SOURCE: Arrhythmia Research Technology, Inc.

Arrhythmia Research Technology, Inc.

November 09, 2016 16:15 ET

Arrhythmia Research Technology, Inc. Reports 2016 Third Quarter Results

Third quarter 2016 gross margin increased 3.5 points compared to third quarter 2015

FITCHBURG, MA--(Marketwired - November 09, 2016) - Arrhythmia Research Technology, Inc. (NYSE MKT: HRT) (the "Company"), through its wholly-owned subsidiary, Micron Products, Inc., a diversified contract manufacturing organization that produces highly-engineered, innovative medical device components requiring precision machining and injection molding, announced results for its third quarter ended September 30, 2016.

"Although the Company posted a net operating loss of $69 thousand in Q3, we reduced the net loss by $197 thousand and gross profit by 8.4% over the same period last year. We are pleased to report the Company is making progress to diversify its customer base and improve margins. The Company added several new machining and plastic injection molding customers in the past six months. Our appeal to these new customers has been our ability to deliver high quality components with better-than-market lead times at a competitive price.

"We continue to work vigorously toward improved market share in sensors. Our continued use of automation and our unique partnerships with suppliers are helping to improve gross margin," commented Salvatore Emma, Jr., President and CEO.

Third Quarter 2016 Review

             
$ In thousands  Q3 2016  Q3 2015  $ Change  % Change
Net sales  $4,713   $5,226   $(513 ) (9.4 %)
Gross profit  $811   $718   $93   (8.4 %)
 Gross margin   17.2 %  13.7 %         
Net income (loss) from continuing operations  $(69 ) $(266 ) $197      
Diluted earnings (loss) per share  $(0.02 ) $(0.10 ) $0.07      
                

Net Sales for the third quarter 2016 decreased $513 thousand when compared to the same period last year. The decrease was driven by a decline in net sales in machined components and sensors of 27.9% and 13.0%, respectively. As an offset, net sales in thermoplastic injection molding increased 3.1%.

Despite a decline in sales, gross profit in the third quarter 2016 increased by $93 thousand and gross profit as a percentage of sales increased 3.5 points to 17.2% when compared to third quarter 2015. Despite a decrease in volume, an increase in gross profit of 26.3% was realized in sensors due to an increase in the weighted average price of silver paired with customer and product mix. In the same period, improvements in automation, operating leverage and increased sales in automotive components lead to an increase in gross profit of 13.0%. These increases were offset by a 31.1% decrease in gross profit in machined components due to lower sales volume.

The increase in gross profit was partly due to reductions in other indirect manufacturing overhead expenses.

Total operating expenses decreased $111 thousand to $809 thousand or 17.2% of sales in the third quarter of 2016 as compared to $920 thousand or 17.6% in the same period last year.

Net loss from continuing operations was $69 thousand, or $0.02 per diluted share, compared with net loss of $266 thousand, or $0.10 per diluted share, in the 2015 third quarter.

EBITDA(1) (income from continuing operations adjusted for income taxes, other income and expense, interest, depreciation and amortization, and share-based compensation expense) for the third quarter of 2016 was $413 thousand, or 8.8% of net sales, compared with $292 thousand, or 5.6% of net sales, for the same period in 2015. (1)See attached table for additional important disclosures regarding the Company's use of EBITDA, as well as a reconciliation of net income (loss) from continuing operations to EBITDA.

First Nine Months 2016 Review

             
$ In thousands  YTD 2016  YTD 2015  $ Change  % Change
Net sales  $14,825   $16,744   $(1,919 ) (12.2 %)
Gross profit  $2,441   $2,546   $(105 ) (10.9 %)
 Gross margin   16.5 %  15.2 %         
Net income (loss) from continuing operations  $(391 ) $(405 ) $14      
Diluted earnings (loss) per share  $(0.14 ) $(0.15 ) $0.01      
                

Net Sales for the first nine months of 2016 decreased $1,919 thousand or 12.2%, when compared to the same period last year. The decrease was driven by a decline in net sales of machined components and sensors of 25.1% and 11.8%, respectively. Additionally, there was a slight decline in thermoplastic injection molding net sales.

Although there was a decrease in gross profit for the first nine months of 2016 of $105 thousand, gross profit as a percentage of sales increased 1.3 points to 16.5% when compared to the same period in the prior year. The decline in gross profit was primarily the result of a 25.7% decrease in gross profit from machined components due to lower volume and costs related to process validation for new customers. Additionally, there was a 17.8% decrease in gross profit from sensors due to lower per unit pricing, as well as customer and product mix. Gross profit from thermoplastic injection molded products increased a net of 3.2% as a result of higher sales and efficiency improvements from automation.

The decreases in gross profit were partially offset by reductions in other indirect manufacturing overhead expenses.

Total operating expenses were $2.6 million or 17.8% of sales for the nine months of 2016 as compared to $2.8 million or 16.5% in the same period last year.

In the first nine months of 2016, net loss from continuing operations was $391 thousand, or $0.14 per diluted share, compared with net loss of $405 thousand, or $0.15 per diluted share, in the same period in 2015.

EBITDA(1) (income from continuing operations adjusted for income taxes, other income and expense, interest, depreciation and amortization, and share-based compensation expense) for the first nine months of 2016 was $989 thousand, or 6.7% of net sales, compared with $1,020 thousand, or 6.1% of net sales, for the same period in 2015. (1)See attached table for additional important disclosures regarding the Company's use of EBITDA, as well as a reconciliation of net income (loss) from continuing operations to EBITDA.

Cash flow and financial resources

At September 30, 2016, the Company had cash on hand of $207 thousand and working capital of $712 thousand as compared to $272 thousand and $2.5 million at December 31, 2015. The change in working capital is due to the reclassification of the revolving line of credit to current liabilities because the maturity date is June 30, 2017. In the third quarter of 2016, the Company had net cash provided by operating activities of $851 thousand and used net cash of $1,069 thousand for capital expenditures. Cash provided by investing activities of $153 thousand was due primarily to net borrowing from the Company's revolver as well as payments made on debt. The Company has recently received a commitment letter from its bank to restructure its debt and add a new equipment line of credit.

Increasing orders from new and existing customers is expected to increase short term working capital needs, which, together with timing of receipts from accounts receivables, is expected to cause fluctuations in cash flows and borrowings over the next several quarters.

Outlook: Improved Operating Leverage

Mr. Emma concluded, "Micron's strength is in its talented staff and their expertise in lean manufacturing, tight tolerance machining, injection molding and silver coating. Our OEM customers trust Micron with their brand which is a responsibility we take very seriously and is demonstrated by winning additional orders and new business. As we look forward into 2017, a continued strong sales effort, cost discipline, and our operating leverage will help to improve earnings."

About Arrhythmia Research Technology, Inc.

Arrhythmia Research Technology, Inc., through its wholly-owned subsidiary, Micron Products, Inc., is a diversified contract manufacturing organization that produces highly-engineered, innovative medical device components requiring precision machining and injection molding. The Company also manufactures components, devices and equipment for military, law enforcement, industrial and automotive applications. In addition, the Company is a market leader in the production and sale of silver/silver chloride coated and conductive resin sensors used as consumable component parts in the manufacture of integrated disposable electrophysiological sensors. The Company's strategy for growth is to build a best-in-class contract manufacturer with a specialized focus on plastic injection molding and highly-engineered medical devices and components requiring precision machining.

The Company routinely posts news and other important information on its websites:
http://www.arthrt.com, http://www.micronproducts.com and http://www.micronmedical.com.

Safe Harbor Statement
Forward-looking statements made herein are based on current expectations of Arrhythmia Research Technology, Inc. ("our" or the "Company") that involve a number of risks and uncertainties and should not be considered as guarantees of future performance. The factors that could cause actual results to differ materially include our ability to obtain and retain order volumes from customers who represent significant proportions of net sales; our ability to maintain our pricing model, offset higher costs with price increases and/or decrease our cost of sales; variability of customer delivery requirements; the level of and ability to generate sales of higher margin products and services; our ability to renew our credit facility and manage our level of debt and provisions in the debt agreements which could make the Company sensitive to the effects of economic downturns and limit our ability to react to changes in the economy or our industry; failure to comply with financial and other covenants in our credit facility; reliance on revenues from exports and impact on financial results due to economic uncertainty or downturns in foreign markets; volatility in commodity and energy prices and our ability to offset higher costs with price increases; continued availability of supplies or materials used in manufacturing at competitive prices; variations in the mix of products sold; continued availability of supplies or materials used in manufacturing at competitive prices; and the amount and timing of investments in capital equipment, sales and marketing, engineering and information technology resources. More information about factors that potentially could affect the Company's financial results is included in the Company's Annual Report on Form 10-K and other filings with the Securities and Exchange Commission.

FINANCIAL TABLES FOLLOW.

 
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
             
   Three Months Ended  Nine Months Ended
   September 30,  September 30,
   2016  2015  2016  2015
Net sales  $4,713,123   $5,226,135   $14,825,417   $16,743,571  
Cost of sales   3,902,363    4,508,622    12,384,788    14,197,508  
  Gross profit   810,760    717,513    2,440,629    2,546,063  
                      
Selling and marketing   303,279    219,895    900,189    740,476  
General and administrative   482,115    651,669    1,664,182    1,825,473  
Research and development   24,534    48,007    74,792    202,792  
  Total operating expenses   809,928    919,571    2,639,163    2,768,741  
                      
  Net income (loss) from continuing operations   832    (202,058 )  (198,534 )  (222,678 )
Other expense:                     
 Interest expense   (69,596 )  (66,602 )  (193,092 )  (202,135 )
 Other income, net   202    3,033    1,029    19,864  
 Total other expense, net   (69,394 )  (63,569 )  (192,063 )  (182,271 )
Income (loss) from continuing operations before income taxes   (68,562 )  (265,627 )  (390,597 )  (404,949 )
Income tax provision   -    -    -    -  
 Income (loss) from continuing operations   (68,562 )  (265,627 )  (390,597 )  (404,949 )
Discontinued Operations:                     
 Income from discontinued operations, net of tax provision of $0 for the three and nine months ended September 30, 2016 and 2015   -    -    -    362,610  
Net income (loss)  $(68,562 ) $(265,627 ) $(390,597 ) $(42,339 )
Earnings (loss) per share - basic                     
  Continuing operations  $(0.02 ) $(0.10 ) $(0.14 ) $(0.15 )
  Discontinued operations   -    -    -    0.13  
Earnings (loss) per share - basic  $(0.02 ) $(0.10 ) $(0.14 ) $(0.02 )
Earnings (loss) per share - diluted                     
  Continuing operations  $(0.02 ) $(0.10 ) $(0.14 ) $(0.15 )
  Discontinued operations   -    -    -    0.13  
Earnings (loss) per share - diluted  $(0.02 ) $(0.10 ) $(0.14 ) $(0.02 )
Weighted average common shares outstanding - basic   2,816,639    2,786,539    2,816,475    2,782,452  
Weighted average common shares outstanding - diluted   2,816,639    2,786,539    2,816,475    2,782,452  
                      
 
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
       
   September 30,  December 31,
   2016  2015
Assets      
Current assets:      
 Cash and cash equivalents  $206,619   $272,291  
 Trade accounts receivable, net of allowance for doubtful accounts of $30,000 at September 30, 2016 and $60,000 at December 31, 2015   2,367,370    2,798,353  
 Inventories   3,144,471    2,118,712  
 Prepaid expenses and other current assets   745,082    614,129  
  Total current assets   6,463,542    5,803,485  
 Property, plant and equipment, net   6,544,711    6,626,069  
 Assets held for sale, net   665,000    665,000  
 Intangible assets, net   17,327    18,645  
 Other assets   237,305    268,835  
  Total assets  $13,927,885   $13,382,034  
Liabilities and Shareholders' Equity           
Current liabilities:           
 Revolving line of credit, current portion  $1,546,495   $-  
 Equipment line of credit, current portion   -    35,718  
 Term notes payable, current portion   771,645    589,635  
 Subordinated promissory notes   493,898    473,135  
 Accounts payable   1,964,666    1,553,388  
 Accrued expenses and other current liabilities   310,390    275,777  
 Customer deposits   417,966    93,407  
 Deferred revenue, current   246,657    272,837  
  Total current liabilities   5,751,717    3,293,897  
Long-term liabilities:           
 Revolving line of credit, non-current portion   -    1,511,495  
 Equipment line of credit, non-current portion   -    301,132  
 Term notes payable, non-current portion   1,342,443    1,120,652  
 Deferred revenue, non-current   255,412    272,181  
  Total long-term liabilities   1,597,855    3,205,460  
  Total liabilities   7,349,572    6,499,357  
Commitments and Contingencies           
Shareholders' equity:           
 Preferred stock, $0.001 par value; 2,000,000 shares authorized, none issued   -    -  
 Common stock, $0.01 par value; 10,000,000 shares authorized; 3,926,491 issued, 2,816,639 outstanding at September 30, 2016 and 3,926,491 issued, 2,801,639 outstanding at December 31, 2015   39,265    39,265  
 Additional paid-in-capital   11,426,837    11,381,536  
 Treasury stock at cost, 1,109,852 shares at September 30, 2016 and 1,124,852 shares at December 31, 2015   (3,028,564 )  (3,069,496 )
 Accumulated deficit   (1,859,225 )  (1,468,628 )
  Total shareholders' equity   6,578,313    6,882,677  
  Total liabilities and shareholders' equity  $13,927,885   $13,382,034  
         
 
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
       
   Nine Months Ended
   September 30,
   2016  2015
Cash flows from operating activities:      
 Net income (loss)  $(390,597 ) $(42,339 )
 Income from discontinued operations   -    (362,610 )
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:           
 (Gain) loss on sale of property, plant and equipment   -    (17,143 )
 Depreciation and amortization   1,152,001    1,102,428  
 Impairment of intangibles   -    118,318  
 Non-cash interest expense   20,762    20,762  
 Change in allowance for doubtful accounts   (30,000 )  3,000  
 Share-based compensation expense   35,083    23,416  
 Changes in operating assets and liabilities:           
  Accounts receivable   460,983    128,961  
  Inventories   (1,025,759 )  56,996  
  Prepaid expenses and other current assets   (130,953 )  (276,904 )
  Other non-current assets   31,530    230,325  
  Accounts payable   411,278    19,387  
  Accrued expenses and other current liabilities   332,993    98,516  
  Other non-current liabilities   (16,769 )  (256,870 )
   Net cash provided by (used in) operating activities   850,552    846,243  
Cash flows from investing activities:           
 Purchases of property, plant and equipment   (1,069,325 )  (1,072,347 )
 Proceeds from sale of property, plant and equipment   -    35,700  
 Cash paid for patents and trademarks   -    (6,176 )
   Net cash provided by (used in) investing activities   (1,069,325 )  (1,042,823 )
Cash flows from financing activities:           
 Proceeds from (payments on) revolving line of credit, net   35,000    190,000  
 Proceeds from equipment line of credit   544,851    415,785  
 Payments on term notes payable   (477,900 )  (383,376 )
 Proceeds from stock option exercises   51,150    28,611  
   Net cash provided by (used in) financing activities   153,101    251,020  
Net increase (decrease) in cash and cash equivalents   (65,672 )  54,440  
Cash and cash equivalents, beginning of period   272,291    209,398  
Cash and cash equivalents, end of period   206,619    263,838  
         
 
ARRHYTHMIA RESEARCH TECHNOLOGY, INC.
EBITDA RECONCILIATION (1)
(Unaudited, $ in thousands)
             
   Three Months Ended  Nine Months Ended
   September 30,  September 30,
   2016  2015  2016  2015
Net income (loss) from continuing operations  ($69 ) ($266 ) ($391 ) ($405 )
 Income tax provision  1   -   1   -  
 Other (income) expense  -   (3 ) (1 ) (20 )
 Interest expense  70   67   193   202  
 Depreciation and amortization  407   372   1,152   1,102  
 Impairment of intangibles  -   118   -   118  
 Share-based compensation  4   4   35   23  
EBITDA  $413   $292   $989   $1,020  
EBITDA margin %  8.8 % 5.6 % 6.7 % 6.1 %

(1) Non-GAAP Financial Measures
In addition to reporting net income, a U.S. generally accepted accounting principle ("GAAP") measure, this news release contains information about EBITDA (income from continuing operations adjusted for income taxes, other income and expense, interest, depreciation and amortization, and share-based compensation expense), which is a non-GAAP measure. The Company believes EBITDA allows investors to view its performance in a manner similar to the methods used by management and provides additional insight into its operating results. EBITDA is not calculated through the application of GAAP. Accordingly, it should not be considered as a substitute for the GAAP measure of net income and, therefore, should not be used in isolation of, but in conjunction with, the GAAP measure. The use of any non-GAAP measure may produce results that vary from the GAAP measure and may not be comparable to a similarly defined non-GAAP measure used by other companies.

Contact Information

  • For more information, contact:
    Derek T. Welch
    Chief Financial Officer
    978.345.5000