MTS Medication Technologies, Inc. Announces Third Quarter and Nine-Month Financial Results

Business Wire, Feb 17, 2009

Revenue And EPS Increase in the Third Quarter

ST. PETERSBURG, Fla. -- MTS Medication Technologies, Inc. (NasdaqCM:MTSI), an international provider of medication adherence packaging systems, today announced its financial results for its third quarter and nine months ended December 31, 2008.

Third Quarter

Net sales for the third quarter increased 30.7% to $19.2 million from $14.7 million in the prior year's third quarter. Net income was $687,000, or $0.10 per diluted common share, compared with $611,000, or $0.09 per diluted common share, in the prior year's third quarter. Net sales associated with consumables in the U.S. long-term care market increased approximately 7%. Net sales through European operations decreased approximately 8% when expressed in U.S. dollars, but increased approximately 16% when expressed in the functional currency in which the sales are made.

Gross margin for the third quarter was 32.2% compared with 38.3% in the prior year's third quarter. The decrease in gross profit margin percentage was due primarily to the difference in gross margins between OnDemand[R] machines and that of consumables and pre-pack machines and also lower gross margins on European sales due to fluctuations in currency rates.

Approximately $3.6 million of revenue was recorded during this quarter as a result of acceptance of 5 OnDemand machines related to an agreement with Omnicare. The gross margin realized on these machines is significantly lower than that of consumables and pre-pack machines, and therefore, accounts for a significant portion of the decline in total gross margins. In addition, the strengthening of the U.S. dollar has resulted in lower gross margins in Europe because a large percentage of revenue in Europe is derived from sales of consumables manufactured and paid for in U.S. dollars.

SG&A expenses for the third quarter were $4.5 million, or 23.6% of revenue, compared with $3.7 million, or 25.4% of revenue, in the prior year's third quarter. The increase in SG&A expenses was primarily due to increased costs associated with service and support of OnDemand machines, costs associated with European operations and increased research and development expenses.

Operating profit for the third quarter was $970,000, or 5.0% of net sales, compared with $1.2 million, or 8.1% of net sales, in the prior year's third quarter. Lower operating margins result primarily from higher SG&A costs and depreciation expense, as well as lower gross margins.

The effective income tax rate for the third quarter was 19.9% compared with 39.1% in the prior year third quarter. The decrease results primarily from adjustments made to the estimated liability for uncertain tax positions in both periods. In addition, the income tax expense has been reduced to account for certain federal income tax credits for manufacturing expenditures that are being made this fiscal year.

Segment Reporting

Consumables

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Net sales for consumables in the third quarter increased $473,000, or 3.6%, primarily due to sales in the U.S. long-term care market. The growth in the U.S. is primarily attributable to new sales to pharmacies servicing nursing homes and assisted living facilities, as well as an increase in the number of long-term care customers served. The European growth is primarily the result of increased penetration of both community and nursing home markets, although currency fluctuations have significantly impacted net sales growth in Europe when net sales are translated to U.S. dollars.

Operating margins declined in the third quarter primarily due to: (a) increases in raw material costs compared to the previous year; (b) additional costs added and allocated to this segment based on revenue; (c) higher depreciation expense related to new assets acquired in this segment; and (d) foreign currency fluctuations.

Packaging Automation

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Net sales for packaging automation in the third quarter increased $3.9 million, or 237.8%, primarily as a result of the acceptance of OnDemand machines under an agreement with Omnicare. During the third quarter, MTS recorded $3.6 million of revenue associated with 5 machines that were accepted by Omnicare.

Operating margin during the third quarter improved over the prior year as a result of the realization of additional gross profit on increased net sales, which offset a portion of the indirect costs attributed to this segment.

Medication Administration Systems

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Net sales for medication administration systems in the third quarter consisted of MedLocker[R] installations.

Operating loss this quarter increased over the prior year because of increased R&D expenditures and new personnel added to support MedTimes product and market development.

Nine Months

Net sales for the nine months increased 35.8% to $59.3 million from $43.7 million in the prior year period. Net income was $1,616,000 or $0.24 per diluted common share, compared with $1,919,000, or $0.28 per diluted common share, in the prior year. Net sales associated with consumables in the U.S. long-term care market increased approximately 7%. Net sales through European operations increased approximately 10%. However, net sales in Europe increased approximately 22% when expressed in the functional currency in which the sales are made.