SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
__________________________
FORM
10-Q
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X
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Quarterly
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934.
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For
the quarterly period ended March 31,
2009
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OR
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Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934.
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For
the transition period from _________ to
_________
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Commission
file number 0-23791
____________________
SONOSITE,
INC.
(Exact
name of registrant as specified in its charter)
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Washington
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91-1405022
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(State
or Other Jurisdiction
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(I.R.S.
Employer
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of
Incorporation or Organization)
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Identification
Number)
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21919
30th Drive SE, Bothell, WA
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98021-3904
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(Address
of Principal Executive Offices)
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(Zip
Code)
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(425)
951-1200
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(Registrant’s
Telephone Number, Including Area
Code)
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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. Yes [X] 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). Yes
[X] No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).
Large
accelerated filer [ ] Accelerated filer
[X] Non-accelerated filer [
] Smaller reporting company [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2). Yes [ ] No [X]
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
Common
Stock, $0.01 par value
|
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17,131,656
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(Class)
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(Outstanding
as of April 20, 2009)
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SonoSite,
Inc.
Quarterly
Report on Form 10-Q
For
the Quarter Ended March 31, 2009
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Page
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No.
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PART
I
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Item
1.
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3
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4
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5
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6
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Item
2.
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16
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Item
3.
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20
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Item
4.
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22
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PART
II
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Item
1.
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22
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Item
4.
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23
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Item
6.
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24
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25
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Condensed
Consolidated Balance Sheets
(unaudited)
(In
thousands, except share data)
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March
31
,
2009
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December
31,
2008
As
Adjusted
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Assets
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Current
assets:
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Cash
and cash equivalents
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$
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198,119
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$
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209,258
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Short-term
investment securities
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58,945
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69,882
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Accounts
receivable, less allowances of $1,962 and $2,190
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59,989
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66,094
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Inventories
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29,386
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29,115
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Deferred
income taxes, current
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12,832
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13,372
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Prepaid
expenses and other current assets
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6,748
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6,623
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Total
current assets
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366,019
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394,344
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Property
and equipment, net
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9,029
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8,955
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Investment
securities
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1,050
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578
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Goodwill
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3,821
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3,767
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Deferred
income taxes
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304
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793
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Identifiable
intangible assets, net
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13,002
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13,062
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Other
assets
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4,524
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5,383
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Total
assets
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$
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397,749
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$
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426,882
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Liabilities
and Shareholders’ Equity
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Current
liabilities:
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Accounts
payable
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$
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7,474
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$
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6,189
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Accrued
expenses
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20,340
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31,921
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Deferred
revenue, current portion
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2,624
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2,755
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Total
current liabilities
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30,438
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40,865
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Long-term
debt, net
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93,212
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111,336
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Deferred
tax liability, net
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7,066
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|
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9,871
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Other
non-current liabilities
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13,639
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13,750
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Total
liabilities
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144,355
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175,822
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Commitments
and contingencies
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Shareholders’
equity:
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Preferred
stock, $1.00 par value
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Authorized
shares--6,000,000
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Issued
and outstanding shares--none
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--
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--
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Common
stock, $.01 par value
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Authorized
shares--50,000,000
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Issued
and outstanding shares:
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As
of March 31, 2009—17,121,384
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172
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As
of December 31, 2008—17,054,697
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171
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Additional
paid-in-capital
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287,292
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285,757
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Accumulated
deficit
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(35,173
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)
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(36,036
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)
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Accumulated
other comprehensive income
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1,103
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1,168
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Total
shareholders’ equity
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253,394
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251,060
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Total
liabilities and shareholders’ equity
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$
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397,749
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$
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426,882
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See
accompanying notes to condensed consolidated financial
statements.
(unaudited)
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(In
thousands, except per share amounts)
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Three
Months Ended
March
31,
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2009
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2008
As
Adjusted
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Revenue
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$
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51,805
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$
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52,499
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Cost
of revenue
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16,713
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14,659
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Gross
margin
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35,092
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37,840
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Operating
expenses:
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Research
and development
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7,697
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6,197
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Sales,
general and administrative
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25,803
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29,249
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Total
operating expenses
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33,500
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35,446
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Other
income (loss)
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Interest
income
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949
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2,826
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Interest
expense
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(2,594
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)
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(4,262
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)
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Other
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1,441
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(615
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)
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Total
other loss, net
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(204
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)
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(2,051
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)
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Income
before income taxes
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1,388
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343
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Income
tax provision
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525
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|
|
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153
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Net
income
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$
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863
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$
|
190
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Net
income per share:
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Basic
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$
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0.05
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$
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0.01
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Diluted
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|
$
|
0.05
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|
$
|
0.01
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Weighted
average common and
potential
common shares
outstanding
:
|
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Basic
|
|
|
17,080
|
|
|
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16,770
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Diluted
|
|
|
17,532
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|
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17,406
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|
See
accompanying notes to condensed consolidated financial
statements
SonoSite,
Inc.
(unaudited)
|
Three
Months Ended
|
|
March
31,
|
(In
thousands)
|
2009
|
|
2008
As
Adjusted
|
Operating
activities:
|
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|
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|
|
|
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Net
income
|
$
|
863
|
|
|
$
|
190
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|
Adjustments
to reconcile net income to net cash (used in) provided by operating
activities:
|
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Depreciation
and amortization
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1,046
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1,064
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Stock-based
compensation
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2,493
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1,879
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Deferred
income tax provision
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1,459
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|
|
|
343
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Amortization
of net discounts on investment securities
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(145
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)
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(598
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)
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Amortization
of debt discount and debt issuance costs
|
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1,340
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|
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2,170
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Accretion
of contingent purchase consideration
|
|
240
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|
|
|
225
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Excess
tax benefit from exercise of stock based awards
|
|
--
|
|
|
|
(234
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)
|
Net
(gain) loss on investments
|
|
(2
|
)
|
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|
5
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|
Gain
on convertible note repurchase
|
|
(1,339
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)
|
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|
--
|
|
Investment
other-than-temporary impairment
|
|
4
|
|
|
|
148
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
4,736
|
|
|
|
9,047
|
|
Inventories
|
|
(628
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)
|
|
|
(2,870
|
)
|
Prepaid
expenses and other assets
|
|
(319
|
)
|
|
|
3,435
|
|
Accounts
payable
|
|
1,305
|
|
|
|
(3,048
|
)
|
Accrued
expenses
|
|
(11,633
|
)
|
|
|
(4,508
|
)
|
Deferred
liabilities
|
|
(294
|
)
|
|
|
86
|
|
Net
cash (used in) provided by operating activities
|
|
(874
|
)
|
|
|
7,334
|
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
Purchases
of investment securities
|
|
(35,449
|
)
|
|
|
(124,913
|
)
|
Proceeds
from sales/maturities of investment securities
|
|
45,881
|
|
|
|
102,592
|
|
Purchases
of property and equipment
|
|
(1,092
|
)
|
|
|
(
355
|
)
|
Earn-out
consideration associated with SonoMetric acquisition
|
|
(387
|
)
|
|
|
(
921
|
)
|
Net
cash provided by (used in) investing activities
|
|
8,953
|
|
|
|
(23,597
|
)
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
Excess
tax benefit from stock-based awards
|
|
--
|
|
|
|
234
|
|
Minimum
tax withholdings on stock-based awards
|
|
(562
|
)
|
|
|
--
|
|
Proceeds
from exercise of stock-based awards
|
|
53
|
|
|
|
451
|
|
Repurchase
of convertible senior notes
|
|
(20,500
|
)
|
|
|
--
|
|
Proceeds
from sale of call options
|
|
1,409
|
|
|
|
--
|
|
Repurchase
of warrants
|
|
(1,325
|
)
|
|
|
--
|
|
Net
cash (used in) provided by financing activities
|
|
(20,925
|
)
|
|
|
685
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
1,707
|
|
|
|
(1,266
|
)
|
Net
change in cash and cash equivalents
|
|
(11,139
|
)
|
|
|
(16,844
|
)
|
Cash
and cash equivalents at beginning of period
|
|
209,258
|
|
|
|
188,701
|
|
Cash
and cash equivalents at end of period
|
$
|
198,119
|
|
|
$
|
171,857
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
Cash paid for income taxes
|
$
|
1,643
|
|
|
$
|
403
|
|
Cash paid for interest
|
$
|
2,805
|
|
|
$
|
4,195
|
|
See
accompanying notes to condensed consolidated financial
statements.
SonoSite,
Inc.
(unaudited)
Interim
Financial Information
Basis
of Presentation
The
information contained herein has been prepared in accordance with instructions
for Form 10-Q and Article 10 of Regulation S-X. The information reflects, in the
opinion of SonoSite, Inc. management, all adjustments necessary (which are of a
normal and recurring nature) for a fair presentation of the results for the
interim periods presented. The results of operations for the three months ended
March 31, 2009 are not necessarily indicative of expected results for the entire
year ending December 31, 2009 or for any other fiscal period. These financial
statements do not include all disclosures required by generally accepted
accounting principles. For a presentation including all disclosures required
by generally accepted accounting principles, these financial statements
should be read in conjunction with the audited financial statements for the year
ended December 31, 2008, included in our Annual Report on Form
10-K.
Adjustment
of prior period balances
Certain
amounts reported in comparable prior periods have been adjusted due to the
adoption of Financial Accounting Standards Board Staff Position (FSP) No. APB
14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash
upon Conversion (Including Partial Cash Settlement)” (“APB 14-1”) on January 1,
2009. For additional detail on the adjusted balances, refer to the
Change in Accounting
Principle
footnote.
Inventories
Inventories
are stated at the lower of cost or market, on a first-in, first-out method.
Included in our inventories balance are demonstration products used by our sales
representatives and marketing department. Adjustments to reduce carrying costs
are recorded for obsolete material, shrinkage, earlier generation products and
used or refurbished products held either as saleable inventory or as
demonstration product. If market conditions change or if the introduction of new
products by us impacts the market for our previously released products, we may
be required to further write down the carrying cost of our
inventories.
Inventories
consisted of the following (in thousands):
|
|
As
of
|
|
|
March
31,
|
|
December
31,
|
|
|
2009
|
|
2008
|
Raw
material
|
|
$
|
10,578
|
|
|
$
|
10,007
|
|
Demonstration
inventory
|
|
|
8,534
|
|
|
|
8,198
|
|
Finished
goods
|
|
|
10,274
|
|
|
|
10,910
|
|
Total
|
|
$
|
29,386
|
|
|
$
|
29,115
|
|
Warranty
expense
We
accrue estimated warranty expense at the time of sale for costs expected to be
incurred under our product warranties. This provision for warranty expense is
made based upon our historical product failure rates and service repair costs
using management’s judgment.
The
warranty liability is summarized as follows (in thousands):
|
|
|
|
|
Charged
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
to
Cost of
|
|
|
Applied
to
|
|
End
of
|
|
|
|
of
Period
|
|
|
Revenue
|
|
|
Liability
|
|
Period
|
|
Three
months ended March 31, 2009
|
|
$
|
7,094
|
|
|
$
|
997
|
|
|
$
|
(605
|
)
|
|
$
|
7,486
|
|
Three
months ended March 31, 2008
|
|
$
|
4,045
|
|
|
$
|
642
|
|
|
$
|
(321
|
)
|
|
$
|
4,366
|
|
Income
taxes
The
income tax provision for the three months ended March 31, 2009 is based on
projections of total year pre-tax income and the projected total year tax
provision. Deferred income taxes are provided based on the estimated future tax
effects of temporary differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates that are expected to apply to taxable
income in the years in which those temporary differences and carryforwards are
expected to be recovered or settled. The decrease in our consolidated effective
tax rate for the three months ended March 31, 2009, as compared to 2008, results
primarily from the reinstatement of the U.S. research and development tax credit
in late 2008 and our qualification for the domestic production activities tax
deduction.
Net
income per share
Basic
net income per share is based on the weighted average number of common shares
outstanding during the period. Diluted net income per share is based on the
weighted average number of common and dilutive common equivalent shares
outstanding during the period. Potentially dilutive common equivalent shares
consist of common stock issuable upon exercise of stock options and warrants, or
upon vesting of restricted stock units using the treasury stock method. Diluted
net income per share would also be impacted to reflect shares issuable upon
conversion of our convertible senior notes if our share price exceeds $38.20 per
share. Our call option on our shares is anti-dilutive and, therefore, excluded
from the calculation of diluted net income per share.
The
following is a reconciliation of the numerator and denominator of the basic and
diluted net income per share calculations (in thousands, except per share
amounts):
|
|
Three
Months
|
|
|
|
Ended
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Net
income
|
|
$
|
863
|
|
|
$
|
190
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares
outstanding used
in computing basic net income
per share
|
|
|
17,080
|
|
|
|
16,770
|
|
Effect
of dilutive stock options and restricted stock units
|
|
|
452
|
|
|
|
636
|
|
Weighted
average common shares outstanding used in
computing
diluted net income per share
|
|
|
17,532
|
|
|
|
17,406
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.05
|
|
|
$
|
0.01
|
|
Diluted
|
|
$
|
0.05
|
|
|
$
|
0.01
|
|
The
following common shares were excluded from the computation of diluted net income
per share as their effect would have been anti-dilutive (in
thousands):
|
|
Three
Months
|
|
|
|
Ended
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Stock
options and restricted stock units
|
|
|
1,475
|
|
|
|
434
|
|
Warrants
outstanding
|
|
|
1,184
|
|
|
|
2,500
|
|
Total
common shares excluded from diluted net income per share
|
|
|
2,659
|
|
|
|
2,934
|
|
The
computation of diluted net income per share does not include any potential
dilutive common shares associated with our convertible senior notes. The
convertible senior notes would become dilutive and included in the calculation
of diluted net income per share, for the number of shares that would be required
to satisfy the conversion spread, if the average market price of our common
stock exceeds $38.20 per share.
Accumulated
other comprehensive income
Unrealized
gains or losses on our available-for-sale securities that are considered
temporary and foreign currency translation adjustments are included in
accumulated other comprehensive income.
The
following presents the components of comprehensive income (in
thousands):
|
Three
Months
|
|
Ended
March 31,
|
|
2009
|
|
2008
|
Net
income
|
$
|
863
|
|
|
$
|
190
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
102
|
|
|
|
326
|
|
Unrealized
holding (loss) gain, net
|
|
(167
|
)
|
|
|
111
|
|
Comprehensive
income
|
$
|
798
|
|
|
$
|
627
|
|
Indemnification
Obligations and Guarantees (excluding product warranty)
We
provide (i) indemnifications of varying scope and size to our customers and
distributors against claims of intellectual property infringement made by third
parties arising from the use of our products; (ii) indemnifications of varying
scope and size to our customers against third party claims arising as a result
of defects in our products; (iii) indemnifications of varying scope and size to
consultants against third party claims arising from the services they provide to
us; and (iv) guarantees to support obligations of some of our subsidiaries such
as lease payments.
To
date, we have not incurred material costs as a result of these obligations and
do not expect to incur material costs in the future. Accordingly, we have not
accrued any liabilities in our financial statements related to these
indemnifications or guarantees.
Fair
value measurements
The
following table presents the assets and liabilities measured or disclosed at
fair value on a recurring basis at March 31, 2009 (in thousands):
|
|
Fair Value Measurements
|
|
|
|
Total C
arr
ying
Value
|
|
|
Quoted
Prices in Active Markets
(Level 1)
|
|
|
Significant
Other Observable Inputs
(Level
2)
|
|
|
Significant
Unobservable Inputs (Level 3)
|
|
Investment
securities
|
|
$
|
59,995
|
|
|
$
|
58,005
|
|
|
$
|
--
|
|
|
$
|
1,990
|
|
Long-term
debt
|
|
$
|
93,212
|
|
|
$
|
102,382
|
|
|
$
|
--
|
|
|
$
|
--
|
|
Investment
securities are measured at fair value using quoted market prices, with the
exception of our investment in the Columbia Strategic Cash Portfolio, which is
in the process of liquidation. This investment is measured at estimated fair
value, which is the net asset value of the portfolio provided by the portfolio
manager. The portfolio manager has measured fair value based upon quoted market
prices and quoted prices of comparable securities, as well as good faith
estimates. Long-term debt is measured at fair value for disclosure only using
quoted market prices. There were no changes to the valuation techniques during
the three months ended March 31, 2009. The carrying value of long-term debt was
reduced as the result of the adoption of APB 14-1. See
Change in Accounting
Principle
for additional information.
We
perform impairment tests on certain assets, including goodwill and intangible
assets at fair value on a nonrecurring basis annually in the fourth quarter or
if and when a triggering event occurs. If there is an impairment, these assets
would be measured at fair value. For the period ended March 31, 2009, there were
no impairments recorded for goodwill and intangible assets.
The following table summarizes
the activity of our level 3 investment securities (in
thousands):
|
|
Three
Months
Ended
March 31,
|
|
|
2009
|
|
2008
|
Balance,
at beginning of period
|
|
$
|
2,765
|
|
|
$
|
12,574
|
|
|
|
|
|
|
|
|
|
|
Total
gain (loss) (realized or unrealized) included in:
|
|
|
|
|
|
|
|
|
Other
income (loss)
|
|
|
(4
|
)
|
|
|
(153
|
)
|
Other
comprehensive income
|
|
|
21
|
|
|
|
--
|
|
Sales
and settlements
|
|
|
(792
|
)
|
|
|
(4,232
|
)
|
Balance,
at end of period
|
|
$
|
1,990
|
|
|
$
|
8,189
|
|
|
|
|
|
|
|
|
|
|
Losses
included in other income (loss) attributable to the change
in unrealized losses relating to assets still held
|
|
$
|
(4
|
)
|
|
$
|
(148
|
)
|
Change in Accounting
Principle
Effective
January 1, 2009, we adopted APB 14-1, which clarifies the accounting for
convertible debt instruments that may be settled in cash (including partial cash
settlement) upon conversion. APB 14-1 requires issuers to account separately for
the liability and equity components of certain convertible debt instruments in a
manner that reflects the issuer’s nonconvertible debt borrowing rate when
interest cost is recognized. APB 14-1 requires bifurcation of a component of the
conversion option, classification of that component in equity and the accretion
of the resulting discount on the debt to be recognized as part of interest
expense in our consolidated statement of income. APB 14-1 requires retrospective
application to the terms of instruments as they existed for all periods
presented. Our debt offering completed in July 2007 of $225.0 million aggregate
principal amount of 3.75% convertible senior notes (“Notes”) falls within the
scope of APB 14-1.
Upon
issuance of the Notes and prior to the adoption of APB 14-1, we evaluated the
Notes using the “Working Draft of AICPA Technical Practice Aid” (“Technical
Practice Aid”) prepared by the Convertible Debt, Convertible Preferred Shares,
Warrants, and Other Equity-Related Financial Instruments Task Force to consider
whether the conversion option on the Notes met the criteria to preclude
recognition as a debt discount. We concluded the conversion feature should be
equity classified and not recorded as a standalone derivative, and thus the
conversion feature was exempt from bifurcation. Debt issuance costs of $7.5
million were being amortized to interest expense over the term of the
Notes.
Upon
adoption of APB 14-1, we were required to bifurcate a component of the
conversion option. We calculated the fair value of the liability component of
the Notes using a discount rate of similar liabilities without conversion
features and determined the carrying amount of the equity component by deducting
the fair value of the liability component from the initial carrying value of the
convertible debt. This resulted in an initial recognition of $63.9 million of
debt discount, to be amortized over a seven year period at an effective interest
rate of 8.5%, and a corresponding deferred tax liability of $23.6 million.
Additionally, $2.1 million of debt issuance costs, included in other assets in
our consolidated balance sheet, were reclassified to equity on a proportionate
basis as the equity component. The adoption of APB 14-1 did not require any
changes to our recognition of our call options and warrants that had
been previously classified as equity.
As
a result of adopting APB 14-1, the change in accounting principle had the
following effect on prior year balances (in thousands except per share
data):
|
|
Three
Months
Ended
March 31, 2008
|
|
|
|
As
Adjusted
|
|
|
As
Reported
|
|
Selected Statement of Income
Data
|
|
|
|
|
|
|
Operating
income
|
|
$
|
2,394
|
|
|
$
|
2,394
|
|
|
|
|
|
|
|
|
|
|
Total
other loss
|
|
|
(2,051
|
)
|
|
|
(151
|
)
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
343
|
|
|
|
2,243
|
|
Income
tax provision
|
|
|
153
|
|
|
|
998
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
190
|
|
|
$
|
1,245
|
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
|
$
|
0.07
|
|
Diluted
|
|
$
|
0.01
|
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
Shares
used in computing net income per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
16,770
|
|
|
|
16,770
|
|
Diluted
|
|
|
17,406
|
|
|
|
17,406
|
|
We
recognized an additional $1.9 million in interest expense for the three months
ended March 31, 2008. The additional interest expense was primarily related to
the amortization of the debt discount.
The adoption of APB 14-1 also resulted
in changes in our consolidated balance sheet for the year ended December 31,
2008 as follows (in thousands):
|
|
Year
Ended
December 31, 2008
|
|
|
|
As
Adjusted
|
|
|
As
Reported
|
|
Condensed Balance Sheet
Data
|
|
|
|
|
|
|
Total
current assets
|
|
$
|
394,344
|
|
|
$
|
390,327
|
|
Total
noncurrent assets
|
|
|
32,538
|
|
|
|
38,960
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
426,882
|
|
|
$
|
429,287
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
$
|
40,865
|
|
|
$
|
40,865
|
|
Total
noncurrent liabilities
|
|
|
134,957
|
|
|
|
158,495
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
$
|
175,822
|
|
|
$
|
199,360
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
$
|
171
|
|
|
$
|
171
|
|
Additional
paid-in capital
|
|
|
285,757
|
|
|
|
252,895
|
|
Accumulated
deficit
|
|
|
(36,036
|
)
|
|
|
(24,307
|
)
|
Accumulated
other comprehensive income
|
|
|
1,168
|
|
|
|
1,168
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
426,882
|
|
|
$
|
429,287
|
|
Current
assets increased by $4.0 million due to an increase in the deferred tax benefit
related to debt issuance costs. Noncurrent assets decreased by $6.4 million due
to the reclassification of $5.3 in deferred tax assets to offset deferred tax
liabilities and a $1.1 million reclassification of debt issuance costs to
equity. Noncurrent liabilities decreased by $23.5 million due to a $33.4 million
reclassification of the equity component of long-term debt to additional paid-in
capital, offset by a net increase in deferred tax liabilities of $9.9 million.
Equity balances were primarily affected by the reclassifications noted above and
lower net income resulting from a decrease of $7.4 million in gains on
repurchase, a cumulative interest expense from 2007 and 2008 of $11.1
million, offset by a $6.8 million reduction in provision for income
taxes.
The
following table summarizes the impact of the adoption of APB 14-1 on the
affected balances within shareholders’ equity (in thousands):
|
Additional
paid-in capital
(1)
|
|
Accumulated
deficit
|
Balance
at December 31, 2007, as reported
|
$
|
236,158
|
|
|
$
|
(
44,893
|
)
|
Adjustments
for adoption of APB 14-1 to 2007
|
|
|
|
|
|
|
|
Equity
component of convertible debt
|
|
63,886
|
|
|
|
--
|
|
Deferred
tax liability related to equity component
|
|
(
23,580
|
)
|
|
|
--
|
|
Debt
issuance costs, net of deferred tax benefit of $784
|
|
(
1,341
|
)
|
|
|
--
|
|
Net
income adjustment
|
|
--
|
|
|
|
(
2,365
|
)
|
Balance
at December 31, 2007, as adjusted
|
$
|
275,123
|
|
|
$
|
(
47,258
|
)
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2008, as reported
|
$
|
252,895
|
|
|
$
|
(
24,307
|
)
|
Cumulative
impact from 2007 adjustments
|
|
38,965
|
|
|
|
(
2,365
|
)
|
Adjustments
for adoption of APB 14-1 to 2008
|
|
|
|
|
|
|
|
Repurchase
of convertible debt attributed to the equity component
|
|
(
10,942
|
)
|
|
|
--
|
|
Repurchase
impact on deferred tax liability related to the
equity component
|
|
7,012
|
|
|
|
--
|
|
Tax
provision related to cancellation of debt
|
|
(
2,173
|
)
|
|
|
--
|
|
Net
income adjustment
|
|
--
|
|
|
|
(
9,364
|
)
|
Balance
at December 31, 2008, as adjusted
|
$
|
285,757
|
|
|
$
|
(
36,036
|
)
|
|
|
|
|
|
|
|
|
(1)
Balances include treasury stock of $133
|
|
|
|
|
|
|
|
The
following table summarizes the carrying value of the debt and equity components
subsequent to the adoption of APB 14-1 (in thousands):
|
|
Three
Months
Ended
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Equity
component
|
|
$
|
33,686
|
|
|
$
|
34,746
|
|
Senior
convertible debt:
|
|
|
|
|
|
|
|
|
Outstanding
|
|
$
|
119,745
|
|
|
$
|
144,745
|
|
Debt
Discount
|
|
|
26,533
|
|
|
|
33,409
|
|
Long
term debt, net
|
|
$
|
93,212
|
|
|
$
|
111,336
|
|
Upon
repurchase or settlement of our Notes, we revalue the liability component,
utilizing an interest rate of comparable nonconvertible debt. We allocate a
portion of the consideration transferred to the liability component equal to the
fair value of that component immediately prior to repurchase. Any difference
between the consideration attributed to the liability component and the sum of
the net carrying amount of the liability component and unamortized debt issuance
costs is recognized as a gain or loss in the statement of income. Any remaining
consideration is allocated to the reacquisition of the equity component and is
recognized as a reduction of stockholders’ equity.
In
the first quarter of 2009, we repurchased $25.0 million in principal amount of
our Notes for $20.5 million. As a result of these repurchases, we recorded a
gain, net of deferred financing costs of $0.5 million and costs to complete the
repurchase transaction, of $1.3 million in other income. We also partially
unwound the associated convertible note hedges, which resulted in proceeds to us
of approximately $1.4 million for the sale of call options, offset by $1.3
million we paid for the repurchase of warrants. The transaction also resulted in
a write off of $0.5 million of debt issuance costs. Following the repurchases,
unamortized debt issuance costs approximated $2.1 million. Interest expense for
the period consisted of $1.3 million related to the amortization of debt
discount and debt issuance costs and $1.3 million related to the contractual
interest coupon. The remaining discount of $26.5 million will be amortized over
5 years.
Additionally,
during the quarter, the carrying value of the equity component was reduced by
$2.9 million, the allocated amount from repurchases of our senior convertible
debt, and $0.2 million from the write-off of the deferred tax asset related to
debt issuance costs, offset by a $2.1 million reduction of the deferred tax
liability related to the debt discount. These were noncash items from the
repurchase transaction.
In the fourth quarter of 2008, we repurchased
$80.3 million in principal amount of our senior convertible notes for $62.4
million. As a result of these repurchases, we recorded a gain, net of deferred
financing costs and costs to complete the repurchase transaction, of $8.2
million in other income, or $15.7 million in other income prior to adoption of
APB 14-1. The payment received from partially unwinding the associated
convertible note hedges resulted in proceeds to us of approximately $6.4
million, offset by $5.9 million we paid for the repurchase of warrants. The
transaction also resulted in a write off of $1.5 million of debt issuance costs,
or $2.2 million prior to adoption of APB 14-1. Following the repurchases, debt
issuance costs approximated $2.7 million, or $3.9 million prior to the adoption
of APB 14-1.
In July
2007, we completed the offering of the Notes, which are due in 2014. The Notes
may be converted, under certain circumstances described below, based on an
initial conversion rate of 26.1792 shares of common stock per $1,000 principal
amount of notes (which is equivalent to an initial conversion price of
approximately $38.20 per share). The net proceeds from the issuance of the
Notes were $217.6 million, after deducting debt issuance costs. The Notes have
no restrictive covenants and the if-converted value is approximately equivalent
to the current principal outstanding.
The net proceeds
from the issuance of the Notes, net of issuance costs, the convertible note
hedge transaction, and the warrant transaction were $208.5 million.
We
pay cash interest on the Notes at an annual rate of 3.75%, payable semi-annually
on January 15 and July 15 of each year, which began on
January 15, 2008.
In
connection with the offering, we used a portion of the offering proceeds to
enter into a convertible note hedge transaction whereby we purchased a call
option for up to 2.5 million shares of our common stock at a price of
$38.1982 per share. These options, which hedge approximately 42% of the risk of
additional share issuance, expire on July 15, 2014 and must be settled in
net shares. The cost of the call option was $28.6 million and has been recorded
as a reduction to stockholders’ equity. The tax benefit from the deduction
related to the purchase of the call option as part of the convertible note hedge
transaction is recorded to additional paid in capital over the term of the hedge
transaction.
Additionally, to partially offset the cost of the
convertible note hedge transaction, we sold warrants to purchase up to
2.5 million shares of our common stock at a price of $46.965 per share. The
warrants expire on various dates from October 15, 2014 through the 60
th
scheduled trading day following October 15, 2014 and must be settled in net
shares. We received approximately $19.5 million in cash proceeds from the sales
of these warrants and they were recorded as an increase to stockholders
equity.
Holders
of our remaining outstanding Notes may convert their Notes based on an initial
conversion rate of 26.1792 shares of our common stock per $1,000 principal
amount of notes, subject to adjustment, at their option at any time prior to
April 15, 2014 under the following circumstances: (1) during any
fiscal quarter beginning after September 30, 2007 (and only during such
fiscal quarter), if the last reported sale price of our common stock for at
least 20 trading days during the 30 consecutive trading days ending on the last
trading day of the immediately preceding fiscal quarter is greater than or equal
to 130% of the applicable conversion price on each applicable trading day of
such preceding fiscal quarter; (2) during the five business day period
after any ten consecutive trading day period in which the trading price per note
for each day of that ten consecutive trading day period was less than 98%
of the product of the last reported sale price of our common stock and the
conversion rate on such day; or (3) upon the occurrence of specified
corporate transactions. On or after April 15, 2014, holders may convert
their Notes at any time prior to the close of business on the third scheduled
trading day immediately preceding the maturity date.
Upon
conversion, we will pay cash and shares of our common stock, if any, based on a
daily conversion rate multiplied by a volume weighted average price of our
common stock during a specified period following the conversion date.
Conversions will be settled in cash up to the principal amount of the Notes,
with any conversion value above the principal amount settled in shares of our
common stock. Holders of the Notes may require us to repurchase the notes for
cash equal to 100% of the principal amount to be repurchased plus accrued and
unpaid interest upon the occurrence of a fundamental change. In addition,
we will adjust the conversion rate for holders who elect to convert notes in
connection with a fundamental change. We may not redeem any of the Notes at our
option prior to maturity.
Hedging
activities
On
January 1, 2009, we adopted Financial Accounting Standards Board (“FASB”)
Statement No.161, “Disclosures about Derivative Instruments and Hedging
Activities”
which
requires enhanced disclosures regarding an entity’s derivative and hedging
activities. As of March 31, 2009, we had $40.7 million in notional amount
of foreign currency forward contracts. The currencies hedged were the British
pound, the European Union euro, the Japanese yen, the Australian dollar and the
Canadian dollar. The fair value of these contracts as of March 31, 2009 was
not material to our results of operations or financial position. These contracts
expire on April 30, 2009 and serve as economic hedges of a substantial
portion of our intercompany balances denominated in a currency other than the
USD. The recognized gains and losses, which are included in other income on the
consolidated statement of income, of foreign currency hedge contracts and the
intercompany receivables are as follows (in thousands):
|
|
Three
Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Foreign
currency hedges
|
|
$
|
2,415
|
|
|
$
|
(2,557
|
)
|
Intercompany
receivables
|
|
|
(2,066
|
)
|
|
|
2,322
|
|
|
|
|
|
|
|
|
|
|
Net
gain (loss) related to hedges
|
|
$
|
349
|
|
|
$
|
(235
|
)
|
Segment
reporting
We
currently have one reportable segment. We market our products in the United
States and internationally through our direct sales force and our indirect
distribution channels. Our chief operating decision maker evaluates resource
allocation decisions and our performance based upon revenue recorded in
geographic regions and does not receive financial information about expense
allocation on a disaggregated basis. Certain amounts reported in previous
periods have been reclassified to conform to current period presentation.
Geographic regions are determined by the shipping destination. Revenue by
geographic location is as follows (in thousands):
|
Three
Months
|
|
|
Ended
March 31,
|
|
|
2009
|
|
|
2008
|
|
United
States
|
|
$
|
23,231
|
|
|
$
|
22,134
|
|
Europe,
Africa and the Middle East
|
|
|
14,263
|
|
|
|
17,481
|
|
Latin
America and Canada
|
|
|
4,769
|
|
|
|
5,877
|
|
Asia
Pacific
|
|
|
9,542
|
|
|
|
7,007
|
|
Total
revenue
|
|
$
|
51,805
|
|
|
$
|
52,499
|
|
On
May 15, 2007, GE Healthcare (“GE”) filed a lawsuit against us in the federal
district court in the Western District of Wisconsin. The lawsuit alleged that
certain of our products willfully infringed certain of GE’s U.S. patents
relating to ultrasound technology. We filed a counterclaim against GE and
certain of its affiliates, and filed an answer denying all of GE’s claims and
alleging that the asserted patents are either invalid, not infringed, or both.
In rulings issued on July 24, 2008, the trial judge granted summary judgment
motions in our favor on five of the six patents that GE had asserted against us.
The court ruled that one of the GE patents is invalid and that our products do
not infringe the other four GE patents. The trial judge also granted summary
judgment in GE’s favor on two of our four asserted patents finding that GE’s
accused products did not infringe our asserted patents. On July 28, the parties
filed a stipulation for dismissal without prejudice for the remaining claims and
counterclaims for the three remaining patents that have yet to be ruled on by
summary judgment in this case, thereby negating the need for a trial. On July
31, 2008, the court granted the parties’ request for dismissal of the remaining
claims and counterclaims that had not been ruled on by the judge. The parties
have appealed certain of the trial court’s summary judgment decisions and other
rulings to the Court of Appeals for the Federal Circuit. We
do not expect an appellate decision until the second half of 2009.
On
May 22, 2008, GE filed a second suit in the same federal court in Wisconsin
seeking to invalidate our U.S. patent 5,722,412. We have counterclaimed that the
new ultrasound systems GE proposes to market and sell infringe this patent. The
trial is scheduled for early June 2009.
We
have not accrued any amounts for potential losses related to these matters.
Because of uncertainties related to the potential outcome and any range of loss
on the pending litigation, management is unable to make a reasonable estimate of
the liability that could result from an unfavorable outcome. As additional
information becomes available, we will assess the potential liability related to
these matters. If and when we determine that a negative outcome of such matters
is probable and reasonably estimable we will record accruals for losses. Our
estimates regarding such losses could differ from actual results. Revisions in
our estimates of the potential liability could materially impact our results of
operations, financial position and cash flow. We expense legal costs as
incurred.
Adjustments
Our
results for the first quarter of 2009 include correction of various prior year
errors deemed immaterial in 2008. These corrections had the effect of decreasing
revenue by $0.1 million and net income by $0.2 million ($0.01 earnings per
diluted share) for the three months ended March 31, 2009. These corrections were
not deemed material to the estimated full year financial results for
2009.
Recent
accounting pronouncements
In
April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and
Presentation of Other-Than-Temporary Impairments” (“FSP 115-2”), which amends
the other-than-temporary impairment guidance for debt securities and changes the
existing impairment model for such securities. It also modifies the presentation
of other-than-temporary losses and increases the frequency of and expands the
required disclosures related to other-than-temporary impairments. FSP 115-2 is
effective for periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. We have elected not to early
adopt and are currently reviewing the provisions of FSP 115-2 to determine the
impact on our future consolidated financial statements.
Item
2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
This
quarterly report on Form 10-Q contains forward-looking statements.
Forward-looking statements provide our current expectations or forecasts of
future events. Forward-looking statements in this report include, without
limitation:
|
•
|
information
concerning possible or assumed future results of operations, trends in
financial results and business plans, including those relating to earnings
growth and revenue growth;
|
|
•
|
statements
about the level of our costs and operating expenses relative to our
revenues, and about the expected composition of our
revenues;
|
|
•
|
statements
about our future capital requirements and the sufficiency of our cash,
cash equivalents, investments and available bank borrowings to meet these
requirements;
|
|
•
|
other
statements about our plans, objectives, expectations and intentions;
and
|
|
•
|
other
statements that are not historical
facts.
|
Words
such as “believe,” “anticipate,” “expect” and “intend” may identify
forward-looking statements, but the absence of these words does not necessarily
mean that a statement is not forward-looking. Forward-looking statements are
subject to known and unknown risks and uncertainties, and are based on
potentially inaccurate assumptions that could cause actual results to differ
materially from those expected or implied by the forward-looking statements. You
should not unduly rely on these forward-looking statements, which speak
only as of the date of this report.
We
undertake no obligation to publicly update any forward-looking statement,
whether as a result of new information, future events or otherwise. You are
advised, however, to consult any further disclosures we make on related subjects
in our future quarterly reports on Form 10-Q, current reports on Form 8-K and
annual reports on Form 10-K. Also note that we provide a cautionary discussion
of risks, uncertainties and possibly inaccurate assumptions relevant to our
business in Item 1A. “Risk Factors” section of our Annual Report on Form 10-K
for the year ended December 31, 2008. These are risks that could cause our
actual results to differ materially from those anticipated in our
forward-looking statements or from our expected or historical results. Other
factors besides the risks, uncertainties and possibly inaccurate assumptions
described in this report could also affect actual results.
Overview
The
following Management’s Discussion and Analysis (“MD&A”) is intended to help
the reader understand the results of operations and financial condition of
SonoSite, Inc. MD&A is provided as a supplement to, and should be read in
conjunction with, our consolidated financial statements and the accompanying
notes to the consolidated financial statements.
Our business strategy is to
lead in the design, development and commercialization of high performance,
innovative ultrasound technology and HCU systems. We intend to sustain long-term
growth of our business through technological innovation, broadening of sales
distribution channels, entry and maintenance of strategic relationships,
expanding into new clinical and geographic markets, and delivering high-quality
products to customers. We are focusing on the development of innovative products
with the objective of improving patient care and efficiency through ease of use,
high performance imaging, and providing quicker results to physicians and
clinicians. We are also investing in research and development in existing and
new lines of business and other areas that we believe may contribute to our
long-term growth. Recognizing that one of our greatest challenges is the current
state of the global economy, we are focused on increasing sales force efficiency
and effective cost management.
Over the last few years, we
have laid a foundation for long-term growth by introducing innovative products,
entering into strategic relationships, expanding into new markets, and providing
high quality products with an industry-leading 5-year warranty. In fiscal year
2009, we plan to continue to build on this foundation and to execute well in key
areas, including continuing to innovate using existing and new technologies, to
build and maintain key relationships in the sales distribution channels, to
improve sales force productivity, to deliver high quality products, and to
manage expenses.
Results
of Operations
Revenue
Revenue
decreased to $51.8 million for the three months ended March 31, 2009 from $52.5
million for the three months ended March 31, 2008. The decrease in 2009 compared
to 2008 was attributable to a slowdown in hospital capital spending and an
unfavorable foreign exchange impact of approximately 8% for the
quarter.
U.S.
revenue increased to $23.2 million for the three months ended March 31, 2009
from $22.1 million for the three months ended March 31, 2008. The increase in
the first quarter 2009 compared to 2008 was primarily attributable to an
increased volume of orders within the enterprise group, partially offset by a
14% decline in direct hospital sales due to reduced hospital capital spending
within the difficult economic environment.
Revenue
from Europe, Africa and the Middle East decreased to $14.3 million for the three
months ended March 31, 2009 from $17.5 million for the three months ended March
31, 2008. The decrease was primarily due to an unfavorable foreign exchange
impact of 19% for the three months ended March 31, 2009. On a constant currency
basis, sales remained relatively consistent.
Revenue
from Latin America and Canada decreased to $4.8 million for the three months
ended March 31, 2009 from $5.9 million for the three months ended March 31,
2008. The decrease was primarily due to decreased sales in Latin America as well
as an unfavorable foreign exchange impact of 9%, partially offset by an increase
in sales in Canada for the three months ended March 31, 2009.
Revenue
from Asia Pacific increased to $9.5 million for the three months ended March 31,
2009 from $7.0 million for the three months ended March 31, 2008. The increase
was primarily due to increased sales in Japan and Asia, partially offset by an
unfavorable foreign exchange of 5% for the quarter.
Fiscal
Year 2009 Outlook
Given
current economic conditions and foreign currency trends, we anticipate that
revenue could potentially be flat to down 10% in 2009 compared to 2008. We
expect to introduce new products and features, to develop the U.S. physicians’
office market, and to expand our international operations. The expansion of our
international markets, as well as the development of the U.S. hospital and
physician office markets, considering current economic conditions, may not be as
successful as anticipated and we may encounter regulatory and other issues
in selling our products. Our revenue has been significantly and may be further
impacted by fluctuations in foreign exchange rates in the countries in which we
sell our products. Increased competition may also impact our anticipated growth
in revenue. We currently face competition from larger companies that manufacture
cart-based and portable ultrasound systems and have greater financial and other
resources.
Gross
margin
Gross margin
was 68% for the three months ended March 31, 2009 and 72% for the three months
ended March 31, 2008. The gross margin decreased over the prior year quarter as
a result of an unfavorable foreign exchange of approximately 2%, a change in
product mix of approximately 1%, and an increase in operating costs of
approximately 1%.
Fiscal
Year 2009 Outlook
Increased
competition from existing and new competitors as well as pricing pressure due to
economic conditions could result in lower average realized prices and could
lower our gross margin. Our gross margin can be expected to fluctuate in future
periods based on the mix of business between direct, government and distributor
sales; mix of U.S. and international sales; and our product and accessories
sales mixes. Changes in our cost of inventory also may impact our gross margin.
Adjustments to reduce carrying costs are recorded for obsolete material, earlier
generation products and used or refurbished products held either as saleable
inventory or as demonstration product. If market conditions change or the
introduction of new products by us impacts the market for our previously
released products, we may be required to further write down the carrying value
of our inventory, resulting in a negative impact on gross margins. We rely on
our sales forecasts by product to determine production volume. To the extent our
sales forecasts or product mix estimates are inaccurate, we may produce excess
inventory or experience inventory shortages, which may result in an increase in
our costs of revenue, a decrease in our gross margin or lost sales. Our gross
margin may also be impacted by fluctuations in foreign exchange
rates.
Operating
expenses
Research
and development expenses were $7.7 million for the three months ended March 31,
2009, compared to $6.2 million for the three months ended March 31, 2008. The
increase compared to the prior year was primarily attributable to increased
headcount and other costs related to development of new features and
products.
Sales,
general and administrative expenses were $25.8 million for the three months
ended March 31, 2009, compared to $29.2 million for the three months ended March
31, 2008. The decrease in the quarter compared to prior year was primarily
attributable to foreign exchange rates and a decrease in sales
costs.
Fiscal
Year 2009 Outlook
We
anticipate that operating expenses will decrease in 2009 compared to 2008
through effective cost management.
Other
loss
Total
other loss was $0.2 million for the three months ended March 31, 2009 compared
to $2.1 million for the three months ended March 31, 2008. The
decrease in loss was primarily attributable to the gain recognized on the
repurchase of our convertible senior notes and lower interest expense as a
result of less outstanding debt compared to the prior year; partially offset by
lower interest income on our investment balances resulting from lower interest
rates. Amounts reported in comparable prior periods have been restated due
to the adoption of Financial Accounting Standards Board Staff Position (FSP) No.
APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in
Cash upon Conversion (Including Partial Cash Settlement)” (“APB 14-1”) on
January 1, 2009
Fiscal
Year 2009 Outlook
We
anticipate that other income will decrease in 2009 as we do not expect to
repurchase the same amount of convertible senior notes and will incur additional
interest expense as a result of the adoption of APB 14-1 and lower interest
rates for interest income.
Income
tax expense
Income
tax provision was $0.5 million for the three months ended March 31, 2009,
compared to $0.2 million for the three months ended March 31, 2008. The decrease
in our consolidated effective tax rate for the three months ended March 31,
2009, as compared to 2008, results primarily from the reinstatement of the U.S.
research and development tax credit in late 2008 and our qualification for the
domestic production activities tax deduction. Amounts reported in comparable
prior periods have been restated due to the adoption of APB
14-1.
Fiscal
Year 2009 Outlook
We
anticipate that our annual consolidated effective tax rate will approximate 39%
for fiscal year 2009.
Warranty
expense
We
expect our warranty liability and expense to continue to increase significantly
due to the five-year warranty offered with the MicroMaxx system, M-Turbo system
and S Series ultrasound tools as our installed base increases. Should actual
failure rates or repair or replacement costs for any of our products differ from
estimates, revisions to the estimated warranty liability may be required and our
results may be materially affected.
Liquidity
and Capital Resources
Our
cash and cash equivalents balance was $198.1 million as of March 31, 2009,
compared to $209.3 million as of December 31, 2008. Cash and cash equivalents
were primarily invested in money market accounts. Our short-term and long-term
investment securities totaled $60.0 million as of March 31, 2009, compared to
$70.5 million as of December 31, 2008. Investment securities generally consist
of high-grade U.S. government or corporate debt. We have the ability to hold our
securities until maturity, however, we classify all securities as
available-for-sale, as the sale of such securities may be required prior to
maturity to implement management strategies.
As
of March 31, 2009, we had $2.0 million in the Columbia Strategic Cash Portfolio,
which is in the process of liquidation. Distributions from this portfolio are
solely at the discretion of the portfolio manager. We have recorded $0.9 million
as a short-term investment and $1.1 million as a long-term
investment.
Operating
activities used cash of $0.9 million for the three months ended March 31, 2009,
compared to cash provided of $7.3 million for the three months ended March 31,
2008. Net income for the three months ended March 31, 2009 was adjusted by
non-cash stock-based compensation expense of $2.5 million, depreciation and
amortization of $1.0 million, amortization of debt discount and debt issuance
costs of $1.3 million, and deferred income taxes of $1.5 million. Operating
assets and liabilities were primarily impacted by the timing of payments and
receipts. For the three month period ended March 31, 2009 operating assets
provided $3.8 million and operating liabilities used $10.6 million. The change
in operating assets is due to accounts receivable collections being less than
sales for the first quarter of 2009, and the change in operating liabilities is
due primarily to the timing of payments of accounts payable and accrued
expenses.
Investing
activities provided cash of $8.9 million for the three months ended March 31,
2009, compared to cash used of $23.6 million for the three months ended March
31, 2008. The cash provided in 2009 was primarily due to net proceeds from the
sale or maturity of investment securities of $10.4 million, offset by purchases
of property and equipment of $1.1 million and payment of $0.4 million of
earn-out consideration associated with the acquisition of SonoMetric Health,
Inc.
Financing
activities used cash of $20.9 million for the three months ended March 31, 2009,
compared to cash provided of $0.7 million for the three months ended March 31,
2008. Cash used in financing activities was due to the repurchase of our
convertible debt and associated warrants for $21.8 million and minimum tax
withholding on stock-based awards of $0.5 million partially offset by the sale
of call options for $1.4 million.
We
believe that our existing cash and cash generated from operations will be
sufficient to fund our operations and anticipated capital expenditures and
repurchases of convertible debt in 2009. Nevertheless, we may experience an
increased need for additional cash due to:
|
•
|
any
significant decline in our revenue or gross margin;
|
|
•
|
any
delay or inability to collect accounts receivable;
|
|
•
|
any
acquisition or strategic investment in another
business;
|
|
•
|
any
significant increase in expenditures as a result of expansion of our sales
and marketing infrastructure, our manufacturing capability or our product
development activities; and
|
|
•
|
any
significant increase in our sales and marketing expenditures as a result
of our introduction of new
products.
|
A
complete listing of our risk factors is
contained in the Item 1A. “Risk Factors” section of our Annual Report on Form
10-K for the year ended December 31,
2008.
The
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with instructions for Form 10-Q and Article 10 of Regulation S-X. The
preparation of these consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenue and expenses, and related disclosure of contingent assets and
liabilities. On an ongoing basis, we evaluate our estimates, including those
related to product returns, bad debts, inventories, investments, warranty
obligations, service contracts, incentive compensation, contingencies and
litigation. We base our estimates on historical experience and on various other
assumptions that we believe are reasonable under the circumstances. The results
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or
conditions.
As
discussed in Item 7, “Management Discussion and Analysis of Financial Condition
and Results of Operations” of our annual report on Form 10-K for the year ended
December 31, 2008, our critical accounting policies and estimates include
revenue recognition, investments, valuation of inventories, warranty expense,
income taxes, stock-based compensation, convertible debt and hedge transaction
and acquisitions.
Long term debt.
On January 1,
2009, we adopted APB 14-1, which clarifies the accounting for convertible debt
instruments that may be settled in cash (including partial cash settlement) upon
conversion. We bifurcated a component of the conversion option and
classified that component in equity. The value of the equity component was
calculated by first measuring the fair value of the liability component, using
the discount rate of a similar liability that does not have a conversion
feature, as of the issuance date. The difference between the proceeds for the
convertible debt and the amount reflected as the liability
component was recorded as the equity component. We recognize the
accretion of the resulting discount as part of interest expense in our
consolidated statement of income.
Upon
settlement of our Notes, we revalue the liability component, utilizing an
interest rate of comparable nonconvertible debt. We allocate a portion of the
consideration transferred to the liability component equal to the fair value of
that component immediately prior to repurchase. Any difference between the
consideration attributed to the liability component and the sum of the net
carrying amount of the liability component and unamortized debt issuance costs
is recognized as a gain or loss in the statement of income. Any remaining
consideration is allocated to the reacquisition of the equity component and is
recognized as a reduction of stockholders’ equity.
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
Interest
rate risk
We
are exposed to market risk relating to changes in interest rates, which could
adversely affect the value of our investments in marketable
securities.
As of March 31, 2009, our investment
portfolio consisted of $58.0 million of interest-bearing debt securities with
maturities of less than one year. Generally we have the ability to hold these
securities until maturity; however, we have classified them as
available-for-sale in the event of unanticipated cash needs. The interest
bearing securities are subject to interest rate risk and will fall in value if
market interest rates increase. We believe that the impact on the fair market
value of our securities and related earnings for 2008 from a hypothetical 10%
increase in market interest rates would not have a material impact on the
investment portfolio.
As of March 31, 2009, we also had $2.0
million in Columbia Strategic Cash Portfolio, which is in the process of
liquidation. Distributions from this portfolio are solely at the discretion of
the portfolio manager. We have recorded $0.9 million as a short-term investment
and $1.1 million as a long-term investment based on the expected liquidation
schedule.
Foreign
currency risk
Except
for sales transacted by our wholly-owned subsidiaries, we transact substantially
all our sales in USDs; therefore, the obligations of many of our international
customers are in USDs. Our exposure to risk from fluctuations in foreign
currencies relates to revenues and expenses transacted by subsidiaries in
foreign currencies. Additionally, we have exposure related to the strengthening
of the USD against the local currency of our international subsidiaries, which
may result in foreign exchange losses on transactions with them, and our
international customers, which may impact our sales to our customers and our
ability to collect amounts owed by them.
Total sales denominated in a currency
other than USD were $19.7 million, or 38% of our total consolidated revenues for
the year ended March 31, 2009. As a result, our results of operations could be
adversely affected by certain movements in exchange rates.
As
of March 31, 2009, 69% of our accounts receivable balance was from international
customers, of which 57%, or $23.3 million, was denominated in a currency other
than USD. Although we regularly review our receivable positions in foreign
countries for any indication that collection may be at risk, our revenue from
international sales may be adversely affected by longer receivables collection
periods and greater difficulty in receivables collection.
The
British pound, the Euro and the Japanese yen represented the majority of
financial transactions executed in a currency not denominated in USDs. We
regularly review our receivable positions in foreign countries for any
indication that collection may be at risk. In addition, we utilize
letters of credit where they are warranted in order to mitigate our collection
risk.
We periodically enter into foreign currency forward contracts to reduce the
impact of adverse fluctuations on earnings associated with foreign currency
exchange rate changes. As of March 31, 2009, we had $40.7 million in notional
amount of foreign currency forward contracts that expire April 30, 2009. They
serve as hedges of a substantial portion of our intercompany balances
denominated in a currency other than the USD. These foreign currencies primarily
include the British pound, the Euro, the Canadian dollar, the Australian dollar
and the Japanese yen. A sensitivity analysis of a change in the fair value of
these contracts indicates that if the USD weakened by 10% against the applicable
foreign currency, the fair value of these contracts would decrease by
approximately $4.1 million. Conversely, if the USD strengthened by 10% against
the applicable foreign currency, the fair value of these contracts would
increase by approximately $4.1 million. Gains and losses in the fair value of
these contracts are intended to offset the losses and gains on the underlying
intercompany balances. These offsetting gains and losses are not reflected in
the sensitivity analysis above. The fair value of these contracts as of March
31, 2009 was not material to our results of operations or our financial
position.
Current
Credit and Financial Markets
The
recent worldwide financial and credit crisis has reduced the availability of
liquidity and credit for our customers to fund the continuation and expansion of
their business operations. The shortage of liquidity and credit
combined with recent substantial losses in worldwide equity markets could lead
to an extended worldwide economic recession. This trend could adversely affect
our customers’ ability to commit to capital spending or to pay and could lead to
pressure to reduce prices for our products and could cause a decrease in the
size of the market and adversely affect our revenue and profitability, which
could harm our business. Our revenues may be impacted by our customers’ ability
to finance the purchase of our systems and cost control efforts implemented by
our customers. We have observed indications of an economic slowdown, which has
impacted U.S. hospital purchase behavior. Based on our analysis, economic
conditions may continue to drive delays in orders. Increased competition may
also impact our anticipated growth in revenue.
Evaluation
of disclosure controls and procedures
As
of March 31, 2009, our chief executive officer and our chief financial officer
have evaluated the effectiveness of our disclosure controls and procedures as
defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934
(the Exchange Act), and they have concluded that our disclosure controls and
procedures were effective to ensure that the information required to be
disclosed by us in reports we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the Securities and Exchange Commission.
Changes
in internal control over financial reporting
We
continue to review, revise and improve the effectiveness of our internal
controls. There have been no changes in the Company’s internal
controls over financial reporting during the first quarter that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART
II: OTHER INFORMATION
On
May 15, 2007, GE Healthcare (“GE”) filed a lawsuit against us in the federal
district court in the Western District of Wisconsin. The lawsuit alleged that
certain of our products willfully infringed certain of GE’s U.S. patents
relating to ultrasound technology. We filed a counterclaim against GE and
certain of its affiliates, and filed an answer denying all of GE’s claims and
alleging that the asserted patents are either invalid, not infringed, or both.
In rulings issued on July 24, 2008, the trial judge granted summary judgment
motions in our favor on five of the six patents that GE had asserted against us.
The court ruled that one of the GE patents is invalid and that our products do
not infringe the other four GE patents. The trial judge also granted summary
judgment in GE’s favor on two of our four asserted patents finding that GE’s
accused products did not infringe our asserted patents. On July 28, the parties
filed a stipulation for dismissal without prejudice for the remaining claims and
counterclaims for the three remaining patents that have yet to be ruled on by
summary judgment in this case, thereby negating the need for a trial. On July
31, 2008, the court granted the parties’ request for dismissal of the remaining
claims and counterclaims that had not been ruled on by the judge. The
parties have appealed certain of the trial court’s summary judgment
decisions and other rulings to the Court of Appeals for the
Federal Circuit. We do not expect an appellate decision until the
second half of 2009.
On
May 22, 2008, GE filed a second suit in the same federal court in Wisconsin
seeking to invalidate our U.S. patent 5,722,412. We have counterclaimed that the
new ultrasound systems GE proposes to market and sell infringe this patent. The
trial is scheduled for early June 2009.
On
April 21, 2009, we held our annual meeting of shareholders. As of the record
date, February 27, 2009, there were 17,069,727 shares of common stock
outstanding and entitled to vote at the meeting. At the meeting, 15,949,339
shares were represented, either in person or by proxy. The following proposals
were adopted by the margins indicated:
1. To
elect nine directors to our board of directors to serve until the 2010 annual
meeting of shareholders.
|
Number
of Shares
|
|
For
|
|
Withheld
|
Kirby Cramer
|
9,607,368
|
|
6,341,971
|
Carmen Diersen
|
14,395,856
|
|
1,553,483
|
Steven Goldstein
|
14,200,844
|
|
1,748,495
|
Kevin Goodwin
|
10,446,146
|
|
5,503,193
|
Paul
Haack
|
15,511,515
|
|
437,824
|
Robert
Hauser
|
9,407,680
|
|
6,541,659
|
Richard
Martin
|
15,776,357
|
|
172,982
|
William
Parzybok, Jr.
|
14,357,032
|
|
1,592,307
|
Jacques
Souquet
|
15,024,599
|
|
924,740
|
2. To
ratify the appointment of KPMG LLP as our independent registered public
accounting firm for the year ending December 31, 2009.
For
|
|
Against
|
|
Abstain
|
15,286,873
|
|
597,993
|
|
56,077
|
Item
6. Exhibits
Exhibit
|
|
|
No.
|
|
Description
|
|
|
|
|
10.1
|
|
SonoSite,
Inc. FY2009 Variable Incentive Bonus Plan
|
|
31.1
|
|
Certification
of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
31.2
|
|
Certification
of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
32.1
|
|
Certification
of Principal Executive Officer pursuant to 18 U.S.C. Section 1350
Section 906 of the Sarbanes-Oxley Act of 2002)
|
|
32.2
|
|
Certification
of Principal Financial Officer pursuant to 18 U.S.C. Section 1350
Section 906 of the Sarbanes-Oxley Act of
2002)
|
Pursuant
to the requirements of Section 13 or 15 d) of the Securities Exchange Act
of 1934, the Company has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
|
SONOSITE,
INC.
(Registrant)
|
Dated:
|
May
1, 2009
|
By:
|
/s/ MICHAEL
J. SCHUH
|
|
|
|
|
|
|
|
Michael
J. Schuh
|
|
|
|
Vice
President, Chief Financial Officer and Treasurer
|
|
|
|
Authorized
Officer and Principal Financial
Officer)
|
INDEX
TO EXHIBITS
Exhibit
|
|
|
No.
|
|
Description
|
|
|
|
|
10.1
|
|
SonoSite,
Inc. FY2009 Variable Incentive Bonus Plan
|
|
31.1
|
|
Certification
of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
31.2
|
|
Certification
of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
32.1
|
|
Certification
of Principal Executive Officer pursuant to 18 U.S.C. Section 1350
Section 906 of the Sarbanes-Oxley Act of 2002)
|
|
32.2
|
|
Certification
of Principal Financial Officer pursuant to 18 U.S.C. Section 1350
Section 906 of the Sarbanes-Oxley Act of
2002)
|
26