BOTHELL, Wash., July 31 /PRNewswire-FirstCall/ -- Cardiac Science Corporation , a global leader in external cardiac monitoring and defibrillation products, today announced strong results for the second quarter ended June 30, 2007.
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Revenue for the quarter was $44.9 million, an increase of 14.5% over the prior year period. The growth reflected a 39% increase in defibrillation sales, partially offset by a 6% decline in cardiac monitoring sales from the second quarter of 2006. Defibrillation was driven by domestic AED sales, which rose 83% from the prior year’s second quarter and 31% sequentially over first quarter of 2007, illustrating continued momentum and gains in market share. Cardiac monitoring revenue remained approximately flat compared to each of the last three quarters, despite the year-over-year contraction.
The Company reported net income of $4.5 million, or $0.19 per diluted share in the second quarter. Net income included a non-cash benefit of $6.0 million related to the Company’s settlement with Philips Medical Systems and charges of $2.0 million in legal and other costs related to this and other litigation during the quarter. The aggregate effect of these litigation- related items, net of income taxes, was to increase the already positive net income in the quarter by $2.7 million, or $0.12 per diluted share.
“Revenue this quarter surpassed our previous best performance, achieved in the first quarter of this year, and was driven by strength in our defibrillation sales. We are particularly pleased with the return to operating profitability and our domestic AED performance. In addition, the settlement of all our major litigation over the last 90 days represents a significant milestone for the Company,” said John Hinson, president and chief executive officer. “With the spending and distraction related to the litigation behind us, we are now able to concentrate our efforts on gaining market share in defibrillation and growing the cardiac monitoring business during the second half,” he concluded.
Second Quarter Results
Second quarter revenue of $44.9 million increased 14.5% from the $39.2 million in revenue reported in the second quarter of 2006. The second quarter 2007 gross margin was 48.5%, an increase over the gross margin from the second quarter of 2006 of 47.4%, driven by favorable product mix and manufacturing efficiencies.
Operating expenses in the second quarter of 2007 were $15.5 million, including the pre-tax effect of the Philips licensing income and litigation settlement and other litigation and related expenses. Excluding the licensing income and litigation settlement of $6.0 million and other litigation and related expenses of $2.0 million, operating expenses were up approximately $2.0 million compared to the second quarter of last year. This year-over-year increase is primarily related to sales commissions and other costs associated with the significant growth in revenue.
Litigation and related expenses during the second quarter totaled $2.0 million, comprised of settlement costs and legal fees related primarily to the three cases, Philips, IAML and Parker, which were settled between April and July. Operating expenses in the second quarter of 2006 included $1.3 million in litigation expenses relating to these same cases.
The Company recorded the settlement with Philips in the second quarter, which included recognition of a $6.0 million non-cash benefit related to the license rights given to Philips. In addition, as part of the settlement, the Company recorded intangible assets of $7.0 million, representing the value of the license rights the Company received from Philips. The intangible assets will be amortized through a non-cash charge to cost of goods sold at a rate of approximately $500,000 per year over the estimated remaining economic life of the related patents.
Including the licensing income and litigation settlement benefit of $6.0 million and other litigation and related expenses of $2.0 million, the Company reported net income of $4.5 million, or $0.19 per diluted share, for the second quarter of 2007. The after-tax impact of the licensing income and litigation settlement benefit and other litigation related expenses was $0.12 per diluted share.
EBITDA was $8.3 million for the second quarter of 2007. Excluding stock- based compensation expense and the litigation related items, Adjusted EBITDA was $4.9 million, or 11% of revenue. The Company generated $3.4 million in cash from operating activities during the quarter and ended the quarter with $14.2 million in cash and short-term investments.
Outlook
The Company continues to expect revenue growth for the full year to be at least 10%, reflecting continued significant growth in defibrillation revenue and slight improvements in cardiac monitoring and service revenue in the second half. The Company anticipates the strong second half results will reflect substantial year-over-year growth in each quarter, although the third quarter may show a sequential decrease compared to the second quarter.
For the full year 2007, gross margin is expected to be at the higher end of the previously indicated range of 46% to 48%, depending on several factors, including product pricing and mix and the timing of the impact of planned cost reductions and productivity increases. Although gross margin exceeded this range during the second quarter, the above factors and the anticipated increase in the proportion of OEM shipments (including the GE crash cart) are expected to reduce the average during the second half. These gross margin expectations include the amortization of the intangible assets received in the Philips settlement discussed above.
Operating expenses are expected to remain consistent with earlier guidance. The Company will take advantage of the significantly reduced legal spending in the second half of 2007 to invest more in research and development. Total spending in the sales and marketing and general and administrative areas, however, is expected to moderate as a percentage of revenue during the remainder of the year.
Operating profit should increase year over year, both in dollars and as a percentage of revenue. Adjusted EBITDA is still expected to be in a range between 9% and 11%.
As a result of the impact of the litigation settlements and expenses, net of income taxes, the Company has increased its overall 2007 net income guidance to between $6.0 million and $8.0 million, or between $0.26 and $0.34 per diluted share. Excluding the effects of the legal settlements and related litigation spending, this represents an increase to the upper end of the earlier guidance of approximately $0.02 per diluted share.
“The range of our expected results balances our expectation for continued momentum in domestic AED sales with the uncertainty related to the timing of GE shipments, as well as the uncertainty related to the timing of the domestic market re-entry by Medtronic Physio,” said Mike Matysik, chief financial officer. “If these things work in our favor, then we could certainly be in the upper portion of this range,” he concluded.
Non-GAAP and Pro Forma Financial Information
This news release contains a discussion of Adjusted EBITDA, which is a non-GAAP financial measure provided as a complement to results provided in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The term “Adjusted EBITDA” refers to a financial measure defined as earnings before net interest, income taxes, depreciation, amortization, stock-based compensation, merger related expenses and litigation expense. Adjusted EBITDA is not a substitute for measures determined in accordance with GAAP, and may not be comparable to Adjusted EBITDA as reported by other companies. Adjusted EBITDA is an integral part of the internal management reporting and planning process and is the primary measure used by management to evaluate the operating performance of the Company’s operations. The components of Adjusted EBITDA include the key revenue and expense items for which operating managers are responsible and upon which their performance is evaluated. The Company also uses Adjusted EBITDA for planning purposes and in presentations to its board of directors. Reconciliations of net income, the most comparable GAAP measure, to Adjusted EBITDA are contained in this press release.
Conference Call Information
Cardiac Science has scheduled a conference call for 4:30 p.m. Eastern Daylight Time today to discuss the Company’s financial results for the second quarter. The call will be hosted by John Hinson, chief executive officer, and Mike Matysik, chief financial officer.
To access the conference call, please dial (800) 240-7305. International participants can call (303) 262-2131. The call will also be webcast live on the web at http://www.cardiacscience.com. An audio replay of the call will be available for 7 days following the call at (800) 405-2236 for U.S. callers or (303) 590-3000 for those calling outside the U.S. The password required to access the replay is 11093331#. An audio archive will be available at http://www.cardiacscience.com for one month following the call.
About Cardiac Science Corporation
Cardiac Science is truly at the heart of saving lives. The Company develops, manufactures, and markets a family of advanced diagnostic and therapeutic cardiology devices and systems, including AEDs, electrocardiographs, stress test systems, Holter monitoring systems, hospital defibrillators, cardiac rehabilitation telemetry systems, patient monitor -- defibrillators and cardiology data management systems. Cardiac Science 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 that sold products under the trusted brand names Burdick(R), Powerheart(R), and Quinton(R). Cardiac Science is headquartered in Bothell, WA, and also has operations in Lake Forest, California; Deerfield, Wisconsin; Shanghai, China and Manchester, United Kingdom.
Forward Looking Statements
This press release contains forward-looking statements. The word “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. Forward looking statements in this press release include, but are not limited to, those relating to Cardiac Science Corporation’s future revenue, earnings, earnings per share, cash flow, gross margins, key distribution partnerships and revenue derived from them, operating expenses, research and development spending, product releases and revenue derived from them, and Adjusted EBITDA. These are forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may vary significantly from the results expressed or implied in such statements. Risks and uncertainties include the effect of competitive and economic factors, and the Company’s reaction to those factors, on business buying decisions with respect to the Company’s products; public health issues and other circumstances that could disrupt supply, delivery, or demand of products; the continued availability on acceptable terms of certain components and services essential to the Company’s business currently obtained by the Company from sole or limited sources; the ability of the Company to deliver to the marketplace and stimulate customer demand for new products, services and technological innovations on a timely basis; the effect that product transitions, changes in product pricing or mix, and/or increases in component costs could have on the Company’s gross margin; the effect that product quality problems could have on the Company’s sales and operating profits; the inventory risk associated with the Company’s need to order or commit to order product components in advance of customer orders; the effect that the Company’s dependency on manufacturing and logistics services provided by third parties may have on the quality, quantity or cost of products manufactured or services rendered; the Company’s dependency on the performance of distributors and other resellers of the Company’s products; and the potential impact of a finding that the Company has infringed on the intellectual property rights of others. More information on potential factors that could affect the Company’s financial results is included from time to time in the Company’s public reports filed with the SEC, including the Company’s Form 10-K for the fiscal year ended December 31, 2006, its Form 10-Q for the quarter ended March 31, 2007, and other filings with the SEC.
The information provided in this press release speaks as of the date of this announcement. Cardiac Science Corporation undertakes no duty or obligation to update the information provided herein.
Company Contact Investor Contact Mike Matysik EVC Group, Inc. Cardiac Science Corporation Douglas Sherk/Jenifer Kirtland Sr. Vice President and CFO (415) 896-6820 (425) 402-2009 Media Contact EVC Group, Inc. Steve DiMattia (646) 201-5445 Cardiac Science Corporation and Subsidiaries Condensed Consolidated Statements of Operations (unaudited) (in thousands, except share and per share amounts) Three Months Ended June 30 2007 2006 $ % $ % Revenues: Products $40,787 90.9% $35,007 89.3% Service 4,102 9.1% 4,214 10.7% Total revenues 44,889 100.0% 39,221 100.0% Cost of Revenues: Products 19,949 48.9% 17,511 50.0% Service 3,174 77.4% 3,120 74.0% Total cost of revenues 23,123 51.5% 20,631 52.6% Gross Profit: Products 20,838 51.1% 17,496 50.0% Service 928 22.6% 1,094 26.0% Gross profit 21,766 48.5% 18,590 47.4% Operating Expenses: Research and development 3,090 6.9% 2,875 7.3% Sales and marketing 11,445 25.5% 9,914 25.3% General and administrative 4,933 11.0% 4,662 11.9% Litigation and related expenses 2,029 4.5% 1,254 3.2% Licensing income and litigation settlement (6,000) -13.4% - 0.0% Total operating expenses 15,497 34.5% 18,705 47.7% Operating income (loss) 6,269 14.0% (115) -0.3% Other Income (Expense): Interest income (expense), net 74 0.2% (5) 0.0% Other income, net 327 0.7% 274 0.7% Total other income 401 0.9% 269 0.7% Income before income tax expense and minority interest 6,670 14.9% 154 0.4% Income tax expense (2,155) -4.8% (49) -0.1% Income before minority interest 4,515 10.1% 105 0.3% Minority interest 15 0.0% 13 0.0% Net income $4,530 10.1% $118 0.3% Net income per share - basic $0.20 $0.01 Net income per share - diluted $0.19 $0.01 Weighted average shares outstanding - basic 22,689,932 22,486,564 Weighted average shares outstanding - diluted 23,283,471 22,522,902 Cardiac Science Corporation and Subsidiaries Condensed Consolidated Statements of Operations (unaudited) (in thousands, except share and per share amounts) Six Months Ended June 30 2007 2006 $ % $ % Revenues: Products $78,478 90.7% $69,576 88.8% Service 8,081 9.3% 8,760 11.2% Total revenues 86,559 100.0% 78,336 100.0% Cost of Revenues: Products 38,786 49.4% 35,191 50.6% Service 6,127 75.8% 6,162 70.3% Total cost of revenues 44,913 51.9% 41,353 52.8% Gross Profit: Products 39,692 50.6% 34,385 49.4% Service 1,954 24.2% 2,598 29.7% Gross profit 41,646 48.1% 36,983 47.2% Operating Expenses: Research and development 6,072 7.0% 5,845 7.5% Sales and marketing 22,553 26.1% 19,297 24.6% General and administrative 9,445 10.9% 9,754 12.5% Litigation and related expenses 3,717 4.3% 1,973 2.5% Licensing income and litigation settlement (6,000) -6.9% -- 0.0% Total operating expenses 35,787 41.3% 36,869 47.1% Operating income 5,859 6.8% 114 0.1% Other Income (Expense): Interest income (expense), net 96 0.1% (55) 0.0% Other income, net 452 0.5% 505 0.6% Total other income 548 0.6% 450 0.6% Income before income tax expense and minority interest 6,407 7.4% 564 0.7% Income tax expense (2,080) -2.4% (208) -0.2% Income before minority interest 4,327 5.0% 356 0.5% Minority interest 37 0.0% 26 0.0% Net income $4,364 5.0% $382 0.5% Net income per share - basic $0.19 $0.02 Net income per share - diluted $0.19 $0.02 Weighted average shares outstanding - basic 22,651,053 22,458,843 Weighted average shares outstanding - diluted 23,187,206 22,565,413 Cardiac Science Corporation and Subsidiaries Condensed Consolidated Balance Sheets (unaudited) (in thousands) June 30, 2007 December 31, 2006 ASSETS Current Assets: Cash and cash equivalents $13,821 $9,819 Short-term investments 395 547 Accounts receivable, net 27,331 26,971 Inventories 20,190 17,617 Deferred income taxes, net 3,813 3,902 Prepaid expenses and other current assets 3,138 2,121 Total current assets 68,688 60,977 Other assets 208 209 Machinery and equipment, net of accumulated depreciation 5,287 5,956 Deferred income taxes, net 38,573 40,525 Intangible assets, net of accumulated amortization 37,044 31,869 Investment in unconsolidated entities 738 496 Goodwill 107,613 107,613 Total assets $258,151 $247,645 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities: Accounts payable $14,316 $11,761 Accrued liabilities 10,907 9,890 Warranty liability 2,905 2,532 Deferred revenue 7,706 7,111 Total current liabilities 35,834 31,294 Other liabilities 366 679 Total liabilities 36,200 31,973 Minority interest 37 75 Shareholders’ Equity 221,914 215,597 Total liabilities and shareholders’ equity $258,151 $247,645 Cardiac Science Corporation and Subsidiaries Condensed Consolidated Statements of Cash Flows (unaudited) (in thousands) Three Months Ended June 30 2007 2006 Operating Activities: Net income $4,530 $118 Adjustments to reconcile net income to cash provided by operating activities: Licensing income and litigation settlement (6,000) -- Depreciation and amortization 1,706 1,543 Deferred income taxes 2,027 49 Stock-based compensation 562 567 Minority interest (16) (13) Loss on disposal of machinery and equipment 1 -- Changes in operating assets and liabilities, net of business acquired: Accounts receivable, net (102) 864 Inventories (1,934) (280) Prepaid expenses and other assets (432) 370 Accounts payable 372 760 Accrued liabilities 1,904 (751) Warranty liability 297 52 Deferred revenue 460 (104) Net cash flows provided by operating activities 3,375 3,175 Investing Activities: Purchases of short-term investments (395) -- Maturities of short-term investments 149 -- Purchase of patents as part of litigation settlement (1,000) -- Purchases of machinery and equipment (494) (400) Payments related to the purchase of Cardiac Science, Inc. (292) (441) Net cash flows used in investing activities (2,032) (841) Financing Activities: Proceeds from exercise of stock options and issuance of shares under employee purchase plan 387 243 Net cash flows provided by financing activities 387 243 Net change in cash and cash equivalents 1,730 2,577 Cash and cash equivalents, beginning of period 12,091 6,169 Cash and cash equivalents, end of period $13,821 $8,746 Cardiac Science Corporation and Subsidiaries Condensed Consolidated Statements of Cash Flows (unaudited) (in thousands) Six Months Ended June 30 2007 2006 Operating Activities: Net income $4,364 $382 Adjustments to reconcile net income to cash provided by operating activities: Licensing income and litigation settlement (6,000) -- Depreciation and amortization 3,312 3,100 Deferred income taxes 1,952 112 Stock-based compensation 1,175 1,016 Minority interest (38) (26) Loss on disposal of machinery and equipment 4 -- Changes in operating assets and liabilities, net of business acquired: Accounts receivable, net (360) 898 Inventories (2,541) 1,774 Prepaid expenses and other assets (1,016) 986 Accounts payable 2,547 878 Accrued liabilities 1,266 (2,348) Warranty liability 373 63 Deferred revenue 595 (91) Net cash flows provided by operating activities 5,633 6,744 Investing Activities: Purchases of short-term investments (544) -- Maturities of short-term investments 696 -- Purchase of patents as part of litigation settlement (1,000) -- Purchases of machinery and equipment (822) (796) Payments related to the purchase of Cardiac Science, Inc. (562) (1,214) Net cash flows used in investing activities (2,232) (2,010) Financing Activities: Proceeds from exercise of stock options and issuance of shares under employee purchase plan 601 466 Net cash flows provided by financing activities 601 466 Net change in cash and cash equivalents 4,002 5,200 Cash and cash equivalents, beginning of period 9,819 3,546 Cash and cash equivalents, end of period $13,821 $8,746 Reconciliation of Net Income to Adjusted EBITDA Three Months Three Months Ended Ended June 30, 2007 June 30, 2006 % of % of revenue revenue Net income $4,530 10.1% $118 0.3% Depreciation and amortization 1,706 3.8% 1,543 3.9% Interest (income) expense (74) -0.2% 5 0.0% Income tax expense 2,155 4.8% 49 0.1% EBITDA 8,317 18.5% 1,715 4.4% Stock-based compensation 562 1.3% 567 1.4% Litigation and related expenses 2,029 4.5% 1,254 3.2% Licensing income and litigation settlement (6,000) -13.4% -- 0.0% Pro forma merger related adjustments -- 0.0% -- 0.0% Adjusted EBITDA $4,908 10.9% $3,536 9.0% Reconciliation of Net Income to Adjusted EBITDA YTD Months Ended YTD Months Ended June 30, 2007 June 30, 2006 % of % of revenue revenue Net income $4,364 5.0% $382 0.5% Depreciation and amortization 3,312 3.8% 3,100 4.0% Interest (income) expense (96) -0.1% 55 0.1% Income tax expense 2,080 2.4% 208 0.3% EBITDA 9,660 11.2% 3,745 4.8% Stock-based compensation 1,175 1.4% 1,016 1.3% Litigation and related expenses 3,717 4.3% 1,973 2.5% Licensing income and litigation settlement (6,000) -6.9% -- 0.0% Pro forma merger related adjustments -- 0.0% 419 0.5% Adjusted EBITDA $8,552 9.9% $7,153 9.1%
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CONTACT: Mike Matysik, Sr. Vice President and CFO of Cardiac ScienceCorporation, +1-425-402-2009; or investors, Douglas Sherk or JeniferKirtland, both of EVC Group, Inc., +1-415-896-6820, for Cardiac ScienceCorporation, or media, Steve DiMattia of EVC Group, Inc., +1-646-201-5445,for Cardiac Science Corporation
Web site: http://www.cardiacscience.com//
