UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One) | |
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2010
or
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: 1-5005
INTRICON CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania |
23-1069060 |
(State or other jurisdiction of |
(I.R.S. Employer Identification No.) |
|
|
1260 Red Fox Road |
55112 |
(Address of principal executive offices) |
(Zip Code) |
(651) 636-9770
(Registrants telephone number, including area code)
NA
(Former name, former address and former fiscal year, if changed since last report)
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.
x Yes o 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No
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 the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o |
Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).
o Yes x No
The number of outstanding shares of the registrants common stock, $1.00 par value, on July 30, 2010 was 5,485,806 (net of 515,754 treasury shares).
INTRICON CORPORATION
|
|
Page |
PART I: FINANCIAL INFORMATION |
| |
|
|
|
Item 1. |
| |
|
|
|
|
Consolidated Condensed Balance Sheets as of June 30, 2010 (Unaudited) and December 31, 2009 |
3 |
|
|
|
|
4 | |
|
|
|
|
5 | |
|
|
|
|
Notes to Consolidated Condensed Financial Statements (Unaudited) |
6-16 |
|
|
|
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
17-24 |
|
|
|
Item 3. |
25 | |
|
|
|
Item 4. |
25 | |
|
|
|
|
|
|
PART II: OTHER INFORMATION |
| |
|
|
|
Item 1. |
26 | |
|
|
|
Item 1A. |
26 | |
|
|
|
Item 2. |
26 | |
|
|
|
Item 3. |
26 | |
|
|
|
Item 4. |
(Removed and Reserved) |
26 |
|
|
|
Item 5. |
26 | |
|
|
|
Item 6. |
27 | |
|
|
|
28 | ||
|
| |
29 |
2
PART I: FINANCIAL INFORMATION
Consolidated Condensed Balance Sheets
(In Thousands)
|
|
June 30, |
|
December 31, |
| ||
Current assets: |
|
|
|
|
|
|
|
Cash |
|
$ |
563 |
|
$ |
385 |
|
Restricted cash |
|
|
413 |
|
|
406 |
|
Accounts receivable, less allowance for doubtful accounts of $246 at June 30, 2010 and $226 at December 31, 2009 |
|
|
7,527 |
|
|
7,084 |
|
Inventories |
|
|
8,457 |
|
|
8,221 |
|
Other current assets |
|
|
450 |
|
|
879 |
|
Current assets of discontinued operations |
|
|
|
|
|
1,140 |
|
Total current assets |
|
|
17,410 |
|
|
18,115 |
|
|
|
|
|
|
|
|
|
Machinery and equipment |
|
|
36,242 |
|
|
35,516 |
|
Less: Accumulated depreciation |
|
|
29,740 |
|
|
28,725 |
|
Net machinery and equipment |
|
|
6,502 |
|
|
6,791 |
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
9,709 |
|
|
9,717 |
|
Investment in partnerships |
|
|
1,225 |
|
|
1,237 |
|
Other assets of discontinued operations |
|
|
|
|
|
142 |
|
Other assets, net |
|
|
1,368 |
|
|
1,361 |
|
Total assets |
|
$ |
36,214 |
|
$ |
37,363 |
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
Checks written in excess of cash |
|
$ |
185 |
|
$ |
102 |
|
Current maturities of long-term debt |
|
|
1,835 |
|
|
1,709 |
|
Accounts payable |
|
|
3,502 |
|
|
3,637 |
|
Deferred gain |
|
|
110 |
|
|
110 |
|
Partnership payable |
|
|
260 |
|
|
260 |
|
Liabilities of discontinued operations |
|
|
|
|
|
926 |
|
Other accrued liabilities |
|
|
3,688 |
|
|
2,867 |
|
Total current liabilities |
|
|
9,580 |
|
|
9,611 |
|
|
|
|
|
|
|
|
|
Long-term debt, less current maturities |
|
|
6,274 |
|
|
7,730 |
|
Other postretirement benefit obligations |
|
|
716 |
|
|
756 |
|
Long-term partnership payable |
|
|
500 |
|
|
500 |
|
Deferred income taxes |
|
|
147 |
|
|
129 |
|
Accrued pension liabilities |
|
|
457 |
|
|
543 |
|
Deferred gain |
|
|
550 |
|
|
605 |
|
Total liabilities |
|
|
18,224 |
|
|
19,874 |
|
|
|
|
|
|
|
|
|
Commitments and contingencies (note 14) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
Common shares, $1.00 par value per share; 20,000 shares authorized; 5,995 and 5,986 shares issued; 5,480 and 5,470 shares outstanding at June 30, 2010 and December 31, 2009, respectively. |
|
|
5,996 |
|
|
5,986 |
|
Additional paid-in capital |
|
|
15,257 |
|
|
14,987 |
|
Retained deficit |
|
|
(1,718 |
) |
|
(2,005 |
) |
Accumulated other comprehensive loss |
|
|
(280 |
) |
|
(214 |
) |
Less: 516 common shares held in treasury, at cost |
|
|
(1,265 |
) |
|
(1,265 |
) |
Total shareholders equity |
|
|
17,990 |
|
|
17,489 |
|
Total liabilities and shareholders equity |
|
$ |
36,214 |
|
$ |
37,363 |
|
(See accompanying notes to the consolidated condensed financial statements)
3
Consolidated Condensed Statements of Operations
(In Thousands, Except Per Share Amounts)
|
Three Months Ended |
|
Six Months Ended |
| |||||||||
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
| |||||
|
|
|
|
|
|
|
|
|
| ||||
Sales, net |
|
$ |
14,934 |
|
$ |
12,811 |
|
$ |
29,488 |
|
$ |
24,655 |
|
Cost of sales |
|
|
10,903 |
|
|
10,118 |
|
|
21,781 |
|
|
19,786 |
|
Gross profit |
|
|
4,031 |
|
|
2,693 |
|
|
7,707 |
|
|
4,869 |
|
|
|
|
|
|
|
|
|
|
| ||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
| |||
Selling expense |
|
|
835 |
|
|
710 |
|
|
1,622 |
|
|
1,329 |
|
General and administrative expense |
|
|
1,493 |
|
|
1,400 |
|
|
2,937 |
|
|
2,779 |
|
Research and development expense |
|
|
1,105 |
|
|
787 |
|
|
2,224 |
|
|
1,667 |
|
Total operating expenses |
|
|
3,433 |
|
|
2,897 |
|
|
6,783 |
|
|
5,775 |
|
Operating income (loss) |
|
|
598 |
|
|
(204 |
) |
|
924 |
|
|
(906 |
) |
|
|
|
|
|
|
|
|
|
| ||||
Interest expense |
|
|
(172 |
) |
|
(118 |
) |
|
(342 |
) |
|
(243 |
) |
Equity in loss of partnerships |
|
|
|
|
|
(114 |
) |
|
(12 |
) |
|
(201 |
) |
Other income, net |
|
|
42 |
|
|
25 |
|
|
86 |
|
|
82 |
|
Income (loss) from continuing operations before income taxes and discontinued operations |
|
|
468 |
|
|
(411 |
) |
|
656 |
|
|
(1,268 |
) |
|
|
|
|
|
|
|
|
|
| ||||
Income tax expense (benefit) |
|
|
64 |
|
|
12 |
|
|
75 |
|
|
(38 |
) |
Income (loss) before discontinued operations |
|
|
404 |
|
|
(423 |
) |
|
581 |
|
|
(1,230 |
) |
|
|
|
|
|
|
|
|
|
| ||||
Loss from discontinued operations, net of income taxes |
|
|
(170 |
) |
|
(175 |
) |
|
(329 |
) |
|
(357 |
) |
Gain on sale of discontinued operations, net of income taxes |
|
|
35 |
|
|
|
|
|
35 |
|
|
|
|
Net income (loss) |
|
$ |
269 |
|
$ |
(598 |
) |
$ |
287 |
|
$ |
(1,587 |
) |
|
|
|
|
|
|
|
|
|
| ||||
Basic income (loss) per share: |
|
|
|
|
|
|
|
|
|
| |||
Continuing operations |
|
$ |
0.07 |
|
$ |
(0.08 |
) |
$ |
0.11 |
|
$ |
(0.23 |
) |
Discontinued operations |
|
$ |
(0.02 |
) |
$ |
(0.03 |
) |
$ |
(0.06 |
) |
$ |
(0.07 |
) |
Net income (loss) |
|
$ |
0.05 |
|
$ |
(0.11 |
) |
$ |
0.05 |
|
$ |
(0.30 |
) |
|
|
|
|
|
|
|
|
|
| ||||
Diluted income (loss) per share: |
|
|
|
|
|
|
|
|
|
| |||
Continuing operations |
|
$ |
0.07 |
|
$ |
(0.08 |
) |
$ |
0.11 |
|
$ |
(0.23 |
) |
Discontinued operations |
|
$ |
(0.02 |
) |
$ |
(0.03 |
) |
$ |
(0.06 |
) |
$ |
(0.07 |
) |
Net income (loss) |
|
$ |
0.05 |
|
$ |
(0.11 |
) |
$ |
0.05 |
|
$ |
(0.30 |
) |
|
|
|
|
|
|
|
|
|
| ||||
Average shares outstanding: |
|
|
|
|
|
|
|
|
|
| |||
Basic |
|
|
5,476 |
|
|
5,354 |
|
|
5,474 |
|
|
5,348 |
|
Diluted |
|
|
5,614 |
|
|
5,354 |
|
|
5,496 |
|
|
5,348 |
|
(See accompanying notes to the consolidated condensed financial statements)
4
Consolidated Condensed Statements of Cash Flows
(In Thousands)
|
Six Months Ended |
||||||
|
June 30, |
|
June 30, |
||||
Cash flows from operating activities: |
|
|
|
|
|||
Net income (loss) |
|
$ |
287 |
|
$ |
(1,587 |
) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|||
Gain on sale of discontinued operations |
|
|
(35 |
) |
|
|
|
Depreciation and amortization |
|
|
1,355 |
|
|
1,245 |
|
Stock-based compensation |
|
|
239 |
|
|
272 |
|
Gain on disposition of property |
|
|
|
|
|
(51 |
) |
Change in deferred gain |
|
|
(55 |
) |
|
(60 |
) |
Change in allowance for doubtful accounts |
|
|
20 |
|
|
(151 |
) |
Equity in loss of partnerships |
|
|
12 |
|
|
201 |
|
Provision for deferred income taxes |
|
|
18 |
|
|
(26 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|||
Accounts receivable |
|
|
(569 |
) |
|
512 |
|
Inventories |
|
|
(307 |
) |
|
(312 |
) |
Other assets |
|
|
210 |
|
|
192 |
|
Accounts payable |
|
|
(116 |
) |
|
388 |
|
Accrued expenses |
|
|
373 |
|
|
(723 |
) |
Other liabilities |
|
|
29 |
|
|
(10 |
) |
Net cash provided by (used in) operating activities |
|
|
1,461 |
|
|
(110 |
) |
|
|
|
|
||||
Cash flows from investing activities: |
|
|
|
|
|||
Purchases of property, plant and equipment |
|
|
(770 |
) |
|
(636 |
) |
Proceeds from sale of property, plant and equipment |
|
|
|
|
|
100 |
|
Proceeds from sale of discontinued operations, net |
|
|
775 |
|
|
|
|
Proceeds from note receivable |
|
|
|
|
|
225 |
|
Net cash provided by (used in) investing activities |
|
|
5 |
|
|
(311 |
) |
|
|
|
|
||||
Cash flows from financing activities: |
|
|
|
|
|||
Proceeds from long-term borrowings |
|
|
4,965 |
|
|
5,087 |
|
Repayments of long-term borrowings |
|
|
(6,295 |
) |
|
(5,141 |
) |
Proceeds from employee stock purchases and exercise of stock options |
|
|
36 |
|
|
53 |
|
Change in restricted cash |
|
|
(57 |
) |
|
(5 |
) |
Change in checks written in excess of cash |
|
|
84 |
|
|
352 |
|
Net cash (used in) provided by financing activities |
|
|
(1,267 |
) |
|
346 |
|
|
|
|
|
||||
Effect of exchange rate changes on cash |
|
|
(21 |
) |
|
(1 |
) |
|
|
|
|
||||
Net increase (decrease) in cash |
|
|
178 |
|
|
(76 |
) |
Cash, beginning of period |
|
|
385 |
|
|
249 |
|
|
|
|
|
||||
Cash, end of period |
|
$ |
563 |
|
$ |
173 |
(See accompanying notes to the consolidated condensed financial statements)
5
Notes to Consolidated Condensed Financial Statements (Unaudited) (In Thousands, Except Per Share Data)
1. General
In the opinion of management, the accompanying consolidated condensed financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly IntriCon Corporations (IntriCon or the Company) consolidated financial position as of June 30, 2010 and December 31, 2009, and the consolidated results of its operations for the three and six months ended June 30, 2010 and 2009. Results of operations for the interim periods are not necessarily indicators of the results of the operations expected for the full year or any other interim period.
On January 1, 2010, the Company purchased the remaining 10 percent minority interest of its German subsidiary for approximately $18. The non-controlling interest was immaterial for all periods presented.
Segment Disclosures A business segment is a distinguishable component of an enterprise that is engaged in providing an individual product or service or a group of related products or services and that is subject to risks and returns that are different from those of other business segments. The Companys segments have similar economic characteristics and are similar in the nature of the products sold, type of customers, methods used to distribute the Companys products and regulatory environment. Management believes that the Company meets the criteria for aggregating its operating segments of its continuing operations into a single reporting segment.
The Company has evaluated subsequent events occurring after the date of the consolidated financial statements for events requiring recording or disclosure in the financial statements. The Company entered into a new Singapore lease subsequent to the quarter ended June 30, 2010. As the Company has decided to move the Singapore manufacturing facility the lease will replace the existing lease set to expire in November 2011. The lease agreement includes a five year term commencing in October 2010 with monthly rental payments ranging from approximately $25 to $35.
2. New Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements, which amends Accounting Standards Codification (ASC) 820, Fair Value Measurements, by requiring additional disclosures for transfers in and out of levels 1 and 2 and activity in level 3 fair value measurements. Additionally, the amendment clarifies existing disclosure requirements surrounding the level of disaggregation and valuation techniques and inputs. This guidance became effective for us January 1, 2010 and did not have a material impact on our consolidated financial statements.
3. Discontinued Operations
In December 2009, the Companys Board of Directors authorized management to exit the non-core electronics products segment operated by its wholly-owned subsidiary, RTI Electronics, Inc. and divest the assets used in the business. The decision to exit the electronics products segment was made to allow the Company to focus on its core body-worn device segment. In connection with its decision to divest the electronics business, the Company evaluated assets for impairment and costs of terminating employees and recorded the following: (i) an impairment charge of $685 relating to goodwill, (ii) a reduction to realizable value of $720 to tangible assets, and (iii) $275 in employee termination costs for the year ended December 31, 2009. Additional costs related to employee terminations of approximately $200 were recorded during the six months ended June 30, 2010.
On May 28, 2010 the Company completed the sale of substantially all of the assets of its electronics business to an affiliate of Shackleton Equity Partners (Shackleton), pursuant to an Asset Purchase Agreement dated May 28, 2010. Shackleton paid $850 cash at closing for the assets and assumed certain operating liabilities of IntriCons electronics business, subject to an accounts receivable adjustment.
6
The Company recorded a gain on sale of $35. The net gain was computed as follows:
Cash |
$ |
4 |
|
Accounts receivable, net |
|
773 |
|
Inventory, net |
|
383 |
|
Other current assets |
|
16 |
|
Property and equipment, net |
|
72 |
|
Other assets |
|
26 |
|
Accounts payable |
|
(356 |
) |
Accrued expenses |
|
(130 |
) |
Long-term debt |
|
(48 |
) |
Total |
$ |
740 |
|
Cash proceeds received from Shackleton |
|
850 |
|
Net assets sold |
|
(740 |
) |
Transaction costs |
|
(75 |
) |
Gain on sale of discontinued operations |
$ |
35 |
|
The following table shows the results of operations of the Companys electronic products segment:
|
Three Months Ended |
Six Months Ended |
| ||||||||||
|
2010 |
|
2009 |
2010 |
|
2009 |
| ||||||
|
|
|
|
|
|
|
|
|
| ||||
Sales, net |
|
$ |
984 |
|
$ |
1,165 |
$ |
2,346 |
|
$ |
2,652 |
| |
Operating costs and expenses |
|
|
(1,151 |
) |
|
(1,337 |
) |
|
(2,670 |
) |
|
(2,989 |
) |
Operating loss |
|
|
(167 |
) |
|
(172 |
) |
|
(324 |
) |
|
(337 |
) |
Other expense, net |
|
|
(3 |
) |
|
(3 |
) |
|
(5 |
) |
|
(5 |
) |
Loss from operations before income tax expense |
|
|
(170 |
) |
|
(175 |
) |
|
(329 |
) |
|
(342 |
) |
Income tax expense |
|
|
|
|
|
|
|
|
|
|
15 |
| |
Net loss from discontinued operations |
|
$ |
(170 |
) |
$ |
(175 |
) |
$ |
(329 |
) |
$ |
(357 |
) |
The following table shows the assets and liabilities of the electronic products segment at December 31, 2009:
|
2009 |
| |
|
|
|
|
Cash |
$ |
5 |
|
Accounts receivable, net |
|
757 |
|
Inventory, net |
|
332 |
|
Other current assets |
|
46 |
|
Current assets of discontinued operations |
|
1,140 |
|
|
|
|
|
Property and equipment, net |
|
116 |
|
Other assets |
|
26 |
|
Other assets of discontinued operations |
|
142 |
|
|
|
|
|
Accounts payable |
|
351 |
|
Accrued compensation and other liabilities |
|
575 |
|
Current liabilities of discontinued operations |
$ |
926 |
|
7
As discussed above, along with the decision to divest the electronics business, the Company evaluated assets for impairment as of December 31, 2009. Information regarding the nonrecurring fair value measurement of such impairments completed during the three month period ended December 31, 2009 was as follows:
2009 (in thousands): |
|
Fair Value as of |
|
Quoted prices |
|
Significant other |
|
Significant |
|
Impairment |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets and goodwill of discontinued operations |
|
$ |
116 |
|
$ |
|
|
$ |
|
|
$ |
116 |
|
$ |
910 |
|
There were no additional impairments identified for the three and six months ended June 30, 2010.
4. Acquisition
On August 13, 2009, the Company acquired all of the outstanding stock of Jon Barron, Inc. doing business as Datrix (Datrix), a privately held developer, manufacturer, tester and marketer of medical devices and related software products, based in Escondido, California. The acquisition provided the Company entry into the ambulatory electrocardiograph (AECG) and event recording markets.
The purchase price included a closing cash payment of $1,225, issuance of 75,000 shares of restricted common stock of the Company, valued at $270 based on the fair value of the common stock on August 13, 2009, and the issuance of a promissory note in the amount of $1,050 bearing annual interest at 6%, subject to adjustment. In addition, the Company paid off Datrixs outstanding line of credit with Wells Fargo of $130 at closing.
The principal amount of the promissory note is payable in three installments of $350 on August 13, 2010, August 13, 2011 and August 13, 2012. The note bears annual interest at 6% and is payable with each installment of principal as set forth above.
The assets and liabilities of Datrix were recorded as of the acquisition date at their respective fair values and consolidated with those of the Company. Likewise, the results of operations of the Datrix operations since August 13, 2009 have been included in the accompanying consolidated statements of operations. The allocation of the net purchase price of the acquisition resulted in goodwill of approximately $2,128. The goodwill represents operating and market synergies that the Company expects to be realized as a result of the acquisition and future opportunities and is not tax deductible. The purchase price allocation is based on estimates of fair values of assets acquired and liabilities assumed. The valuation required the use of significant assumptions and estimates. These estimates were based on assumptions the Company believed to be reasonable.
The purchase price was as follows as of August 13, 2009 (amounts in thousands):
Cash paid to seller at closing |
|
$ |
1,225 |
|
Cash paid to Wells Fargo at closing |
|
|
130 |
|
Stock consideration |
|
|
270 |
|
Seller note at close |
|
|
1,050 |
|
Total purchase price |
|
$ |
2,675 |
|
The following table summarizes the purchase price allocation for the Datrix acquisition (amounts in thousands):
Cash |
|
$ |
13 |
|
Other current assets |
|
|
522 |
|
Intangible assets (weighted average life of 2.4 years) |
|
|
125 |
|
Goodwill Body-Worn Segment |
|
|
2,128 |
|
Current liabilities |
|
|
(113 |
) |
Total preliminary purchase price allocation |
|
$ |
2,675 |
|
Results from operations of Datrix are not considered material to the financial statements for 2009. Proforma results are also not considered material for 2009. Acquisition costs of $277 were primarily incurred and recorded in the three month period ended September 30, 2009.
8
5. Product Warranty
In general, the Company warrants its products to be free from defects in material and workmanship and will fully conform to and perform to specifications for a period of one year. The following table presents changes in the Companys warranty liability for the three and six months ended June 30, 2010:
|
|
Three months |
|
Six months |
| ||
Beginning balance |
|
$ |
98 |
|
$ |
71 |
|
|
|
|
|
|
|
|
|
Warranty expense |
|
|
26 |
|
|
53 |
|
Closed warranty claims |
|
|
(5 |
) |
|
(5 |
) |
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
119 |
|
$ |
119 |
|
6. Geographic Information
The geographical distribution of long-lived assets to geographical areas consisted of the following at:
|
|
June 30, |
|
December 31, |
| ||
|
|
|
|
|
|
|
|
United States |
|
$ |
5,630 |
|
$ |
5,893 |
|
Other primarily Singapore |
|
|
1,250 |
|
|
1,229 |
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
6,880 |
|
$ |
7,122 |
|
Long-lived assets consist of property and equipment as they are difficult to move and relatively illiquid. Excluded from long-lived assets are investments in partnerships, patents, license agreements and goodwill. The Company capitalizes long-lived assets pertaining to the production of specialized parts. These assets are periodically reviewed to assure the net realizable value from the estimated future production based on forecasted cash flows exceeds the carrying value of the assets.
The geographical distribution of net sales to geographical areas for the three and six months ended June 30, 2010 and 2009 were as follows:
|
|
Three months ended |
|
Six months ended |
| ||||||||
Net Sales to Geographical Areas |
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
10,489 |
|
$ |
9,152 |
|
$ |
20,549 |
|
$ |
17,532 |
|
Germany |
|
|
525 |
|
|
307 |
|
|
1,413 |
|
|
880 |
|
China |
|
|
851 |
|
|
808 |
|
|
1,690 |
|
|
1,341 |
|
Switzerland |
|
|
179 |
|
|
190 |
|
|
340 |
|
|
352 |
|
Japan |
|
|
406 |
|
|
514 |
|
|
673 |
|
|
939 |
|
France |
|
|
468 |
|
|
455 |
|
|
863 |
|
|
878 |
|
Singapore |
|
|
288 |
|
|
151 |
|
|
748 |
|
|
451 |
|
United Kingdom |
|
|
103 |
|
|
191 |
|
|
180 |
|
|
341 |
|
Vietnam |
|
|
376 |
|
|
300 |
|
|
649 |
|
|
464 |
|
Hong Kong |
|
|
179 |
|
|
55 |
|
|
355 |
|
|
206 |
|
All other countries |
|
|
1,070 |
|
|
688 |
|
|
2,028 |
|
|
1,271 |
|
Consolidated |
|
$ |
14,934 |
|
$ |
12,811 |
|
$ |
29,488 |
|
$ |
24,655 |
|
Geographic net sales are allocated based on the location of the customer. All other countries include net sales primarily to various countries in Europe and in the Asian Pacific.
For the three and six months ended June 30, 2010, one customer accounted for 25 percent of the Companys consolidated net sales. For the three and six months ended June 30, 2009, two customers accounted for 19 percent and 12 percent and 19 percent and 13 percent of the Companys consolidated net sales, respectively.
9
At June 30, 2010, one customer accounted for 14 percent of the Companys consolidated accounts receivable, respectively. At December 31, 2009, two customers accounted for 16 percent and 11 percent of the Companys consolidated accounts receivable, respectively.
7. Inventories
Inventories consisted of the following at:
|
|
Raw materials |
|
Work-in process |
|
Finished products and components |
|
Total |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
3,799 |
|
$ |
1,517 |
|
$ |
1,186 |
|
$ |
6,502 |
|
Foreign |
|
|
1,277 |
|
|
463 |
|
|
215 |
|
|
1,955 |
|
Total |
|
$ |
5,076 |
|
$ |
1,980 |
|
$ |
1,401 |
|
$ |
8,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
3,651 |
|
$ |
1,680 |
|
$ |
934 |
|
$ |
6,265 |
|
Foreign |
|
|
1,515 |
|
|
217 |
|
|
224 |
|
|
1,956 |
|
Total |
|
$ |
5,166 |
|
$ |
1,897 |
|
$ |
1,158 |
|
$ |
8,221 |
|
8. Short and Long-Term Debt
Short and long-term debt is summarized as follows:
|
|
June 30, |
|
December 31, |
| ||
|
|
|
|
|
|
|
|
Domestic Asset-Based Revolving Credit Facility |
|
$ |
3,240 |
|
$ |
4,450 |
|
Foreign Overdraft and Letter of Credit Facility |
|
|
919 |
|
|
678 |
|
Domestic Term Loan |
|
|
2,900 |
|
|
3,250 |
|
Domestic Capital Equipment Leases |
|
|
|
|
|
11 |
|
Note Payable Datrix Purchase |
|
|
1,050 |
|
|
1,050 |
|
Total Debt |
|
|
8,109 |
|
|
9,439 |
|
Less: Current maturities |
|
|
(1,835 |
) |
|
(1,709 |
) |
Total Long Term Debt |
|
$ |
6,274 |
|
$ |
7,730 |
|
To finance a portion of the Datrix acquisition and replace the Companys existing credit facilities with Bank of America, including capital leases, the Company and its domestic subsidiaries entered into a new three year credit facility with The PrivateBank and Trust Company on August 13, 2009. The credit facility provides for:
▪ |
an $8,000 revolving credit facility, with a $200 subfacility for letters of credit. Under the revolving credit facility, the availability of funds depends on a borrowing base composed of stated percentages of the Companys eligible trade receivables and eligible inventory, and eligible equipment less a reserve; and |
|
|
▪ |
a $3,500 term loan. |
Loans under the credit facility are secured by a security interest in substantially all of the assets of the Company and its domestic subsidiaries including a pledge of the stock of its domestic subsidiaries. Loans under the credit facility bear interest at varying rates based on predefined levels of Funded Debt / EBITDA, at the option of the Company, at:
▪ |
the London InterBank Offered Rate (LIBOR) plus 3.00% - 4.00%, or |
|
|
▪ |
the base rate, which is the higher of (a) the rate publicly announced from time to time by the lender as its prime rate and (b) the Federal Funds Rate plus 0.5%, plus 0.25% - 1.25%. |
10
Weighted average interest on the new domestic asset-based revolving credit facility was 4.56% for the six months ended June 30, 2010 and 4.07% for the year ended December 31, 2009. The outstanding balance of the revolving credit facility was $3,240 and $4,450 at June 30, 2010 and December 31, 2009, respectively. The total remaining availability on the revolving credit facility was approximately $3,608 and $2,821 at June 30, 2010 and December 31, 2009, respectively. The credit facility expires on August 13, 2012 and all outstanding borrowings will become due and payable.
The outstanding principal balance of the term loan is payable in quarterly installments of varying amounts ranging from $169 to $188. Any remaining principal and accrued interest is payable on August 13, 2012. IntriCon is also required to use 100% of the net cash proceeds of certain asset sales (excluding inventory and certain other dispositions), sale of capital securities or issuance of debt to pay down the term loan.
In March 2010, the Company entered into an amendment with the PrivateBank to waive certain covenant violations at December 31, 2009 and January 31, 2010 and reset certain covenant thresholds defined in the original agreement. The Company was in compliance with all applicable covenants under the credit facility, as amended, as of June 30, 2010.
Upon termination of the Bank of America credit facility, the Company was required to settle the outstanding obligations of $121 for the liability related to its interest rate swap agreement with Bank of America and recognize the corresponding charge of $121 in interest expense in the three month period ended September 30, 2009, which was previously included in accumulated other comprehensive loss. In addition, the Company expensed the remaining deferred financing costs of $86 related to the Bank of America facility, which was also included in interest expense in the three month period ended September 30, 2009.
The prior credit facility provided for:
▪ |
a $10,000 revolving credit facility, with a $200 subfacility for letters of credit. Under the revolving credit facility, the availability of funds depends on a borrowing base composed of stated percentages of our eligible trade receivables and eligible inventory, less a reserve. |
|
|
▪ |
a $4,500 term loan, which was used to fund the Companys May, 2007 acquisition of Tibbetts Industries, Inc. |
Loans under the credit facility were secured by a security interest in substantially all of the assets of the borrowers including a pledge of the stock of the subsidiaries. All of the borrowers were jointly and severally liable for all borrowings under the credit facility.
In June 2008, the Company completed a sale-leaseback of machinery and equipment with Bank of America. The transaction generated proceeds of $1,098, of which $1,013 was used to pay down the domestic term loan. The facility was repaid on August 13, 2009 with proceeds borrowed under the new PrivateBank facility.
In addition to its domestic credit facilities, the Companys wholly-owned subsidiary, IntriCon, PTE LTD., entered into an international senior secured credit agreement with Oversea-Chinese Banking Corporation Ltd. that provides for a $1,860 line of credit. Borrowings bear interest at a rate of .75% to 2.5% over the lenders prevailing prime lending rate. Weighted average interest on the international credit facilities was 3.93% for the six months ended June 30, 2010 and 5.31% for the year ended December 31, 2009. The outstanding balance was $919 and $678 at June 30, 2010 and December 31, 2009, respectively. The total remaining availability on the international senior secured credit agreement was approximately $941 and $1,177 at June 30, 2010 and December 31, 2009, respectively.
9. Income Taxes
Income tax expense for the three and six months ended June 30, 2010 was $64 and $75, respectively compared to expense of $12 and benefit of $38 for the same periods in 2009. The expense (benefit) for the three and six months ended June 30, 2010 and 2009 were primarily due to foreign operating income (loss) and state tax estimated payments. The Company has net operating loss carryforwards for U.S. federal income tax purposes and, consequently, minimal federal benefit or expense from the domestic operations was recognized as the deferred tax asset has a full valuation allowance.
11
The following was the income (loss) before income taxes for each jurisdiction that the Company has operations for the three and six months ended June 30, 2010 and 2009:
|
|
Three months ended |
|
Six months ended |
| ||||||||
|
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
| ||||
United States |
|
$ |
183 |
|
$ |
(473 |
) |
$ |
340 |
|
$ |
(1,069 |
) |
Singapore |
|
|
169 |
|
|
32 |
|
|
143 |
|
|
(189 |
) |
Germany |
|
|
116 |
|
|
30 |
|
|
173 |
|
|
(10 |
) |
Income (loss) before income taxes and discontinued operations |
|
$ |
468 |
|
$ |
(411 |
) |
$ |
656 |
|
$ |
(1,268 |
) |
10. Shareholders Equity and Stock-based Compensation
The Company has a 1994 stock option plan, a 2001 stock option plan, a non-employee directors stock option plan and a 2006 equity incentive plan. New grants may not be made under the 1994, the 2001 and the non-employee directors stock option plans; however certain option grants under these plans remain exercisable as of June 30, 2010. The aggregate number of shares of common stock for which awards could be granted under the 2006 Equity Incentive Plan as of the date of adoption was 699 shares. Additionally, as outstanding options under the 2001 stock option plan and non-employee directors stock option plan expire, the shares of the Companys common stock subject to the expired options will become available for issuance under the 2006 Equity Incentive Plan. On April 21, 2010, the Companys shareholders approved an amendment to the 2006 Equity Incentive Plan to increase (i) the authorized number of shares of the Companys common stock reserved and issuable under the plan by an additional 250 shares and (ii) the maximum number of incentive stock options that may be granted under the plan to be the same as the maximum number of shares that may be granted under the plan.
Under the various plans, executives, employees and outside directors receive awards of options to purchase common stock. Under the 2006 Equity Incentive Plan, the Company may also grant stock awards, stock appreciation rights, restricted stock units and other equity-based awards, although no such awards, other than awards under the programs discussed in the next two paragraphs, had been granted as of June 30, 2010. Under all awards, the terms are fixed on the grant date. Generally, the exercise price equals the market price of the Companys stock on the date of the grant. Options under the plans generally vest over three years, and have a maximum term of 10 years.
Additionally, the board has established the non-employee directors stock fee election program, referred to as the director program, as an award under the 2006 equity incentive plan. The director program gives each non-employee director the right under the 2006 equity incentive plan to elect to have some or all of his quarterly director fees paid in common shares rather than cash. There were 1 and 1 shares issued in lieu of cash for director fees under the director program for the three and six months ended June 30, 2010, respectively. There were 1 and 2 shares issued in lieu of cash for director fees under the director program for the three and six months ended June 30, 2009, respectively.
On July 23, 2008, the Compensation Committee of the Board of Directors approved the non-employee director and executive officer stock purchase program, referred to as the management purchase program, as an award under the 2006 Plan. The purpose of the management purchase program is to permit the Companys non-employee directors and executive officers to purchase shares of the Companys common stock directly from the Company. Pursuant to the management purchase program, as amended, participants may elect to purchase shares of common stock from the Company not exceeding an aggregate of $100 during any fiscal year. Participants may make such election one time during each twenty business day period following the public release of the Companys earnings announcement, referred to as a window period, and only if such participant is not in possession of material, non-public information concerning the Company, subject to the discretion of the Board to prohibit any transactions in common stock by directors and executive officers during a window period. There were no shares purchased under the management purchase program during the three and six months ended June 30, 2010 and 2009, respectively.
12
Stock option activity as of and during the six months ended June 30, 2010 was as follows:
|
|
Number of Shares |
|
Weighted-average |
|
Aggregate |
| |||
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009 |
|
|
1,054 |
|
$ |
5.67 |
|
|
|
|
Options forfeited |
|
|
(4 |
) |
|
9.63 |
|
|
|
|
Options granted |
|
|
127 |
|
|
3.44 |
|
|
|
|
Options exercised |
|
|
(2 |
) |
|
3.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2010 |
|
|
1,175 |
|
$ |
5.42 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2010 |
|
|
855 |
|
$ |
5.29 |
|
$ |
51 |
|
|
|
|
|
|
|
|
|
|
|
|
Available for future grant at December 31, 2009 |
|
|
161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for future grant at June 30, 2010 |
|
|
289 |
|
|
|
|
|
|
|
The number of shares available for future grant at June 30, 2010 does not include a total of up to 398 shares subject to options outstanding under the 2001 stock option plan and non-employee directors stock option plan as of June 30, 2010, which will become available for grant under the 2006 Equity Incentive Plan in the event of the expiration of such options.
The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of subjective assumptions, including the expected stock price volatility. Because the Companys options have characteristics different from those of traded options, in the opinion of management, the existing models do not necessarily provide a reliable single measure of the fair value of its options. The weighted average fair value of options granted was $2.17 and $1.86, respectively, for options granted during the three and six months ended June 30, 2010. The weighted average fair value of options granted was $1.62 and $1.68, respectively, for options granted during the three and six months ended June 30, 2009.
The Company calculates expected volatility for stock options and awards using both historical volatility as well as the average volatility of our peer competitors. The Companys historical volatility is not the sole input due to the material changes in the Companys operations as a result of the sales of business segments that occurred in 2005 and 2010.
The Company currently estimates a nine percent forfeiture rate for stock options, but will continue to review this estimate in future periods.
The Company also has an Employee Stock Purchase Plan (the Purchase Plan). A maximum of 100 shares may be sold under the Purchase Plan. There were 3 and 7 shares purchased under the plan for the three and six months ended June 30, 2010 and a total of 8 and 18 shares purchased for the three and six months ended June 30, 2009.
The risk-free rates for the expected terms of the stock options and awards and the Purchase Plan is based on the U.S. Treasury yield curve in effect at the time of grant.
The weighted average remaining contractual life of options exercisable at June 30, 2010 was 5.25 years.
The Company recorded $121 and $239 of non-cash stock option expense for the three and six months ended June 30, 2010, respectively. The Company recorded $134 and $272 of non-cash stock option expense for the three and six months ended June 30, 2009, respectively. As of June 30, 2010, there was $526 of total unrecognized compensation costs related to non-vested awards that are expected to be recognized over a weighted-average period of 1.5 years.
13
11. Income Per Share
The following table presents a reconciliation between basic and diluted earnings per share:
|
|
Three months ended |
|
Six months ended |
| ||||||||
|
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
| ||||
Numerators: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before discontinued operations |
|
$ |
404 |
|
$ |
(423 |
) |
$ |
581 |
|
$ |
(1,230 |
) |
Loss from discontinued operations, net of taxes and gain on sale |
|
|
(135 |
) |
|
(175 |
) |
|
(294 |
) |
|
(357 |
) |
Net income (loss) |
|
$ |
269 |
|
$ |
(598 |
) |
$ |
287 |
|
$ |
(1,587 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted shares outstanding |
|
|
5,476 |
|
|
5,354 |
|
|
5,474 |
|
|
5,348 |
|
Weighted shares assumed upon exercise of stock options |
|
|
138 |
|
|
|
|
|
22 |
|
|
|
|
Diluted weighted shares outstanding |
|
|
5,614 |
|
|
5,354 |
|
|
5,496 |
|
|
5,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.07 |
|
$ |
(0.08 |
) |
$ |
0.11 |
|
$ |
(0.23 |
) |
Discontinued operations |
|
|
(0.02 |
) |
|
(0.03 |
) |
|
(0.06 |
) |
|
(0.07 |
) |
Basic earnings (loss) per share: |
|
$ |
0.05 |
|
$ |
(0.11 |
) |
$ |
0.05 |
|
$ |
(0.30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.07 |
|
$ |
(0.08 |
) |
$ |
0.11 |
|
$ |
(0.23 |
) |
Discontinued operations |
|
|
(0.02 |
) |
|
(0.03 |
) |
|
(0.06 |
) |
|
(0.07 |
) |
Diluted earnings (loss) per share: |
|
$ |
0.05 |
|
$ |
(0.11 |
) |
$ |
0.05 |
|
$ |
(0.30 |
) |
The dilutive impact summarized above relates to the periods when the average market price of Company stock exceeded the exercise price of the potentially dilutive option securities granted. Earnings per common share was based on the weighted average number of common shares outstanding during the periods when computing the basic earnings per share. When dilutive, stock options are included as equivalents using the treasury stock market method when computing the diluted earnings per share.
Excluded from the computation of diluted earnings per share for the three and six months ended June 30, 2010 were options out of the money with rights to purchase approximately 583 and 639 common shares, respectively, with an average exercise price of $8.33 and $7.68, respectively, because the effect would have been anti-dilutive. Excluded from the computation of diluted earnings per share for the three and six months ended June 30, 2009 were options out of the money with rights to purchase approximately 1,033 common shares with an average exercise price of $5.75 because the effect would have been anti-dilutive due to the Companys net losses in these periods.
12. Derivative Financial Instruments
Derivative financial instruments are used by the Company in the management of its interest rate and foreign currency exposure. There were no foreign currency derivative financial instruments for the periods presented. The Company does not hold or issue derivative financial instruments for trading purposes. When entered into, the Company formally designates the derivative financial instrument as a hedge of a specific underlying exposure if such criteria are met, and documents both the risk management objectives and strategies for undertaking the hedge. The Company formally assesses, both at inception and at least quarterly thereafter, whether the derivative financial instruments that are used in hedging transactions are effective at offsetting changes in either the fair value or cash flows of the related underlying exposure. Because of the high correlation between the derivative financial instrument and the underlying exposure being hedged, fluctuations in the value of the derivative financial instruments are generally offset by changes in the fair values or cash flows of the underlying exposures being hedged. Any ineffective portion of a derivative financial instruments change in fair value is immediately recognized in earnings.
The Company uses interest rate swaps to manage its interest rate risk. The swaps are designated as cash flow hedges with the changes in fair value recorded in accumulated other comprehensive loss and as a derivative hedge asset or liability, as applicable. The swaps settle periodically in arrears with the related amounts for the current settlement period payable to, or receivable from, the counter-parties included in accrued liabilities or accounts receivable and recognized in earnings as an adjustment to interest expense from the underlying debt to which the swap is designated.
Upon termination of the Bank of America credit facility, the Company was required to settle the outstanding obligations of $121 for the liability related to its interest rate swap agreement with Bank of America and recognize the corresponding charge of $121 in interest expense in the three month period ended September 30, 2009, which was previously included in other comprehensive income.
14
Interest rate swaps, which are considered derivative instruments, of $0 and $35 are reported on the balance sheet at fair value in other current liabilities at June 30, 2010 and December 31, 2009, respectively.
13. Comprehensive Income (Loss)
The components of comprehensive income (loss) were as follows:
|
|
Three months ended |
|
Six months ended |
| ||||||||
|
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
| ||||
Net income (loss) |
|
$ |
269 |
|
$ |
(598 |
) |
$ |
287 |
|
$ |
(1,587 |
) |
Change in fair value of interest rate swap |
|
|
|
|
|
14 |
|
|
35 |
|
|
26 |
|
(Loss) gain on foreign currency translation adjustment |
|
|
(59 |
) |
|
(28 |
) |
|
(101 |
) |
|
1 |
|
Comprehensive income (loss) |
|
$ |
210 |
|
$ |
(612 |
) |
$ |
221 |
|
$ |
(1,560 |
) |
14. Legal Proceedings
We are a defendant along with a number of other parties in approximately 122 lawsuits as of June 30, 2010, (approximately 122 lawsuits as of December 31, 2009) alleging that plaintiffs have or may have contracted asbestos-related diseases as a result of exposure to asbestos products or equipment containing asbestos sold by one or more named defendants. Due to the noninformative nature of the complaints, we do not know whether any of the complaints state valid claims against us. Certain insurance carriers have informed us that the primary policies for the period August 1, 1970-1973, have been exhausted and that the carriers will no longer provide a defense under those policies. We have requested that the carriers substantiate this situation. We believe we have additional policies available for other years which have been ignored by the carriers. Because settlement payments are applied to all years a litigant was deemed to have been exposed to asbestos, we believe when settlement payments are applied to these additional policies, we will have availability under the years deemed exhausted. We do not believe that the asserted exhaustion of the primary insurance coverage for this period will have a material adverse effect on our financial condition, liquidity, or results of operations. Management believes that the number of insurance carriers involved in the defense of the suits and the significant number of policy years and policy limits, to which these insurance carriers are insuring us, make the ultimate disposition of these lawsuits not material to our consolidated financial position or results of operations.
The Companys former wholly owned French subsidiary, Selas SAS, filed for insolvency in France and is being managed by a court appointed administrator. The Company may be subject to additional litigation or liabilities as a result of the French insolvency proceeding.
We are also involved in other lawsuits arising in the normal course of business. While it is not possible to predict with certainty the outcome of these matters, management is of the opinion that the disposition of these lawsuits and claims will not materially affect our consolidated financial position, liquidity or results of operations.
15. Related-Party Transactions
One of the Companys subsidiaries leases office and factory space from a partnership consisting of three present or former officers of the subsidiary, including Mark Gorder, a member of the Companys Board of Directors and the President and Chief Executive Officer of the Company. The subsidiary is required to pay all real estate taxes and operating expenses. In the opinion of management, the terms of the lease agreement are comparable to those which could be obtained from unaffiliated third parties. The total base rent expense, real estate taxes and other charges incurred under the lease was approximately $124 and $245 for the three and six months ended June 30, 2010, respectively. The total base rent expense, real estate taxes and other charges incurred under the lease was approximately $123 and $242 for the three and six months ended June 30, 2009, respectively. Annual lease commitments, which include base rent expense, real estate taxes and other charges, approximate $477 through October 2011.
The Company uses the law firm of Blank Rome LLP for legal services. A partner of that firm is the son-in-law of the Chairman of the Companys Board of Directors. For the three and six months ended June 30, 2010, the Company paid that firm approximately $90 and $104, respectively, for legal services and costs. For the three and six months ended June 30, 2009, the Company paid that firm approximately $72 and $92, respectively, for legal services and costs. The Chairman of our Board of Directors is considered independent under applicable Nasdaq and SEC rules because (i) no payments were made to the Chairman or the partner directly in exchange for the services provided by the law firm and (ii) the amounts paid to the law firm did not exceed the thresholds contained in the Nasdaq standards. Furthermore, the aforementioned partner does not provide any legal services to the Company and is not involved in billing matters.
15
16. Statements of Cash Flows
The following table provides supplemental disclosures of cash flow information:
|
|
Six months ended |
| ||||
|
|
June 30, |
|
June 30, |
| ||
|
|
|
|
|
|
|
|
Interest received |
|
$ |
3 |
|
$ |
1 |
|
Interest paid |
|
|
357 |
|
|
176 |
|
Income taxes paid |
|
|
7 |
|
|
69 |
|
17. Investment in Partnerships
The Company owns a 9% partnership interest in the Hearing Instrument Manufacturers Patent Partnership (HIMPP), and is a party to a license agreement that grants the Company access to over 45 US registered patents. The Company recorded an $80 and $117 decrease in the carrying amount of the investment, reflecting amortization of the patents, other intangibles and the Companys portion of the partnerships operating results for the three and six months ended June 30, 2010, respectively. The Company recorded a $91 and $128 decrease in the carrying amount of the investment, reflecting amortization of the patents, other intangibles and the Companys portion of the partnerships operating results for the three and six months ended June 30, 2009, respectively.
The Companys subsidiary, IntriCon Tibbetts Corporation, owns a 50% interest in a joint venture with a Swiss company to market, design, manufacture, and sell audio coils to the hearing health industry. The Company has recorded an $80 and $105 increase in the carrying amount of the investment, reflecting the Companys portion of the joint ventures operating results for the three and six months ended June 30, 2010, respectively. The Company has recorded a $23 and $73 decrease in the carrying amount of the investment, reflecting the Companys portion of the joint ventures operating results for the three and six months ended June 30, 2009, respectively.
Condensed financial information of the unaudited joint venture was as follows:
|
|
June 30, |
|
December 31, |
| ||
Balance Sheet: |
|
|
|
|
|
|
|
Current assets |
|
$ |
938 |
|
$ |
833 |
|
Non-current assets |
|
|
242 |
|
|
224 |
|
Total assets |
|
$ |
1,180 |
|
$ |
1,057 |
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
517 |
|
|
604 |
|
Non-current liabilities |
|
|
|
|
|
|
|
Stockholders equity |
|
|
663 |
|
|
453 |
|
Total liabilities and stockholders equity |
|
$ |
1,180 |
|
$ |
1,057 |
|
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
|
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
| ||||
Income Statement: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
761 |
|
$ |
430 |
|
$ |
1,524 |
|
$ |
876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
160 |
|
$ |
(46 |
) |
$ |
210 |
|
$ |
(146 |
) |
18. Revenue by Market
The following tables set forth, for the periods indicated, net revenue by market:
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
|
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
| ||||
Hearing Health |
|
$ |
4,919 |
|
$ |
5,009 |
|
$ |
10,289 |
|
$ |
9,420 |
|
Medical |
|
|
6,516 |
|
|
5,474 |
|
|
13,026 |
|
|
10,759 |
|
Professional Audio Communications |
|
|
3,499 |
|
|
2,328 |
|
|
6,173 |
|
|
4,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue |
|
$ |
14,934 |
|
$ |
12,811 |
|
$ |
29,488 |
|
$ |
24,655 |
|
16
ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
Headquartered in Arden Hills, Minnesota, IntriCon Corporation (together with its subsidiaries referred to as the Company, IntriCon, we, us or our) is an international firm engaged in designing, developing, engineering and manufacturing body-worn devices.
In addition to its operations in Minnesota, the Company has facilities in Maine, California, Singapore and Germany.
Currently, the Company operates in one business segment, the body-worn device segment. In 2009, the Company decided to exit its non-core electronic products segment, to allow for greater focus on its body-worn device segment. On May 28, 2010 the Company completed the sale of substantially all of the assets of its electronics business to an affiliate of Shackleton Equity Partners. For all periods presented, the Company classified its former electronics products segment as discontinued operations. Unless otherwise indicated, the following description of our business refers only to our continuing operations.
Information contained in this section of this Quarterly Report on Form 10-Q and expressed in U.S. dollars is presented in thousands (000s), except for per share data and as otherwise noted
Market Overview: Body-Worn Devices
Products and Industries Served
IntriCon designs, develops and manufactures miniature and micro-miniature body-worn products based on its proprietary technology to meet the rising demand for smaller, portable and more advanced devices. Our expertise is focused on three main markets: medical, hearing health and professional audio communications. Within these chosen markets, we combine ultra-miniature mechanical and electronics capabilities with proprietary technology including ultra low power (ULP) wireless and digital signal processing (DSP) capabilities that enhances the performance of body-worn devices.
Medical
In the medical market, the Company is focused on sales of multiple bio-telemetry devices from life-critical diagnostic monitoring devices to drug-delivery systems. Using our nanoDSP and ULP nanoLink technology, the Company manufactures microelectronics, micro-mechanical assemblies, high-precision injection-molded plastic components and complete bio-telemetry devices for emerging and leading medical device manufacturers. Targeted customers include medical product manufacturers of portable and lightweight battery powered devices, as well as a variety of sensors designed to connect a patient to an electronic device.
The medical industry is faced with pressures to reduce the costs of healthcare. IntriCon currently serves this market by offering medical manufacturers the capabilities to design, develop and manufacture components for medical devices that are easier to use, are more miniature, use less power, and are lighter. These devices measure with greater accuracy and provide more functions while reducing the costs to manufacture these devices. The industry-wide trend toward further miniaturization and ambulatory operation enabled by wireless connectivity is commonly referred to as bio-telemetry. Through the further development of our ULP BodyNet family, a series of wirelessly enabled products including our new wireless nanoLink and physioLink families, we believe the bio-telemetry offers a significant future opportunity. Increasingly, the medical industry is looking for wireless, low-power capabilities in their devices. We believe our strategic partnership with Advanced Medical Electronics Corp. (AME) will allow us to develop new bio-telemetry devices that better connect patients and care givers, providing critical information and feedback. Current examples of IntriCon bio-telemetry products used by medical device manufacturers include components found in wireless continuous glucose monitors that measure glucose levels and provide real-time blood glucose trend information. In 2009, we also entered the cardiac diagnostic monitoring (CDM) market with our acquisition of Datrix, a supplier of patient monitoring devices. We are leveraging Datrixs cardiac monitoring capabilities and incorporating IntriCons core competencies to develop and launch a new line of CDM devices, including a next-generation wireless outpatient CDM device that we call Centauri (formerly referred to as MPETS), which we anticipate will be available for sale later in 2010.
In addition, IntriCon manufactures and supplies bubble sensors and flow restrictors that monitor and control the flow of fluid in an intravenous infusion system. IntriCon also manufactures a family of safety needle products for an original equipment manufacturing (OEM) customer that utilizes IntriCons insert and straight molding capabilities. These products are assembled using full automation, including built-in quality checks within the production lines.
17
Hearing Health
IntriCon manufactures hybrid amplifiers and integrated circuit components (hybrid amplifiers), along with faceplates for in-the-ear and in-the-canal hearing instruments. IntriCon is a leading manufacturer and supplier of microminiature electromechanical components to hearing instrument manufacturers. These components consist of volume controls, microphones, receivers, trimmer potentiometers and switches. Components are offered in a variety of sizes, colors and capacities in order to accommodate a hearing manufacturers individualized specifications.
Hearing instruments, which fit behind or in a persons ear to amplify and process sound for a hearing impaired person, generally are composed of four basic parts and several supplemental components for control or fitting purposes. The four basic parts are microphones, amplifier circuits, miniature receivers/speakers and batteries, all of which IntriCon manufactures, with the exception of the battery. IntriCons hybrid amplifiers are a type of amplifier circuit. Supplemental components include volume controls, trimmer potentiometers, which shape sound frequencies to respond to the particular nature of a persons hearing loss, and switches used to turn the instrument on and off and to go from telephone to normal speech modes. Faceplates and an ear shell, molded to fit the users ear, often serve as housing for hearing instruments. IntriCon manufactures its components on a short lead-time basis in order to supply just-in-time delivery to its customers and, consequently, order backlog amounts are not meaningful.
Using our ULP BodyNet family technology, specifically nanoDSP and our new wireless nanoLink and physioLink technologies, IntriCon is building a new generation of affordable, high-quality hearing aids and similar amplifier devices under contracts for OEMs. DSP devices have better clarity, attractive pricing points and an improved ability to filter out background noise. During 2009, we introduced our Scenic DSP amplifier with acoustic scene analysis, our new high-performance adaptive DSP hearing instrument amplifier. In our view, Scenic advanced capabilities are ideally suited for the hearing health market. Additionally, in 2010 we introduced the Overtus DSP amplifier. The Overtus DSP amplifier is designed to optimize open in the canal (ITC) type fittings. The amplifier algorithm contains two patented features, an advanced adaptive feedback canceller optimized for open ITC fittings and an acoustic switch eliminating the need for a mechanical switch and allowing for further miniaturization. We believe the introduction of both Scenic and Overtus solidifies our position as a leader of high-performance adaptive DSP hearing instrument amplifiers. Furthermore, we believe our strategic alliance with Dynamic Hearing will allow us to develop new body-worn applications and further expand both our hearing health and professional audio product portfolio.
Overall, we believe the hearing health market holds significant opportunities for the Company. In the United States, Europe and Japan, the 65-year-old-plus age demographic is the fastest growing segment of the population, and many of those individuals could, at some point, benefit from a hearing device that uses IntriCons proprietary technology.
While it harbors great potential, the hearing health market is experiencing slowness due to macroeconomic conditions. In general, the U.S. market does not provide insurance reimbursement for hearing aid purchases. People can defer their hearing aid purchase. We believe the hearing health market will experience slow, steady growth in 2010. Reimbursement trends in Europe are more favorable, with insurers and the governments covering more devices.
Professional Audio Communications
IntriCon entered the high-quality audio communication device market in 2001, and now has a line of miniature, professional audio headset products used by customers focusing on homeland security and emergency response needs. The line includes several communication devices that are extremely portable and perform well in noisy or hazardous environments. These products are well suited for applications in the fire, law enforcement, safety, aviation and military markets. In addition, the Company has a line of miniature ear- and head-worn devices used by performers and support staff in the music and stage performance markets. Our May 2007 acquisition of Tibbetts Industries provided the Company access to homeland security agencies in this market. We believe performance in difficult listening environments and wireless operations will continue to improve as these products increasingly include our proprietary nanoDSP, wireless nanoLink and physioLink technologies.
In early 2011, we plan to introduce a line of situational listening devices (SLDs) intended to help hearing impaired people hear in noisy environments like restaurants and automobiles, and listen to television and music by direct wireless connection. Such devices are intended to be supplements to their conventional hearing aids, which do not handle those situations well. The SLDs will be based on our ULP wireless nanoLink technology and our physioLink technology, which was recently demonstrated at the annual convention of the American Academy of Audiology. The product line consists of an earpiece, TV transmitter, companion microphone, iPod/iPhone transmitter, and USB transmitter.
18
Forward-Looking and Cautionary Statements
Certain statements included in this Quarterly Report on Form 10-Q or documents the Company files with the Securities and Exchange Commission, which are not historical facts, or that include forward-looking terminology such as may, will, believe, anticipate, expect, should, optimistic or continue or the negative thereof or other variations thereof, are forward-looking statements (as such term is defined in Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933, and the regulations thereunder), which are intended to be covered by the safe harbors created thereby. These statements may include, but are not limited to statements in Managements Discussion and Analysis of Financial Condition and Results of Operations and Notes to the Companys Condensed Consolidated Financial Statements such as net operating loss carryforwards, the ability to meet cash requirements for operating needs, the ability to meet liquidity needs, assumptions used to calculate future level of funding of employee benefit plans, the adequacy of insurance coverage, the impact of new accounting pronouncements and litigation.
Forward-looking statements also include, without limitation, statements as to the Companys expected future results of operations and growth, the Companys ability to meet working capital requirements, the Companys business strategy, the expected increases in operating efficiencies, anticipated trends in the Companys markets, estimates of goodwill impairments and amortization expense of other intangible assets, the effects of changes in accounting pronouncements, the effects of litigation and the amount of insurance coverage, and statements as to trends or the Companys or managements beliefs, expectations and opinions.
Forward-looking statements are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially from those in the forward-looking statements. In addition to the factors discussed in this Quarterly Report on Form 10-Q, certain risks, uncertainties and other factors can cause actual results and developments to be materially different from those expressed or implied by such forward-looking statements, including, without limitation, the following:
▪ |
the ability to successfully implement the Companys business and growth strategy; |
▪ |
risks arising in connection with the insolvency of our former subsidiary, Selas SAS, and potential liabilities and actions arising in connection therewith; |
▪ |
potential obligations to indemnify the purchaser of our former electronics business for certain material claims that may arise; |
▪ |
the volume and timing of orders received by the Company; |
▪ |
changes in estimated future cash flows; |
▪ |
ability to collect on our accounts receivable; |
▪ |
foreign currency movements in markets the Company services; |
▪ |
changes in the global economy and financial markets; |
▪ |
weakening demand for the Companys products due to general economic conditions; |
▪ |
changes in the mix of products sold; |
▪ |
ability to meet demand; |
▪ |
changes in customer requirements; |
▪ |
timing and extent of research and development expenses; |
▪ |
FDA approval, timely release and acceptance of the Companys products; |
▪ |
competitive pricing pressures; |
▪ |
pending and potential future litigation; |
▪ |
cost and availability of electronic components and commodities for the Companys products; |
▪ |
ability to create and market products in a timely manner and develop products that are inexpensive to manufacture; |
▪ |
ability to comply with covenants in our debt agreements; |
▪ |
ability to repay debt when it comes due; |
▪ |
the loss of one or more of our major customers; |
▪ |
ability to identify and integrate Datrix and other acquisitions; |
▪ |
effects of legislation; |
▪ |
effects of foreign operations; |
▪ |
foreign currency risks; |
▪ |
ability to recruit and retain engineering and technical personnel; |
▪ |
the costs and risks associated with research and development investments; |
▪ |
our ability and the ability of our customers to protect intellectual property; and |
▪ |
loss of members of our senior management team. |
For a description of these and other risks, see Risk Factors in Part I, Item 1A: Risk Factors in the Companys Annual Report on Form 10-K for the year ended December 31, 2009, and other risks described elsewhere in this Quarterly Report on Form 10-Q, or in other filings the Company makes from time to time with the Securities and Exchange Commission. The Company does not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the Company.
19
Results of Operations
Sales, net
Our net sales are comprised of three main markets: hearing health, medical and professional audio device. Below is a summary of our sales by main markets for the three and six months ended June 30, 2010 and 2009:
|
|
|
|
|
|
Change |
| ||||||
Three months ended June 30 |
|
2010 |
|
2009 |
|
Dollars |
|
Percent |
| ||||
Medical |
|
$ |
6,516 |
|
$ |
5,474 |
|
$ |
1,042 |
|
|
19.0 |
% |
Hearing Health |
|
|
4,919 |
|
|
5,009 |
|
|
(90 |
) |
|
(1.80 |
)% |
Professional Audio Communications |
|
|
3,499 |
|
|
2,328 |
|
|
1,171 |
|
|
50.3 |
% |
Total Consolidated Net Sales |
|
$ |
14,934 |
|
$ |
12,811 |
|
$ |
2,123 |
|
|
16.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical |
|
$ |
13,026 |
|
$ |
10,759 |
|
$ |
2,267 |
|
|
21.1 |
% |
Hearing Health |
|
|
10,289 |
|
|
9,420 |
|
|
869 |
|
|
9.2 |
% |
Professional Audio Communications |
|
|
6,173 |
|
|
4,476 |
|
|
1,697 |
|
|
37.9 |
% |
Total Consolidated Net Sales |
|
$ |
29,488 |
|
$ |
24,655 |
|
$ |
4,833 |
|
|
19.6 |
% |
For the three and six months ended June 30, 2010, we experienced increases of 19 percent and 21 percent, respectively, in net sales in the medical equipment market as a direct result of increased sales to existing OEM customers and the addition of sales from our proprietary Cardiac Monitoring Devices, or CDMs, which we acquired in the Datrix acquisition in the third quarter of 2009. Management believes there is an industry-wide trend toward further miniaturization and ambulatory operation enabled by wireless connectivity, referred to as bio-telemetry, which resulted in further growth in our medical business. We have experienced solid growth in our most advanced biotelemetry device, a continuous wireless glucose monitor, which we manufacture for a major medical OEM. Additionally, we are actively involved with this customer for future development of next-generation wireless glucose monitors. We are also working with our strategic partner, AME, on proprietary biotelemetry technologies that will enable us to develop new devices that connect patients and care givers, providing critical information and feedback.
Net sales in our hearing health business for the three and six months ended June 30, 2010 decreased 2 percent and increased 9 percent, respectively, from the same periods in 2009. The hearing health growth was hampered by sustained sluggishness in consumer spending on hearing aids. We believe our longer term prospects in our hearing health business remain strong as we continue to develop advanced technologies, such as our nanoDSP, Overtus and Scenic, which will enhance the performance of hearing devices. In addition, we believe the market indicators in the hearing health industry, including the aging world population, suggest long-term industry growth.
Net sales to the professional audio device sector increased 50 percent and 38 percent, respectively, for the three and six months ended June 30, 2010 compared to the same periods in 2009, primarily through organic growth, sales of headset devices to the installed sound market and communication devices to security agencies. We believe our extensive portfolio of communication devices that are portable and perform well in noisy or hazardous environments will provide for future long-term growth in this market. These products are well suited for applications in fire, law enforcement, safety, aviation and military markets.
Gross profit
Gross profit, both in dollars and as a percent of sales, for the three and six months ended June 30, was as follows:
|
|
2010 |
|
2009 |
|
Change |
| ||||||||||||
Three months ended June 30 |
|
Dollars |
|
Percent |
|
Dollars |
|
Percent |
|
Dollars |
|
Percent |
| ||||||
Gross profit |
|
$ |
4,031 |
|
|
27.0% |
|
$ |
2,693 |
|
|
21.0% |
|
$ |
1,338 |
|
|
49.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
7,707 |
|
|
26.1% |
|
$ |
4,869 |
|
|
19.7% |
|
$ |
2,838 |
|
|
58.3% |
|
In 2010, gross profit increased primarily due to higher sales volumes and the impact of various profit enhancement programs. We have various activities underway to further increase our gross profit, such as transferring our microphone and receiver production from our Maine facility to our lower cost Singapore facility, increasing the percentage of IntriCon proprietary content in the devices we manufacture and working to introduce Six Sigma lean manufacturing methods into key medical device product lines.
20