Fourth Quarter Sales Increase 13% to $129.2 Million; Earnings per
Share were $0.39 READING, Pa., Oct. 4 /PRNewswire-FirstCall/ --
Arrow International, Inc. (NASDAQ:ARRO) today reported results for
its fourth fiscal quarter and twelve months ended August 31, 2006.
Fourth Quarter Net sales for the fourth quarter of fiscal year 2006
increased 13.0% to $129.2 million from $114.3 million in the fourth
quarter of fiscal year 2005 reflecting strong demand for the
Company's products in international markets and the U.S. The
details for the growth in U.S. and international sales, along with
two tables showing the growth by geographic area and product
platform, are discussed later in this press release. As previously
reported, gross profit in last year's fourth quarter was reduced by
a provision of $12.4 million for excess inventory and the write-off
of $2.4 million of equipment no longer in use, which was offset by
an increase in gross profit of $3.5 million for the correction of
fixed asset lives. After considering the net amount of these three
items reflected in the fourth quarter of fiscal year 2005, the
gross margins in both fiscal years 2006 and 2005 were similar.
Gross margins in the fourth quarter fiscal year 2006 benefited from
incremental sales in the United Kingdom, where the Company began
direct selling in April 2006 following its acquisition of certain
assets of its UK distributor, Kimal PLC, in the third quarter of
fiscal year 2006. Reducing fourth quarter fiscal year 2006 gross
margin were costs primarily related to employee training associated
with the start-up of two new facilities as part of the Company's
manufacturing capital investment program. Research and development
(R&D) expense was $6.8 million or 5.3% of net sales in the
fourth quarter of fiscal year 2006 versus $8.0 million or 7.0% of
net sales in the fourth quarter of fiscal year 2005. The decrease
in R&D was primarily due to a reduction in spending on the
CorAide(TM) continuous flow ventricular assist system, the
Company's joint research and development program with The Cleveland
Clinic Foundation. Selling, general and administrative (SG&A)
expenses were $32.9 million in the fourth quarter of fiscal year
2006, or 25.4% of net sales, compared to $34.1 million or 29.9% of
net sales in the fourth quarter of the prior fiscal year. Included
in the prior year's fourth quarter was a $2.0 million charge for
the settlement of a claim for indemnification related to a divested
business. In addition, on a comparative basis, last year's fourth
quarter included $1.4 million of higher spending for the Company's
Project Operational Excellence and $1.4 million of higher spending
related to the Company's review of its internal controls over
financial reporting. These two programs continued in the fourth
quarter of fiscal year 2006 but at lower spending levels.
Increasing SG&A expenses in the 2006 fourth quarter were $1.2
million of expenses related to the Company's newly established UK
operation and $0.8 million of compensation expense for employee and
director stock options that were unvested as of September 1, 2005
and for options that were granted during fiscal year 2006, as
required under Statement of Financial Accounting Standards (SFAS)
No. 123R, the new accounting guidelines for equity-based
compensation. As a result, operating income for the fourth fiscal
quarter was $24.6 million or 19.0% of net sales versus $3.8 million
in the fourth quarter of the prior fiscal year or 3.3% of net
sales. The Company's effective income tax rate for the fourth
quarter of fiscal year 2006 was 29.9%. As previously disclosed, the
Company initiated Competent Authority proceedings with the Internal
Revenue Service to obtain relief from a tax assessment related to
transfer pricing between the U.S. and our Japanese subsidiary. The
Company recorded a $3.6 million reduction to its fourth quarter
fiscal year 2006 tax expense related to the conclusion of the
Competent Authority process. During the fourth quarter, the Company
also completed an intercompany transaction that enabled it to
utilize an expiring U.S. capital loss carry forward and recorded
$1.2 million of tax expense as part of this transaction. In
addition, the fourth quarter fiscal year 2006 tax provision was
increased by $1.8 million to provide for deferred taxes related to
temporary differences that will reverse after the end of the Czech
Republic tax holiday and for additional state income taxes. The
Company's tax for the fourth quarter of fiscal year 2005 was a
credit of $0.6 million. During the prior year fourth quarter, the
Company recorded a $3.1 million reduction in the income tax
provision due to a shift in the mix of earnings to the Czech
Republic, which had a lower tax rate due to a tax holiday through
August 2006, and a reduction in the book taxable income without a
corresponding reduction in R&D and Extraterritorial Income
(ETI) tax credits. In addition, the Company provided $1.4 million
reserve for state income taxes primarily as a result of a third
party New Jersey court ruling in August 2005. Net income for the
fourth quarter of fiscal year 2006 was $17.6 million or 13.6% of
net sales versus $5.0 million or 4.4% of net sales in the prior
fiscal year's fourth quarter and diluted earnings per share were
$0.39 in this year's fourth quarter versus $0.11 in the prior
fiscal year fourth quarter. CEO's Comments on the Fourth Quarter
Commenting on the fourth quarter, Arrow Chairman and CEO, Carl G.
Anderson, Jr., said, "The investments we made over the past two
years to strengthen our infrastructure have provided Arrow with a
base for expansion. Our 13% increase in net sales in the fourth
quarter was 11.6% on a constant currency basis and without the
benefit of incremental sales from our newly established UK
operations. However, this increase was influenced by relatively
weak sales in the prior year fourth quarter. Nevertheless, we are
encouraged by the continued strong growth in sales of Arrow
products in Europe and Asia/International and by the acceleration
of sales in the United States versus a year ago. Our U.S. growth
benefited from increased sales of our Maximal Barrier Central
Venous Access Kit, which addresses physicians' needs for safety and
the management of infection risk among patients and healthcare
workers. "During the fourth quarter, we also made progress on our
new product pipeline, with the receipt of Food and Drug
Administration (FDA) 510(k) marketing clearance for the Arrow
Pressure Injectable PICC (Peripherally Inserted Central Catheter)
which addresses the emerging therapeutic needs for a catheter that
can withstand the higher pressures required by the injection of
contrast media for CT scans. This new product, Arrow's first major
catheter introduction in some time, was launched this week and is
supported by an aggressive marketing campaign. "During the fourth
quarter, we completed hospital market preference evaluations of the
new software for our AutoCAT(R) 2 WAVE(TM) intra-aortic balloon
pump and received very positive customer feedback. We released this
new version of the software in August 2006. It is supported by a
strong marketing campaign which features the ProActive
CounterPulsation(TM) claim that relates to the system's ability to
support an arrhythmic patient. Global sales for our Cardiac Care
business, which includes the intra-aortic balloon pump products,
grew 6.9% in the fourth quarter. "This past quarter also saw
continued progress in our Project Operational Excellence program
designed to strengthen our operational infrastructure and help
ensure the Company's quality system is fully compliant with the FDA
regulations. The implementation of enhancements to our quality
system is on track and the implementation phase is expected to be
completed during the first quarter of fiscal year 2007. Our
manufacturing capital investment program is also on schedule. Our
new plant in Zdar, Czech Republic began production in August 2006
and will be fully operational by the end of calendar year 2006.
Importantly, we continue to see significant improvements in key
operational metrics, including improved customer service levels
reflected by low backorders and line fill at 90%, a significant
reduction in overtime, higher yields and reduced scrap." Full Year
For the twelve months ended August 31, 2006, Arrow's net sales were
$481.6 million, an increase of 6.0% compared to $454.3 million in
the prior fiscal year. Gross profit for fiscal year 2006 was $236.8
million and gross margin was 49.2%, as compared to gross profit of
$213.8 million and gross margin of 47.1% in the prior fiscal year.
In addition to the three items mentioned above and as previously
reported, gross profit in fiscal year 2005 was reduced by $4.6
million for write-offs associated with the termination of the Arrow
LionHeart(TM) program in April 2005 and by $1.9 million for charges
related to the Company's voluntary early retirement program in the
second quarter of fiscal year 2005. Reducing fiscal year 2006 gross
margin were costs primarily related to employee training associated
with the start-up of two new facilities as part of the Company's
manufacturing capital investment program. R&D was $27.5 million
or 5.7% of net sales in fiscal year 2006 versus $29.7 million or
6.5% of net sales in fiscal year 2005. The decrease in R&D was
primarily due to a reduction of $4.8 million in spending on the
Arrow LionHeart(TM) program. This reduction was partially offset by
increased spending on CorAide(TM) continuous flow ventricular
assist system, the Company's joint research and development program
with The Cleveland Clinic Foundation. SG&A expenses were $130.0
million in fiscal year 2006 or 27.1% of net sales compared to
$128.2 million or 28.2% of net sales in the prior fiscal year.
Increasing SG&A expenses this year were $3.0 million of
expenses to strengthen the Company's sales force, $2.0 million of
expenses related to the newly established UK operation, and $1.1
million of increased costs for providing medical insurance to its
employees, for which the Company is self- insured. In addition,
there was $3.0 million of compensation expense for employee and
director stock options that were unvested as of September 1, 2005
and for options that were granted during fiscal year 2006. Included
in the prior year's SG&A expense was $5.0 million for the
Company's voluntary early retirement program and a $2.0 million
charge for the settlement of a claim related to a divested
business. Also, on a comparative basis, last year included $2.2
million of higher spending for Project Operational Excellence and
$1.6 million of higher spending related to the Company's review of
its internal controls over financial reporting. These two programs
continued in fiscal year 2006 but at lower spending levels. As a
result, operating income for fiscal year 2006 increased 46.5% to
$79.1 million compared to $54.0 million for the prior fiscal year.
Net income increased 41.8% to $56.0 million in fiscal year 2006
compared to $39.5 million in the prior fiscal year and diluted
earnings per share were $1.24 compared to $0.88 in the prior year.
For the full fiscal year 2006, the new stock-based compensation
expense reduced operating income, net income and diluted earnings
per share by $3.9 million, $3.4 million and $0.07, respectively,
compared to the prior year. U.S. Sales Arrow's U.S. sales for the
fourth quarter of fiscal year 2006, which represented 58.7% of
total net sales, increased 8.7% to $75.9 million from $69.8 million
in the fourth quarter of fiscal year 2005 due primarily to
increased sales of central venous catheters, arterial and regional
anesthesia products, and intra-aortic balloon pumps. The Company
believes the momentum demonstrated in the fourth quarter of fiscal
year 2006 will continue in fiscal year 2007 as a result of new
product offerings and improved service levels. During fiscal year
2006, U.S. sales, which represented 60.5% of total net sales,
increased 5.0% to $291.4 million from $277.6 million in the prior
year. While there were no sales of NeoCare(R) products in fiscal
year 2006, sales of NeoCare(R) products were $2.1 million in fiscal
year 2005. International Sales Arrow's international sales in the
fourth quarter of fiscal year 2006 increased 19.8% to $53.3 million
from $44.5 million in the fourth quarter of fiscal year 2005 and
represented 41.3% of total net sales. The weakness of the U.S.
dollar compared to the same period of last year increased total
international sales by $0.7 million and increased the percentage
change in international sales by 1.9%. European sales growth for
the fourth quarter of fiscal year 2006 was 19.8% due in large part
to incremental sales in the United Kingdom, where the Company began
direct selling in April 2006, and sales to its Middle East
distributor. The incremental sales in the UK increased the
percentage change in international sales for the fourth quarter of
fiscal year 2006 by 3.1%. Asia/International sales in the fourth
quarter of fiscal year 2006 grew 19.7% and benefited from sales to
Arrow's Chinese distributor as it expanded its business, which
increased the fourth quarter percentage change in international
sales by 3.9%. International sales in fiscal year 2006 increased
7.6% to $190.2 million from $176.7 million in the prior fiscal year
and represented 39.5% of total net sales. The relative strength of
the U.S. dollar for the year, compared to last year, decreased
total international sales by $3.9 million, and decreased the
percentage change in international sales by 2.5%. The table below
shows Arrow's geographical sales for the fourth quarter and twelve
months ended August 31, 2006, with comparisons to the same prior
year periods. Fourth Quarter % Change at Constant Geographical
Sales % Exchange (Dollars in millions) FY06 FY05 Change Rates (1)
United States $74.1 $67.8 9.3% 9.3% Europe 26.0 21.7 19.8% 14.5%
Asia/International 27.3 22.8 19.7% 21.3% Subtotal International
Sales 53.3 44.5 19.8% 17.9% Subtotal Arrow Products $127.4 $112.3
13.4% 12.7% Non-Arrow U.S. distributed products (4) 1.8 2.0 (10.0)%
(10.0)% Total Company Sales $129.2 $114.3 13.0% 12.4% Twelve Months
% Change at Constant Geographical Sales % Exchange (Dollars in
millions) FY06 FY05(2) Change Rates (3) United States $283.8 $269.7
5.2% 5.2% Europe 93.4 85.6 9.1% 12.1% Asia/International 96.8 91.1
6.3% 8.2% Subtotal International Sales 190.2 176.7 7.6% 10.1%
Subtotal Arrow Products $474.0 $446.4 6.2% 7.1% Non-Arrow U.S.
distributed products (4) 7.6 7.9 (3.8)% (3.8)% Total Company Sales
$481.6 $454.3 6.0% 6.9% 1) Percentage change at constant exchange
rates are calculated by dividing fourth quarter fiscal year 2006
sales by fourth quarter fiscal year 2005 local currency sales
translated at fourth quarter fiscal year 2006 exchange rates. 2)
Sales in the above table for the first twelve months of fiscal year
2005 and the corresponding percentage changes reflect the
previously reported Shipping Terms Adjustment which reduced second
quarter fiscal year 2005 sales by $4.3 million. 3) Percentage
change at constant exchange rates are calculated by dividing
twelve-month fiscal year 2006 sales by twelve-month fiscal year
2005 local currency sales translated at twelve-month fiscal year
2006 exchange rates. 4) The Company purchased the Stepic Medical
Company, its New York area distributor, in September 2002, and has
continued to distribute non-Arrow products through its Stepic
subsidiary. The table below shows sales of Arrow's critical care
product platforms and cardiac care products for the fourth quarter
and twelve months ended August 31, 2006, with comparisons to the
same prior year periods. Fourth Quarter % Change at Constant Sales
by Product Platforms % Exchange (Dollars in millions) FY06 FY05
Change Rates (1) Central Venous Catheters $67.9 $58.4 16.3% 15.9%
Specialty Catheters 41.0 36.6 12.0% 11.1% Non-Arrow distributed
Products (4) 1.8 2.0 (10.0)% (10.0)% Subtotal Critical Care $110.7
$97.0 14.1% 13.5% Cardiac Care 18.5 17.3 6.9% 5.7% TOTAL $129.2
$114.3 13.0% 12.4% Twelve Months % Change at Constant Sales by
Product Platforms % Exchange (Dollars in millions) FY06 FY05(2)
Change Rates (3) Central Venous Catheters $250.7 $235.2 6.6% 7.8%
Specialty Catheters 152.9 142.3 7.4% 7.5% Non-Arrow distributed
Products (4) 7.6 7.9 (3.8)% (3.8)% Subtotal Critical Care $411.2
$385.4 6.7% 7.5% Cardiac Care 70.4 68.9 2.2% 4.0% TOTAL $481.6
$454.3 6.0% 6.9% 1) See footnote 1 to the above table. 2) See
footnote 2 to the above table. 3) See footnote 3 to the above
table. 4) See footnote 4 to the above table. Research &
Development Tax Credit The R&D tax credit, which expired in
January 2006, may be extended by Congress in its Fall 2006 session.
If the R&D tax credit is extended in its present form prior to
the filing of the Company's Annual Report on Form 10-K in November
2006, fourth quarter fiscal year 2006 tax expense would be reduced
and net income increased by approximately $1.1 million or
approximately $0.02 diluted earnings per share. Sales and E.P.S.
Targets For the fourth quarter of fiscal 2006, the Company targeted
net sales of $124 million to $128 million and diluted earnings per
share of $0.39 to $0.41 at exchange rates in effect at the end of
May 2006. Actual results were net sales of $129.2 million and
diluted earnings per share of $0.39. For the full fiscal year 2007,
the Company is targeting net sales of $515 million to $525 million
at exchange rates in effect at the end of September 2006. The
effective tax rate is anticipated to increase from 31.6% in fiscal
year 2006 to 35.0% for fiscal year 2007 due to a reduction in
export tax credits. If legislation extending the R&D tax credit
is not passed this Fall, Arrow's fiscal year 2007 tax expense could
be increased by $1.3 million, or $0.03 per share, which could
increase the 2007 effective tax rate from 35.0% to approximately
36.5%. The Company is targeting diluted earnings per share of $1.40
to $1.48 for the full fiscal year 2007, assuming a 35.0% effective
tax rate. The targets for the full fiscal year 2007 reflect
assumptions regarding growth based on the introduction of new
products, the addition of manufacturing capacity, and the extension
of the R&D tax credit, which the Company believes are
reasonable but cannot assure will occur as presently anticipated.
Balance Sheet and Cash Flow Cash and Marketable Securities on
August 31, 2006 were $158.4 million, up from $119.3 million at
August 31, 2005, while short-term debt of $72.0 million increased
by $44.0 million from the prior fiscal year level primarily due to
the financing of the new plant in the Czech Republic. The amount of
days' sales outstanding were 73 days at both August 31, 2006 and
August 31, 2005. Inventory turns of 2.5 times per year remained
relatively consistent compared to prior year levels. Operating
income, plus depreciation and amortization, increased to $106.0
million for fiscal year 2006 from $75.5 million in the prior year.
Depreciation and amortization expenses for fiscal year 2006 were
approximately $26.9 million. Capital expenditures for fiscal year
2006 were approximately $42.0 million. Conference Call and Webcast
The Company will hold a conference call to discuss its fourth
quarter and full fiscal year 2006 results today, October 4, 2006,
at 4:30 pm Eastern. The call and simultaneous webcast can be
accessed by dialing 1-800-737-9483 in the U.S. and Canada, and
1-706-679-7371 for international and local callers, using
Conference ID #6214433, or by visiting
http://www.arrowintl.com/presentations/. Certain financial slides
have been included with the web cast which may be useful for
analysis as well as pictures of Arrow's Pressure Injectable PICC,
the AutoCAT(R) 2 WAVE(TM) intra-aortic balloon pump and the new
plant in Zdar, Czech Republic. Company Information Arrow
International, Inc. develops, manufactures and markets a broad
range of clinically advanced, disposable catheters and related
products for critical and cardiac care. The Company's products are
used primarily by anesthesiologists, critical care specialists,
surgeons, emergency and trauma physicians, cardiologists,
interventional radiologists, and other health care providers. Arrow
International's news releases and other company information can be
found on the World Wide Web at http://www.arrowintl.com/. The
Company's common stock trades on the NASDAQ Global Select
Market(SM) under the symbol ARRO. Safe Harbor Statement "Safe
Harbor" Statement under the Private Securities Litigation Reform
Act of 1995: This news release provides historical information and
includes forward-looking statements (including projections).
Although the Company believes that the expectations in such
forward-looking statements are reasonable, the Company can give no
assurance that such expectations will prove to have been correct.
The forward-looking statements are based upon a number of
assumptions and estimates that, while presented with numerical
specificity and considered reasonable by the Company, are
inherently subject to significant business, economic and
competitive risks, uncertainties and contingencies which are beyond
the control of the Company, and upon assumptions with respect to
future business decisions which are subject to change. Accordingly,
the forward-looking statements are only an estimate, and actual
results will vary from the forward-looking statements, and these
variations may be material. Consequently, the inclusion of the
forward- looking statements should not be regarded as a
representation by the Company of results that actually will be
achieved. Forward-looking statements are necessarily speculative in
nature, and it is usually the case that one or more of the
assumptions in the forward-looking statements do not materialize.
Investors are cautioned not to place undue reliance on the
forward-looking statements. In connection with the "Safe Harbor"
provisions of the Private Securities Litigation Reform Act of 1995,
the Company cautions the reader that, among others, the factors
below, which are discussed in the Company's Annual Report on Form
10-K for the fiscal year ended August 31, 2005 and in its other
filings with the Securities and Exchange Commission, could cause
the Company's results to differ materially from those stated in the
forward- looking statements. These factors include: (i) stringent
regulation of the Company's products by the US Food and Drug
Administration and, in some jurisdictions, by state, local and
foreign governmental authorities; (ii) the highly competitive
market for medical devices and the rapid pace of product
development and technological change in this market; (iii)
pressures imposed by the health care industry to reduce the cost or
usage of medical products and services; (iv) dependence on patents
and proprietary rights to protect the Company's trade secrets and
technology, and the need for litigation to enforce or defend these
rights; (v) risks associated with the Company's international
operations; (vi) potential product liability risks inherent in the
design, manufacture and marketing of medical devices; (vii) risks
relating to interruptions in the supply of or increases in the
price of essential raw materials or components; (viii) risks
associated with the Company's use of derivative financial
instruments; and (ix) dependence on the continued service of key
members of the Company's management. Arrow International, Inc. (In
thousands, except per share amounts) (Unaudited) Three Months Ended
Year Ended Consolidated Statements of August 31, August 31, August
31, August 31, Income Data: 2006 2005 2006 2005 Net sales $129,182
$114,292 $481,587 $454,296 Cost of goods sold 64,532 68,230 244,757
240,457 Gross profit 64,650 46,062 236,830 213,839 Operating
expenses: Research and development 6,840 8,024 27,548 29,692
Selling, general and administrative 32,880 34,109 129,961 128,232
Restructuring charges 344 115 218 1,886 Total operating expenses
40,064 42,248 157,727 159,810 Operating income 24,586 3,814 79,103
54,029 Interest, net (1,099) (652) (3,158) (1,122) Other (income)
expenses, net 502 61 401 327 Income before income taxes 25,183
4,405 81,860 54,824 Provision for income taxes 7,537 (637) 25,851
15,311 Net income $17,646 $5,042 $56,009 $39,513 Basic earnings per
common share $0.39 $0.11 $1.25 $0.89 Diluted earnings per common
share $0.39 $0.11 $1.24 $0.88 Weighted average shares used in
computing basic earnings per common share 44,879 44,598 44,767
44,300 Weighted average shares used in computing diluted earnings
per common share 45,365 45,210 45,273 45,008 August 31, August 31,
Consolidated Balance Sheet: 2006 2005 ASSETS Cash $148,576 $119,326
Marketable securities 9,783 - Receivables (net) 96,937 91,029
Inventories 102,901 95,356 Prepaid expenses and other 31,023 24,748
Total current assets 389,220 330,459 Property, plant and equipment
(net) 173,853 152,207 Other assets 134,364 117,824 Total assets
$697,437 $600,490 LIABILITIES AND SHAREHOLDERS' EQUITY Notes
payable $70,979 $26,891 Other current liabilities 66,113 63,908
Current maturities of long-term debt 995 1,054 Other liabilities
33,802 30,130 Total liabilities 171,889 121,983 Total shareholders'
equity 525,548 478,507 Total liabilities and shareholders' equity
$697,437 $600,490 DATASOURCE: Arrow International, Inc. CONTACT:
Frederick J. Hirt, CFO, Arrow International, Inc., +1-610-478-3117
Web site: http://www.arrowintl.com/
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