonal promotion as described above. Accounts payable were unusually high at fiscal year-end 2015 because of raw material and other purchases related to the seasonal promotion. The reduction during the first quarter reflects our accounts payable balance returning to a more normal level.

 

Accounts receivable, net of allowances, increased by $1.5 million, or 19%, to $9.3 million at the end of the first quarter of fiscal 2016 compared with $7.8 million at the end of fiscal 2015. The increase was entirely related to the seasonal promotion described above. Our accounts receivable balance at the end of the first quarter of fiscal 2016 included $2.0 million of receivables related specifically to the seasonal promotion. Our average collection time for trade accounts receivable during the first quarter of fiscal 2016 was 43.3 days compared with 41.0 days for the full fiscal year 2015. All accounts receivable of Span-U.S. and Span-Canada are unsecured. However, certain receivables of Span-Canada are insured under the terms of an insurance policy.

 

Inventory decreased by $1.8 million, or 21%, to $7.0 million at the end of the first quarter of fiscal 2016 compared with $8.7 million at fiscal year-end 2015. The decrease in inventory occurred primarily in the categories of consumer raw materials and finished goods and was related almost entirely to the seasonal promotion described above. Inventory turns, calculated using annualized cost of sales and average inventory balances, were 8.1 times for the first quarter of fiscal 2016 compared with 5.3 times for the full year of fiscal 2015. The increase in inventory turns during the first quarter was caused by the seasonal promotion of consumer products.

 

 

From the end of our 2015 fiscal year to the end of the first quarter of fiscal 2016:

 

●

Prepaid expenses increased by 121% from $412,000 to $909,000 due to (1) the payment of a refundable deposit on a performance bond related to a bid to provide beds and therapeutic support surfaces to a government customer and (2) the payment of insurance premiums for our property and casualty insurance for fiscal year 2016;

 

●

Net property and equipment decreased by $60,000, or 1%, to $4.5 million primarily as a result of depreciation expense of $207,000, equipment purchases of $182,000 and foreign currency translation adjustments;

 

●

Net intangibles decreased by $152,000, or 7%, to $2.1 million primarily as a result of amortization expenses of $73,000 and foreign currency translation losses that resulted from the U.S.-Canadian currency conversion;

 

●

Other assets decreased by 4% to $2.8 million as a result of a decrease in deposits on raw material purchases;

 

●

Accounts payable decreased 35% from $4.0 million to $2.6 million primarily as the result of the seasonal promotion of consumer products described above. Our accounts payable level at fiscal year-end 2015 was higher than usual because of purchases associated with the seasonal promotion;

 

●

Accrued and sundry liabilities increased by $245,000, or 8%, to $3.4 million due primarily to increases in accruals for income taxes, incentive compensation and property taxes during the first quarter of fiscal 2016.

 

At January 2, 2016, we had $1.0 million outstanding under our revolving credit facility, which was used to partially fund the increase in working capital related to the seasonal promotion of consumer products described above. This outstanding balance was repaid in full by the end of January 2016. The maximum principal amount we can borrow at any one time under our revolving credit agreement is $5.0 million with a maturity date of April 30, 2018. The credit facility is unsecured and accrues interest at a variable rate equal to 30-day LIBOR plus a margin ranging from 85 to 165 basis points, depending on our leverage ratio (as defined in the credit agreement). The interest rate, including the margin of 85 basis points, was 1.2795% in January 2016. Interest-only payments are required monthly. We have pledged to grant the lending bank a security interest in our accounts, instruments and chattel paper upon its request in the event of a default as defined in the credit agreement. Our obligations under the credit agreement are guaranteed by our subsidiary, Span-Canada.

 

The credit facility includes financial covenants relating to tangible net worth and leverage ratios, and restricts mergers and acquisitions, asset sales, indebtedness, liens and capital expenditures. Violation of loan covenants could result in acceleration of the term of the agreement. The lending bank waived any event of default in connection with the Johnston/Zucker stock repurchase described below and elsewhere in this report. We believe that we were in compliance with all other loan covenants in the credit facility as of January 2, 2016.

 

 

The Company has repurchased a total of 433,593 shares of its common stock from the beginning of the repurchase programs in November 2007 through the end of the first quarter of fiscal year 2016. This represents 15.6% of the Company’s outstanding shares at the beginning of the repurchase program. As of the end of the first quarter of fiscal 2016, there were no remaining shares available to be repurchased under previously authorized share repurchase programs. Please see Item 2 below under the heading “Issuer Purchases of Equity Securities” for more information on our stock repurchase programs.

 

We believe that funds on hand, funds generated from operations and funds available under our revolving credit facility are adequate to finance our operations and expected capital requirements during fiscal 2016 and for the foreseeable future.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

We have no off-balance sheet arrangements.

 

IMPACT OF INFLATION AND COST OF RAW MATERIALS

 

Inflation was low in the United States and Canada during the first quarter of our fiscal year 2016 and was consequently a minor factor in our operations for the quarter. If the rate of inflation accelerated, the largest effect on the Company would likely be increases in cost of goods sold, primarily in the cost of raw materials, which is our single largest cost category. We would attempt to mitigate any such higher costs, but we can give no assurance that higher costs could be fully offset by sales price increases, expense reductions or other operational changes. See Item 3 “Quantitative and Qualitative Disclosures about Market Risk” below for more information on the cost of our raw materials.

 

FOREIGN CURRENCY EXCHANGE

 

Span-Canada, operating under the name “M.C. Healthcare Products,” uses the Canadian dollar as its functional currency. We are subject to exchange rate fluctuations, which vary based on volume and currency market conditions. These exchange rate fluctuations will cause foreign exchange gains and losses, which could be material to our results of operations depending on currency market conditions and the timing and levels of our business activities in the U.S and Canada. For the first quarter of fiscal year 2016, our realized foreign currency exchange gain was $117,000 compared with a gain of $71,000 in the first quarter of fiscal 2015. The increase in foreign currency gain was caused by the strengthening of the U.S. dollar versus the Canadian dollar during the first quarter of fiscal 2016.

 

Exchange rate fluctuations may also impact the competitive price position of our products manufactured in the U.S. and sold in Canada, which is our primary market outside the U.S. The appreciation of the U.S. dollar relative to the Canadian dollar makes our U.S.-origin products more expensive in Canadian dollar terms compared to similar products manufactured in Canada.

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to financial market risk in four areas: commodity price risk, cash value of life insurance, our credit facility and foreign currency exchange. Commodity price risk could affect our operations primarily through our purchase of raw materials used in our manufacturing processes. The cost of polyurethane foam, our primary raw material, is indirectly influenced by oil prices. However, other market factors also affect foam prices, including the available supply of component chemicals, demand for related products from domestic and international manufacturers, competition among domestic suppliers, our purchase volumes and regulatory requirements. Consequently, it is difficult for us to accurately predict the impact that future inflation and other factors might have on the cost of polyurethane foam, our largest-volume raw material. If the cost of polyurethane foam increased significantly, and if we were unable to offset the cost increase through sales price increases or other expense reductions, our earnings could be materially negatively affected.

 

Recent reductions in oil prices have to date had no material impact on our cost of polyurethane foam or other raw materials. In addition, we do not have any indication yet as to whether or how the recent oil price reductions will impact our raw material costs.

 

As of January 2, 2016, our other assets included $2.6 million in cash value of life insurance, which is subject to market risk related to equity pricing and interest rate changes. The cash value is generated from life insurance policies that are being used as the funding vehicle for a retirement program for Span-America’s founder and former chairman and his ex-wife. The cash value is invested in a combination of fixed income life insurance contracts and a portfolio of mutual funds managed by an insurance company. The fixed income contracts are similar to fixed income bond funds and are therefore subject to interest rate and company risk. The mutual fund portfolios invest in common stocks and bonds in accordance with their individual investment objectives. These portfolios are exposed to stock market, company and interest rate risks similar to comparable mutual funds. We believe that substantial fluctuations in equity markets and interest rates and the resulting changes in cash value of life insurance would not have a material adverse effect on our financial position. During the first quarter of fiscal 2016, the cash value of life insurance increased by 3%, creating after-tax income of approximately $65,000.

 

Our credit facility accrues interest at a variable rate equal to 30-day LIBOR plus a margin ranging from 85 to 165 basis points depending on our then-applicable leverage ratio (as defined in the credit facility). Interest is payable monthly. The interest rate, including the margin of 85 basis points, was 1.2795% in January 2016. A material increase in interest rates could have a negative impact on our financial condition and earnings to the extent that we had significant outstanding borrowings under the facility. The degree of impact would vary depending on the level of the borrowings. We had $1.0 million outstanding under our credit facility as of January 2, 2016, which was used to partially fund the increase in working capital related to the seasonal promotion of consumer products described above. However, this outstanding balance was repaid in full by the end of January 2016. Assuming a constant level of debt of $1.0 million for an entire fiscal year, a 100 basis point increase in the interest rate on the outstanding loan balance would increase our interest expense by $10,000 per year.

 

 

As a result of the M.C. Healthcare asset acquisition, we own assets in Canada and manufacture and sell products in Canada in addition to the U.S. We are therefore subject to realized and unrealized gains or losses on foreign currency translation activities related to our operations. We do not currently hedge our foreign exchange risks because our foreign exchange transactions occur infrequently and in relatively small amounts since our revenues and costs are incurred in both U.S. and Canadian dollars. Our foreign exchange risk could increase if the exchange rates between the U.S. and Canadian dollars became more volatile.

 

Most of our Span-Canada operating costs and liabilities are denominated in Canadian dollars. Span-Canada sales are denominated in the currency of the country in which they occur. Accordingly, material changes in the Canadian-U.S. dollar exchange rate may significantly impact our revenues and costs and the value of our assets and liabilities. The magnitude and direction of this impact primarily depends on our production and sales volume, the proportion of our production and sales that occur in Canada, the proportion of our financial liabilities denominated in Canadian dollars and the magnitude, direction and duration of changes in the Canadian-U.S. dollar exchange rate. Increases in the value of the Canadian dollar versus the U.S. dollar reduce our earnings, which are reported in U.S. dollar terms. Assets and liabilities are translated into U.S. dollars at the quarter-end exchange rate. Revenues and expenses are translated at weighted average exchange rates. Based on our levels of assets and liabilities in Canada as of January 2, 2016, for every 1% increase in the value of a Canadian dollar compared to a U.S. dollar our total assets would have increased by approximately $102,000, and our total liabilities would have increased by approximately $11,000 for a net change of approximately $91,000. For the first quarter of fiscal year 2016, our net realized foreign currency exchange gain was $117,000 compared with a net realized foreign currency exchange gain of $71,000 in the first quarter of fiscal 2015. The increase in net realized foreign currency exchange gain in the first quarter of fiscal 2016 compared with the first quarter of fiscal 2015 was the result of the strengthening of the U.S. dollar relative to the Canadian dollar during the first quarter of fiscal 2016.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of January 2, 2016, and, based on their evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures were effective as of January 2, 2016. There were no changes in the Company’s internal control over financial reporting during our fiscal quarter ended January 2, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Disclosure controls and procedures are the Company’s controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

 

PART II. OTHER INFORMATION

  

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

We announced on November 28, 2007 that the Board authorized the Company to repurchase up to 138,772 shares of its common stock. On February 11, 2009, the Board expanded the repurchase program by 100,000 shares, bringing the total number of authorized shares to 238,772. In September 2015, the Board authorized the repurchase of 261,310 shares of common stock from former director Robert Johnston and his affiliate, The Jerry Zucker Revocable Trust (the “Johnston/Zucker shares”). Immediately prior to the repurchase of the Johnston/Zucker shares, the Company had a total of 66,489 remaining shares available to be repurchased under the plans authorized in 2007 and 2009. The Board therefore used the remaining previously authorized shares and authorized an additional 194,821 shares (261,310 – 66,489) to complete the Johnston/Zucker share repurchase. After the completion of the Johnston/Zucker share repurchase, there were no remaining shares available to be repurchased under previously authorized plans.

 

The Johnston/Zucker share repurchase was completed in two transactions on two different dates. The first transaction for 249,310 shares was completed on October 1, 2015, which occurred during our 2015 fiscal year that ended on October 3, 2015. The second transaction for 12,000 shares was completed on October 9, 2015 and was part of our first quarter of fiscal year 2016 as shown in the table below. Including the Johnston/Zucker repurchases and prior stock repurchases under the existing repurchase program, the Company has repurchased a total of 433,593 shares of its common stock since beginning the repurchase program in November 2007, or 15.6% of the outstanding shares at the beginning of the repurchase program.

 

 

Issuer Purchases of Equity Securities
Period		Total Number of Shares (or Units) Purchased				Average Price Paid per Share (or Unit)				Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs				Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under the Plans or Programs
10/04/15 – 10/31/15			12,000			$	17.49				0				0
11/01/15 – 11/28/15			0				0				0				0
11/29/15 – 01/02/16			0				0				0				0
Total			12,000			$	17.49				0				0

 

Our credit facility restricts stock repurchases. See the description of these restrictions under Part I – Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources, which description is incorporated herein by reference.

 

ITEM 6. EXHIBITS

 

31.1	Chief Executive Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act.

31.2	Chief Financial Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act.

 

32.1	Chief Executive Officer certification pursuant to Section 906 of the Sarbanes-Oxley Act.

32.2	Chief Financial Officer certification pursuant to Section 906 of the Sarbanes-Oxley Act.

 

101.INS**

XBRL Instance

 

101.SCH**

XBRL Taxonomy Extension Schema

 

101.CAL**

XBRL Taxonomy Extension Calculation

 

101.DEF**

XBRL Taxonomy Extension Definition

 

101.LAB**

XBRL Taxonomy Extension Labels

 

101.PRE**

XBRL Taxonomy Extension Presentation

 

**

XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

 

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.

 

SPAN-AMERICA MEDICAL SYSTEMS, INC.   /s/ Richard C. Coggins Richard C. Coggins Chief Financial Officer   /s/ James D. Ferguson James D. Ferguson President and Chief Executive Officer

 

 

Date: February 16, 2016

 

 

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