Cardiac Science Corp. posted third-quarter sales of $38.9 million for the three months ended Sept. 30, down 28 percent compared with $54 million during the same period last year. The Bothell, Wash.-based firm slipped into the red during the quarter, reporting a net loss of $66.6 million, compared with net income of $2.5 million during Q3 2008:
Cardiac Science Announces Third Quarter Results
Company Reports $38.9M Q3 Revenue; Takes AED Field Product Update Charge of $18.5M and Non-cash Deferred Tax Assets Charge of $44.0M
BOTHELL, Wash., Nov. 9 /PRNewswire-FirstCall/ — Cardiac Science Corporation (Nasdaq: CSCX), a global leader in automated external defibrillator (AED) and diagnostic cardiac monitoring devices, today announced revenue of $38.9 million for the third quarter ended September 30, 2009, in line with its previous guidance. The Company also recorded a charge of $18.5 million for an AED field product update and a non-cash charge of $44.0 million to increase its valuation allowance against deferred income tax assets. Including these charges, the Company reported a net loss for the quarter of $66.5 million, or $2.85 per share.
Sales in all areas of the business continued to stabilize during the period and execution of the Company’s turnaround initiatives should help to reinstate revenue growth in the coming year.
Cardiac monitoring revenue was $13.0 million and defibrillation products revenue was $21.6 million for the third quarter of 2009. As anticipated, AED sales in Japan were approximately $10.0 million less than in the prior year quarter, due primarily to market weakness and a competing AED product introduction by the Company’s current distribution partner. North American AED sales were down 9% compared to the prior year period. However, following the resumption of AED shipments in August after a temporary ship hold, the Company’s manufacturing and quality teams performed well, filling the vast majority of open orders that had accumulated during the ship hold. Cardiac monitoring revenue decreased 15% compared to the prior year period, driven by slowed demand in the hospital and physician office markets.
The Company recorded a charge of $18.5 million for estimated costs relating to an initiative to improve the reliability of approximately 300,000 AEDs in the field. The Company has determined that, in very rare instances, AEDs may fail to deliver therapy due to a suspect component. The Company has improved its manufacturing process to enhance component reliability in forward production and has elected to undertake an initiative to further strengthen the reliability of field units. The initiative is expected to cost $18.5 million, but the Company is still in discussion with the FDA and other stakeholders to determine the final scope and details. Actual costs may be more or less than the amount of the estimated charge, based on a number of factors.
In addition, the Company’s third quarter results reflect a charge to earnings of $44.0 million to increase its valuation allowance against deferred income tax assets. In light of recent losses, including the $18.5 million charge relating to the anticipated field initiative, the Company has made an assessment that the realization of the benefit of its deferred tax assets, primarily comprised of income tax loss and tax credit carry-forwards, is not “more likely than not” in accordance with applicable GAAP guidelines and has therefore increased its valuation allowance against those assets. This is a non-cash charge that has no impact on the Company’s liquidity and the tax loss and credit carry-forwards remain available to offset future cash income taxes when the Company regains profitability.
“Gaining clarity on the financial impact of the component issue will allow all of our stakeholders to eliminate uncertainty and begin to focus on the progress we’ve made in our turnaround. Operationally, we continue to move at a brisk pace in improving our systems and capabilities with an eye toward building a stronger foundation for future growth,” said Dave Marver, president and chief executive officer. “We have several new technologies slated for introduction in the next 12 months. The introduction of our new vital signs monitors in cooperation with Omron is one of many enhancements we’ll be making to our product line that leverage our brands, distribution, and large installed customer base.”
Third Quarter Financial Results
Third quarter revenue of $38.9 million represented a decrease of 28% compared to the $54.0 million in revenue reported in the third quarter of 2008. Third quarter gross margin was 0.2%, inclusive of the $18.5 million charge relating to the AED field initiative. Excluding this charge, pro forma gross margin would have been 47.8%, a slight decrease from reported third quarter 2008 gross margin, which was 48.4%. The decrease in gross margin on a pro forma basis was due primarily to lower service margins relating to lower revenue being spread over a somewhat fixed cost structure.
Operating expenses in the third quarter of 2009 were $22.8 million, a modest increase from the $22.1 million for the third quarter of 2008. Inclusive of the $18.5 million charge relating to the AED field product update and the $44.0 million charge related to deferred tax assets, the Company reported a net loss of $66.5 million, or $2.85 loss per share in the third quarter of 2009.
EBITDA was negative $21.1 million for the third quarter of 2009. Adjusted EBITDA, which excludes stock-based compensation expense and the costs relating to the AED field initiative, was negative $1.9 million for the third quarter of 2009.
The Company had $31.6 million in cash and cash equivalents as of September 30, 2009, down from $37.9 million at the end of the second quarter. The most significant reason for the decrease was a delay in cash collections during the quarter relating to the delay in shipping AEDs until the second half of the period as a result of the earlier ship hold. As those collections normalize, the cash position is expected to be positively impacted during the fourth quarter.
The Company expects revenue for the fourth quarter of 2009 to be in a range between $39.0 million and $41.0 million. During the fourth quarter, the Company will continue to incur higher regulatory and quality assurance expenses as it upgrades its internal capabilities in this area and draws upon outside consultants to assist with the establishment of improved systems. In addition, the Company expects to incur higher research and development and marketing expenses associated with product development initiatives – both internal and with strategic partners.
The Company expects to report a net loss for the quarter in a range between $4.0 and $5.0 million, or between $0.17 and $0.21 per share. The expected loss includes non-cash expenses of approximately $2.2 million related primarily to depreciation, amortization, and stock-based compensation. The Company will not record any tax benefit for operating losses, so these estimates are not tax effected.
Non-GAAP and Pro Forma Financial Information
This news release contains a discussion of EBITDA, Adjusted EBITDA, and Pro Forma Gross Margin, which are non-GAAP financial measures provided as a complement to results provided in accordance with U.S. generally accepted accounting principles (“GAAP”). The term “EBITDA” refers to a financial measure defined as earnings before net interest, income taxes, depreciation, and amortization. “Adjusted EBITDA” refers to EBITDA before stock-based compensation and costs associated with the AED field product update. “Pro Forma Gross Margin” refers to Gross Profit before costs associated with the AED field product update as a percentage of Total Revenues. These measures are a substitute for measures determined in accordance with GAAP, and may not be comparable to the same measures as reported by other companies. EBITDA and Adjusted EBITDA are an integral part of the internal management reporting and planning process and are the primary measures used by management to evaluate the operating performance of the Company. The components of these measures include the key revenue and expense items for which operating managers are responsible and upon which their performance is evaluated. The Company also uses Adjusted EBITDA for planning purposes and in presentations to its board of directors. Pro Forma Gross Margin is being presented because of the impact of the extraordinary charge related to the AED field product update on the Company’s Gross Margin for the third quarter of 2009. Presentation of our Gross Margin excluding this charge allows for a comparison of the Company’s performance on a basis that management believes is more consistent from period to period. Reconciliations of EBITDA and Adjusted EBITDA to net income, and Pro Forma Gross Margin to Gross Margin, the most comparable GAAP measures, are contained in this press release.
Conference Call Information
Cardiac Science will conduct a conference call at 4:30 p.m. Eastern Standard Time today to discuss the Company’s financial results for the third quarter. The call will be hosted by Dave Marver, president and chief executive officer, and Mike Matysik, senior vice president and chief financial officer.
To access the conference call, please dial 877.941.2332 and reference conference ID 4179087. Callers outside the U.S. can dial 480.629.9724. The call will also be webcast live at www.cardiacscience.com. An audio replay of the call will be available for 7 days following the call at 800.406.7325 for U.S. callers or 303.590.3030 for those calling from outside the U.S. The password required to access the replay is 4179087#. An archived webcast will also be available at www.cardiacscience.com for 90 days.
About Cardiac Science
Cardiac Science develops, manufactures, and markets a family of advanced diagnostic and therapeutic cardiology devices and systems, including automated external defibrillators (AED), electrocardiograph devices (ECG/EKG), cardiac stress test treadmills and systems, Holter monitoring systems, hospital defibrillators, cardiac rehabilitation telemetry systems, and cardiology data management systems (informatics) that connect with hospital information (HIS), electronic medical record (EMR), and other information systems. The Company sells a variety of related products and consumables and provides a portfolio of training, maintenance, and support services. Cardiac Science, the successor to the cardiac businesses that established the trusted Burdick(®), HeartCentrix(®), Powerheart(®), and Quinton(®) brands, is headquartered in Bothell, Washington. The Company distributes its products in nearly 100 countries worldwide, with operations in North America, Europe, and Asia. For information, call 425.402.2000 or visit http://www.cardiacscience.com.
This press release contains forward-looking statements. The word “believe,” “expect,” “intend,” “anticipate,” variations of such words, and similar expressions identify forward-looking statements, but their absence does not mean that the statement is not forward-looking. Forward-looking statements in this press release include, but are not limited to, those relating to Cardiac Science Corporation’s future financial results and condition, actual costs of the AED field product update, potential negative impact on future sales of AED products resulting from the announced AED field product update, constraints on our ability to pursue strategic initiatives as a result of the costs associated with implementing the AED field product update, including future product releases, and income taxes on future pre-tax results. These are forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results and performance may vary significantly from those expressed or implied in such statements. Factors that could cause or contribute to such varying results and other risks include those with respect to the quality of our processes, products and services and the implementation of voluntary actions or those taken at the request of regulatory authorities relating to our business, as well as those more fully described in the Annual Report on Form 10-K filed by Cardiac Science Corporation for the year ended December 31, 2008, as updated by subsequent quarterly reports on Form 10-Q. Cardiac Science Corporation undertakes no duty or obligation to update the information provided herein.