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|Subject: Hologix-HOLX||Date: 3/14/2004 11:54 PM|
|Author: kitkatklub||Number: 623 of 1264|
Hospitals plan to boost capital spending by 14% annually over the next 5 years, a new survey shows, a move that could squeeze many hospital systems' already thin profits.
This is from the Wall Street Journal the first week of March 2004. Hospitals are facing tough choices and are pressured to begin buying new technologies such as computerized physician order -entry systems and digital radiology systems. 71% respondents indicayed radiology updates were at the head of the list. After years of neglect, with capital spending increaasing just 1% between 1997 and 2001, hospitals may be forced against their will to go on a buying spree over the next several years. It may be a bad time to buy hospitals , but a good time to explore the industries at the forefront of the new hospital based technologies.
The benefits of digital radiography technology stem from fast and efficient production of diagnostic quality images.Digital radiography systems incorporating direct-to-digital technology offers improved patient care, increased staff and equipment productivity, and the potential to attract a greater number of referral patients and physicians. In spite of their high acquisition cost, digital radiography systems can be cost effective in the long-term when considering increased throughput, savings in film-related expenses, image storage and transfer costs as well as the benefits of enhanced diagnostic convenience.
A significant factor in the medical market's acceptance of digital technology is the current transition within the healthcare industry from conventional x-ray film archiving to Picture, Archive and Communication Systems, or PACS, to store x-ray images electronically. Although only a limited number of hospitals have adopted the PACS environment to date, this adoption rate will most likely accelerate over the next several years as hospitals realize the value and cost savings of a filmless infrastructure. While not all facilities in which x-ray units are installed will migrate to digital technology, most large facilities will, particularly those in the U.S. where PACS is an important initiative.
A leading industry analysis firm, estimates that there are approximately 300,000 general radiographic x-ray units installed worldwide with a replacement rate of approximately 11,000 systems per year. By 2007, this firm projects that the market for digital general radiography systems will exceed $1.0 billion annually.
Products and acquisitions
Hologic is a manufacturer and supplier of diagnostic and medical imaging systems primarily serving the healthcare needs of women. Core women's healthcare business units are focused on bone densitometry, mammography and direct-to-digital radiography. In addition, they develop, manufacture and supply other X-ray-based imaging systems, such as general-purpose direct-to-digital radiography equipment and mini C-arm imaging products.
They have begun to sell, distribute and service complementary products that were developed and manufactured by other original equipment manufacturers. Recent examples of these products include jointly labeled breast imaging ultrasound system with Aloka Company, Ltd.,computer aided detection software for breast cancer detection with R2 Technology and breast biopsy system with Suros Surgical Systems. Customers include hospitals, imaging clinics and private practices and include many of the leading healthcare organizations in the world.
In 1996 they acquired Fluoroscan Imaging Systems, a low intensity, real-time mini C-arm X-ray imaging devices that address the trend towards minimally invasive surgery. In June 1999, they acquired Direct Radiography Corp from Sterling Diagnostics and have continued to invest in the development of their direct-to-digital X-ray technology, DirectRay, targeting mammography as well as general radiography applications. They expedited entry into the mammography market by acquiring the U.S. assets of Trex Medical Corporation, which included the Lorad product line of mammography and minimally invasive breast biopsy systems used to detect breast cancer.
Why they suffered earnings losses
As a result of these acquisitions and a commitment to develop digital radiography, particularly for mammography systems,they generated losses in fiscal 1999, 2000 and 2001. In August 2001, they implemented an extensive restructuring plan focused on returning to profitability in the women's health and emerging digital imaging markets. This restructuring plan included a company-wide cost savings initiative, which resulted in annual cost savings in excess of $11 million. In January 2002, they closed a conventional X-ray equipment manufacturing facility located in Littleton, Massachusetts, which was acquired through our acquisition of the U.S. assets of Trex Medical. This business incurred significant losses during fiscal 2001.
They returned to profitability in the second quarter of fiscal 2002.
The business operates in five principal operating segments: osteoporosis assessment products, mammography products, direct-to-digital imaging products, mini C-arm imaging products and conventional general radiography products.
Marketing and sales
In the United States, they sell and service products through a combination of a direct sales and service force and a network of independent distributors. In early fiscal 2002, they centralized management of these sales channels for all product lines. PSS World Medical, Inc. and its affiliates, the largest distributor network in the United States, accounted for approximately 24% of product sales for fiscal 2002 and 21% of product sales in fiscal 2001. In fiscal 2002 they assumed full sales and service responsibility in these geographic locations on a direct basis. For 2003, PSS accounted for 12% of our product sales. As of November 30, 2003 the direct sales and service force comprised of over 68 people in sales, and 123 field service engineers, plus internal technical support and associated administrative functions.
United States marketing efforts also include the use of two national account managers which are focused on obtaining purchasing contracts from large purchasing entities, such as managed care organizations and government healthcare facilities. The rise of these large purchasing organizations has significantly altered the organization.
The list of competitors for rradiology systems is fairly short, but intimidating. Hologics has a tough road ahead making a dent in the sales of these huge companies. The big three are General Electric, Phillips and Siemans.
Interestingly, the much maligned Kodak has a presence in this area.
The primary competitor for osteoporosis assessment products is General
Electric Medical Systems (GE).Direct-to-digital imaging products compete
with traditional X-ray systems as well as indirect conversion systems, such as
computed radiography systems, which are less expensive, and other direct-to-digital systems. The larger competitors in these markets include GE, Siemens, Kodak, Canon, Philips, SwissRay, Fischer Imaging and Varian. Mammography systems compete with products offered by a number of competitors, including GE, Siemens, PlanMed, Instrumentarium, Fischer Imaging and Agfa. Kodak's digital general radiography x-ray system currently incorporates Hologic's DirectRay detector.
An increasing backlog is encouraging. This is product that has been ordered.
Backlog as of November 30, 2003 totaled $49.5 million and as of November 30, 2002 totaled $40.9 million. Backlog consists of purchase orders for which a delivery schedule within the next twelve months has been specified by the customer. Orders included in backlog may be canceled or rescheduled by customers without significant penalty.
Allowance for Doubtful Accounts
Allowance for doubtful accounts was $3.5 million, $4.7 million and $4.9 million in fiscal 2003, 2002 and 2001, respectively. The decrease in
the reserve in fiscal 2003 was primarily attributable to write off of
reserves and accounts receivable related to financed sales in Latin America.
There are several items of interest here. They recognize revenue upon shipment of approriately ordered equipment.
Revenue is recognized upon shipment, provided that there is persuasive evidence of an arrangement, there are no uncertainties regarding acceptance, the sales price is fixed or determinable and collection of the resulting receivable is probable.
If they are required to install and service sold units, the revenue is correctly rrecognized after installation.They also recognize the costs of warranties.
Product revenue is recognized upon the completion of installation for shipments that require more than perfunctory obligations at the time of shipment, specifically for digital imaging systems. A provision is made at that time for estimated warranty costs to be incurred.
Products sold are generally covered by a warranty for a period of one year. They accrue a warranty reserve at the time of revenue recognition for estimated costs to provide warranty services.Warranty accrual was approximately $4.5 million, $4.8 million and $6.2 million in fiscal
2003, 2002 and 2001, respectively. The decrease in this accrual over the past
three fiscal years is directly attributable to a decision to eliminate the
unprofitable conventional general radiography product lines which had warranty
periods of up to five years. This was a part of restructuring: closing out the general radiology lines. It also benefited them by decreasing the warranty from 5 years to one year.
income statement (In thousands, except per share data)
*a $0.01 loss resulted from change in accounting principle
Ratios for the income statement
**Terrible margins due to operating losses are improving.
**Growth in revenue
**Growth in net income
**Total revenues increased 7% to $204.0 million in fiscal 2003 from $190.2 million in fiscal 2002. This increase was primarily due to increased
mammography and osteoporosis assessment product sales and, to a lesser extent, increased service revenues. Partially offsetting these increases was a decrease in conventional general radiography product revenues due to
a phase-out of this unprofitable product line during fiscal 2002, and
slightly lower mini C-arm sales.
**Product sales increased 8% to $156.7 million in fiscal 2003 from
$144.7 million in fiscal 2002. Product sales in the mammography business
increased approximately 16% to $68.7 million in fiscal 2003 from $59.1 million
in fiscal 2002.
**Osteoporosis assessment product sales increased 14% to $51.9 million in fiscal 2003 from $45.5 million in fiscal 2002. This increase was primarily due to an increase in the number of systems sold internationally.
**Digital imaging product sales increased 6% to $21.7 million in fiscal 2003 from $20.5 million in fiscal 2002. This increase was primarily due to an increase in the average selling prices of digital plates sold resulting in higher revenues on fewer plates sold and an increase in the number of general radiography digital systems.
**Mini c-arm product sales decreased 3% to $14.3 million in fiscal 2003 from
$14.8 million in fiscal 2002. This decrease was primarily due to lower average
selling prices in the United States and a decrease in the number of systems
**Conventional general radiography product sales decreased to $46,000 in fiscal 2003 from $4.8 million in fiscal 2002. This decreases was due to a decision to phase-out unprofitable conventional general radiography product lines, which was completed in fiscal 2002.
**In fiscal 2003, approximately 68% of product sales were generated in the United States, 17% in Europe and 15% in other international markets. In fiscal 2002, approximately 80% of product sales were generated in the United States, 9% in Europe and 11% in other international markets.
**Service and other revenue increased to $47.3 million in fiscal 2003 from $45.5 million in fiscal 2002. This increase was primarily due to increased service revenues primarily in mammography business as a
result from assuming service responsibilities previously performed by a former distributor and increased service contract revenues in osteoporosis assessment and digital imaging businesses.
**The cost of product sales decreased as a percentage of product sales to 55% in fiscal 2003 from 58% in fiscal 2002. These costs decreased as a percentage of product sales primarily due to improved gross margins recognized on the mammography and osteoporosis assessment products as a result of the increase in revenues, as well as lower manufacturing costs on the mini c-arm products and the elimination of unprofitable conventional general radiography product lines in the third quarter of fiscal 2002.
**Research and development expenses decreased 10% to $18.4 million, 9% of total revenues, in fiscal 2003 from $20.4 million, 11% of total revenues, in fiscal 2002. The decrease was primarily due to a decrease in research and development spending and personnel primarily related to reduced spending on digital detectors at DRC, phase-out of the conventional general radiography product line in fiscal 2002 and reduced spending related to the mammography
business. These decreases were partially offset by increased spending related to general radiography digital imaging systems. Approximately $8.2 million and $8.7 million of the total of these expenses related to the development of digital mammography and digital general radiography systems and detectors at DRC in fiscal 2003 and 2002, respectively.
**Restructuring costs in the first and second quarters of fiscal 2002 were primarily the result of continuing efforts to streamline operations and eliminate unprofitable product lines. In the second quarter of fiscal 2002 severance costs of approximately $495,000 in connection with the reduction of workforce in the United States and Europe by 13 persons across all functional areas. In the first quarter of fiscal 2002,a restructuring charge of approximately $806,000 was incurred primarily comprised of severance costs related to the termination of 85 employees at the Littleton facility. In addition,they incurred severance cost of approximately $561,000 and $208,000 in connection with the closure of our direct sales and service office in Paris, France and the continued reduction of Lorad's workforce, respectively.
**In fiscal 2003 and 2002, we incurred interest and other expense of approximately $445,000 and $3.0 million, respectively. In fiscal
2003, these expenses were primarily due to the interest costs on the Wells
Fargo Foothill, Inc. note payable. In fiscal 2002, these expenses included
interest costs of approximately $700,000 per quarter on the $25 million note
payable issued in connection with the Trex Medical acquisition. In September 2002, they paid off the note payable to Trex Medical with the proceeds from the sale/leaseback transaction of two facilities.
Cash flow statement in thousands
Ratios for the cash flow statement
**Free cash flow is negative
**On September 15, 2000 Hologic acquired the U.S.business assets of Trex Medical in exchange for $30M cash and a note in the amount of $25M. The note had a term of three years, bore interest at a rate of 11.5% per annum and was repaid in full in September 2002 with the proceeds from the Company's sale/leaseback transaction
**Cash provided by operating activities was $4.7 million which included net
income of $2.9 million for fiscal 2003 increased by non-cash charges for
depreciation and amortization of an aggregate of $7.4 million.
**Cash used in operations due to changes in current assets and liabilities included an increase in inventory of $5.1 million, an increase in accounts receivable of $4.1 million and a decrease in accrued expenses of $1.7 million.
**These uses of cash were partially offset by a decrease in prepaid expenses and other current assets of $5.3 million.
**The increase in inventory was primarily due to the build up of digital mammography systems.
**The increase in accounts receivable was primarily due to the increased European revenue in the last six months of fiscal 2003 compared to the same period of fiscal 2002. The European sales generally have longer payment terms than domestic sales.
**The decrease in accrued expenses was primarily due to the timing of payments. The decrease in prepaid expenses was primarily due to the receipt of income tax refunds.
**In fiscal 2003,they used approximately $7.9 million of cash in investing
activities. This use of cash was primarily attributable to purchases of
property and equipment of $8.1 million, which consisted primarily of corporate
wide computer information software and hardware systems and other equipment and building improvements.
**In fiscal 2003, financing activities provided $2.3 million of cash. These cash flows included approximately $3.1 million from the exercise of stock
options partially offset by $718,000 of repayments of term loan with Wells
Fargo Foothill, Inc.
Balance sheet in thousands
Ratios for the balance sheet
**AR growing slightly faaster than revenue--blamed on slow collections in Europe
**CCC high--payables not extended
**Inventory turns reasonable for high cost capital goods--might expect to see improvement if capex spending in creases in health care sector
**Increasing cash per share
**Terrible returns on equity, assets and capital--operating losses are responsible
**September 27, 2003 they had approximately $103.9 million of working capital.
Cash and cash equivalents balance decreased slightly during fiscal 2003 primarily due to the use of cash for purchases of property and equipment substantially offset by cash provided by operating and financing activities.
**September 27, 2003 short term borrowings, including the current portion of long term obligations, of $480,000 and long term notes payable totaled $1.6 million.
**The short term borrowings represent the current portion of long term notes payable.
**The long term notes payable consisted primarily of the $944,000 borrowed from Wells Fargo Foothill, Inc. as the long term portion of a term loan under the credit facility, and the $604,000 balance due on the note to Fleet in connection with the settlement of the Fleet litigation.
**Through September 27, 2003 payments totaling $3.4 million for hardware, software and consulting services represented substantially all of the capital commitments related to updating software. Most of the cost has been capitalized and amortized over their expected useful lives in December 2002.
**In September 2002, HOLX completed a sale/leaseback transaction for for headquarters and manufacturing facilities located in Bedford, Massachusetts and LORAD manufacturing facility in Danbury, Connecticut. The transaction
resulted in net proceeds to us of $31.4 million. The new lease for these
facilities, including the associated land, has a term of 20 years, with four
five-year year renewal terms. The basic rent for the facilities is $3.2 million per year
**Reported operating income for the osteoporosis assessment business segment was $10.2 million for fiscal 2003 compared to $6.5 million in fiscal 2002. The improvement in operating income for this business segment for fiscal 2003 was primarily due to an increase in service and other revenue gross profits as a result of higher service revenues together with lower costs and to a lesser extent, improved gross profits from an increase in product sales.
**Reported operating income for the mammography segment was $4.3 million in fiscal 2003 and was $4.2 million in fiscal 2002. Improvements in operating income in the current year were primarily due to increased product revenues and improved product gross margin. These improvements were offset by additional personnel and other costs in the field service and sales areas to
expand United States service capabilities for digital mammography products and to assume direct coverage of territories previously assigned to distributors.
**The digital imaging business operating loss increased 42% to $14.6 million in fiscal 2003 from $10.3 million for fiscal 2002. This increase was primarily due to a reduction in both gross profit and gross margins related to an increase in manufacturing costs of the digital detectors due to vendor quality problems, increased personnel and other costs in cost of service and selling expenses to provide direct service and sales coverage for digital radiography products, increased tradeshow expenses and an increase in general and administrative expenses.
**At the beginning of fiscal 2004 they started to move away from selling their own general digital X-ray systems in competition with their OEM partners in general digital radiography, and to focus on selling DirectRay detectors to OEM's for incorporation in their own line of digital radiography systems. In 2003 Hologic offered DirectRay digital detectors in Hologic designed,
manufactured installed and serviced systems and to Original Equipment
Manufacturers (OEMs), to incorporate into their own equipment. Partner OEMs
include Analogic Corporation, a supplier to Eastman Kodak, Tromp Medical,
Sedecal, E-com, GM, Neusoft, FirstTech, and Dong Kang for digital radiography
systems, and Agfa and Siemens for digital mammography systems. Kodak's digital general radiography x-ray system currently incorporates DirectRay detector.
**The mini C-arm business segment reported operating income of $2.2 million for fiscal 2003 compared to operating income of $3.5 million for fiscal 2002. This decrease was primarily attributable to higher field service personnel costs.
** As previously discussed,they closed the manufacturing facility of the Hologic Systems Division and relocated certain of its product lines and sales and service support personnel to our corporate headquarters. Revenue in this business segment in the current fiscal year is primarily from ongoing service business. This business segment reported operating income of $884,000 for fiscal 2003 compared to an operating loss of $1.7 million for the same period last year. These improvements are primarily due to phasing-out the unprofitable product sales and related operating expenses from this business during fiscal 2002.
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Dilution 16% very high although few have been exercised in 2002.
Market Cap (intraday): 412.38M
Trailing P/E (ttm, intraday): 83.39
Forward P/E (fye 27-Sep-05): 24.32 More reasonable future PE
Price/Sales (ttm): 1.99 Fairly low
Price/Book (mrq): 2.68
Profit Margin (ttm): 2.44% improved over 2003 results by a factor of 2
Return on Assets (ttm): 2.68% low
Return on Equity (ttm): 3.40% low
Revenue (ttm): 204.92M
Revenue Per Share (ttm): 10.05
Diluted EPS (ttm): 0.245
Earnings Growth (lfy)?: 1510.10% increased
Total Cash (mrq): 45.02M
Total Cash Per Share (mrq): 2.23
Total Debt (mrq): 1.85M low deb
% Held by Insiders: 1.91% low
A discounted cashflow is difficult to do for Holgix since they do not have a positive free cash flow.
Change in noncashWC=$6M
Debt repaid $718,000
No new debt
free cash flow to equity= -$1.11M
In these cases it is possible to set up a scenario where you predict when a company will start becoming cash flow positive and predict how much it is worth based on the projections. It is a little speculative and I don't feel adds to the exercise of valuing the company.If you want to buy them for their current cash flow, then you must pass. They are not at that point in their turnaround where they are making a sufficient amount to generate large amounts of cash.
On the other hand, they are in a field that has a huge growth potential over the next 5 years.
Unfortunately they have a lot of competition from some very big players-GE,Siemans and Phillips.
They do not have big contracts that are reported by the company at this point.
They are a pure play in the specialty of digital radiology. If you take on GE or Phillips for the potential pop from hospital capex spending, you buy all their other divisions.
Hologix has seen the future in digital radiology and took a severe blow to profitability and executued a cosstly restructuring program that hurt earnings in 2000,2001 and 2002. Since earnings are improving dramatically in 2003 and 2004, it would seem the restructuring is paying off.
They have too many options outstanding.
The current price has seemingly priced in expectations of growth or at least has completely rewarded hologix for the success of its restructuring. The PE is outrageous. However, looking forward, it drops to 24 which is more reasonable. the P?S and P?B are more reasonable. However, the volatility and risk coupled with low earnings make to these two ratios understandably low. They should be low with these risk factors.
I would not characterize Hologix as a value play. It is highly speculative and success depends entirely on its ability to land lucrative contracts and compete head to head with some highly regarded profitable companies.
Here is how they characterize there current position and future prospects:
Notwithstanding this shift in focus, we cannot assure that the operating
results of our digital imaging segment will improve. The markets for our direct radiography products are in the early stage of development. In 1998, our subsidiary, Direct Radiography Corp., was the first company to introduce direct-to-digital X-ray imaging products in the United States. The markets for these products are relatively new. There is a significant installed base of conventional X-ray imaging products in hospitals and radiological practices. The use of our direct-to-digital X-ray imaging products, including digital mammography products, in many cases would require these potential customers to either modify or replace their existing X-ray imaging equipment. Moreover, we believe that a major factor in the market's acceptance of direct-to-digital X-ray technology is the trend toward transition by the healthcare industry from conventional film archiving systems to hospital Picture, Archive and Communication Systems, known as PACS, to store X-ray images electronically. Because the benefits of our direct-to-digital technology may not be fully realized by customers until they install a PACS platform, a large potential market for these products may not develop until PACS environments are more widely used. Because of the early stage of the markets for these products, it is likely that our evaluation of the potential markets for these products will materially vary with time. We cannot assure that the markets for our direct radiography products will continue to develop.
For all the risk involved and the volatility in the stock, it would be preferrable to catch them at a price some what lower than the 52 week high. They are a good, well-run company, that understands where radiology is heading and is making the right moves to capture some of this potentially huge market.
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