PLEASANTON, Calif., Nov. 5, 2014 /PRNewswire/ -- Thoratec Corporation (NASDAQ: THOR), a world leader in device-based mechanical circulatory support therapies to save, support and restore failing hearts, today reported its financial results for the third quarter of 2014.
"While recent market growth has fallen short of our longer-term expectations, I am highly optimistic with respect to the opportunity ahead," said D. Keith Grossman, President and Chief Executive Officer. "Our market remains large and underpenetrated, our technologies deliver dramatic benefits to patients, and we are developing breakthrough technologies to continue advancing the field of mechanical circulatory support," he added.
For the quarter ended September 27, 2014, Thoratec reported revenues of $105.8 million, a 16 percent decrease compared to revenues of $126.4 million in the third quarter of 2013. Net income on a GAAP basis was $2.9 million, or $0.05 per diluted share, compared with GAAP net income of $18.9 million, or $0.32 per diluted share, in the same period a year ago. Non-GAAP net income, which is described later in this press release, was $10.2 million, or $0.18 per diluted share, compared with non-GAAP net income of $28.5 million, or $0.49 per diluted share, in the same period a year ago.
For the first nine months of fiscal 2014, revenues were $349.6 million, a decrease of seven percent compared to revenues of $374.6 million in the same period a year ago. Net income on a GAAP basis was $38.5 million, or $0.67 per diluted share, compared with GAAP net income of $60.3 million, or $1.03 per diluted share, in the same period a year ago. Non-GAAP net income was $58.2 million, or $1.02 per diluted share, compared with non-GAAP net income of $82.8 million, or $1.42 per diluted share, in the same period a year ago.
"Our new product pipeline is rapidly emerging and increasingly exciting, and we have begun work on improved execution that will aggressively address current challenges. However, 2015 may be something of a transition year for the company as we seek to ultimately reaccelerate market growth," Grossman commented. "In total, I could not be more excited to rejoin Thoratec as CEO at this crucial time."
Third Quarter and First Nine Months of 2014 Financial Results
Thoratec reported revenues of $105.8 million in the third quarter of 2014, a decrease of 16 percent compared to the same quarter last year. The HeartMate product line contributed $91.6 million, a decrease of 19 percent, while the CentriMag product line contributed $11.3 million, an increase of nine percent.
For the first nine months of 2014, Thoratec reported revenues of $349.6 million, a decrease of seven percent compared to the same period last year. The HeartMate product line contributed $303.6 million to revenues, while the CentriMag product line contributed $37.4 million.
GAAP gross margin in the third quarter of 2014 was 59.7 percent compared to 67.6 percent in the same quarter last year. Non-GAAP gross margin, described later in this press release, was 61.4 percent compared to 69.4 percent in the same quarter last year. The decrease in GAAP and non-GAAP gross margin was due primarily to warranty-related expense associated with the HeartMate II Pocket Controller. During the third quarter, in conjunction with the introduction of a new version of the Pocket Controller, the company decided to make this new version available to customers as a replacement for previously purchased versions. As such, the company accrued incremental expense for this activity, based on the number of units that we estimate will be exchanged, of approximately $10.7 million.
GAAP operating expenses in the third quarter of 2014 were $61.1 million compared to $63.1 million in the same quarter last year. The decrease in GAAP operating expenses was due primarily to lower expense in 2014 related to the remeasurement of contingent consideration, partially offset by increased personnel costs. Non-GAAP operating expenses, described later in this press release, were $52.5 million compared to $51.5 million in the same quarter last year. The increase in non-GAAP operating expenses was primarily due to increased personnel costs.
The company's GAAP effective tax rate in the third quarter of 2014 was (194.4) percent versus 17.5 percent a year ago. The non-GAAP tax rate, which is described later in this press release, was 19.1 percent versus 22.8 percent in the same period last year. The decrease in GAAP effective tax rate was primarily attributable to a reduction in our pre-tax income and a change in the deductibility of executive compensation.
Cash and investments were $252.9 million as of September 27, 2014, compared to $295.5 million as of June 28, 2014, and $310.0 million as of December 28, 2013. During the third quarter, the company used $30.0 million in cash to fund accelerated share repurchase activity and approximately $35.0 million for the acquisition of Apica Cardiovascular Limited.
GUIDANCE
The following statements are based on current expectations. These statements are forward-looking and actual results may differ materially. For a more detailed discussion of forward-looking statements, please see the additional information below.
The company is adjusting fiscal 2014 guidance for revenues to a range of $450 million to $460 million and for net income per diluted share to a range of $0.70 to $0.80 on a GAAP basis and $1.20 to $1.30 on a non-GAAP basis. Gross margin is expected to be 66.8 percent to 67.3 percent on a GAAP basis and 68.5 percent to 69.0 percent on a non-GAAP basis. We expect the effective tax rate to be 26.5 percent to 27.5 percent on a GAAP basis and 29 percent to 30 percent on a non-GAAP basis.
CONFERENCE CALL/WEBCAST INFORMATION
Thoratec will hold a conference call to discuss its financial results and operating activities for all interested parties at 1:30 p.m., Pacific Standard Time (4:30 p.m., Eastern Standard Time), today. The teleconference can be accessed by calling (719) 325-2445, passcode 6219511. Please dial in 10-15 minutes prior to the beginning of the call. The webcast will be available via the Internet at http://www.thoratec.com. A replay of the conference call will be available through Wednesday, November 12, via http://www.thoratec.com or by telephone at (719) 457-0820, passcode 6219511.
GAAP TO NON-GAAP RECONCILIATION
Thoratec management evaluates and makes operating decisions using various measures. These measures are generally based on revenues generated by the company's products and certain costs of producing those revenues, such as costs of product sales, research and development and selling, general and administrative expenses. We use the following measures, which are not calculated in accordance with Generally Accepted Accounting Principles ("GAAP"): non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating expenses, non-GAAP other income and expense, non-GAAP tax rate and expense, non-GAAP net income, and non-GAAP net income per diluted share. These are non-GAAP financial measures under Section 101 of Regulation G under the Securities Exchange Act of 1934, as amended. These non-GAAP financial measures are calculated by excluding certain GAAP financial items that we believe have less significance to the day-to-day operation of our business. The company has outlined below the type and scope of these exclusions and the limitations on the use of the non-GAAP financial measures as a result of these exclusions.
Management uses these non-GAAP financial measures for financial and operational decision making, including in the determination of employee annual cash incentive compensation, as a means to evaluate period-to-period comparisons, as well as comparisons to our competitors' operating results. Management also uses this information internally for forecasting and budgeting, as it believes that the measures are indicative of Thoratec's core operating results. Management also believes that non-GAAP financial measures provide useful supplemental information to management and investors regarding the performance of the company's business operations, provide a greater transparency with respect to key metrics used by management in its decision making, facilitate comparisons of results for current periods and guidance for future periods with our historical operating results, and assist in analyzing future trends.
Non-GAAP net income consists of GAAP net income, excluding, as applicable, the tax-effected impact of share-based compensation expense, the amortization of purchased intangible assets, acquisition-related contingent consideration adjustments including foreign currency re-measurement, and acquisition-related transaction costs.
Non-GAAP net income per diluted share is defined as non-GAAP net income divided by the weighted average number of shares on a fully-diluted basis.
Non-GAAP gross profit and gross margin consist of GAAP gross profit and gross margin excluding share-based compensation expense and the amortization of purchased intangible assets.
Non-GAAP operating expenses consist of GAAP operating expenses excluding share-based compensation expense, the amortization of purchased intangible assets, acquisition-related contingent consideration adjustments, and acquisition-related transaction costs.
Non-GAAP other income and expense consists of GAAP other income and expenses excluding the impact of foreign currency re-measurement related to contingent consideration.
Non-GAAP tax expense consists of the GAAP tax expense adjusted for the tax effect of the adjustments from GAAP net income to non-GAAP net income.
Management believes that it is useful in measuring Thoratec's operations to exclude the amortization of purchased intangible assets. These costs are primarily fixed at the time of an acquisition and, unlike other fixed costs that result from ordinary operations, are the result of infrequent and irregular events.
Because of varying valuation methodologies, subjective assumptions and the variety of award types that companies can use, Thoratec management believes that providing non-GAAP financial measures that exclude share-based compensation allows investors to compare Thoratec's recurring core business operating results to those of other companies and over multiple periods. The exclusion also enhances investors' ability to review Thoratec's business from the same perspective as Thoratec management, which believes that share-based compensation expense is not directly attributable to the underlying performance of the company's business operations.
Thoratec management has excluded acquisition-related contingent consideration adjustments, including foreign currency re-measurement, and acquisition-related transaction costs from GAAP results to allow investors to compare Thoratec's recurring core business operating results to those of other companies and over multiple periods.
There are a number of limitations related to the use of non-GAAP financial measures. First, non-GAAP financial measures exclude some costs, namely share-based compensation, that are recurring expenses. Second, share-based compensation is part of an employee's compensation package and as such may be useful for investors to consider.
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