Allied Healthcare Products 10-K 2010
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year June 30, 2010
o 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 0-19266
ALLIED HEALTHCARE PRODUCTS, INC.
[Exact name of registrant as specified in its charter]
Registrant’s telephone number, including area code (314) 771-2400
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: >None
Indicate by check mark if the registrant is a well –known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No x
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 (§229.405 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. ¨ No. ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
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 definitions of “large accelerated filer, accelerated filer and “smaller reporting company” in Rule 12 b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12 b-2). Yes ¨ No x
As of December 31, 2009, the last business day of the registrant’s most recently completed second fiscal quarter; the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $24,344,622.
As of September 19, 2010, there were 8,093,386 shares of common stock, $0.01 par value (the “Common Stock"), outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement to be dated October 8, 2010 (portion) (Part III)
ALLIED HEALTHCARE PRODUCTS, INC.
INDEX TO FORM 10-K
“SAFE HARBOR” STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
Statements contained in this Report, which are not historical facts or information, are “forward-looking statements.” Words such as “believe,” “expect,” “intend,” “will,” “should,” and other expressions that indicate future events and trends identify such forward-looking statements. These forward-looking statements involve risks and uncertainties, which could cause the outcome and future results of operations and financial condition to be materially different than stated or anticipated based on the forward-looking statements. Such risks and uncertainties include both general economic risks and uncertainties, risks and uncertainties affecting the demand for and economic factors affecting the delivery of health care services, and specific matters which relate directly to the Company’s operations and properties as discussed in Items 1, 1A, 3 and 7 in this Report. The Company cautions that any forward-looking statements contained in this report reflect only the belief of the Company or its management at the time the statement was made. Although the Company believes such forward-looking statements are based upon reasonable assumptions, such assumptions may ultimately prove inaccurate or incomplete. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement was made.
Allied Healthcare Products, Inc. (“Allied”, the “Company”, ‘we”, or “us”) manufactures a variety of respiratory products used in the health care industry in a wide range of hospital and alternate site settings, including sub-acute care facilities, home health care and emergency medical care. The Company’s product lines include respiratory care products, medical gas equipment and emergency medical products. The Company believes that it maintains significant market shares in selected product lines.
The Company’s products are marketed under well-recognized and respected brand names to hospitals, hospital equipment dealers, hospital construction contractors, home health care dealers, emergency medical products dealers and others. Allied’s product lines include:
Respiratory Care Products
· home respiratory care products
Medical Gas Equipment
· medical gas system construction products
· medical gas system regulation devices
· disposable oxygen and specialty gas cylinders
· portable suction equipment
Emergency Medical Products
· respiratory/resuscitation products
· trauma and patient handling products
The Company’s principal executive offices are located at 1720 Sublette Avenue, St. Louis, Missouri 63110, and its telephone number is (314) 771-2400.
Markets and Products
In fiscal 2010, respiratory care products, medical gas equipment and emergency medical products represented approximately 26%, 52% and 22%, respectively, of the Company’s net sales. In comparison, in fiscal 2009, respiratory care products, medical gas equipment and emergency medical products represented approximately 24%, 57%, and 19%, respectively, of the Company’s net sales. The Company operates in a single industry segment and its principal products are described in the following table:
Respiratory Care Products
Market.> Respiratory care products are used in the treatment of acute and chronic respiratory disorders such as asthma, emphysema, bronchitis and pneumonia. Respiratory care products are used in both hospitals and alternate care settings. Sales of respiratory care products are made through distribution channels focusing on hospitals and other sub-acute facilities. Sales of home respiratory care products are made through durable medical equipment dealers through telemarketing, and by contract sales with national chains.
Respiratory Care/Anesthesia Products. >The Company manufactures and sells a broad range of products for use in respiratory care and anesthesia delivery. These products include large volume air compressors, calibration equipment, humidifiers, croup tents, equipment dryers and a complete line of respiratory disposable products such as oxygen tubing, facemasks, cannulas and ventilator circuits.
Home Respiratory Care Products. >Home respiratory care products represent one of Allied’s potential growth areas. Allied’s broad line of home respiratory care products include aluminum oxygen cylinders, oxygen regulators, pneumatic nebulizers, portable suction equipment and the full line of respiratory disposable products.
Medical Gas Equipment
Market>. The market for medical gas equipment consists of hospitals, alternate care settings and surgery centers. The medical gas equipment group is broken down into three separate categories: construction products, regulation devices and suction equipment, and disposable cylinders.
Construction Products. >Allied’s medical gas system construction products consist of in-wall medical system components, central station pumps and compressors, and headwalls. These products are typically installed during construction or renovation of a health care facility and are built in as an integral part of the facility’s physical plant. Typically, the contractor for the facility’s construction or renovation purchases medical gas system components from manufacturers and ensures that the design specifications of the health care facility are met.
Allied’s in-wall components, including outlets, manifolds, alarms, ceiling columns and zone valves, serve a fundamental role in medical gas delivery systems.
Central station pumps and compressors are individually engineered systems consisting of compressors, reservoirs, valves and controls designed to drive a hospital’s medical gas and suction systems. Each system is designed specifically for a given hospital or facility, which purchases pumps and compressors from suppliers. The Company’s sales of pumps and compressors are driven, in large part, by its share of the in-wall components market.
The Company’s construction products are sold primarily to hospitals, alternate care settings and hospital construction contractors. The Company believes that it holds a major share of the U.S. market for its construction products, that these products are installed in more than three thousand hospitals in the United States and that its installed base of equipment in this market will continue to generate follow-on sales. The Company believes that most hospitals and sub-acute care facility construction spending is for expansion or renovation of existing facilities. Many hospital systems and individual hospitals undertake major renovations to upgrade their operations to improve the quality of care they provide, reduce costs and attract patients and personnel.
Regulation Devices and Suction Equipment. >The Company’s medical gas system regulation products include flowmeters, vacuum regulators and pressure regulators, as well as related adapters, fittings and hoses which measure, regulate, monitor and help transfer medical gases from walled piping or equipment to patients in hospital rooms, operating theaters or intensive care areas. The Company’s leadership position in the in-wall components market provides a competitive advantage in marketing medical gas system regulation devices that are compatible with those components.
Portable suction equipment is typically used when in-wall suction is not available or when medical protocol specifically requires portable suction. The Company also manufactures disposable suction canisters, which are clear containers used to collect the fluids suctioned by in-wall or portable suction systems. The containers have volume calibrations, which allow the medical practitioner to measure the volume of fluids suctioned.
The market for regulation devices and suction equipment includes hospital and sub-acute care facilities. Sales of these products are made through the same distribution channel as our respiratory care products. The Company believes that it holds a significant share of the U.S. market in both regulation devices and suction equipment.
Disposable Cylinders. >Disposable oxygen cylinders are designed to provide oxygen for short periods of time in emergency situations. Since they are not subjected to the same pressurization as standard containers, they are much lighter and less expensive than standard gas cylinders. The Company markets filled disposable oxygen cylinders through industrial safety distributors and similar customers, principally to first aid providers, restaurants, industrial plants and other customers that require oxygen for infrequent emergencies.
Emergency Medical Products
Market>. Emergency medical products are used in the treatment of trauma-induced injuries. The Company’s emergency medical products provide patient resuscitation or ventilation during cardiopulmonary resuscitation or respiratory distress as well as immobilization and treatment for burns. The Company has seen growth in the trauma care venue for health care services, as the trend continues toward providing health care outside the traditional hospital setting. The Company also expects that other countries will develop trauma care systems in the future, although no assurance can be given that such systems will develop or that they will have a favorable impact on the Company. Sales of emergency medical products are made through specialized emergency medical products distributors to ambulance companies, fire departments and emergency medical systems volunteer organizations.
The emergency medical products are broken down into two categories: respiratory/resuscitator products and trauma patient handling products.
Respiratory/Resuscitation Products. >The Company’s respiratory/resuscitation products include demand resuscitation valves, portable resuscitation systems, bag masks and related products, emergency transport ventilators, precision oxygen regulators, minilators, multilators and humidifiers.
Demand resuscitation valves are designed to provide 100% oxygen to breathing or non-breathing patients. In an emergency situation, they can be used with a mask or tracheotomy tubes and operate from a standard regulated oxygen system. The Company’s portable resuscitation systems provide fast, simple and effective means of ventilating a non-breathing patient during cardiopulmonary resuscitation and 100% oxygen to breathing patients on demand with minimal inspiratory effort. The Company also markets a full line of disposable and reusable bag mask resuscitators, which are available in a variety of adult and child-size configurations. Disposable mouth-to-mask resuscitation systems have the added advantage of reducing the risk of transmission of communicable diseases.
The Company’s autovent transport ventilator can meet a variety of needs in different applications ranging from typical emergency medical situations to more sophisticated air and ground transport. Each autovent is accompanied by a patient valve, which provides effective ventilation during cardiopulmonary resuscitation or respiratory distress. When administration of oxygen is required at the scene of a disaster, in military field hospitals or in a multiple-victim incident, Allied’s minilators and multilators are capable of providing oxygen to one or a large number of patients.
The Company’s mass casualty ventilation line has been designed to meet the unique ventilation demands that can occur during a mass casualty event or pandemic. The mass casualty products are lightweight, robust, and easy to operate. Designed for surge capacity, these products are capable of providing reliable ventilation even in unpredictable environments and conditions, and require minimal periodic maintenance.
To complement the family of respiratory/resuscitation products, the Company offers a full line of oxygen product accessories. This line of accessory products includes reusable aspirators, tru-fit masks, disposable cuffed masks and related accessories.
Trauma and Patient Handling Products. >The Company’s trauma and patient handling products include spine immobilization products, pneumatic anti-shock garments and trauma burn kits. Spine immobilization products include a backboard that is designed for safe immobilization of injury victims and provides a durable and cost effective means of emergency patient transportation and extrication. The infant/pediatric immobilization board is durable and scaled for children. The half back extractor/rescue vest is useful for both suspected cervical/spinal injuries and for mountain and air rescues. The Company’s pneumatic anti-shock garments are used to treat victims experiencing hypovolemic shock. Allied’s trauma burn kits contain a comprehensive line of products for the treatment of trauma and burns.
Sales and Marketing
Allied sells its products primarily to respiratory care/anesthesia product distributors, hospital construction contractors, emergency medical equipment dealers and directly to hospitals. The Company maintains a sales force of 28 sales professionals, all of whom are full-time employees of the Company.
The sales force includes nine domestic hospital and homecare specialists, ten domestic construction specialists, and five international sales representatives. A total of four sales managers lead each of the sales groups. Two product managers are responsible for the marketing activities of our product lines.
The domestic hospital specialists are responsible for sales of all Allied products with the exception of construction products within their territory. The domestic construction specialists are responsible for sales of all Allied construction products within their territory. Sales of products are accomplished through respiratory care/anesthesia distributors for the regulation devices, suction equipment, respiratory care/anesthesia products and disposable cylinders. Emergency products are principally sold to ambulance companies, fire departments and emergency medical systems volunteer organizations through specialized emergency medical products distributors.
Construction products are sold direct to hospital construction contractors and through distributors.
The Company’s international specialists sell all Allied products within their territory. Allied’s net sales to foreign markets totaled 19% of total net sales in fiscal 2010, unchanged from fiscal years 2009 and 2008. International sales are made through a network of dealers, agents and U.S. exporters who distribute the Company’s products throughout the world. Allied has market presence in Canada, Mexico, Central and South America, Europe, the Middle East and the Far East.
Allied’s manufacturing processes include fabrication, electro-mechanical assembly operations and plastics manufacturing. A significant part of Allied’s manufacturing operations involves electro-mechanical assembly of proprietary products and the Company is vertically integrated in most elements of metal machining and fabrication. Most of Allied’s hourly employees are involved in machining, metal fabrication, plastics manufacturing and product assembly.
Allied manufactures small metal components from bar stock in a machine shop, which includes automatic screw machines, horizontal lathes and drill presses and computer controlled machining centers. The Company makes larger metal components from sheet metal using computerized punch presses, brake presses and shears. In its plastics manufacturing processes, the Company utilizes both extrusion and injection molding. The Company believes that its production facilities and equipment are in good condition and sufficient to meet planned increases in volume over the next few years and that the conditions in local labor markets should permit the implementation of additional shifts and days operated.
Allied’s research and development department group is responsible for the development of new products. This group is staffed with mechanical and electrical engineers.
During the fiscal year 2010 the research and development group completed development of an auxiliary battery pack for the MCV100 and MCV200 mass casualty ventilators. This battery pack extends the operating time of the ventilators by 14 hours if running on internal compressors or by 42 hours if running on an oxygen supply. The group also completed some upgrades to the 4000 series construction manifold.
The group is actively working on other products that were not released during fiscal year 2010.
As part of the agreement relating to the withdrawal of the Baralyme® product in August 2004, Abbott Laboratories agreed to pay to Allied up to $2,150,000 in product development costs to pursue development of a new carbon dioxide absorption product for use in connection with inhalation anesthetics that does not contain potassium hydroxide and does not produce a significant exothermic reaction with currently available inhalation agents. Allied has pursued development of a new carbon dioxide absorption product, resulting in its new Litholyme® product. As of June 30, 2010 the Company had been reimbursed $2,150,000 by Abbott. More detailed information concerning this agreement is included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.
The Company’s products and its manufacturing activities are subject to extensive and rigorous government regulation by federal and state authorities in the United States and other countries. In the United States, medical devices for human use are subject to comprehensive review by the United States Food and Drug Administration (the “FDA”). The Federal Food, Drug, and Cosmetic Act (“FDC Act”), and other federal statutes and regulations, govern or influence the research, testing, manufacture, safety, labeling, storage, record keeping, approval, advertising and promotion of such products. Noncompliance with applicable requirements can result in warning letters, fines, recall or seizure of products, injunction, refusal to permit products to be imported into or exported out of the United States, refusal of the government to clear or approve marketing applications or to allow the Company to enter into government supply contracts, or withdrawal of previously approved marketing applications and criminal prosecution.
The Company is required to file a premarket notification in the form of a premarket approval (“PMA”) with the FDA before it begins marketing a new medical device that offers new technology that is currently not on the market. The Company also must file a premarket notification in the form of a 510(k) with the FDA before it begins marketing a new medical device that utilizes existing technology for devices that are currently on the market. The 510(k) submission process is also required when the Company makes a change or modifies an existing device in a manner that could significantly affect the device’s safety or effectiveness.
Compliance with the regulatory approval process in order to market a new or modified medical device can be uncertain, lengthy and, in some cases, expensive. There can be no assurance that necessary regulatory approvals will be obtained on a timely basis, or at all. Delays in receipt or failure to receive such approvals, the loss of previously received approvals, or failure to comply with existing or future regulatory requirements could have a material adverse effect on the Company’s business, financial condition and results of operations.
The Company manufactures and distributes a broad spectrum of respiratory therapy equipment, emergency medical equipment and medical gas equipment. To date, all of the Company’s FDA clearances have been obtained through the 510(k) clearance process. These determinations are very fact specific and the FDA has stated that, initially, the manufacturer is best qualified to make these determinations, which should be based on adequate supporting data and documentation. The FDA however, may disagree with a manufacturer’s determination not to file a 510(k) and require the submission of a new 510(k) notification for the changed or modified device. Where the FDA believes that the change or modification raises significant new questions of safety or effectiveness, the agency may require a manufacturer to cease distribution of the device pending clearance of a new 510(k) notification. Certain of the Company’s medical devices have been changed or modified subsequent to 510(k) marketing clearance of the original device by the FDA. Certain of the Company’s medical devices, which were first marketed prior to May 28, 1976, and therefore, grandfathered and exempt from the 510(k) notification process, also have been subsequently changed or modified. The Company believes that these changes or modifications do not significantly affect the devices’ safety or effectiveness, or make a major change or modification in the devices’ intended uses and, accordingly, submission of new 510(k) notification to the FDA is not required. There can be no assurance, however, that the FDA would agree with the Company’s determinations.
In addition, commercial distribution in certain foreign countries is subject to additional regulatory requirements and receipt of approvals that vary widely from country to country. The Company believes it is in compliance with regulatory requirements of the countries in which it sells its products.
The Medical Device Reporting regulation requires that the Company provide information to the FDA on deaths or serious injuries alleged to have been associated with the use of its devices, as well as product malfunctions that would likely cause or contribute to death or serious injury if the malfunction were to recur. The Medical Device Tracking regulation requires the Company to adopt a method of device tracking of certain devices, such as ventilators, which are life-supporting or life-sustaining devices used outside of a device user facility, some of which are permanently implantable devices. The regulation requires that the method adopted by the Company will ensure that the tracked device can be traced from the device manufacturer to the person for whom the device is indicated (i.e., the patient). In addition, the FDA prohibits a company from promoting an approved device for unapproved applications and reviews a company’s labeling for accuracy. Labeling and promotional activities also are in certain instances, subject to scrutiny by the Federal Trade Commission.
The Company’s medical device manufacturing facilities are registered with the FDA, and have received ISO 9001 certification under the Medical Device Directive (MDD - European) for certain products in 1998. The Company’s St. Louis facility is ISO 9000 certified. The Company is subject to audit by the FDA, ISO, and European auditors for compliance with the Good Manufacturing Practices (“GMP”), the ISO and MDD regulations for medical devices. These regulations require the Company to manufacture its products and maintain its products and documentation in a prescribed manner with respect to design, manufacturing, testing and control activities. The Company also is subject to the registration and inspection requirements of state regulatory agencies.
There can be no assurance that any required FDA or other governmental approval will be granted, or, if granted, will not be withdrawn. Governmental regulation may prevent or substantially delay the marketing of the Company’s proposed products and cause the Company to undertake costly procedures. In addition, the extent of potentially adverse government regulation that might arise from future administrative action or legislation cannot be predicted. Any failure to obtain, and maintain, such approvals could adversely affect the Company’s ability to market its products or proposed products.
Sales of medical devices outside the United States are subject to foreign regulatory requirements that vary widely from country to country. Medical products shipped to the European Community generally require CE certification. The letters 'CE' are an abbreviation of Conformité Européenne, French for European conformity. Whether or not FDA approval has been obtained, approval of a device by a comparable regulatory authority of a foreign country generally must be obtained prior to the commencement of marketing in those countries. The time required to obtain such approvals may be longer or shorter than that required for FDA approval. In addition, FDA approval may be required under certain circumstances to export certain medical devices.
The Company is also subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protections, fire hazard control and disposal of hazardous or potentially hazardous substances.
Patents, Trademarks and Proprietary Technology
The Company owns and maintains domestic and foreign patents on several products it believes are useful to the business and provide the Company with an advantage over its competitors. During the fiscal year 2010 the Company continued to pursue patents on the construction alarm, Mask Restraint, EPV100 Ventilator and Litholyme®. A United States patent for the Litholyme® carbon dioxide absorbent product was obtained in July 2010 and will expire in 2027. Patents which expire during the period 2010 to 2027 in the aggregate are believed to be of material importance in the operation of Allied’s business. Allied believes that no single patent, except that related to Litholyme, is material in relation to Allied’s business as a whole. Although the expiration of an individual patent may lead to increased competition, other factors such as a competitor’s need to obtain regulatory approvals prior to marketing a competitive product and the nature of the market, may allow Allied to continue to have commercial advantages after the expiration of the patent.
The company owns and maintains U.S. trademarks for Allied Healthcare Products, Inc., Chemetron, Gomco, Oxequip, Lif-O-Gen, Life Support Products, Timeter, Vacutron, and Schuco, its principal trademarks. Registrations for these trademarks are also owned and maintained in countries where such products are sold and such registrations are considered necessary to preserve the Company’s proprietary rights therein.
Environmental and Safety Regulation
The Company is subject to federal, state and local environmental laws and regulations that impose limitations on the discharge of pollutants into the environment and establish standards for the treatment, storage and disposal of toxic and hazardous wastes. The Company is also subject to the federal Occupational Safety and Health Act and similar state statutes. From time to time the Company has been involved in environmental proceedings involving clean up of hazardous waste. There are no such material proceedings currently pending. Costs of compliance with environmental, health and safety requirements have not been material to the Company. The Company believes it is in material compliance with all applicable environmental laws and regulations.
The Company has different competitors within each of its product lines. Many of the Company’s principal competitors are larger than Allied and the Company believes that most of these competitors have greater financial and other resources. The Company competes primarily on the basis of price, quality and service. The Company believes that it is well positioned with respect to product cost, brand recognition, product reliability, and customer service to compete effectively in each of its markets.
At June 30, 2010, the Company had approximately 307 full-time employees. Approximately 190 employees in the Company’s principal manufacturing facility located in St. Louis, Missouri, are covered by a collective bargaining agreement that will expire on May 31, 2012.
Executive Officers of the Registrant
This section provides information regarding the executive officers of the Company who are appointed by and serve at the pleasure of the Board of Directors:
The Company's business, operations and financial condition are subject to various risks and uncertainties. You should carefully consider the risks and uncertainties described below, together with all of the other information in this annual report on Form 10-K and in the company's other filings with the SEC, before making any investment decision with respect to the company's securities. The risks and uncertainties described below may not be the only ones the company faces. Additional risks and uncertainties not presently known by the company or that the company currently deems immaterial may also affect the company's business. If any of these known or unknown risks or uncertainties actually occur or develop, the company's business, financial condition, and results of operations could change.
We participate in a highly competitive environment.
The medical device industry is characterized by rapid technological change, changing customer needs and frequent new product introductions. Our products may be rendered obsolete as a result of future innovations. We face intense competition from other manufacturers. Some of our competitors may be larger than we are and may have greater financial, technical, research, marketing, sales, distribution and other resources than we do. We believe that price competition will continue among products developed in our markets. Our competitors may develop or market technologies and products that are more effective or commercially attractive than any we are developing or marketing. Our competitors may succeed in obtaining regulatory approval and introducing or commercializing products before we do. Such developments could have a significant negative effect on our business, financial condition and results of operations. Even if we are able to compete successfully, we may not be able to do so in a profitable manner.
Decreased availability or increased costs of raw materials could increase our costs of producing our products.
We purchase raw materials, fabricated components and services from a variety of suppliers. Raw materials such as brass and plastics are considered key raw materials. We believe that our relationships with our suppliers are satisfactory and that alternative sources of supply are readily available. From time to time, however, the prices and availability of these raw materials fluctuate due to global market demands, which could impair the company's ability to procure necessary materials, or increase the cost of such materials. Inflationary and other increases in costs of these raw materials have occurred in the past and may recur from time to time. In addition, freight costs associated with shipping and receiving product and sales are impacted by fluctuations in the cost of oil and gas. A reduction in the supply or increase in the cost of those raw materials could impact our ability to manufacture our products and could increase the cost of production.
Changes in third party reimbursement could negatively impact our revenues and profitability.
The cost of a majority of medical care in the United States is funded by the U.S. Government through the Medicare and Medicaid programs and by private insurance programs, such as corporate health insurance plans. Although we do not receive payments for our products directly from these programs, home respiratory care providers and durable medical equipment suppliers, who are the primary customers for several of our products, depend heavily on payments from Medicare, Medicaid and private insurers as a major source of revenues. In addition, sales of certain of our products are affected by the extent of hospital and health care facility construction and renovation at any given time. The federal government indirectly funds a significant percentage of such construction and renovation costs through Medicare and Medicaid reimbursements. In recent years, governmentally imposed limits on reimbursement to hospitals and other health care providers have impacted spending for services, consumables and capital goods. A material decrease from current reimbursement levels or a material change in the method or basis of reimbursing health care providers is likely to adversely affect future sales of our products.
Our success depends upon the development of new products and product enhancements, which entails considerable time and expense.
We place a high priority on the development of new products to add to our product portfolio and on the development of enhancements to our existing products. Product development involves substantial expense and we cannot be certain that a completed product will generate sufficient revenue for our business to justify the resources that we devote to research and development related to such product. The time and expense required to develop new products and product enhancements is difficult to predict and we cannot assure you that we will succeed in developing, introducing and marketing new products and product enhancements. Our inability to successfully develop and introduce new or enhanced products on a timely basis or at all, or to achieve market acceptance of such products, could materially impair our business.
We are dependent on adequate protection of our patent and proprietary rights.
We rely on patents, trade secrets, trademarks, copyrights, know-how, license agreements and contractual provisions to establish and protect our intellectual property rights. However, these legal means afford us only limited protection and may not adequately protect our rights or remedies to gain or keep any advantages we may have over our competitors.
We cannot assure you that others may not independently develop the same or similar technologies or otherwise obtain access to our technology and trade secrets. Our competitors, many of which have substantial resources and may make substantial investments in competing technologies, may apply for and obtain patents that will prevent, limit, or interfere with our ability to manufacture or market our products. Further, while we do not believe that any of our products or processes interfere with the rights of others, third parties may nonetheless assert patent infringement claims against us in the future.
Costly litigation may be necessary to enforce patents issued to us, to protect trade secrets or “know-how” we own, to defend us against claimed infringement of the rights of others or to determine the ownership, scope, or validity of our proprietary rights and the rights of others.
Any claim of infringement against us may involve significant liabilities to third parties, could require us to seek licenses from third parties, and could prevent us from manufacturing, selling, or using our products. The occurrence of this litigation or the effect of an adverse determination in any of this type of litigation could have a material adverse effect on our business, financial condition and results of operations.
Our business of manufacturing, marketing, selling of medical devices involves the risk of liability claims and such claims could seriously harm our business, particularly if our insurance coverage is inadequate.
Our business exposes us to potential product liability claims that are inherent in the testing, production, marketing and sale of medical devices. Like other participants in the medical device market, we are from time to time involved in lawsuits, claims and proceedings alleging product liability and related claims such as negligence. If any current or future product liability claims become substantial, our reputation could be damaged significantly, thereby harming our business. We may be required to pay substantial damage awards as a result of any successful product liability claims. Any product liability claim against us, whether with or without merit, could result in costly litigation, and divert the time, attention, and resources of our management.
As a result of our exposure to product liability claims, we currently carry product liability insurance covering our products with policy limits per occurrence and in the aggregate that we have deemed to be sufficient. Our insurance may not cover certain product liability claims or our liability for any claims may exceed our coverage limits. Therefore, we cannot predict whether this insurance is sufficient, or if not, whether we will be able to obtain sufficient insurance to cover the risks associated with our business or whether such insurance will be available at premiums that are commercially reasonable. In addition, these insurance policies must be renewed annually. Although we have been able to obtain liability insurance, such insurance may not be available in the future on acceptable terms, if at all. A successful claim against us or settlement by us with respect to uninsured liabilities or in excess of our insurance coverage, or our inability to maintain insurance in the future, or any claim that results in significant costs to or adverse publicity against us, could have a material adverse effect on our business, financial condition and results of operations.
We are subject to substantial domestic and international government regulation, including regulatory quality standards applicable to our manufacturing and quality processes. Failure by us to comply with these standards could have an adverse effect on our business, financial condition or results of operations.
The FDA regulates the approval, manufacturing, and sales and marketing of many of our products in the U.S. Significant government regulation also exists in Canada, Japan, Europe, and other countries in which we conduct business. As a device manufacturer, we are required to register with the FDA and are subject to periodic inspection by the FDA for compliance with the FDA’s Quality System Regulation (“QSR”) requirements, which require manufacturers of medical devices to adhere to certain regulations, including testing, quality control and documentation procedures. In addition, the federal Medical Device Reporting regulations require us to provide information to the FDA whenever there is evidence that reasonably suggests that a device may have caused or contributed to a death or serious injury or, if a malfunction were to occur, could cause or contribute to a death or serious injury. Compliance with applicable regulatory requirements is subject to continual review and is rigorously monitored through periodic inspections by the FDA. In the European Community, we are required to maintain certain ISO certifications in order to sell our products and must undergo periodic inspections by notified bodies to obtain and maintain these certifications. Failure to comply with current governmental regulations and quality assurance guidelines could lead to temporary manufacturing shutdowns, product recalls or related field actions, product shortages or delays in product manufacturing. Efficacy or safety concerns, an increase in trends of adverse events in the marketplace, and/or manufacturing quality issues with respect to our products could lead to product recalls or related field actions, withdrawals, and/or declining sales.
Our products may be subject to product recalls even after receiving FDA clearance or approval, which would harm our reputation and our business.
The FDA and similar governmental authorities in other countries in which our products are sold, have the authority to request and, in some cases, require the recall of our products in the event of material deficiencies or defects in design or manufacture. A government-mandated or voluntary recall by us could occur as a result of component failures, manufacturing errors or design defects. Any recall of product would divert managerial and financial resources, harm our reputation with our customers and damage our business.
We are exposed to certain credit risks, resulting primarily from customer sales.
Substantially all of our receivables are due from homecare providers, distributors, hospitals, and contractors. Our customers are located throughout the U.S. and around the world. We record an estimated allowance for uncollectible amounts based primarily on our evaluation of the payment pattern, financial condition, cash flows, and credit history of its customers as well as current industry and economic conditions. Our inability to collect on its trade accounts receivable could substantially reduce our income and have a material adverse effect on its financial condition and results of operations.
Our common stock is thinly traded and its market price may fluctuate widely.
Our common stock is listed on the NASDAQ Global Market but is thinly traded. As a result, you may not be able to sell all of your shares of common stock on short notice. Additionally, the market price of our common stock could be subject to significant fluctuations in response to quarter-to-quarter variation in our operating results, announcements of new products or services by us or our competitors, and other events or factors. For example, a shortfall in net sales or net income, or an increase in losses could have an immediate and significant adverse effect on the market price and volume fluctuations that have particularly affected the market prices of many micro and small capitalization companies and that have often been unrelated or disproportionate to the operating performance of these companies. These fluctuations, as well as general economic and market conditions, may adversely affect the market price for our common stock.
If a natural or man-made disaster strikes our manufacturing facilities, we may be unable to manufacture certain products for a substantial amount of time and our revenue could decline.
We have one principal manufacturing operation. In the event that this facility, located in St. Louis, Missouri, were severely damaged or destroyed as a result of a natural or man-made disaster, we would be forced to relocate production to other facilities and/or rely on third-party manufacturers. Such an event could have a material adverse effect on our business, results of operations and financial condition. Although we have insurance for damage to our property and the interruption of our business, this insurance may not be sufficient in scope or amount to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all.
Requirements associated with the evaluation of internal controls required by Section 404 of the Sarbanes-Oxley Act of 2002 have required and will require significant company resources and management attention.
We are subject to the reporting requirements of federal securities laws, including the Sarbanes-Oxley Act of 2002. Among other requirements, the Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal control over financial reporting. We have, and expect to continue to, expend significant management time and resources maintaining documentation and testing internal control over financial reporting. While management's evaluation as of June 30, 2010 resulted in the conclusion that our internal control over financial reporting was effective as of that date, we cannot predict the outcome of testing in future periods. If we are not able to continue to comply with the requirements of Section 404 in a timely manner, we could be subject to scrutiny by regulatory authorities, such as the SEC or the NASDAQ Global Market, and the trading price of our stock could decline. Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important in helping us to prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our stock could drop significantly.
If we are unable to hire or retain key employees, it could have a negative impact on our business.
Our failure to attract and retain skilled personnel could hinder the management of our business, our research and development, our sales and marketing efforts, and our manufacturing capabilities. However, there is no assurance that we will continue to be able to hire or retain key employees. We compete to hire new employees, and then must train them and develop their skills and competencies. Our operating results could be adversely affected by increased costs due to increased competition for employees, higher employee turnover or increased employee benefit costs. Any unplanned turnover could deplete our institutional knowledge base and erode our competitive advantage.
The U.S. healthcare environment is changing in many ways, some of which may not be favorable to us, as a result of recent federal healthcare legislation.
Our products and services are primarily intended to function within the current structure of the healthcare industry in the United States. In recent years, the healthcare industry has undergone significant changes designed to control costs. The use of managed care has increased; Medicare and Medicaid reimbursement levels have declined; distributors, manufacturers, healthcare providers have consolidated; and large, sophisticated purchasing groups have become more prevalent.
In March 2010, Congress approved, and the President signed into law, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (collectively the "Healthcare Reform Acts"). Among other things, the Healthcare Reform Acts seek to expand health insurance coverage to approximately 32 million uninsured Americans. Many of the significant changes in the Healthcare Reform Acts do not take effect until 2014, including a requirement that most Americans carry health insurance. We expect expansion of access to health insurance to increase the demand for our products and services, but other provisions of the Healthcare Reform Acts could affect us adversely. The Healthcare Reform Acts contain many provisions designed to generate the revenues necessary to fund the coverage expansions and to reduce costs of Medicare and Medicaid. Beginning in 2013, each medical device manufacturer will have to pay a tax in an amount equal to 2.3% of the price for which the manufacturer sells its medical devices. We manufacture and sell devices that will likely be subject to this tax. We could be adversely affected by, among other things, changes in the delivery or pricing of or reimbursement for medical devices.
The Company’s headquarters are located in St. Louis, Missouri and the Company maintains manufacturing facilities in Missouri and New York. Set forth below is certain information with respect to the Company’s manufacturing facilities at June 30, 2010.
In addition, the Company owns a 16.8-acre parcel of undeveloped land in Stuyvesant Falls, New York.
Product liability lawsuits are filed against the Company from time to time for various injuries alleged to have resulted from defects in the manufacture and/or design of the Company’s products. Any such proceedings that are currently pending are not expected to have a material adverse effect on the Company. The Company maintains comprehensive general liability insurance coverage which it believes to be adequate for the continued operation of its business, including coverage of product liability claims.
In addition, from time to time the Company’s products may be subject to product recalls in order to correct design or manufacturing flaws in such products. The Company intends to continue to conduct business in such a manner as to avert any FDA action seeking to interrupt or suspend manufacturing or require any recall or modification of products.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Allied Healthcare Products, Inc. trades on the NASDAQ Global Market under the symbol AHPI. As of September 10, 2010, there were 167 record owners of the Company’s Common Stock. The following tables summarize information with respect to the high and low closing prices for the Company’s Common Stock as listed on the NASDAQ Global market for each quarter of fiscal 2010 and 2009, respectively. The Company currently does not pay, and in the most recent fiscal years has not paid, any dividend on its Common Stock.
Common Stock Information
Information concerning securities authorized for issuance under equity compensation plans is incorporated by reference to the Company’s proxy statement for the 2010 annual meeting of shareholders.
Results of Operations
The Company manufactures and markets respiratory products, including respiratory care products, medical gas equipment and emergency medical products. Set forth below is certain information with respect to amounts and percentages of net sales attributable to respiratory care products, medical gas equipment and emergency medical products for the fiscal years ended June 30, 2010, 2009, and 2008.
The following table sets forth, for the fiscal periods indicated, the percentage of net sales represented by the various income and expense categories reflected in the Company’s consolidated statement of operations.
Critical Accounting Policies
In preparing financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company evaluates estimates and judgments on an ongoing basis, including those related to bad debts, inventory valuations, property, plant and equipment, intangible assets, income taxes, and contingencies and litigation. Estimates and judgments are based on historical experience and on various other factors that may be reasonable under the circumstances. Actual results may differ from these estimates. The following areas are considered to be the Company’s most significant accounting policies:
Revenue is recognized for all sales, including sales to agents and distributors, at the time products are shipped and title has transferred, provided that a purchase order has been received or a contract executed, there are not uncertainties regarding customer acceptance, the sales price is fixed and determinable and collectability is reasonably assured. Sales discounts, returns and allowances are included in net sales, and the provision for doubtful accounts is included in selling, general and administrative expenses. Net sales do not include sales tax. Additionally, it is the Company’s practice to include revenues generated from freight billed to customers in net sales with corresponding freight expense included in cost of sales in the consolidated statement of operations.
The sales price is fixed by the Company’s acceptance of the buyer’s firm purchase order. The sales price is not contingent, or subject to additional discounts. The Company’s standard shipment terms are “F.O.B. shipping point” as stated in the Company’s Terms and Conditions of Sale. The customer is responsible for obtaining insurance for and bears the risk of loss for product in-transit. Additionally, sales to customers do not include the right to return merchandise without the prior consent of the Company. In those cases where returns are accepted, product must be current and restocking fees must be paid by the respective customer. A provision has been made for estimated sales returns and allowances. These estimates are based on historical analysis of credit memo data and returns.
The Company does not provide installation services for its products. Most products shipped are ready for immediate use by the customer. The Company’s in-wall medical system components, central station pumps and compressors, and headwalls do require installation by the customer. These products are typically purchased by a third-party contractor who is ultimately responsible for installation services. Accordingly, the customer purchase order or contract does not require customer acceptance of the installation prior to completion of the sale transaction and revenue recognition. The Company’s standard payment terms are net 30 days from the date of shipment, and payment is specifically not subject to customer inspection or acceptance, as stated in the Company’s Terms and Conditions of Sale. The buyer becomes obligated to pay the Company at the time of shipment. The Company requires credit applications from its customers and performs credit reviews to determine the creditworthiness of new customers. The Company requires letters of credit, where warranted, for international transactions. The Company also protects its legal rights under mechanics lien laws when selling to contractors.
The Company does offer limited warranties on its products. The standard warranty period is one year. The Company’s cost of providing warranty service for its products for the years ended June 30, 2010, June 30, 2009, and June 30, 2008 was $135,032, $166,651, and $62,954, respectively. The related liability for warranty service amounted to $95,547 and $104,157 at June 30, 2010 and 2009, respectively.
Inventory reserve for obsolete and excess inventory:
Inventory is recorded net of a reserve for obsolete and excess inventory which is determined based on an analysis of inventory items with no usage in the preceding year and for inventory items for which there is greater than two years’ usage on hand. This analysis considers those identified inventory items to determine, in management’s best estimate, if parts can be used beyond one year, if there are alternate uses or at what values such parts may be disposed for. At June 30, 2010 and 2009, inventory is recorded net of a reserve for obsolete and excess inventory of $1.5 million and $1.3 million, respectively.
The Company accounts for income taxes under ASC Topic 740: “Income Taxes.” Under ASC 740, the deferred tax provision is determined using the liability method, whereby deferred tax assets and liabilities are recognized based upon temporary differences between the financial statement and income tax bases of assets and liabilities using presently enacted tax rates. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.
Accounts receivable net of allowances:
Accounts receivable are recorded net of an allowance for doubtful accounts, which is determined based on an analysis of past due accounts including accounts placed with collection agencies, and an allowance for returns and credits, which is based on historical analysis of credit memo data and returns. At June 30, 2010 and 2009, accounts receivable is recorded net of allowances of $0.3 million.
As a result of our 2009 annual impairment review, we concluded that the carrying value of our goodwill was impaired. As a result, our fourth quarter and full year 2009 financial results included an aggregate non-cash pretax impairment charge of approximately $16.0 million. The impairment charge was the result of the annual assessment for impairment and reflected factors impacted by market conditions and the completion of our annual budget process. This non-cash charge had no effect on our cash balances or cash flows.
Valuation of Long-Lived Assets:
The impairment of tangible and intangible assets is assessed when changes in circumstances (such as, but not limited to, a decrease in market value of an asset, current and historical operating losses or a change in business strategy) indicate that their carrying value may not be recoverable. This assessment is based on management’s expectations and judgments regarding future business and economic conditions, future market values and disposal costs. Actual results and events could differ significantly from management’s estimates. Based upon our most recent analysis, we believe that no impairment exists at June 30, 2010. There can be no assurance that future impairment tests will not result in a charge to net earnings (loss).
The Company maintains a self-insurance program for a portion of its health care costs. Self-insurance costs are accrued based upon the aggregate of the liability for reported claims and the estimated liability for claims incurred but not reported. As of June 30, 2010 and 2009, the Company had $300,000 and $395,000, respectively, of accrued liabilities related to health care claims. In order to establish the self-insurance reserves, the Company utilized actuarial estimates of expected claims based on analyses of historical data.
Share Based Compensation:
We calculate share based compensation using the Black-Sholes-Merton (“Black-Scholes”) option-pricing model, which requires the input of highly subjective assumptions including the expected stock price volatility. For the twelve-month periods ended June 30, 2010, 2009, and 2008, we recorded $648,000, $27,000 and $77,000, respectively, in share-based employee compensation. This compensation cost is included in the general and administrative expenses and cost of sales in the accompanying consolidated income statements.
Significant Factors Affecting Past and Future Operating Results
On August 27, 2004, the Company entered into an agreement with Abbott Laboratories (“Abbott”) pursuant to which Allied agreed to cease production of its product Baralyme®, and to effect the withdrawal of Baralyme® product held by distributors. The agreement permits Allied to pursue the development of a new carbon dioxide absorbent product. Baralyme®, a carbon dioxide absorbent product, has been used safely and effectively in connection with inhalation anesthetics since its introduction in the 1920s. In recent years, the number of inhalation anesthetics has increased, giving rise to concerns regarding the use of Baralyme® in conjunction with these newer inhalation anesthetics if Baralyme® has been allowed, contrary to recommended practice, to become desiccated. The agreement also provides that, for a period of eight years, Allied will not manufacture, distribute, promote, market, sell, commercialize or donate any Baralyme® product or similar product based upon potassium hydroxide and will not develop or license any new carbon dioxide absorbent product containing potassium hydroxide.
In consideration of the foregoing, Abbott agreed to pay Allied an aggregate of $5,250,000 of which $1,530,000 was paid on September 30, 2004 and the remainder payable in four equal annual installments of $930,000 due on July 1, 2005 through July 1, 2008. The last installment due on July 1, 2008 was received by Allied on June 19, 2008.
The payments received from Abbott are being recognized into income, as net sales, over the eight-year term of the agreement. Allied has no further obligations under this agreement which would require the Company to repay these amounts or otherwise impact this accounting treatment. During the year ended June 30, 2010, $688,200 was recognized into income as net sales.
A reconciliation of deferred revenue resulting from the agreement with Abbott, with the amounts received under the agreement, and amounts recognized as net sales for fiscal years 2010 and 2009 is as follows:
In 2004, Allied’s sales of Baralyme® were approximately $2.0 million and contributed approximately $0.6 million in pre-tax earnings and cash flow from operations. The majority of the $5,250,000 Allied has received from Abbott will be recognized into income over the eight-year term of the agreement. The net cash flow realized by Allied under the agreement with Abbott is substantially equivalent to the net cash flow Allied would have expected to realize from continued manufacture and sales of Baralyme® during the initial five years of the period.
Fiscal 2010 Compared to Fiscal 2009
The Company had a loss of $0.9 million before taxes for fiscal 2010, compared to a loss of $17.2 million before taxes for fiscal 2009. The Company recorded an income tax benefit of $0.3 million in fiscal 2010, compared to an income tax benefit of $0.4 million in fiscal 2009. The 2009 tax benefit was not affected due to the non-deductibility of the goodwill impairment charge for federal income tax purposes.
For further discussion of the Company’s income tax calculation please refer to Note 5 of the “Notes to Consolidated Financial Statements” section included in this Form 10-K.
Financial results for fiscal 2009 were adversely impacted by the write down of $16.0 million in goodwill. The write down resulted from the required annual impairment review of goodwill at June 30, 2009, which took into consideration the declining economic environment and declining profitability. For further discussion of the Company’s goodwill impairment calculation please refer to Note 13 of the “Notes to Consolidated Financial Statements” section included in this Form 10-K.
Net sales for fiscal 2010 of $46.0 million were $6.1 million or 11.7% less than net sales of $52.1 million in fiscal 2009. Domestically, sales decreased by $4.6 million dollars. Internationally, sales decreased by $1.5 million. International business is dependent upon hospital construction projects, and the development of medical facilities in those regions in which the Company operates. Domestic sales for fiscal 2010 include approximately $0.7 million for the recognition into sales of payments resulting from the agreement with Abbott Laboratories, as discussed below. For 2009, domestic sales included approximately $0.8 million for the recognition into sales of payments resulting from the agreement with Abbott Laboratories.
The Company continues to believe that the decrease in net sales for the year is primarily the result of the worldwide recession. By and large, the Company’s products are considered durable goods. The Company believes that the purchase of equipment and durable goods and the purchase of equipment by hospitals and municipalities have been cut radically as a short term measure to meet budgets and conserve cash. Orders for the Company’s products for the year ended June 30, 2010 of $44.9 million were $4.6 million or 9.3% lower than orders for the year ended June 30, 2009 of $49.5 million. Customer purchase order releases for the year ended June 30, 2010 of $44.0 million were $5.6 million or 11.3% lower than customer purchase order releases of $49.6 million from the prior fiscal year.
As in 2009, sales for the year ended June 30, 2010 included $0.7 million for the recognition into sales of payments resulting from the agreement with Abbott Laboratories to cease production and distribution of Baralyme®.
Sales for the year ended June 30, 2009 also included recognition as sales of $0.1 million in reimbursement by Abbott Laboratories in product development cost to pursue development of new carbon dioxide absorption product as a result of the agreement to cease production and distribution of Baralyme®. In total, domestic sales for 2009 included approximately $0.8 million for recognition into sales of payments resulting from the agreement with Abbott Laboratories.
Allied continues to sell Carbolime®, a carbon dioxide absorbent with a different formulation than Baralyme®. For the year ended June 30, 2010 the Company had carbon dioxide absorbent sales of Carbolime® of $1.7 million dollars, compared with $1.8 million for the year ended June 30, 2009. Allied has recently introduced a new premium carbon dioxide absorbent, Litholyme®, with a new formulation. There were no sales of Litholyme® for the year ended June 30th, 2010.
Respiratory care products sales in fiscal 2010 of $11.9 million were $0.4 million, or 3.3% lower than sales of $12.3 million in the prior year. Included in the sales for respiratory care products is an approximately $0.1 million decrease in the amount recognized resulting from the agreement to cease the production and distribution of Baralyme®. The amount recognized as sales decreased to approximately $0.7 million or $0.1 million less than in the prior year. Respiratory care products also include the Company’s efforts in the homecare market. The Company continues to develop systems and personnel to improve our sales and marketing efforts and continues to emphasize measures to reduce cost.
Medical gas equipment sales, which include construction products, of $23.8 million in fiscal 2010 were $5.9 million, or 19.9% lower than prior year levels of $29.7 million. Internationally, sales of medical gas equipment in fiscal 2010 were $1.6 million less than in the prior year. The remainder of the decrease in sales, of $4.3 million, took place in the domestic market. The Company does not believe this decrease in sales represents a loss of market share, but a result of lower total demand and full-year impact of the recession.
Emergency medical product sales in fiscal 2010 of $10.4 million were $0.3 million or 3.0% higher than fiscal 2009 sales of $10.1 million. International sales of Emergency medical products increased by $0.1 million from the prior year while domestic sales increased by $0.2 million. Also, orders for the Company’s Emergency Products were $0.3 million higher than the prior year. The Company believes that demand for these products, which are largely consumed by local agencies, continues to be impacted by economic conditions as states and municipalities continued to struggle with decreased tax revenues.
International sales, which are included in the product lines discussed above, decreased $1.5 million, or 14.9%, to $8.6 million in fiscal 2010 compared to sales of $10.1 million in fiscal 2009. As discussed above, the Company’s international shipments are dependent on hospital construction projects and the expansion of medical care in those regions. In fiscal 2010, international shipments of medical gas equipment, including construction products, decreased by $1.6 million dollars. This decrease was partially offset by an increase of $66,000 in the sale of emergency care products and by a $116,000 increase in the sale of respiratory care products. The Company believes sales declines are the result of the current recession worldwide.
Gross profit in fiscal 2010 was $11.1 million, or 24.1% of sales, compared to a gross profit of $11.8 million, or 22.6% of sales in fiscal 2009. Lower production levels result in less effective utilization of the Company’s manufacturing capacity and the fixed expenses associated with that capacity. However, this impact was more than offset by initiatives to lower the cost of production through process change and lower cost acquisition of certain purchased components and finished goods. The Company continues to review the cost of production and seek opportunities to lower those costs.
The Company invested $0.3 million in capital expenditures in fiscal 2010, $1.5 million in fiscal 2009, and $1.1 million in fiscal 2008 for manufacturing equipment and computer systems, which continue to decrease production costs and improve efficiencies for several product lines. The Company continues to control cost and actively pursue methods to reduce its costs through automation.
Selling, General, and Administrative (“SG&A”) expenses for fiscal 2010 were $11.9 million, compared to SG&A expenses of $13.0 million in fiscal 2009. Stock option expense increased approximately $0.6 million due to the grant of immediately vested stock options to the Company’s President and CEO. The Company reduced expenses in almost all other areas of SG&A, including compensation, professional services and recruiting expenses. Due to the low level of sales for fiscal 2010, sales commissions decreased $0.3 million. Additionally, selling expenses for business travel decreased approximately $235,000, expenses for trade shows decreased approximately $134,000, expenses for supplies decreased approximately $60,000 and vehicle expenses decreased approximately $40,000.
Interest income in fiscal 2010 was $10,000 compared to interest income of $60,000 in fiscal 2009 due to lower average cash balances and lower interest rates.
Net loss in fiscal 2010 was $0.6 million or $0.07 per basic and diluted earnings per share, down from a net loss of $16.8 million, or $2.12 per basic and diluted earnings per share in fiscal 2009. In 2010, the weighted number of shares used in the calculation of basic and diluted earnings per share was 8,066,740. In 2009, the weighted number of shares used in the calculation of basic earnings per share was 7,898,782.
Fiscal 2009 Compared to Fiscal 2008
The Company had a loss of $17.2 million before taxes for fiscal 2009, compared to income of $1.3 million before taxes for fiscal 2008. The Company recorded an income tax benefit of $0.4 million in fiscal 2009, compared to an income tax provision of $0.4 million in fiscal 2008. The 2009 tax benefit was not affected due to the non-deductibility of the goodwill impairment charge for federal income tax purposes.
For further discussion of the Company’s income tax calculation please refer to Note 5 of the “Notes to Consolidated Financial Statements” section included in this Form 10-K.
Financial results for fiscal 2009 were adversely impacted by the write down of $16.0 million in goodwill. The write down resulted from the required annual impairment review of its goodwill at June 30, 2009, which took into consideration the declining economic environment and declining profitability. For further discussion of the Company’s goodwill impairment calculation please refer to the “Critical Accounting Polices – Goodwill” section above.
Net sales for fiscal 2009 of $52.1 million were $4.3 million or 7.6% less than net sales of $56.4 million in fiscal 2008. Domestically, sales decreased by $3.7 million dollars. Internationally, sales decreased by $0.6 million. International business is dependent upon hospital construction projects, and the development of medical facilities in those regions in which the Company operates. Domestic sales for fiscal 2009 include approximately $0.8 million for the recognition into sales of payments resulting from the agreement with Abbott Laboratories, as discussed below. For 2008, domestic sales included approximately $1.7 million for the recognition into sales of payments resulting from the agreement with Abbott Laboratories.
The decrease in net sales for the year is primarily the result of the worldwide recession. By and large, the Company’s products are considered durable goods. The Company believes that the purchase of equipment and durable goods and the purchase of equipment by hospitals and municipalities have been cut radically as a short term measure to meet budgets and conserve cash. Orders for the Company’s products for the year ended June 30, 2009 of $49.5 million were $4.9 million or 9.0% lower than orders for the year ended June 30, 2008 of $54.4 million. Customer purchase order releases for the year ended June 30, 2009 of $49.6 million were $4.2 million or 7.8% lower than customer purchase order releases of $53.8 million from the prior fiscal year.
Sales for the year ended June 30, 2009 included $688,000 for the recognition into sales of payments resulting from the agreement with Abbott Laboratories to cease production and distribution of Baralyme®. Sales for the year ended June 30, 2009 also included recognition as sales of $99,000 in reimbursement by Abbott Laboratories in product development cost to pursue development of new carbon dioxide absorption product as a result of the agreement to cease production and distribution of Baralyme®. In total, domestic sales for 2009 included approximately $787,000 for recognition into sales of payments resulting from the agreement with Abbott Laboratories.
By comparison, sales for the year ended June 30, 2008 included $465,000 for the recognition into sales of payments resulting from the agreement with Abbott Laboratories to cease production and distribution of Baralyme® and $1,196,000 in reimbursement by Abbott Laboratories in product development cost to pursue development of new carbon dioxide absorption product to replace Baralyme®.
Allied continues to sell Carbolime®, a carbon dioxide absorbent with a different formulation than Baralyme®. For the year ended June 30, 2009 the Company had carbon dioxide absorbent sales of Carbolime®, of $1.8 million dollars, compared with $1.9 million for the year ended June 30, 2008.
Respiratory care products sales in fiscal 2009 of $12.3 million were $1.9 million, or 13.4% lower than sales of $14.2 million in the prior year. Included in the sales for respiratory care products is an approximately $1.0 million decrease in the amount recognized resulting from the agreement to cease the production and distribution of Baralyme®. The amount recognized as sales decreased to approximately $0.7 million or $1.0 million less than in the prior year. Respiratory care products also include the Company’s efforts in the homecare market. The Company continues to develop systems and personnel to improve our sales and marketing efforts, has increased inventory levels and continues to emphasize measures to reduce cost.
Medical gas equipment sales, which include construction products, of $29.7 million in fiscal 2009 were $1.0 million, or 3.3% lower than prior year levels of $30.7 million. Internationally, sales of Medical gas equipment in fiscal 2009 were $0.8 million less than in the prior year. The remainder of the decrease in sales, of $0.2 million, took place in the domestic market. The Company does not believe this decrease in sales represents a loss of market share.
Emergency medical product sales in fiscal 2009 of $10.1 million were $1.3 million or 11.4% lower than fiscal 2008 sales of $11.4 million. International sales of emergency medical products were unchanged from the prior year while domestic sales decreased by $1.3 million. Also, orders for the Company’s emergency products were $1.2 million lower than the prior year. The Company believes that demand for these products, which are largely consumed by local agencies, was impacted by economic conditions as states and municipalities struggled with decreased tax revenues.
International sales, which are included in the product lines discussed above, decreased $0.7 million, or 6.5%, to $10.1 million in fiscal 2009 compared to sales of $10.8 million in fiscal 2008. As discussed above, the Company’s international shipments are dependent on hospital construction projects and the expansion of medical care in those regions. In fiscal 2009, international shipments of medical gas equipment, including construction products, decreased by $0.8 million dollars. This decrease was partially offset by an increase of $48,000 in the sale of emergency care products and by a $142,000 increase in the sale of respiratory care products. The Company believes order declines in South America and Southeast Asia, and other regions are the result of the current recession.
Gross profit in fiscal 2009 was $11.8 million, or 22.6% of sales, compared to a gross profit of $13.4 million, or 23.7% of sales in fiscal 2008. Lower production levels result in less effective utilization of the Company’s manufacturing capacity and the fixed expenses associated with that capacity. In addition, the cost of providing medical coverage to its employees increased approximately $0.3 million in fiscal 2009 over fiscal 2008. Cost of sales for the year ended June 30, 2009 includes approximately $0.1 million in cost incurred in product development cost to pursue development of a new carbon dioxide absorption product as a result of the agreement with Abbott Laboratories to cease production and distribution of Baralyme®. Cost of sales for the year ended June 30, 2008 includes approximately $0.6 million in cost incurred in product development cost to pursue development of a new carbon dioxide absorption product.
The Company invested $1.5 million in capital expenditures in fiscal 2009, $1.1 million in fiscal 2008, and $0.6 million in fiscal 2007 for manufacturing equipment and computer systems, which continue to decrease production costs and improve efficiencies for several product lines. The Company continues to control cost and actively pursue methods to reduce its costs.
SG&A expenses for fiscal 2009 were $13.0 million, compared to SG&A expenses of $12.1 million in fiscal 2008. Salaries and benefits increased by $0.8 million from the prior year primarily due to open employee positions in the prior fiscal year and normal increases in the cost of fringe benefits. There have not been changes in staffing levels over the prior year. Also, outside services increased approximately $0.1 million primarily for the testing of the Company’s new EPV100 and MCV ventilators designed to meet the needs of the mass casualty and pandemic markets. Additionally, legal expenses increased by approximately $0.1 million, as a result of product liability claims. Selling, general and administrative expenses also include approximately $0.2 million in product development cost for the new carbon dioxide absorption product being developed. In the prior year all development cost for this product were reimbursed. These increases have been partially offset by a $0.1 million decrease in recruiting expenses and a $0.1 million decrease in auditing and accounting professional fees from the prior year as a result of the IRS examination of the Company’s U.S. income tax returns for the fiscal years ended June 30, 2005 and 2006, which occurred during fiscal year 2008.
Interest income in fiscal 2009 was $60,000 compared to interest income of $138,000 in fiscal 2008.
Net loss in fiscal 2009 was $16.8 million or $2.12 per basic and diluted earnings per share, down from net income of $0.9 million, or $0.11 per basic and diluted earnings per share in fiscal 2008. In 2009, the weighted number of shares used in the calculation of basic and diluted earnings per share was 7,898,782. In 2008, the weighted number of shares used in the calculation of basic earnings per share was 7,883,659 and the weighted number of shares used in the calculation of diluted earnings per share was 8,119,776.
Financial Condition, Liquidity and Capital Resources
The following table sets forth selected information concerning Allied's financial condition at June 30:
The Company’s working capital was $17.6 million at June 30, 2010 compared to $17.0 million at June 30, 2009. Cash increased $3.3 million and accrued liabilities decreased by $0.1 million. During fiscal 2010, these increases in working capital were offset by a $0.3 million increase in accounts payable and a decrease of $1.5 million in inventories. Also, income tax receivable decreased $0.1 million and other current assets decreased $0.1 million. Accounts receivable decreased to $5.4 million at June 30, 2010, down $0.8 million from $6.2 million at June 30, 2009. Accounts receivable as measured in days sales outstanding (“DSO”) decreased to 40 DSO, down from 43 DSO in the prior year.
The net increase in cash for the fiscal year ended June 30, 2010 was $3.3 million. The net decrease in cash for the fiscal year ended June 30, 2009 was $4.2 million. Net cash provided by operating activities was $3.5 million for fiscal 2010 compared to net cash used in operating activities of $2.7 for fiscal 2009. The increase in cash flows from operations in fiscal 2010 is due primarily to decreases in inventory. The decrease in inventory is due to the decrease in sales, as the lower level of sales can be supported with less inventory.
Cash flows used in operating activities for the fiscal year ended June 30, 2009 consisted of a net loss of $16.8 million, supplemented by $1.3 million in non-cash charges to operations for amortization and depreciation. The net loss was also offset by a $16.0 million non-cash charge to operations for the impairment of goodwill. Cash was used to make capital expenditures of $1.5 million.
Effective as of November 13, 2009, Allied Healthcare Products, Inc. (the “Company”) terminated its revolving credit facility arrangement with Bank of America, N.A., as successor to LaSalle Bank National Association (the “Old Credit Agreement”). The Old Credit Agreement provided for borrowings of up to $10,000,000 and was available through September 1, 2010. No loans were outstanding under the Old Credit Agreement as of November 13, 2009.
On November 17, 2009, in order to obtain replacement financing, the Company entered into a Loan and Security Agreement by and between Enterprise Bank & Trust and the Company (the “New Credit Agreement”) pursuant to which the Company obtained a secured revolving credit facility with borrowing availability of up to $7,500,000 (the “New Credit Facility”). The Company’s obligations under the New Credit Facility are secured by certain assets of the Company, including all inventories and accounts receivable of the Company. The Company also paid a closing fee of $20,000 in order to obtain the New Credit Facility.
The New Credit Facility will be available on a revolving basis until it expires on November 15, 2010, at which time any amounts outstanding under the New Credit Facility will be due and payable. Advances under the New Credit Facility will be made pursuant to a Revolving Credit Note (the “Promissory Note”) executed by the Company in favor of Enterprise Bank & Trust. Such advances will bear interest at a rate equal to .50% in excess of Enterprise Bank & Trust’s prime-rate based interest rate for commercial loans, subject to a minimum annual interest rate of 4.50%. Advances may be prepaid in whole or in part without premium or penalty.
Under the New Credit Agreement, advances are generally subject to customary borrowing conditions. The New Credit Agreement also contains covenants with which the Company must comply during the term of the New Credit Facility. Among other things, such covenants restrict the Company’s ability to incur certain additional debt; make specified restricted payments, dividends and capital expenditures; authorize or issue capital stock; enter into certain transaction with affiliates; consolidate or merge with or acquire another business; sell certain of its assets or dissolve or wind up the Company. The New Credit Agreement also contains certain events of default that are customary for financings of this type including, without limitation: the failure to pay principal, interest, fees or other amounts when due; the breach of specified representations or warranties contained in the loan documents; cross-default with certain other indebtedness of the Company; the entry of uninsured judgments that are not bonded or stayed; failure to comply with the observance or performance of specified agreements contained in the loan documents; commencement of bankruptcy or other insolvency proceedings; and the failure of any of the loan documents entered into in connection with the New Credit Facility to be in full force and effect. After an event of default, and upon the continuation thereof, the principal amount of all loans made under the New Credit Facility would bear interest at a rate per annum equal to 4.00% above the otherwise applicable interest rate (provided, that the interest rate may not exceed the highest rate permissible under law), and the lender would have the option to accelerate maturity and payment of the Company’s obligations under the New Credit Facility.
At June 30, 2010 the Company had not drawn any amounts under the New Credit Agreement and had no other indebtedness, including capital lease obligations, short-term debt or long-term debt.
The following table summarizes the Company’s contractual obligations at June 30, 2010:
Capital expenditures were $0.3 million, $1.5 million and $1.1 million in fiscal 2010, 2009, and 2008, respectively. The Company believes that cash flows from operations and available borrowings under its credit facilities will be sufficient to finance fixed payments and planned capital expenditures of $0.8 million in 2011.
Cash flows from operations may be negatively impacted by decreases in sales, market conditions, and adverse changes in working capital. In the event that economic conditions were to severely worsen for a protracted period of time, we believe that we will be able to negotiate an amendment and waiver to our existing credit facility or procure a replacement credit facility, and our borrowing capacity under those arrangements will provide sufficient financial flexibility. The Company would have options available to ensure liquidity in addition to increased borrowing. Capital expenditures, which are budgeted at $0.8 million for the fiscal year ended June 30, 2011, could be postponed. At June 30, 2010, the Company had no bank debt.
The Company’s credit facility will be available until it expires on November 15, 2010. Based on discussions with the Bank, the Company believes it will be able to negotiate an amendment with the Bank extending the term of the credit facility.
Inflation has not had a material effect on the Company's business or results of operations. The Company makes its foreign sales in dollars and, accordingly, sales proceeds are not affected by exchange rate fluctuations, although the effect on its customers does impact the pace of incoming orders.
Seasonality and Quarterly Results
In past fiscal years, the Company has experienced moderate seasonal increases in net sales during its second and third fiscal quarters (October 1 through March 31) which in turn have affected net income. Such seasonal variations were likely attributable to an increase in hospital equipment purchases at the beginning of each calendar year (which coincides with many hospitals’ fiscal years) and an increase in the severity of influenza during winter months.
The following table sets forth selected operating results for the eight quarters ended June 30, 2009. The information for each of these quarters is unaudited, but includes all normal recurring adjustments which the Company considers necessary for a fair presentation thereof. These operating results, however, are not necessarily indicative of results for any future period. Further, operating results may fluctuate as a result of the timing of orders, the Company’s product and customer mix, the introduction of new products by the Company and its competitors, and overall trends in the health care industry and the economy. While these patterns have an impact on the Company’s quarterly operations, the Company is unable to predict the extent of this impact in any particular period.
Dollars in thousands, except per share data
Earnings per share is computed independently for each of the quarters presented. Therefore, the sum of the quarterly amounts will not necessarily equal the total for the year.
Litigation and Contingencies
The Company becomes, from time to time, a party to personal injury litigation arising out of incidents involving the use of its products. The Company believes that any potential judgments resulting from such claims over its self-insured retention will be covered by the Company’s product liability insurance.
Off Balance Sheet Arrangements
The Company does not have any off balance sheet arrangements.
Recently Issued Accounting Pronouncements
See Item 8, Note 2 “Summary of Significant Accounting Policies” for a discussion of recent accounting pronouncements and their impact on our consolidated financial statements, if any.
At June 30, 2010, the Company did not have any debt outstanding. The revolving credit facility bears an interest rate using the commercial bank’s “floating reference rate” or LIBOR as the basis, as defined in the loan agreement, and therefore is subject to additional expense should there be an increase in market interest rates.
The Company had no holdings of derivative financial or commodity instruments at June 30, 2010. Allied Healthcare Products has international sales; however these sales are denominated in U.S. dollars, mitigating foreign exchange rate fluctuation risk.
The following described consolidated financial statements of Allied Healthcare Products, Inc. are included in response to this item:
Report of Independent Registered Public Accounting Firm.
Consolidated Statement of Operations for the fiscal years ended June 30, 2010, 2009 and 2008.
Consolidated Balance Sheet for the fiscal years ended June 30, 2010 and 2009.
Consolidated Statement of Changes in Stockholders’ Equity for the fiscal years ended June 30, 2010, 2009 and 2008.
Consolidated Statement of Cash Flows for the fiscal years ended June 30, 2010, 2009 and 2008.
Notes to Consolidated Financial Statements.
Schedule of Valuation and Qualifying Accounts and Reserves for the years ended June 30, 2010, 2009 and 2008.
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Allied Healthcare Products, Inc.
We have audited the accompanying consolidated balance sheet of Allied Healthcare Products, Inc. and subsidiaries (collectively, the Company) as of June 30, 2010 and 2009, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the three years in the period ended June 30, 2010. In connection with our audit of the consolidated financial statements, we also have audited the related financial statement schedule of valuation and qualifying accounts and reserves for the years ended June 30, 2010, 2009 and 2008. These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal controls over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Allied Healthcare Products, Inc. and subsidiaries as of June 30, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2010, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule referred to above, when considered in relation to the consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ RubinBrown LLP
St. Louis, Missouri
September 23, 2010
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
See accompanying Notes to Consolidated Financial Statements.
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
See accompanying Notes to Consolidated Financial Statements.
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
See accompanying Notes to Consolidated Financial Statements.
ALLIED HEALTHCARE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS