BOTHELL, Wash., Feb. 27 /PRNewswire-FirstCall/ -- Cardiac Science Corporation , a global leader in external cardiac monitoring and defibrillation products, today announced financial results for the fourth quarter and full year ended December 31, 2006.
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Revenue for the fourth quarter increased 9% to $39.0 million from revenue for the fourth quarter of 2005 of $35.9 million. The growth reflected a 41% increase in defibrillation sales, partially offset by an 11% decline in cardiac monitoring revenue. Domestic AED sales rose 50% from the prior year's fourth quarter and international AED sales increased 31%, despite a temporary decline in sales in Japan due to the transition to a recently-introduced AED product. The Company reported a small net loss of $35,000, or $0.00 per share, in the fourth quarter of 2006, compared with a net loss of $2.5 million, or $0.11 per share, in the fourth quarter of 2005.
"Revenue growth in the fourth quarter was driven by strong sales of our defibrillation products, resulting from increasing adoption of AEDs in commercial and public venues in the U.S. and overseas," said John Hinson, president and chief executive officer.
For the full year 2006, revenue totaled $155.4 million, an increase of 46% compared with revenue reported on a GAAP basis for 2005 of $106.7 million. Revenue was up approximately 10% compared with pro forma 2005 revenue, giving full effect to the results of the two predecessor companies, Quinton Cardiology Systems, Inc. (Quinton) and Cardiac Science, Inc. (CSI), as if the merger of the two had been completed on January 1, 2005. The Company reported net income of $49,000, or $0.00 per share, for 2006, compared with a net loss of $1.2 million, or $(0.08) per share, in 2005, as reported on a GAAP basis.
Commenting on the year just completed, Mr. Hinson stated, "We clearly made progress in 2006, integrating our operations post-merger, growing our AED operations, introducing new products with improved functionality, increasing revenue overseas, decreasing our cost structure and strengthening our intellectual property portfolio. While we encountered several challenges during the past year, we significantly improved year over year results, with Adjusted EBITDA increasing to $8.2 million for 2006 from negative $9.0 million for 2005 on a pro forma basis, an improvement of over $17 million."
Fourth Quarter Results
Fourth quarter 2006 revenue of $39.0 million increased 9% from the $35.9 million in revenue reported in the fourth quarter of 2005. Fourth quarter gross margin was 46.7%. The fourth quarter gross margin was below the 47.4% margin achieved in the third quarter of 2006, primarily due to a trade-in promotion offered to customers with the introduction of our new Powerheart(R) G-3 Plus AED during the quarter. Gross margin was also negatively impacted by changes in the mix of cardiac monitoring products and by a decline in service revenue in our AED business. The Company believes that the decline in gross margin from quarter to quarter is within the range of normal fluctuations in gross margins that investors should expect.
Operating expense in the fourth quarter of 2006 was $19.1 million, compared with $18.6 million in the fourth quarter of the prior year. Included in this was $625,000 in litigation related expense, primarily related to a patent infringement lawsuit with Philips Medical Systems and two other cases relating to the business of the former CSI. All three of these cases are currently scheduled to go to trial in the second quarter of 2007. The Company expects that litigation expenses should decline significantly once these cases are resolved.
The Company reported a net loss of $35,000 for the fourth quarter of 2006, which included a tax benefit of $614,000 that was mostly due to increased research and development tax credits resulting from the reinstatement of these credits by Congress prior to year end.
The Company used $137,000 in cash for operating activities during the quarter, primarily due to an increase in working capital relating to significant sales near quarter end. Cash at the end of the year totaled $10.4 million and there was no outstanding long-term debt.
Fiscal 2006 Results
For 2006, the Company generated revenue of $155.4 million, compared with $106.7 million in reported revenue for 2005, an increase of 46%. Fiscal year 2006 revenue increased by approximately 10% over pro forma revenue for 2005, which would have been $141.9 million had Quinton and CSI been combined during that period. Comparing current year revenue to prior year pro forma combined revenue, 2006 defibrillation revenue was up 32%, cardiac monitoring revenue was down 4% and service revenue increased 1%.
Gross margin for 2006 was 47.1% compared with 43.9% for the comparable period a year ago. The Company posted net income of $49,000, or $0.00 per share, in 2006. This compares with a net loss of $1.2 million, or $(0.08) per share, in 2005. Net income for 2006 included a tax benefit of $615,000, mostly due to the previously mentioned research and development credits.
The Company generated $8.6 million in cash from operations in 2006, despite $3.9 million in litigation expenses. This compares to a use of cash of $850,000 in 2005.
Outlook
"This year we will focus our efforts on several key areas that we believe will increase shareholder value," said Mr. Hinson. "These include continuing our worldwide double-digit AED growth, reinvigorating our cardiac monitoring sales based on a restructured U.S. organization, increasing service revenue and profitability, and releasing our hospital "crash cart" defibrillator. We believe that we are poised for a very successful 2007."
The Company continues to expect revenue growth for 2007 to be approximately 10%, with double-digit growth in defibrillation revenues and more modest growth in cardiac monitoring and service revenues.
For 2007, gross margin is expected to be in a range between 46% and 48%, depending on several factors, including product pricing, the mix of sales through our different distribution channels, and the timing of the impact of planned productivity increases and cost reductions.
While operating expenses may fluctuate from quarter to quarter, we continue to expect operating expenses, excluding litigation, to grow over the course of the year at about one-half of the rate of our revenue growth.
The company expects reported net income, inclusive of an income tax rate of 37%, to be in a range between $3 and $4 million, or between $0.13 and $0.17 per share. Adjusted EBITDA is expected to be in a range between 7% and 9% of revenue.
"Given the momentum we are currently seeing in AED sales and the inability of one of our largest competitors to ship product domestically, we see upside opportunity in defibrillation," said Mike Matysik, chief financial officer. "Despite the recent contraction in our cardiac monitoring business, we expect to see some growth in 2007. Our optimism is based on a new strategy which enables cross-channel sales of all of our Quinton and Burdick products within our domestic distribution network. We still have some uncertainty with respect to litigation, which creates some profitability risk. However, we expect growth in revenue and increasing profit and cash flow over the course of the year," Matysik 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 and merger related expenses. 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.
In addition, the Company believes that comparisons of the full year 2006 results with 2005 may not be meaningful because results for the fiscal 2005 include the performance of Quinton for the full period, but include the results of CSI for only the four-month period after the merger date of September 1, 2005. Accordingly, the Company believes that pro forma results, giving effect to the combination of Quinton and CSI as if the two companies had been combined for the full period in 2005, may be helpful to investors' comparison of the Company's 2006 results. Summaries of pro forma results, as determined in accordance with GAAP, and reconciliations of those GAAP pro forma results to Adjusted EBITDA are also contained in this press release.
Conference Call Information
Cardiac Science has scheduled a conference call for 4:30 p.m. Eastern Standard Time today to discuss the Company's financial results for the fourth 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) 218-8862. International participants can call (303) 262-2130. The call will also be webcast live on the web at 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 11082862#. An audio archive will be available at 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, litigation related expenses, trial dates, 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. Factors that could cause or contribute to such varying results and other risks are more fully described in the Annual Report on Form 10-K for the year ended December 31, 2005 and other documents filed by Cardiac Science Corporation. 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 December 31 2006 2005 $ % $ % Revenues: Products $34,964 89.7% $31,827 88.6% Service 4,013 10.3% 4,079 11.4% Total revenues 38,977 100.0% 35,906 100.0% Cost of Revenues: Products 17,756 50.8% 18,286 57.5% Service 3,038 75.7% 2,683 65.8% Total cost of revenues 20,794 53.3% 20,969 58.4% Gross Profit: Products 17,208 49.2% 13,541 42.5% Service 975 24.3% 1,396 34.2% Gross profit 18,183 46.7% 14,937 41.6% Operating Expenses: Research and development 3,096 7.9% 3,374 9.4% Sales 8,843 22.7% 7,860 21.9% Marketing 1,775 4.6% 1,247 3.5% General and administrative 5,337 13.7% 6,118 17.0% Total operating expenses 19,051 48.9% 18,599 51.8% Operating loss (868) -2.2% (3,662) -10.2% Other Income (Expense): Interest income (expense), net 21 0.1% (56) -0.1% Other income (expense), net 183 0.5% (635) -1.8% Total other income (loss) 204 0.5% (691) -1.9% Loss before income taxes and minority interest (664) -1.7% (4,353) -12.1% Income tax benefit 614 1.6% 1,819 5.1% Loss before minority interest in loss of consolidated entity (50) -0.1% (2,534) -7.0% Minority interest in loss of consolidated entity 15 0.0% 7 0.0% Net Loss: $(35) -0.1% $(2,527) -7.0% Loss per share - basic $(0.00) $(0.11) Loss per share - diluted $(0.00) $(0.11) Weighted average shares outstanding - basic 22,565,801 22,398,829 Weighted average shares outstanding - diluted 22,565,801 22,398,829 Cardiac Science Corporation and Subsidiaries Condensed Consolidated Statements of Operations (unaudited) (in thousands, except share and per share amounts) Twelve Months Ended December 30, 2006 2005 $ % $ % Revenues: Products $138,430 89.1% $93,460 87.6% Service 16,999 10.9% 13,190 12.4% Total revenues 155,429 100.0% 106,650 100.0% Cost of Revenues: Products 69,857 50.5% 51,195 54.8% Service 12,338 72.6% 8,599 65.2% Total cost of revenues 82,195 52.9% 59,794 56.1% Gross Profit: Products 68,573 49.5% 42,265 45.2% Service 4,661 27.4% 4,591 34.8% Gross profit 73,234 47.1% 46,856 43.9% Operating Expenses: Research and development 11,733 7.5% 9,353 8.7% Sales 32,888 21.2% 21,438 20.1% Marketing 7,072 4.5% 3,519 3.3% General and administrative 22,927 14.8% 15,126 14.2% Total operating expenses 74,620 48.0% 49,436 46.3% Operating loss (1,386) -0.9% (2,580) -2.4% Other Income (Expense): Interest income (expense), net (16) 0.0% 325 0.3% Other income (expense), net 782 0.5% (487) -0.5% Total other income (loss) 766 0.5% (162) -0.2% Loss before income taxes and minority interest (620) -0.4% (2,742) -2.6% Income tax benefit 615 0.4% 1,473 1.4% Loss before minority interest in loss of consolidated entity (5) 0.0% (1,269) -1.2% Minority interest in loss of consolidated entity 54 0.0% 31 0.0% Net income (loss) $49 0.0% $(1,238) -1.2% Income (loss) per share - basic $0.00 $(0.08) Income (loss) per share - diluted $0.00 $(0.08) Weighted average shares outstanding - basic 22,502,040 14,695,261 Weighted average shares outstanding - diluted 22,555,326 14,695,261 Cardiac Science Corporation and Subsidiaries Condensed Consolidated Balance Sheets (unaudited) (in thousands) December 31, December 31, 2006 2005 ASSETS Current Assets: Cash and cash equivalents $10,366 $3,546 Accounts receivable, net 26,971 25,738 Inventories 17,617 22,052 Deferred income taxes 3,902 12,115 Prepaid expenses and other current assets 1,891 2,511 Total current assets 60,747 65,962 Machinery and equipment, net of accumulated depreciation 5,956 7,631 Intangible assets, net of accumulated amortization 31,869 35,338 Goodwill 107,612 111,215 Investment in unconsolidated entities 496 462 Other assets 209 100 Deferred income taxes, net 41,054 27,849 Total assets $247,943 $248,557 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $11,761 $11,642 Accrued liabilities 10,188 11,918 Warranty liability 2,532 2,348 Deferred revenue 7,111 7,924 Total current liabilities 31,592 33,832 Other liabilities 679 1,806 Total liabilities 32,271 35,638 Minority interest in consolidated entity 75 128 Shareholders' Equity 215,597 212,791 Total liabilities and shareholders' equity $247,943 $248,557 Cardiac Science Corporation and Subsidiaries Condensed Consolidated Statements of Cash Flows (unaudited) (in thousands) Three Months Ended December 31 2006 2005 Operating Activities: Net loss (35) $ (2,527) Adjustments to reconcile net loss to cash used in operating activities: Depreciation and amortization 1,600 1,606 Loss on disposal of machinery and equipment 58 6 Stock-based compensation expense 490 19 Deferred income taxes (1,066) (1,856) Minority interest in consolidated entity (14) (7) Loss on disposal of technology - 270 Loss in value of investment in unconsolidated entity - 916 Changes in operating assets and liabilities, net of business acquired: Accounts receivable (4,325) (5,194) Inventories 2,259 1,638 Prepaid expenses and other current assets 74 (105) Accounts payable (615) (770) Accrued and other liabilities 1,569 1,846 Warranty liability (134) 14 Deferred revenue 2 1,752 Net cash flows used in operating activities (137) (2,392) Investing Activities: Purchases of machinery and equipment, net (316) (696) Payments of acquisition related costs (135) (1,588) Proceeds from collection of note (Defibtech) - - Net cash flows used in investing activities (451) (2,284) Financing Activities: Proceeds from exercise of stock options and employee stock purchase plan 255 135 Proceeds from issuance of stock, net of issuance costs - (32) Net cash flows from financing activities 255 103 Net change in cash and cash equivalents (333) (4,573) Cash and cash equivalents, beginning of period 10,699 8,119 Cash and cash equivalents, end of period $10,366 $3,546 Cardiac Science Corporation and Subsidiaries Condensed Consolidated Statements of Cash Flows (unaudited) (in thousands) Twelve Months Ended December 31 2006 2005 Operating Activities: Net income (loss) $49 $(1,238) Adjustments to reconcile net (income) loss to cash from (used in) operating activities: Depreciation and amortization 6,261 3,212 Loss on sale of machinery and equipment 58 6 Stock-based compensation expense 2,028 58 Deferred income taxes (1,299) (1,565) Minority interest in consolidated entity (53) (31) Gain on sale of marketable equity securities - (15) Loss on disposal of technology - 270 Loss in value of investment in unconsolidated entity - 916 Changes in operating assets and liabilities, net of business acquired: Accounts receivable (1,189) (5,034) Inventories 2,956 2,334 Prepaid expenses and other current assets 1,408 (118) Accounts payable 330 (2,742) Accrued and other liabilities (1,390) 1,055 Warranty liability (95) (208) Deferred revenue (465) 2,250 Net cash flows from (used in) operating activities 8,599 (850) Investing Activities: Purchases of machinery and equipment, net (1,249) (1,187) Payments of acquisition related costs (1,665) (17,491) Proceeds from collection of note 238 - Proceeds from sale of marketable equity securities - 625 Net cash flows used in investing activities (2,676) (18,053) Financing Activities: Proceeds from exercise of stock options and employee stock purchase plan 897 719 Proceeds from issuance of stock, net of issuance costs - (172) Net cash flows from financing activities 897 547 Net change in cash and cash equivalents 6,820 (18,356) Cash and cash equivalents, beginning of period 3,546 21,902 Cash and cash equivalents, end of period $10,366 $3,546 Cardiac Science Corporation and Subsidiaries Reconciliation of GAAP Results to Non-GAAP Results (unaudited) (in thousands) Reconciliation of Net Income to Adjusted EBITDA Three Months Three Months Ended Ended December 31, December 31, 2006 2005 % of % of revenue revenue Net loss $(35) -0.1% $(2,527) -7.0% Depreciation and amortization 1,600 4.1% 1,606 4.5% Interest income (expense) (21) -0.1% 56 0.2% Income tax benefit (614) -1.6% (1,819) -5.1% EBITDA 930 2.4% (2,684) -7.5% Stock-based compensation expense 490 1.3% 19 0.1% Pro forma merger related adjustments - 0.0% 2,544 2.4% Adjusted EBITDA $1,420 3.6% $(121) -0.3% Reconciliation of Net Income (Loss) to Adjusted EBITDA Twelve Months Twelve Months Ended Ended December 31, December 31, 2006 2005 % of % of revenue revenue Net income (loss) $49 0.0% $(1,238) -1.2% Depreciation and amortization 6,261 4.0% 3,212 3.0% Interest income (expense) 16 0.0% (325) -0.3% Income tax benefit (615) -0.4% (1,473) -1.4% EBITDA 5,711 3.7% 176 0.2% Stock-based compensation expense 2,028 1.3% 58 0.1% Pro forma merger related adjustments 419 0.3% 7,149 6.7% Adjusted EBITDA $8,158 5.2% $7,383 6.9% Additional Supplemental Information: Stock-Based Compensation Detail Three Months Twelve Months Ended Ended December 31, December 31, 2006 2006 Cost of revenue $98 $335 Research and development 71 320 Sales 105 471 Marketing 62 252 General and administrative 154 650 Total stock-based compensation $490 $2,028 Cardiac Science Corporation and Subsidiaries Comparison of Current Year Results to Prior Year Pro Forma Combined Results of Quinton and CSI (unaudited) (in thousands) Three Months Twelve Months Ended Ended Dec. 31, Dec. 31, Dec. 31, Dec. 31, 2006 2005 2006 2005 Revenue 38,977 35,906 155,429 141,943 Cost of revenues 20,794 20,969 82,195 78,237 Gross profit 18,183 14,937 73,234 63,706 % 46.7% 41.6% 47.1% 44.9% Operating costs 19,051 18,599 74,620 83,975 Goodwill impairment - - - 47,269 Operating loss (868) (3,662) (1,386) (67,538) 204 (691) 766 (2,038) Other income (expense) Income (loss) before income taxes and minority interest (664) (4,353) (620) (69,576) Income tax benefit 614 1,819 615 8,036 Income (loss) before minority interest (50) (2,534) (5) (61,540) Minority interest in loss of subsidiary 15 7 54 31 Net income (loss) (35) (2,527) 49 (61,509) Depreciation and amortization 1,600 1,606 6,261 5,946 Interest (income) expense (21) 56 16 1
