Theragenics Corp. (TGX) filed Quarterly Report for the period ended 2009-06-30.
Theragenics Corporation a medical isotope and cancer treatment producer is a leader in the production and sales of implantable radiation devices used in the treatment of cancer. The company produces and sells TheraSeed based on the radioactive isotope palladium 103. TheraSeed is used primarily in the treatment of early stage prostate cancer. In the treatment TheraSeeds are implanted into the prostate in a one-time minimally invasive procedure. Theragenics Corp. has a market cap of $47.5 million; its shares were traded at around $1.42 with a P/E ratio of 14.2 and P/S ratio of 0.7.
Highlight of Business Operations:
In May 2009, we executed an Amended and Restated Credit Agreement (the “Credit Agreement”) with a financial institution. The Credit Agreement provides for up to $30 million of borrowings under a revolving credit facility (the “Revolver”) and a $10 million term loan (the “Term Loan”). The Revolver matures on October 31, 2012 with interest payable at the London Interbank Offered Rate (“LIBOR”) plus 2.25%. Maximum borrowings under the Revolver can be increased to $40 million with the prior approval of the financial institution under an accordion feature. The Term Loan is payable in equal monthly installments over 36 months commencing July 1, 2009 (totaling $3.3 million annually) plus interest at LIBOR plus 1.75%. We also entered into interest rate swap agreements to hedge our interest rate risk. We entered into a floating to fixed rate swap with respect to the outstanding principal amount of the Term Loan, at a fixed interest rate of 3.27%, and a separate floating to fixed rate swap with respect to $6 million of the principal amount outstanding under the Revolver, at a fixed interest rate of 4.26%. This new Credit Agreement replaces the credit agreement that would have matured in October 2009. See “Credit Agreement” under “Liquidity and Capital Resources” below for additional information.
We acquired all of the outstanding common stock of NeedleTech on July 28, 2008. The total purchase price, including transaction costs, was approximately $44.1 million (net of cash, cash equivalents, and marketable securities acquired of approximately $5.8 million). We paid the purchase price in cash, including $24.5 million from borrowings under our credit facility.
Operating income in our surgical products segment decreased $157,000 or 16% in the second quarter of 2009 and decreased $652,000 or 43% in the first half of 2009 from the comparable 2008 periods as a result of a number of factors. First, our investments in research and development (“R&D”) increased $448,000 in the second quarter of 2009 and $931,000 for the first half of 2009 over the comparable 2008 periods. We launched a new R&D program in our surgical products business in the second half of 2008. This R&D program is intended to focus on product extensions, next generation products, and new products that are complementary to our current product lines. Our R&D program is intended to focus on 510(k) products, and not on products that require lengthy and expensive clinical trials. We expect introduction of our first new products from this R&D effort in late 2009 or early 2010. Second, corporate costs allocated to our surgical products business increased by $300,000 in the second quarter of 2009 and $900,000 in the first half of 2009, as compared to the 2008 periods. Our corporate costs are allocated based on the relative revenue of each of our two business segments. Revenue in our surgical products business significantly increased as a percent of consolidated revenue after the acquisition of NeedleTech in July 2008. We expect allocation of corporate costs will begin to become more comparable in the third quarter of 2009, as NeedleTech results were included in the third quarter of 2008. Third, we recorded amortization expense related to our tradenames intangible assets totaling $81,000 in the second quarter of 2009 and $162,000 in the first half of 2009. We did not record any amortization in the comparable 2008 periods. Amortization of our tradenames intangible assets resulted from our reassessment of their useful lives during impairment testing at December 31, 2008. Total amortization expense from tradename amortization is expected to be $324,000 for the full year in 2009. We also incurred expenses in 2009 related to our program to standardize the information technology (“IT”) systems across all of our businesses and locations. We expect to continue to invest in infrastructure and R&D during 2009 as investments are made to support anticipated future growth and to develop products to address growth opportunities in our surgical products business. Looking forward, our quarterly results are expected to be affected by the timing of these investments.
Operating income in our brachytherapy business decreased $292,000 or 18% in the second quarter of 2009 and $838,000 or 25% in the first half of 2009 compared to the 2008 periods. The decline in operating income is primarily a result of lower revenues. Manufacturing related expenses in our brachytherapy business tend to be relatively fixed in nature. Accordingly, even modest declines in revenue have a negative impact on operating income. Gross margins and operating income in our brachytherapy seed business are expected to continue to be highly dependent on sales levels due to this high fixed cost component. Operating income in our brachytherapy business benefited from a reduction in the allocation of corporate costs in the 2009 periods. We now allocate corporate costs based on the relative revenue of each of our two business segments. Because our brachytherapy revenue comprised less of our consolidated revenue in 2009, mainly due to the inclusion of NeedleTech results, corporate costs allocated to our brachytherapy business declined $225,000 in the second quarter and $376,000 in the first half of the year, compared to the 2008 periods. We expect allocation of corporate costs will begin to become more comparable in the third quarter of 2009, as NeedleTech results were included in the third quarter of 2008.
Interest income decreased to $6,000 in the second quarter of 2009 from $297,000 in the second quarter of 2008 and to $17,000 in the first half of 2009 from $756,000 in the first half of 2008 due to significantly lower yields on our investment portfolio. In the 2008 periods, we had significant investments in auction rate securities. These investments provided relatively higher returns than we are currently experiencing, but these investments also turned out to be illiquid and very risky. The auction rate security market continues to be relatively illiquid and risky. We liquidated our auction rate securities in late 2008 and early 2009 at full value and without incurring any losses to principal. However, due to the uncertainties and risks inherent in the current investment and credit markets, our investment portfolio in 2009 is much more conservatively invested than it was last year. All of our investments are currently held in banks, U.S. Treasury Bills or highly rated money market accounts. Looking forward, we may invest our funds in higher yielding investments if those investments meet the conservative criteria established by our investment policies and the macroeconomic outlook becomes clearer. In addition, we had fewer funds invested in 2009. A portion of our available funds in the first half of 2008 were utilized in our NeedleTech acquisition in July 2008. Finally, funds available for investment have and will continue to be utilized for our current and future expansion programs, for strategic opportunities for growth and diversification, and for installment payments on the term loan. As funds continue to be used for these purposes, and as interest rates continue to change, we expect interest income to fluctuate accordingly.
Interest expense increased to $156,000 in the second quarter of 2009 from $131,000 in the second quarter of 2008 and increased to $285,000 in the first half of 2009 from $277,000 in the first half of 2008. This increase was a result of higher borrowings due to an additional $24.5 million of borrowings for the NeedleTech acquisition. Somewhat offsetting this increase in higher borrowings was a lower effective interest rate during most of the first half of 2009. Our weighted average effective interest rate was 3.1% at July 5, 2009.
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