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7. Management's Discussion and Analysis of Financial Condition and Results
of Operations. OVERVIEW During
2005, we made significant investments in new production facilities, expanded our
U.S. direct sales force and increased research and development efforts. In 2005,
we completed the construction of our new molding, technology, and logistic facility
(MTL) in South Jordan, Utah, and purchased a new facility in Chester, Virginia,
for the MedSource procedure tray business that we acquired during the fourth quarter
of 2004. These facilities, along with facilities completed in Galway, Ireland
and South Jordan, Utah during 2004, were developed to meet production demands
for anticipated future sales growth. Also, during 2005 we added additional research
and development staff and created a new pilot production clean room to support
new product launches. During 2005, we also released several new products, including
the Prelude™ sheath introducer, Viceroy inflation device, Backstop® Plus and Ministop™
Plus safety devices. We plan to release three new products in the first half of
2006, the Revolution™ securement device, the Impress™ radiology catheter and the
Honor™ hemostasis valve. In an effort to promote future sales growth and improve
market penetration, we hired 17 new sales people for our U.S. domestic direct
sales force during 2005. We believe despite the temporary effects of these investments
on earnings, they were needed to position us for potential future sales growth
and earnings. For the year ended December 31, 2005,
we reported net sales of $166.6 million, up $15.2 million or 10% over the comparable
period in 2004. Net sales growth in 2005 was primarily driven by increased sales
of our stand-alone products and our new procedure tray business. Gross
margins as a percentage of sales were down to 41.5% for the year ended December
31, 2005, compared to 44.6% for year ended December 31, 2004. This decline resulted
primarily from new facilities and equipment, increased cost of direct labor, higher
overhead and negative margins in the new procedure tray business acquired. Sales
of procedure trays contributed 2.4% to the Company’s total sales for 2005. Net
income decreased for the year ended December 31, 2005 to $15.8 million, compared
to $17.9 million for the prior year period. When compared to the prior year period,
net income for the year ended December 31, 2005 was positively affected by increased
sales volumes, and negatively affected by lower gross margins, higher research
and development spending and increased selling, general and administrative expenses.
RESULTS OF OPERATIONS The
following table sets forth certain operational data as a percentage of sales for
the periods indicated: 
Our
net sales increased by $15.2 million, or 10%, in 2005, compared to an increase
of $15.4 million, or 11.4%, in 2004, and an increase of 19.7 million, or 17%,
in 2003. We report sales in five product categories. Listed below are the sales
relating to these product categories for the years ended December 31, 2005, 2004
and 2003: | |
