BOTHELL, Wash., Feb. 23 /PRNewswire-FirstCall/ -- Cardiac Science Corporation , a global leader in advanced cardiac monitoring and defibrillation products, today announced results for the quarter ended December 31, 2005, reporting pro forma net income of $0.1 million and pro forma revenue growth of 9% over the third quarter of 2005.
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Pro forma net income for the fourth quarter excludes certain merger- related and other exceptional charges. Including these charges, which total approximately $2.6 million net of income taxes, the Company reported a net loss in accordance with U.S. generally accepted accounting principles(“GAAP”) of $2.5 million for the fourth quarter.
The fourth quarter was the first full quarter that included the results of both predecessor companies since the closing of the merger of Quinton Cardiology Systems, Inc. (“Quinton”) and Cardiac Science, Inc. (“CSI”) on September 1, 2005. Reported results for the year ended December 31, 2005 are comprised of Quinton’s financial results for the period prior to the closing of the merger and, since the closing, the combined results of Quinton and CSI.
Fourth Quarter Results
Revenue for the fourth quarter was $35.9 million, representing sequential growth of 31% over reported third quarter revenue of $27.4 million. Revenue for the fourth quarter increased by 9% over pro forma third quarter revenue (as if Quinton and CSI had been combined for all of the third quarter) of $32.9 million. Fourth quarter diagnostic monitoring and service revenues reflected single-digit percentage increases, while defibrillation revenue grew over 25 percent, compared with corresponding third quarter pro forma amounts.
“The sequential growth over the third quarter demonstrates that we have regained revenue momentum. In addition, by substantially completing our planned merger integration activities on schedule, and prior to year-end, we believe we are well-positioned to achieve our 2006 goals,” said John Hinson, president and chief executive officer.
Gross margin for the fourth quarter was 41.6%. Excluding merger-related charges and a write off of certain discontinued and field demonstration inventory items aggregating approximately $2.4 million, pro forma gross margin for the fourth quarter would have been 48.4%, an increase of one percentage point over the corresponding third quarter amount.
The Company reported a net loss for the fourth quarter of $2.5 million, or $0.11 per share. These results included planned retention bonuses and redundant staffing costs, as well as other non-recurring items, aggregating $4.3 million, or $2.6 million, net of tax. Excluding these items and the related income tax effect, the Company’s pro forma net income for this period would have been $0.1 million, or $0.01 per fully diluted share.
The fourth quarter loss was expected, but was higher than originally anticipated because it includes three significant exceptional charges. The Company wrote down a non-strategic minority preferred equity investment that the Company had obtained in a transaction over five years ago, resulting in a charge of $0.9 million. The Company also wrote off previously acquired technology rights of $0.3 million, which did not merit further investment and wrote off certain field demonstration inventory items aggregating $0.5 million.
Cash Flow and Liquidity
The Company used net cash in operating activities for the quarter of $2.4 million, principally due to merger-related payments. Adjusting for these merger-related payments, which were substantially in line with the Company’s expectations, pro forma cash provided by operations for the quarter would have been approximately break even. Additional transaction-related payments that were accrued at the time of the merger, amounting to approximately $1.6 million, were paid during the quarter. These transaction related costs were treated as a part of the merger consideration, so the related cash flows are classified as investing, rather than operating, activities.
The Company ended the quarter with $3.5 million in cash. In addition to its cash balances, the Company has a $20 million line of credit with Silicon Valley Bank, substantially all of which is currently available to fund future working capital needs or other strategic opportunities.
Outlook
For 2006, management expects revenue in the range of $160 to $175 million and gross margin in the range of 48% to 52%, depending on revenue mix. Fully taxed net income for 2006 is expected to be in the range of $5.0 to $6.0 million, or between $0.21 and $0.27 per fully diluted share.
The expected 2006 results include estimated non-cash stock-based compensation expense of $2.6 to $2.8 million. Expected 2006 results also include anticipated expenses for depreciation of $3.3 to $3.5 million and acquisition-related amortization of $3.5 to $3.7 million.
The Company expects a statutory combined federal and state tax rate for 2006 of 37 % to 38% of pre-tax income, adjusted to exclude non-deductible stock-based compensation. Because stock-based compensation is generally non- deductible for tax purposes, the Company expects that its effective tax rate on reported pre-tax income will be between 45% and 49%. However, the Company expects cash income taxes to be $4.0 to $5.0 million less than reported income tax expense, due to the benefit of tax loss carry forwards.
Management noted this 2006 guidance is consistent with that which was provided previously, with solid double-digit percentage revenue growth and with EBITDA, excluding stock-based compensation, in the range of 11% to 14% of revenues.
“We have been operating out of combined facilities since December,” said Mike Matysik, chief financial officer. “With the headcount and other cost reductions already implemented, we expect to see the full benefits of the related savings, as well as greater scale, in 2006,” he continued.
For the first quarter of 2006, management expects revenue to be in a range between $36 million to $38 million. While the merger integration activities are essentially complete, additional merger-related costs, estimated to be approximately $0.5 million pre-tax, will be incurred in the first quarter of 2006, after which no further merger-related expenses are expected to be incurred. Including these charges, the Company expects gross margin for the first quarter to be in a range between 48% and 50%, depending on revenue mix.
Net income for the first quarter is expected to be between breakeven and $0.5 million, or between $0.00 and $0.02 per fully diluted share. Excluding the merger-related charges of approximately $0.5 million per-tax, management expects first quarter pro forma earnings per share to be in the range of $0.01 to $0.03 per share.
First quarter results are expected to include non-cash stock-based compensation of $0.5 to $0.7 million and depreciation and amortization expenses of $1.6 to $1.8 million.
Pro Forma Financial Information
This press release contains certain financial information (presented on a “pro forma basis”) calculated on a basis other than United States generally accepted accounting principles (“GAAP”). Information presented on a pro forma basis relates to gross profit, gross margin, net income, earnings per share and operating cash flows for the three month period and year ended December 31, 2005, after adjusting for merger-related items and other items which are unusual in nature.
One of the pro forma adjustments to gross profit was for the effect of a charge to cost of sales resulting from a purchase accounting valuation adjustment to the inventory of CSI, which increased the value of inventory above its historical cost as of the date of the merger. An additional pro forma adjustment to gross profit was for the effect of merger-related retention bonuses and redundant facility and personnel costs that were incurred during a transitional period while the Company consolidated its manufacturing operations into one facility. The final pro forma adjustment to gross profit was for the effect of certain field demonstration and other inventory items that were written off during the quarter, including field demonstration units and discontinued product components.
Other pro forma adjustments include the effects of: (1) similar retention bonuses and redundant costs that were incurred during a transitional period while the Company consolidated its corporate headquarters into one facility; (2) the write-off of a technology investment that the Company has decided to abandon for strategic reasons; (3) the write-down of a non-strategic minority preferred equity interest in ScImage, which the Company received as consideration in a divestiture transaction in 2000; (4) the cost of tail insurance coverage that was purchased in the third quarter for directors and officers of the predecessor companies (Quinton and CSI); and (5) cost of merger-related shareholder litigation incurred in the second quarter of 2005.
The pro forma adjustments to operating cash flows relate to the payment of the merger related items severance and retention, the purchase of tail coverage under the predecessor companies’ insurance programs covering directors and officers and other less significant items.
The estimated income tax effect (as applicable) relating to the foregoing items is also included in the adjustments to arrive at pro forma net income and earnings per share information. Management has applied an estimated statutory rate of 38% to these pro forma adjustments.
Management believes that this pro forma information is meaningful because the write-downs of the minority equity interest, the technology investment and the inventory items that are the subject of the pro forma adjustments occur infrequently. In addition, the merger related items that are the subject of the pro forma adjustments are expected to occur infrequently once the integration of Quinton and CSI is complete and once the inventory items that were subject to revaluation as of the merger date have been sold. These charges are not expected to extend beyond the first quarter of 2006.
Conference Call / Webcast
Cardiac Science has scheduled a conference call for Thursday, February 23, 2006 at 4:30 p.m. Eastern Standard Time to discuss the Company’s fourth quarter financial results with analysts and investors. The call will be hosted by John Hinson, chief executive officer, and Mike Matysik, chief financial officer.
To access the conference call, dial 877-851-1757. International participants can call 706-679-3220. The ID number is 5566110. The call will also be audio cast live through the web at: www.cardiacscience.com.
An audio replay of the call will be available for 7 days following the call at 800-642-1687 for U.S. callers or 706-645-9291 for those calling outside the U.S. The ID number is 5566110. An audio archive will be available at www.cardiacscience.com for one month following the call.
About Cardiac Science Corporation
Cardiac Science Corporation develops, manufactures, and markets a family of advanced diagnostic and therapeutic cardiology devices and systems, including automated external defibrillators, electrocardiographs, stress test systems, Holter monitoring systems, hospital defibrillators, cardiac rehabilitation telemetry systems, patient monitor -- defibrillators and cardiology data management systems. Cardiac Science Corporation also sells a variety of related products and consumables, and provides a comprehensive portfolio of training, maintenance and support services.
The Company is the successor to various entities that have owned and operated cardiology related businesses, which sold products under the trusted brand names Burdick(R), Powerheart(R), and Quinton(R). Cardiac Science Corporation is headquartered in Bothell, WA, and also has operations in Lake Forest, California, Deerfield, Wisconsin, Shanghai, China, Copenhagen, Denmark and Manchester, United Kingdom.
Forward-Looking Statements
This press release contains forward-looking statements, including, but not limited to, those relating to Cardiac Science Corporation’s future revenue, earnings, earnings per share, depreciation and amortization expenses, stock- based compensation charges, litigation related expenses, merger related costs and income taxes and that involve a number of risks and uncertainties. These are forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. The words “believe,” “expect,” “intend,” anticipate,” variations of such words, and similar expressions identify forward-looking statements, but their absence does not mean that the statement is not forward-looking. Actual results may vary significantly from the results expressed or implied in such statements. Factors that could cause or contribute to such varying results include, but are not limited to, delays in our product development activities, regulatory approvals and commercial introduction of product enhancements and new products, changes in competitors’ products or their pricing which may impair the market acceptance of our products or force us to lower our prices, unexpected softness in the market demand for our products, changes to expected order cycles, disruptions in supplies or increases in prices of certain components we use in our products, unexpected delays or difficulties in completing merger-related integration activities, changes in the number of primary or fully diluted shares outstanding, the impact of acquisitions and divestitures, circumstances or events that may lead to limitations on the usage of our income tax operating loss carryforwards or other changes in circumstances relating to taxes on our income, the final court decision with respect to currently pending litigation, and our ability to maintain good relationships with our employees. These and other risks are more fully described in the registration statement on Form S-4/A that was filed by Cardiac Science Corporation under the name CSQ Holding Company on July 28, 2005, under the caption “Risk Factors,” and in the Annual Reports of Quinton Cardiology Systems, Inc. and Cardiac Science, Inc. on Form 10-K for the year ended December 31, 2004, under the captions “Certain Factors that May Affect Future Results,” in the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 under the caption “Certain Factors that May Affect Future Results,” and in other documents we file with the Securities and Exchange Commission. Cardiac Science Corporation undertakes no duty or obligation to update the information provided herein.
Contact: Mike Matysik, senior vice president and chief financial officer 425-402-2009 www.cardiacscience.com Cardiac Science Corporation and Subsidiaries Condensed Consolidated Statements of Operations (unaudited) (in thousands, except share and per share amounts) Three Months Ended December 31, 2004 2005 $ % $ % Revenues: Products $20,871 87.7% $31,827 88.6% Service 2,934 12.3% 4,079 11.4% Total revenues 23,805 100.0% 35,906 100.0% Cost of Revenues: Products 11,196 53.6% 18,286 57.5% Service 1,884 64.2% 2,683 65.8% Total cost of revenues 13,080 54.9% 20,969 58.4% Gross Profit: Products 9,675 46.4% 13,541 42.5% Service 1,050 35.8% 1,396 34.2% Gross profit 10,725 45.1% 14,937 41.6% Operating Expenses: Research and development 1,888 7.9% 3,374 9.4% Sales and Marketing 4,872 20.5% 9,107 25.4% General and administrative 2,283 9.6% 6,118 17.0% Total operating expenses 9,043 38.0% 18,599 51.8% Operating income (loss) 1,682 7.1% (3,662) -10.2% Other Income (Expense): Interest income (expense) (48) -0.2% (56) -0.1% Other income (expense), net 381 1.6% (635) -1.8% Total other income (loss) 333 1.4% (691) -1.9% Income (loss) before income taxes and minority interest 2,015 8.5% (4,353) -12.1% Income tax benefit 8,960 37.6% 1,819 5.1% Income (loss) before minority interest in loss of consolidated entity 10,975 46.1% (2,534) -7.0% Minority Interest in loss of consolidated entity 4 0.0% 7 0.0% Net income (loss) $10,979 46.1% $(2,527) -7.0% Income (loss) per share - basic $1.01 $(0.11) Income (loss) per share - diluted $0.96 $(0.11) Weighted average shares outstanding - basic 10,838,402 22,398,829 Diluted Weighted average shares outstanding - diluted 11,412,643 22,398,829 Twelve Months Ended December 31, 2004 2005 $ % $ % Revenues: Products $77,373 86.4% $93,460 87.6% Service 12,230 13.6% 13,190 12.4% Total revenues 89,603 100.0% 106,650 100.0% Cost of Revenues: Products 42,862 55.4% 51,195 54.8% Service 7,440 60.8% 8,599 65.2% Total cost of revenues 50,302 56.1% 59,794 56.1% Gross Profit: Products 34,511 44.6% 42,265 45.2% Service 4,790 39.2% 4,591 34.8% Gross profit 39,301 43.9% 46,856 43.9% Operating Expenses: Research and development 7,397 8.3% 9,353 8.7% Sales and Marketing 18,378 20.5% 24,957 23.4% General and administrative 8,348 9.3% 15,126 14.2% Total operating expenses 34,123 38.1% 49,436 46.3% Operating income (loss) 5,178 5.8% (2,580) -2.4% Other Income (Expense): Interest income (expense) (70) -0.1% 325 0.3% Other income (expense), net 1,031 1.2% (487) -0.5% Total other income (loss) 961 1.1% (162) -0.2% Income (loss) before income taxes and minority interest 6,139 6.9% (2,742) -2.6% Income tax benefit 8,890 9.9% 1,473 1.4% Income (loss) before minority interest in loss of consolidated entity 15,029 16.8% (1,269) -1.2% Minority Interest in loss of consolidated entity 39 0.0% 31 0.0% Net income (loss) $15,068 16.8% $(1,238) -1.2% Income (loss) per share - basic $1.47 $(0.08) Income (loss) per share - diluted $1.39 $(0.08) Weighted average shares outstanding - basic 10,236,838 14,695,261 Diluted Weighted average shares outstanding - diluted 10,814,680 14,695,261 Cardiac Science Corporation and Subsidiaries Condensed Consolidated Balance Sheets (unaudited) (in thousands) Dec 31, 2004 Dec 31, 2005 ASSETS Current Assets: Cash and cash equivalents $21,902 $3,546 Marketable equity securities 646 -- Accounts receivable, net 13,649 25,738 Inventories 11,047 22,052 Deferred income taxes 5,542 12,115 Prepaid expenses and other current assets 790 2,511 Total current assets 53,576 65,962 Machinery and equipment, net of accumulated depreciation 4,314 7,631 Intangibles assets, net of accumulated amortization 5,619 35,338 Goodwill 9,072 111,215 Investment in unconsolidated entities 1,000 462 Other assets -- 100 Deferred income taxes 3,594 27,849 Total assets $77,175 $248,557 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities: Accounts payable $5,615 $11,642 Accrued liabilities 6,220 11,918 Warranty liabilities 2,093 2,348 Deferred revenue 4,754 7,924 Total current liabilities 18,682 33,832 Other liabilities -- 1,806 Total liabilities 18,682 35,638 Minority interest in consolidated entity 159 128 Shareholders’ Equity 58,334 212,791 Total liabilities and shareholders’ equity $77,175 $248,557 Cardiac Science Corporation and Subsidiaries Condensed Consolidated Statements of Cash Flows (unaudited) (in thousands) Three Months Twelve Months Ended Ended December 31, December 31, 2004 2005 2004 2005 Operating Activities: Net income (loss) $10,979 $(2,527) $15,068 $(1,238) Adjustments to reconcile net income (loss) to cash from (used in) operating activities: Depreciation and amortization 394 1,606 1,574 3,212 Loss on sale of machinery and equipment 16 6 20 6 Stock-based compensation expense 19 19 73 58 Gain on sale of marketable equity securities (610) -- (610) (15) Deferred taxes (9,028) (1,856) (9,014) (1,565) Minority interest in consolidated entity (4) (7) (39) (31) Gain on sale of hemodynamic monitoring business -- -- (633) -- Loss on disposal of technology -- 270 -- 270 Loss in value of investment in unconsolidated entity -- 916 -- 916 Effect of foreign currency exchange -- 5 -- 5 Changes in operating assets and liabilities, net of businesses acquired and divested: Accounts receivable 199 (5,194) (1,169) (5,034) Inventories (245) 1,638 775 2,334 Prepaid expenses and other current assets 9 (105) (51) (123) Accounts payable (378) (775) (568) (2,742) Accrued and other liabilities 1,814 1,846 332 1,055 Warranty liability 84 14 49 (208) Deferred revenue 389 1,752 452 2,250 Net cash flows from (used in) operating activities 3,638 (2,392) 6,259 (850) Investing Activities: Purchases of machinery and equipment (323) (696) (666) (1,187) Payments of acquisition related costs, net of cash acquired of $6,295 -- (1,588) -- (17,491) Proceeds from sale of marketable equity securities -- -- -- 625 Proceeds from collection of a note receivable issued in connection with the sale of hemodynamic monitoring product line 750 -- 750 -- Purchase of technology -- -- (125) -- Net cash flows from (used in) investing activities 427 (2,284) (41) (18,053) Financing Activities: Proceeds from issuance of stock, net of issuance costs -- (32) 15,451 (172) Proceeds from exercise of stock options and employee stock purchase plan 154 135 890 719 Repayments on bank line of credit, net -- -- (354) -- Payments of long term debt (91) -- (363) -- Payment of note payable related to purchase of technology -- -- (125) -- Net cash flows from financing activities 63 103 15,499 547 Net change in cash and cash equivalents 4,128 (4,573) 21,717 (18,356) Cash and cash equivalents, beginning of period 17,774 8,119 185 21,902 Cash and cash equivalents, end of period $21,902 $3,546 $21,902 $3,546 Cardiac Science Corporation and Subsidiaries Reconciliation of GAAP Results to Pro Forma Results (in thousands, except share and per share amounts) Reconciliation of Net Income to Pro Forma Net Income Three months ended December 31, 2005 (In thousands, except per share amounts) As Reported Pro Forma Adjustments in Accordance Inventory Technology Investment Pro with Merger Inventory Write- Write- Write- Forma GAAP Expenses Valuation off off off Results Total revenues $35,906 $-- $-- $-- $-- $-- $35,906 Gross profit 14,937 919 1,052 465 -- -- 17,373 % 41.6% 48.4% Total operating expenses 18,599 (573) -- -- (347) -- 17,679 Operating income (loss) (3,662) 1,492 1,052 465 347 -- (306) Total other income (expense) (691) -- -- -- -- 916 225 Income (loss) before income taxes (4,353) 1,492 1,052 465 347 916 (81) Income tax (expense) benefit 1,819 (567) (399) (177) (132) (348) 196 Income (loss) before minority interest (2,534) 925 653 288 215 568 115 Minority interest 7 -- -- -- -- -- 7 Net income (loss) $(2,527) $925 $653 $288 $215 $568 $122 Weighted average shares - primary 22,399 22,399 Weighted average shares - fully diluted 22,399 22,815 Net income (loss) per share (1) $(0.11) $0.01 Reconciliation of Net Income to Pro Forma Net Income Year ended December 31, 2005 (In thousands, except per share amounts) As Reported Pro Forma Adjustments in Accordance Inventory Technology Investment Pro with Merger Inventory Write- Write- Write- Forma GAAP Expenses Valuation off off off Results Total revenues $106,650 $-- $-- $-- $-- $-- $106,650 Gross profit 46,856 1,186 1,567 465 -- -- 50,074 % 43.9% 47.0% Total operating expenses 49,436 (2,244) -- -- (347) -- 46,845 Operating income (loss) (2,580) 3,430 1,567 465 347 -- 3,229 Total other income (expense) (162) -- -- -- -- 916 754 Income (loss) before income taxes (2,742) 3,430 1,567 465 347 916 3,983 Income tax (expense) benefit 1,473 (1,303) (595) (177) (132) (348) (1,082) Income (loss) before minority interest (1,269) 2,127 972 288 215 568 2,901 Minority interest 31 -- -- -- -- -- 31 Net income (loss) $(1,238) $2,127 $972 $288 $215 $568 $2,932 Weighted average shares - primary 14,695 14,695 Weighted average shares - fully diluted 14,695 15,173 Net income (loss) per share (1) $(0.08) $0.19 (1) Primary weighted average shares are used for computing net loss per share and fully diluted weighted average shares are used for computing net income per share. Reconciliation of Cash Flows From Operations to Pro Forma Cash Flow From Operations (In thousands, except per share amounts) Pro Forma GAAP
