Vital Signs, Inc. F3Q08 (Qtr End 06/30/08) Earnings Call Transcript

| About: Vital Signs (VITL)

Vital Signs, Inc. (VITL) F3Q08 (Qtr End 06/30/08) Earnings Call Transcript August 7, 2008 4:30 PM ET


Mark Mishler – CFO

Terry Wall – President, CEO and Chairman


Greg Brash – Sidoti & Company


Good day, ladies and gentlemen, and welcome to the Vital Signs, Inc. third quarter earnings conference call. My name is Nancy and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session toward the end of this conference. (Operator instructions) I would now like to turn the presentation over to your host for today’s call, Mr. Mark Mishler, Chief Financial Officer of Vital Signs. Please proceed.

Mark Mishler

Thank you, Nancy. Good afternoon and welcome to the Vital Signs 2008 fiscal third quarter conference call. I'm Mark Mishler, Chief Financial Officer of Vital Signs. Here with me today is Terry Wall, Chief Executive Officer; Alex Chanin, Chief Operating Officer; and Jay Sturm, General Counsel and Vice President of Human Resources.

By now you should have received our press release for the fiscal third quarter ended June 30, 2008. To access the press release online, please go to, then click on Investor Relations, then click Press Releases.

Before getting started, let me read our required disclaimer. All statements in this press release other than historical statements constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from such statements as a result of a variety of risks and uncertainties including unanticipated delays in bringing new products to market, regulatory approval of new products, market conditions, and competitive responses, as well as other factors referred to by Vital Signs in its Annual Report on Form 10-K for the year ended September 30, 2007.

As most of you probably know, we announced on July 24th a merger agreement with General Electric Healthcare. The merger is subject to Vital Signs’ shareholder and regulatory approvals, and is expected to close in the calendar fourth quarter of 2008. We expect to file the proxy statement with the SEC in the next three weeks. There is nothing we can add beyond what is already disclosed, so we will not talk about the merger agreement on this conference call.

The format this afternoon is as follows. I will provide a financial review, Terry will then provide comments, and then we will open up the call for your questions. Let's begin.

Fiscal third quarter revenue of $60.7 million increased by 11.5% over the prior year revenue of $54.4 million. Individual segment revenue and growth figures are – Anesthesia $20.6 million, up 3.8% over $19.9 million last year; Respiratory/critical care $12 million, up 4.5% over $11.5 million last year; Sleep/ventilation $17 million, up 31.6% over $12.9 million last year; Interventional cardiology/radiology $7.6 million, up 9.3% over $7 million last year. The Sleep/ventilation segment revenue growth was due to strong Breas sales.

Fiscal third quarter gross profit of $31.5 million increased by 13.6% over the prior year. As a percent of sales, gross profit this quarter was 53.5%, a 100 basis point improvement over 52.5% in the prior year fiscal third quarter. Individual segment gross profit percentages are – Anesthesia 56.2% and that's 3.8 percentage points; Respiratory/critical care 57.5% and that's up 2.9 percentage points; Sleep/ventilation 50.2% and that's down 3.8 percentage points; and Interventional cardiology/radiology 54.8% and that’s down 3.1 percentage points. The gross profit margin improvements in the Anesthesia and Respiratory/critical care segments were due to lower material costs and manufacturing process improvements.

Operating income in the fiscal third quarter of $13.1 million increased by 11% over the prior year. As a percent of sales, operating income was 21.6%, essentially the same as last year. Operating expenses this quarter included SG&A and R&D costs from acquisitions where the comparable amount for last year was zero. Total R&D cost increased by 21.9% primarily due to Breas and Enginivity.

Net income in the fiscal third quarter was $9.7 million, which was 12.3% above the 2007 fiscal third quarter net income of $8.6 million. Diluted earnings per share of $0.73 in the fiscal third quarter were 12.3% above $0.65 in the prior year. The Do You Snore sleep acquisition had a negative impact on earnings in the fiscal third quarter and reduced EPS by about $0.01.

Year-to-date revenue of $173.1 million increased by 11.8% over the prior year revenue of $154.8 million. Individual segment revenue and growth figures are Anesthesia $60 million, up 6.1%; Respiratory/critical care $35.2 million, up 1.3%; Sleep/ventilation $48.4 million, up 36.8%; Interventional cardiology/radiology $20.4 million, up 3.3%. The Sleep/ventilation segment revenue growth was due to a combination of strong Breas sales and two domestic sleep acquisitions. Breas was up 45.1% and SSA increased 26.1%.

Year-to-date gross profit of $91.6 million increased by 14.3% over the prior year. As a percent of sales, gross profit for the first nine months was 52.9%, an improvement over the 51.8% in the prior year nine months. Most noteworthy was the gross profit margin improvement in the Anesthesia segment to 54.7%, up from 51.4% in the prior year due to lower material costs for facemasks and non-latex breathing bags.

Operating income in the nine months of $36.6 million increased by 11.2% over the prior year. As a percent of sales, operating income was 21.2%, essentially the same as last year. Operating expenses this year included SG&A and R&D costs from acquisitions where the comparable amount for last year was zero.

Net income in the nine months was $27.7 million, which was 12.8% above the comparable 2007 net income of $24.6 million. Diluted earnings per share of $2.08 were 13% above $1.84 in the prior year.

Vital Signs' balance sheet continues to be strong. The current ratio is 11.2:1, and there is no debt. Cash plus cash equivalents were $132.1 million at June 30, 2008. And this balance would have been higher with $26.6 million of auction-rate securities that are classified as long-term investments.

The company is a strong cash generator, as cash flow provided by operating activities was $35.2 million for the nine months. Expenditures for plant and equipment were $5.5 million in the first nine months. About one-third of this was for domestic machinery to produce non-latex anesthesia breathing bags. On August 4, 2008, the Board of Directors authorized a quarterly dividend of $0.11 per share payable on August 28 to shareholders of record on August 21, 2008.

At this time, I will turn the discussion over to Terry Wall, Founder and the company's Chief Executive Officer. Terry?

Terry Wall

Thank you, Mark. This has been a really exciting time for Vital Signs’ shareholders and all of its employees. And I’m pleased with both our results for the third quarter and our progress year-to-date. This past quarter we continued to build on our very strong GPO portfolio by adding for the first time Broadlane and Premier contracts on our new laryngoscope products. We also successfully renewed the MedAssets anesthesia contract and even added Redi-Tube, our new endotracheal tube with a preloaded stylet.

We are very pleased with the market acceptance of our three new anesthesia products, in particular enFlow, the blood and fluid warmer, which is the largest revenue contributor of our new products. It’s already reached an annual run rate of over $2 million. And important future driver of our single patient use products was the CMS decision not to reimburse hospital-acquired infections, which is set to take place on October ’09. However, we’ve been seeing a solid growth in our single patient blood pressure cuff and pressure infusor lines as we think hospitals are preparing now for this initiative.

Over the past two weeks, we began to roll out our new Click-It single-use blood pressure cuffs that we believe will be a very key driver for our Respiratory segment going forward. We are also in the midst of engineering cost savings project in our manual resuscitator line that will also drive our Respiratory segment in the future.

We have identified $3,500,000 of cost savings projects to be implemented in the fiscal year ’09, which is $500,000 more than we have scheduled for ’08. At Sleep Services of America, revenue increased $0.065 when our Do You Snore acquisition continued to be a challenge. However, we do expect Do You Snore to earn money in our fourth quarter. Our Breas subsidiary had another exceptional quarter growing 55.7% with very strong growth both in our iSleep product and Vivo bi-level ventilator product lines.

This will – may be our last earnings call as Vital Signs and I would really like to thank our investors, especially those who invested the original $46,000 of capital in 1973; also our early 100% commission sales force, some of whom are still with us. It’s been an absolute wonderful journey and I’ve loved just about every minute of it. So I want to thank very much the analysts who have covered us over the years, the investors who have stuck with us, our employees and friends.

So Nancy, can we turn it over for questions?

Question-and-Answer Session


(Operator instructions) Your first question comes from the line of Greg Brash.

Greg Brash – Sidoti & Company

Hi guys, thanks for taking my call. And Terry, congratulations on the sale.

Terry Wall

Thank you, Greg.

Greg Brash – Sidoti & Company

Just curious on the SSA side, it looked like you had some strong growth there, I was just curious what was driving that. I mean, we’ve seen a lot of, I guess, flat same-store sales growth the last couple of quarters. Are you just starting to gain some traction here in selling the devices in the labs or is anything changed?

Terry Wall

This lead segment growth that I think you are talking about, Greg, primarily was driven by Breas’ growth, which is – they sell CPAP machines and home care ventilators. The SSA same-store growth was about 2.5%. The SSA revenue growth for the nine-month was primarily due to acquisitions. So we acquired Do You Snore and SST, two subsidiaries down in Georgia; one in Atlanta and one in Macon.

Greg Brash – Sidoti & Company

Okay. And then just curious on the breathing bag side, I know that you are selling latex-free breathing bags. You know that raw material costs are rising, are you seeing your competitors out there having to raise their prices and that gives you little bit of a competitive advantage because you do have latex-free and you are less exposed to those rising costs?

Terry Wall

Greg, I don’t think we’ve actually gotten. We’ve pushed that to that effect, but that should on an ongoing going forward basis be a significant advantage for us. The fact that – first off, we are making them here in the US at Totowa, New Jersey. The fact that the process itself is automated, the resin actually it’s one of our additional cost savings for next year. We’ve been experimenting with another resin that we think actually slightly improves the product and significantly lowers the cost again. So, on an ongoing forward basis, I think that turns out to be a great project for us.

Greg Brash – Sidoti & Company

Great. And then just one final question, just wanted to get your view on the – your macro view on the economy, I asked it last quarter also. I was just curious if you are seeing any drop-off in procedure volumes in any of the areas that you market.

Terry Wall

To my friends and those who ask, I always try to make the analogy today that I guess you use the Razor/Razorblade, but the values are saying that the equipment sales people were selling like the equivalent of cars. Our single-use products are the equivalent of the gasoline, because every time you do a procedure, you are going to need one of our circuits. Our circuits are primarily used in the more serious operations where general anesthesia is used. There is really no drop-off in that. The only thing that could drop off in the future could be elective procedures, but quite frankly they are not going to be using a general anesthetic procedure anyway, therefore not our type of product. So it’s one of these things when the economy actually goes poorly, a lot of people do come running to our type of stocks because we are really pretty much recession proof.

Greg Brash – Sidoti & Company

Yes. All right. Well, that’s all I have. And again, best of luck with the merger and congratulations.

Terry Wall

Thank you very much.


(Operator instructions) And sir, you have no questions in queue.

Terry Wall

Okay. Well, once again I’d just like to thank everyone who has been involved with Vital Signs. As I said, it’s been an absolute wonderful journey. And hopefully our paths will cross again. And good bye and thank you.

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