MGC Diagnostics fourth quarter revenue increases 11% to $9.1 million

MGC Diagnostics Corporation (NASDAQ: MGCD), a global medical technology company, today reported financial results for the fourth quarter and year ended October 31, 2013.

Fourth Quarter Highlights:

• Fourth quarter revenue of $9.1 million, an 11% increase over the fiscal 2012 fourth quarter. Sequential quarterly revenue growth of 15% from the fiscal 2013 third quarter;
• Fourth quarter operating income increased to $875,000, compared to $7,000 in the fourth quarter of 2012;
• Net income for the fourth quarter of $836,000, or $0.20 per diluted share, compared to net income of $790,000, of which $785,000 was generated from income from discontinued operations, or $0.20 per diluted share in the 2012 fourth quarter; 
• Fourth quarter service revenue increased 24% on a year-over-year basis, while service gross margin improved 180 basis points to 70.1%, compared to 68.3% in the fiscal 2012 fourth quarter; 
• Fourth quarter gross margin improved 270 basis points to 57.8%, compared to 55.1% in last year's fourth quarter;
• The fourth quarter Attachment Rate of point-of-sale extended service contracts improved to 31%, compared to 10% in last year's fourth quarter; and
• Fourth quarter 2013 recurring revenue (service and supplies revenues) totaled $3.1 million, or 34% of total fourth quarter revenue.

Fiscal Year 2013 Highlights:

• Fiscal 2013 revenue increased 17% to $31.6 million, compared to $27.2 million in fiscal 2012;
• Fiscal 2013 competitive conversions totaled 102 accounts representing $6.3 million of recognized revenue;
• Fiscal 2013 net income of $1.4 million, or $0.34 per diluted share, compared to fiscal 2012 net loss of $1,000, or $0.00 per diluted share;
• Strong balance sheet with $10.6 million in cash and cash equivalents, $15.4 million of working capital and no long-term debt; and
• At October 31, 2013, the Company had federal net operating loss carry forwards of approximately $12.8 million that may be used to offset a portion of the Company's future tax liability.

Fourth quarter fiscal 2013 total revenues increased 11% to $9.1 million, compared to $8.2 million in the fiscal 2012 fourth quarter. Domestic 2013 fourth quarter sales increased 15% to $7.6 million, compared to $6.6 million in the 2012 fourth quarter, while international sales decreased 4% to $1.58 million from $1.64 million for last year's fourth quarter.  Fourth quarter Group Purchasing Organization ("GPO") sales increased 23% to $5.9 million, compared to $4.8 million in the prior year's fourth quarter.

Fourth quarter equipment, supplies and accessories sales totaled $7.7 million, an increase of 9%, compared to $7.1 million for last year's fourth quarter. Service revenues for the fourth quarter totaled $1.4 million, compared to $1.1 million for last year's fourth quarter. The Attachment Rate, which reflects the percentage of Extended Service Contracts added at the point of sale to customer equipment purchases, was 31% for the fiscal 2013 fourth quarter, compared to 10% for the same period last year. Backlog at October 31, 2013 was $504,000, an improvement from $413,000 at the end of the 2012 fourth quarter.

Gross margin for the quarter was 57.8%, compared to 55.1% for the 2012 fourth quarter.  Gross margin for equipment, supplies and accessories was 55.6% for the quarter, compared to 53.0% for the prior year's quarter. Gross margin for services increased to 70.1% for the quarter, compared to 68.3% for the prior year's quarter, primarily due to improved pricing and service mix.

Fourth quarter 2013 general and administrative expenses totaled $1.2 million, or 12.7% of revenue, compared to $1.2, or 14.1% of revenue in the comparable quarter last year. Sales and marketing expenses were $2.9 million, or 31.6% of revenue, compared to $2.5 million, or 30.0% of revenue in the 2012 fourth quarter. Research and development expenses were $363,000, or 4.0% of revenue, compared to $791,000, or 9.6% of revenue in last year's fourth quarter.  This decrease is primarily due to a $294,000 expense reduction attributed to claims for expense credits under the State of Minnesota Credit for Increasing Research Activities, which the Company will be filing for fiscal years 2011, 2012 and 2013.  In fiscal 2013, the Company invested approximately $1.4 million in new research and product development initiatives.  During the 2013 fourth quarter, the Company capitalized $150,000 of software development expenses, compared to $161,000 for the same quarter last year.

Fourth quarter operating income improved to $875,000, compared to operating income of $7,000 in the 2012 fourth quarter. For the 2013 fourth quarter, the Company reported net income of $836,000, or $0.20 per diluted share, versus net income of $790,000, or $0.20 per diluted share, in the 2012 fourth quarter. During the fourth quarter of 2012, the Company recognized income from discontinued operations totaling $785,000, or $0.20 per diluted share.

Gregg O. Lehman, Ph D., president and chief executive officer of MGC Diagnostics, said, "Fiscal 2013 was an important year for MGC Diagnostics, as we achieved a number of milestones. With the Company reconfigured and our strategic plan firmly in place, we challenged our sales force to focus on two main goals during fiscal 2013: increase our market share through competitive conversions and increase the number of customers that purchase a point-of-sale Extended Service Contract. Stepping up to meet that challenge, the sales team converted 102 competitive accounts totaling $6.3 million of recognized revenue. Included in this group of conversions are a number of highly recognized national healthcare institutions. With regards to Extended Service Contracts, the Attachment Rate, which we define as the percentage of instrument sales that include a point-of-sale Extended Service Contract, dramatically increased to 31% in the fourth quarter of fiscal 2013 versus 10% in last year's fourth quarter and increased to 27% for the fiscal year compared to 6% last year. I am very proud of the sales team's performance and their contribution to the excellent operational and financial results of the fiscal year."

"We remain dedicated to reengineering our existing products and developing new products to more effectively address the needs of the evolving healthcare market, both domestically and internationally," continued Dr. Lehman. "During fiscal 2013, we invested approximately 10% of total sales into R&D projects to enhance and expand our product offerings. We will continue to appropriately allocate resources to keep our products and technologies on the leading edge of the market."

"As we look forward to fiscal 2014 and beyond," concluded Dr. Lehman, "growing our business organically and driving consistent profitability are our main priorities. With three consecutive quarters of profitability under our belt, we are on our way toward the consistency that we seek.  We maintain a strong balance sheet with no long-term debt, which permits us to effectively operate our business from internally generated cash flow. It also provides us the ability to  remain opportunistic in our pursuit of strategic partnerships, licensing arrangements and merger and acquisition opportunities that can strengthen our position within the industry. We have made great progress at MGC Diagnostics in the past two years in terms of becoming a competitive force in the market and enhancing shareholder value. In the coming years, we look forward to continuing our business growth and improving our competitive position among the market leaders."

Discontinued Operations
On August 28, 2012, the Company completed the sale of the assets of its New Leaf business to Life Time Fitness, Inc. for $1.235 million. As a result, the Company reclassified its results for prior periods to eliminate from its consolidated statements of comprehensive income (loss) all fiscal 2012 revenues and expenses associated with its New Leaf business and presented the income from New Leaf activities as "discontinued operations." In the fiscal 2012 fourth quarter, the Company recognized income from discontinued operations of $785,000, which includes a gain on sale of discontinued operations of $816,000.

Net Operating Loss Carry Forward
At October 31, 2013, the Company had federal net operating loss carry forwards of approximately $12.8 million, not subject to IRC annual limitations on use.  These loss carry forwards will expire in years 2018 through 2032.