Filed with the SEC from Mar 29 to April 04:
Zoll Medical (ZOLL)
Gamco Investors has 1,231,870 shares (5.5%) after purchases made from Jan. 30 through March 29 at prices that ranged from $67.34 to $92.98.
ZOLL Medical Corporation (ZOLL, the Company, we or us) develops, manufactures, and markets resuscitation devices, related data management and software solutions, and temperature management technology. ZOLL is continuing its expansion from its founding focus on external pacemakers and defibrillators for the treatment of cardiac arrest to a much broader focus on a range of resuscitation devices and temperature management solutions for critical care and surgical patients. This expanded focus involves not only initial care but prevention of sudden cardiac death in patients with a known risk, as well as care after an event, where initial resuscitation success can be enhanced with specific strategies for improving recovery and reducing morbidity. As the science of resuscitation continues to expand, so does our business opportunity and the potential for revenue growth. We believe there is a substantially greater opportunity to improve operating profitability and achieve significant recurring revenues as we provide products and services to a much larger resuscitation and critical care market.
Historically, ZOLL grew primarily from its core defibrillation and pacing technologies used to treat victims of sudden cardiac arrest (SCA) and other heart arrhythmias. This primarily involved the sale of capital equipment to the hospital and emergency medical services (EMS) markets. With a strong product differentiation strategy, ZOLL has been successful at driving long-term revenue growth by increasing its market share through significant investments in research and development and building direct sales and distribution channels.
In the late 1990‚Äôs, ZOLL entered the data management software business, seeking to gain leverage in the pre-hospital market. Although these software solutions offer higher profitability, with margins significantly greater than the capital equipment products, and recurring revenues, the revenues generated by this business are relatively modest in comparison to defibrillator revenue. The addition of automatic external defibrillators (AEDs) in 2002 to our product portfolio, targeting the public access portion of the defibrillator market, again provided new opportunities to drive revenue growth through market expansion. We built market share with our introduction of cardiopulmonary resuscitation (CPR) feedback technology, although operating profitability was constrained by the highly fragmented nature of this new, highly competitive part of the market.
Also in the early 2000‚Äôs, we recognized the growth opportunity associated with improving SCA outcomes beyond defibrillation and expanded our strategy to focus on the broader resuscitation opportunity. Expanding product offerings to address each of the links in the American Heart Association‚Äôs (AHA‚Äôs) Chain of Survival (COS) was a key element of our strategy. In fiscal 2005, ZOLL acquired the AutoPulse ¬ģ Non-Invasive Cardiac Support Pump to offer enhanced circulatory support and chest compression capability, and also acquired the Power Infuser ¬ģ fluid resuscitation product, which is used primarily in military applications. In 2006, ZOLL completed a long-term plan to acquire the LifeVest ¬ģ wearable defibrillator business, which provides proactive protection for patients at risk of SCA. In 2007 and 2009, ZOLL acquired therapeutic hypothermia technology and products that are used to provide therapeutic management of patients‚Äô core body temperatures, including as part of post-resuscitation care. Throughout this period, ZOLL‚Äôs data management offerings were also expanded.
We believe ZOLL‚Äôs focus on the much larger resuscitation market has opened up significant new, long-term market opportunities beyond our core business of defibrillation and pacing. The current defibrillation/pacing market is estimated to be approximately $1.5 billion annually. The annual U.S. market for the LifeVest, which achieved $105.8 million of revenue in 2011, has a long-term potential of growing to approximately $1.9 billion annually. In Germany, where we have begun sales of the LifeVest, the market opportunity is more than $500 million. Similar, if not larger, market opportunities for the LifeVest exist in other countries like Japan. While our AutoPulse and temperature management products compete in markets of modest annual size currently, the potential worldwide markets for these products long-term are estimated at $600 million and $2.5 billion, respectively. These new markets are expected to develop over a number of years, accelerating as they expand from the initial indication and early adopters; clinical research will drive further use, offering increased growth opportunities.
Equally important, we believe there is a significant opportunity to increase ZOLL‚Äôs profitability well above our historical levels due to the business models associated with these new markets. In particular, the LifeVest has been built as a service business relying on new and recurring physician prescriptions. The AutoPulse leverages our existing capital equipment distribution channels. Our temperature management solutions offer both a capital equipment product and a steady stream of recurring revenue from single-use, proprietary, disposable catheters used for each treated patient. These opportunities offer the potential of higher levels of profitability when compared to our historical levels. Finally, we expect that our broader focus on resuscitation will give rise to opportunities to develop or acquire additional resuscitation products to further leverage existing infrastructure.
As ZOLL continues its expansion and its mix of businesses changes, we expect to realize greater opportunities for revenue growth. In addition, we believe there is significantly greater opportunity to improve our rate of operating profitability.
The Clinical Need and Opportunity
Sudden Cardiac Arrest and Resuscitation
An estimated 450,000 people die from SCA annually in the United States. Approximately 1,000 people die of SCA every day outside of the hospital, and similar unexpected deaths occur in hospitalized patients at a rate of nearly 100,000 per year. Estimates of worldwide deaths exceed 1 million each year, making SCA one of the largest public health problems in the world.
Resuscitation in this context refers to the restoration of normal physiological function in a patient who has had an episode of SCA. An individual‚Äôs chances of surviving SCA in the United States can fluctuate dramatically, depending on where he lives, and international results are similar. According to the AHA, the median survival-to-discharge rate after SCA is 6.4% in the United States. Medical interventions can treat the underlying disease, but many tens of thousands of lives could be saved with better quality resuscitation care.
For SCA victims, time is the most critical element to survival. For every minute of delay in the restoration of effective cardiac function provided by defibrillation‚ÄĒthe process of delivering electrical current to the heart to stop the fibrillation and permit the return of coordinated cardiac contractions‚ÄĒsurvival decreases by as much as 10%. According to the AHA, about 95% of SCA victims in the United States die, in many cases because lifesaving defibrillators arrive too late, if at all.
Providing temporary circulatory support with CPR is also critical to survival when SCA occurs. When appropriate care is provided in the form of CPR, early defibrillation, advanced life support (ALS), and continuing post-resuscitation care, as many as 50% of victims can survive SCA resulting from ventricular fibrillation. For some patients with a known and identified risk of SCA, immediate defibrillation with a wearable external defibrillator or implanted defibrillator can be highly effective, and the survival rate can approach 100%.
Chain of Survival (COS)
A useful metaphor to describe dependent relationships among different aspects of care contributing to survival is the ‚ÄúChain of Survival.‚ÄĚ The metaphor suggests that survival is dependent on the strength of each link and that any weakness in one link will break the chain and reduce the likelihood of survival. ZOLL‚Äôs resuscitation business strategy seeks to provide products that support and strengthen each link in the chain.
Historically, the AHA‚Äôs COS defined the four key steps that rescuers should follow in treating SCA: early access, circulation, defibrillation, and advanced cardiac life support (ACLS). Historically, heavy emphasis was focused by the market on the defibrillation link in the chain. Over the past decade, the AHA‚Äôs view of this COS has emerged to place balanced emphasis on all links of the chain. In addition, the AHA has recently added a fifth link, post-resuscitation care. From our viewpoint, we believe the COS should include an additional link, preventive care, at the beginning of the COS, and utilize data collection and analysis to tie it all together.
ZOLL Products as Related to the COS
Early Intervention Link: The LifeVest Wearable Defibrillator
ZOLL manufactures and markets the only wearable defibrillator, the LifeVest, worn by patients at risk for SCA. It provides protection during their changing medical condition and while permanent SCA risk has not been established. The LifeVest allows a patient‚Äôs physician time to assess the patient‚Äôs long-term arrhythmic risk and implement appropriate treatment. Lightweight and easy to wear, it allows patients to return to their activities of daily living, while providing the peace of mind that they are protected from SCA. The LifeVest continuously monitors the patient‚Äôs heart and, if a life-threatening heart rhythm is detected, the device delivers a treatment shock to restore normal heart rhythm.
The LifeVest is used for a wide range of indications, including following a heart attack, before or after bypass surgery or stent placement, as well as in patients with cardiomyopathy or congestive heart failure that places them at particular risk of SCA. In addition, the LifeVest is worn by patients awaiting an implantable defibrillator or after removal of an implantable device due to infection or other reasons. We believe there is a wide range of conditions that place patients at risk of SCA, for which the LifeVest could be an attractive treatment option.
The LifeVest is prescribed by a physician, typically a cardiologist, for a patient to wear during a period of temporary risk of a fatal arrhythmic event and is covered by most health plans in the United States, including commercial, state, and federal plans. Medicare provides coverage for the device rental for patients satisfying specific medical criteria and physician prescription requirements. As of November 2011, the LifeVest has been prescribed for more than 50,000 patients.
The LifeVest durable medical equipment (DME) rental business model allows a physician to protect a specific patient from SCA by placing a medical order (i.e., prescription) directly with ZOLL. From this point, ZOLL manages the process, which includes fitting the LifeVest to the specific patient, educating the patient in the hospital, managing the medical documentation and insurance paperwork, and being available to address patient needs once discharged from the hospital.
Potential applications of the LifeVest are broad, and the understanding of the factors placing patients at risk of SCA continues to evolve. Wearable defibrillation remains in the early stages of market development. We believe that there is ever-growing awareness of the LifeVest system as a treatment option for patients with SCA risk, and some physicians have incorporated the LifeVest into their practice standards. Despite this progress, market penetration remains low, and we believe that there is substantial opportunity for growth, to the extent that the LifeVest becomes accepted as a standard of care. Our ongoing commercial efforts focus on generating growth through clinical acceptance and research demonstrating patient benefit. In our model of potential acceptance across current coverage indications, we estimate that the LifeVest‚Äôs market in the United States has the potential to grow over many years to be approximately $1.9 billion annually.
On August 4, 2011, Durable Medical Equipment Regional Carriers issued for comment draft revisions to the local coverage determinations with respect to Medicare reimbursement for AEDs and wearable defibrillators, including our LifeVest product. The draft revisions would limit the indications for Medicare reimbursement for the LifeVest product. These draft revisions are subject to public hearings and comments. The public comment period ended September 23, 2011. We have been advised that a decision could be made in the near future, although there is no statutory provision that defines a timeline for a decision. We believe that following the public hearing process, the current indications for Medicare reimbursement of the LifeVest product will not be limited; however, in the event the draft revisions were to become final, the draft limitations on the indications for Medicare reimbursement would have a material adverse effect on our LifeVest business.
The LifeVest is the only non-invasive wearable defibrillator on the market or commercially available today.
At the present time, there is no other device on the market similar to the ZOLL LifeVest. Other treatment options for physicians managing patients at high risk of SCA are an AED that requires bystander intervention by a family member or other person, or an implantable cardiac defibrillator (ICD) that requires surgery. Advances in implantable devices may someday provide for less invasive and less expensive therapies, such as subcutaneous implantable defibrillators, but the non-invasive nature of the LifeVest is a strong differentiator whenever SCA risk is considered temporary or changing. Finally, we believe that any interested, potential competitor would need to follow the same clinical and regulatory path that was required of the LifeVest to prove both safety and efficacy.
CPR Link: AutoPulse
CPR is a means to provide temporary circulation of blood for patients whose hearts have stopped beating. It can be a lifesaving intervention before the arrival or availability of skilled medical care. Public safety personnel, hospital medical personnel, and many others are required to be regularly trained in CPR. It consists of pressing hard on the patient‚Äôs chest to a depth of at least 2 inches and at a rate of at least 100 times per minute, as is now recommended in the 2010 AHA guidelines. In some cases, ventilation with mouth-to-mouth breathing or mechanical ventilating devices should be provided. CPR is demanding physically and difficult to perform effectively, especially over long periods, and particularly when a patient needs to be moved or is in the back of a moving ambulance. When performed effectively, manual CPR can provide about 30% of normal blood flow to temporarily support a patient and preserve cardiac and brain function.
ZOLL develops and markets the AutoPulse ¬ģ , an automated CPR device. The AutoPulse is battery operated and portable and is designed for use in emergency medical services applications and in hospitals. It consists of a backboard and a simple disposable load-distributing band that fastens across a victim‚Äôs chest. The AutoPulse automatically calculates the patient‚Äôs shape and size for maximum compression/decompression benefit without the need to enter patient information or make manual adjustments. The AutoPulse improves the consistency of circulatory support, reduces the manpower required to perform CPR, and enhances the safety of rescue personnel in a moving vehicle.
The AutoPulse compresses the entire upper chest (thorax) in a unique, semi-circumferential ‚Äúhands-free‚ÄĚ manner, circulating more blood than is customary with manual chest compressions. Studies of the device have shown that it can achieve coronary perfusion pressures equal to normal heart function in some patients. Additionally, it offers the benefit of providing CPR without the need for additional personnel who can provide the required manpower to sustain CPR over a long period. It also permits rescuers to focus on other lifesaving interventions while CPR is being done mechanically. At the end of fiscal 2011, there were approximately 6,000 AutoPulse units installed in hospitals and emergency services worldwide.
More recently, significant attention has been directed to decreasing the risk of injury to rescuers when providing care during ambulance transport, since rescuers are often unrestrained while providing care and subject to serious injury in the event of a crash. The National Association of EMS Physicians, the International Association of Fire Chiefs, and a number of other interested parties have instituted safety initiatives. Providing manual CPR in a moving vehicle while unrestrained has been identified as an area of focus. The AutoPulse addresses this risk and facilitates the provision of CPR in a moving ambulance while the rescuers are safely restrained.
The AutoPulse uses a proprietary mechanism of action (e.g., a load-distributing band vs. sternal compression) to provide blood flow nearly equal to normal circulation.
Research supporting the AutoPulse is more extensive than for any other mechanical chest compression device. The CIRC (Circulation Improving Resuscitation Care) trial compared the rates of survival to hospital discharge among patients who suffered out-of-hospital cardiac arrest and were treated with the AutoPulse to similar patients who received manual CPR. Initial results from CIRC were presented in November at the AHA Resuscitation Science Symposium (ReSS) in Orlando. Full results of the trial are expected to be published in 2012.
The CIRC trial confirmed the impact that high-quality CPR can have on improving survival rates from SCA. The trial demonstrated that AutoPulse compressions are equivalent to high-quality manual CPR compressions. Manual CPR is the current standard for providing temporary circulatory support and oxygen delivery during cardiac arrest and has the highest treatment recommendation (Class I) in the AHA guidelines. However, delivery of manual CPR is often inconsistent. Significant decreases in quality have been seen after as little as one minute. The physical challenges associated with providing consistent manual CPR are recognized as a key factor in limiting CPR quality.
Comparing high-quality manual CPR to AutoPulse CPR was a major focus of the CIRC trial. The protocol incorporated intensive training in manual CPR beyond that which is required in current guidelines; this training was uniformly delivered to caregivers at all participating sites. It focused on minimizing hands-off time and frequent re-training, and it also closely tracked CPR fraction, the percentage of time that compressions are being delivered during resuscitation, which is a marker of CPR quality. Performance audits were also used to track CPR quality. The CPR fractions reported in both arms of the trial were very high for a large, multicenter prospectively randomized study. The resulting overall survival rate in the CIRC trial was also comparatively higher. Further, because of the high standards employed in the design of this trial, it is expected that the CIRC trial will set a new standard for research in the pre-hospital environment.
We believe most EMS and hospitals are not able to provide the consistently high-quality manual CPR that was incorporated by extensive training and monitoring of staff in the CIRC trial. The trial clearly demonstrates that AutoPulse can be a safe and effective option for significantly improving CPR quality and providing improved outcomes. We believe many systems will incorporate the AutoPulse in their efforts to improve system performance. The AutoPulse will be especially effective when manual CPR performance is known to be lower than that reported in the CIRC trial.
Competitors offer devices that provide mechanical CPR. Other products duplicate the mechanism of manual CPR by compressing the sternum (i.e., the center of the chest.) Michigan Instruments, which originally pioneered the introduction of a mechanical CPR device known as a ‚ÄúThumper,‚ÄĚ manufactures the Life-Stat ¬ģ Model 1108, the newest model. It is sold through independent distributors in the United States and internationally. The LUCAS device, similar to the Michigan Instruments device in terms of its mechanism of operation, was developed by Jolife AB, a privately held Swedish company, which was acquired in February 2011 by Physio-Control, a division of Medtronic, Inc.
Defibrillation Link: Defibrillators
Professional defibrillators are used by health care professionals to treat patients experiencing SCA in all areas of health care. They are installed on all ambulances that provide ACLS and in virtually all health care facilities. In hospitals, defibrillators are typically placed on ‚Äúcrash carts‚ÄĚ located in either every hospital unit and care area or placed strategically so they may be rapidly brought to a patient‚Äôs bedside by trained staff in the event of need.
Professional defibrillators incorporate monitoring capabilities, so professionals can view the patient‚Äôs electrocardiogram (ECG), e.g. heart rhythm, and other vital physiologic information, such as oxygen saturation and blood pressure. The ECG helps to determine the patient‚Äôs treatment and may indicate the need for a defibrillating shock or external pacing. Another characteristic of professional defibrillators is that they permit the user to determine whether a shock is needed and to manually select the level of energy (‚Äúdose‚ÄĚ), calculated in joules, used to defibrillate. They incorporate a wide range of energy outputs to cover the various defibrillating energy doses required for adult, pediatric, and neonatal patients. Disposable electrodes are typically used to deliver defibrillation and pacing therapy to patients. Professional defibrillators can also have paddles, held by the user on the chest to deliver defibrillation. In addition, professional defibrillators have the capability to perform a procedure called cardioversion, which is used to terminate an abnormal but non-life-threatening heart rhythm. The defibrillator delivers a shock at a specific point in the ECG, thereby ‚Äúconverting‚ÄĚ the rhythm.
ZOLL‚Äôs professional defibrillators include many selectable monitoring parameters to provide a detailed assessment of a patient‚Äôs condition. Examples of these parameters include: oxygen saturation levels (SpO 2 ); 12-lead acquisition and analysis; invasive and non-invasive blood pressure; end-tidal CO 2 concentrations (EtCO 2 ); carboxyhemoglobin saturation levels (SpCO); methemoglobin saturation levels (SpMet); and patient temperature.
Richard A. Packer 54 1996
Mr. Packer joined the Company in 1992 and in 1999 was appointed Chairman of the Board of Directors and Chief Executive Officer. Mr. Packer resigned as Chairman in November 2010, and he continues to serve as Chief Executive Officer. Mr. Packer served as President, Chief Operating Officer and Director from 1996 to his appointment as Chief Executive Officer. From 1992 to 1996, he served as Vice President of Operations of the Company and also served as Chief Financial Officer and Head of North American Sales from 1995 to 1996. From 1987 to 1992, Mr. Packer served as Vice President of various functions for Whistler Corporation, a consumer electronics company. Prior to this, Mr. Packer was a manager with the consulting firm of PRTM/KPMG, specializing in operations of high technology companies. Since April 2007, Mr. Packer has also served as a director of Bruker Corporation, a scientific instruments company. He is currently on Bruker Corporation‚Äôs audit committee. Mr. Packer provides a critical contribution to the Board of Directors as a result of his extensive and detailed knowledge of the Company and of the Company‚Äôs industry, prospects, customers and strategic marketplace. Mr. Packer received B.S. and M. Eng. degrees from the Rensselaer Polytechnic Institute and an M.B.A. degree from the Harvard Graduate School of Business Administration.
Robert J. Halliday 57 2003
Mr. Halliday has served as the General Manager of the Varian Semiconductor Equipment business unit of Applied Materials, Inc., a provider of equipment, services and software to the semiconductor, flat panel display and solar photovoltaic industries, and as a Group Vice President of Applied Materials, Inc. since November 2011. Mr. Halliday previously served as Executive Vice President and Chief Financial Officer of Varian Semiconductor Equipment Associates, Inc., a manufacturer of semiconductor capital equipment, from October 2006 to November 2011; Executive Vice President, Treasurer and Chief Financial Officer from October 2004 to October 2006; Vice President, Treasurer and Chief Financial Officer from November 2002 to October 2004; and Vice President and Chief Financial Officer from March 2001 to November 2002. Prior to joining Varian Semiconductor, Mr. Halliday was Vice President and Chief Financial Officer of Unica Corporation, a software company. Previously, Mr. Halliday was at Ionics, Incorporated, a global separations technology company. At Ionics, he was Chief Operating Officer in 2000; Vice President of the Consumer Water Group from 1996 to 2000; and Chief Financial Officer from 1990 to 2000. Mr. Halliday brings to the Board of Directors his extensive executive leadership experience and his financial expertise. Mr. Halliday received a B.S. degree from the University of Pennsylvania‚Äôs Wharton School and an M.B.A. degree from The Wharton School of Finance.
MANAGEMENT DISCUSSION FROM LATEST 10K
Our sales for the fiscal year ended October 2, 2011 increased approximately $79.7 million, or 18%, to $523.7 million, as compared to fiscal year 2010. Revenue results reflected a positive foreign exchange impact of approximately $6 million. The increase in sales was driven primarily by the LifeVest business and our International business. LifeVest revenue grew 57% in fiscal 2011 compared to fiscal 2010 as this product continues to gain greater acceptance and we expand the LifeVest sales force both in the U.S. and Germany. International revenues grew 21% in fiscal 2011 compared to fiscal 2010. This increase in International revenues stretched across all of our product lines. Revenues from the North American hospital core defibrillator business, excluding military, grew approximately 8% as we continued to see modest recovery in this market. The North American EMS environment continues to experience tightened budgetary restrictions within public agencies, and revenue was down modestly from the prior year. Although, on a shipments basis, North American EMS was down and North American hospital core defibrillator business grew modestly, orders in both these markets increased at a much higher rate, which is reflected in our increased backlog. Our total temperature management product sales worldwide increased 38% to $26 million in fiscal 2011. Our gross margin reflected an increased volume of higher margin LifeVest business and favorable North American pricing.
Our sales to the North American pre-hospital market decreased $2.7 million, or 2%, in fiscal 2011 compared to fiscal 2010. The decrease in pre-hospital sales was primarily due to the continued softness in this market due to the general economic environment and the spending constraints this has placed on EMS agencies, although we were encouraged by the increase in order flow as the year progressed.
International sales increased by $24.5 million, or 21%, to $139.3 million in fiscal 2011 compared to $114.8 million in fiscal 2010. The increase in International sales was due to an increased volume of sales of AEDs, Temperature Management products and professional defibrillator equipment. The increased volume of sales also included a positive impact from foreign currency exchange rate fluctuations, excluding Canada, of approximately $5.0 million. The sales volume growth was driven primarily by Australia, the U.K., the Middle East, Africa and China.
Total rental revenue of the LifeVest product increased 57% to $111.0 million in fiscal 2011 compared to $70.7 million in fiscal 2010. The increased volume is attributable to continued acceptance of the LifeVest and the continued growth and productivity of our sales force.
Total sales of AEDs to all of our markets increased $9.8 million, or 14%, from $71.6 million in fiscal 2010 to $81.4 million in fiscal 2011. This growth is attributable to a large Australian AED sale during 2011, which was offset by slight decreases in our domestic markets.
Total sales of the AutoPulse product to all of our markets decreased 1% to $17.3 million in fiscal 2011, compared to $17.5 million for fiscal 2010. An 11% increase in sales volume of the AutoPulse in the International market was offset by a larger decrease in sales volume in the North American pre-hospital market and the emergence of competition.
Cost of sales consists primarily of material, labor, overhead, and freight associated with our various medical equipment devices, data collection software and disposables. These products are primarily sold to the hospital, pre-hospital, and International markets. We lease the LifeVest product and sell our data collection software mainly to the pre-hospital market.
Overall, gross margins for fiscal 2011 increased to approximately 57% compared to 54% in fiscal 2010. Approximately one percentage point of the increase was attributable to the higher margin LifeVest business being a larger percentage of our overall sales in fiscal 2011. Another percentage point was due to favorable North American pricing. Other factors affecting the fluctuation in gross margin each individually represented less than one percentage point of our overall gross margin, including the positive impact of our international business mix, foreign exchange rate fluctuations and temperature management product cost reductions. Our gross margin tends to fluctuate from period to period as a result of unit volume levels, mix of product and customer class, geographical mix, foreign exchange rate fluctuations and overall market conditions.
We ended fiscal 2011 with a backlog of approximately $30 million, compared to approximately $32 million at the end of the prior quarter. Backlog was approximately $14 million at October 3, 2010. Typically, our backlog decreases during the first and second quarters, remains relatively flat during the third quarter, and increases during the fourth quarter due to the purchasing practices of our customers. During fiscal 2011, we had higher levels of backlog earlier in the year due to variation of the timing of orders over the course of the year relative to our shipments. Due to possible changes in delivery schedules, cancellation of orders and delays in shipments, our backlog at any particular date is not necessarily an accurate predictor of revenue for any succeeding period.
Investment and Other Income (Expense)
Investment and other income (expense) was a nominal amount in fiscal 2011, as compared to $0.9 million in the previous fiscal year. This decrease was a result of a strengthening U.S. dollar at the end of fiscal 2011 as we marked our foreign denominated intercompany receivables to market at the end of the year.
Our effective tax rate for fiscal 2011 increased to 35% compared to 33% in fiscal 2010. The extension of the R&D tax credit by Congress in October 2010 resulted in seven quarters of R&D tax credits benefiting the 2011 effective tax rate. The 2010 effective tax rate was lower due to the greater rate impact with the release of approximately $836,000 of tax liabilities due to the expiration of tax statutes, completion of tax audits and the resolution of uncertain tax positions, along with the decrease of $664,000 of deferred tax liabilities for international positions.
At October 2, 2011 and October 3, 2010, we had $2.9 million and $3.8 million, respectively, of gross unrecognized tax benefits, of which, $1.8 million, if recognized, would affect our effective tax rate compared to $2.2 million at October 3, 2010 which, if recognized, would have impacted our effective tax rate.
We are subject to U.S. federal income tax as well as the income tax of multiple states and foreign jurisdictions. We have concluded all U.S. federal and most state and foreign income tax matters through fiscal 2007. Our tax return covering fiscal 2007 was audited by the IRS with no material adjustments made. The acquired losses from Revivant for tax years 2003 and 2004 remain open to examination by the IRS to the extent losses are claimed in open years.
Our sales to the North American hospital market increased $11.8 million, or 10%, in fiscal 2010 compared to fiscal 2009. This growth was primarily attributable to increased revenue from sales of professional defibrillators and an increased volume derived from our Temperature Management business, which benefited from a full year of revenue as compared to five months of revenue in fiscal year 2009. These increases were partially offset by a decrease in the volume of US Military/Big Government sales.
Our sales to the North American pre-hospital market increased $3.0 million, or 2%, in fiscal 2010 compared to fiscal 2009. The increase in pre-hospital sales was primarily due to increased sales of professional defibrillators as our product pricing returned to what we believe are more typical levels.
International sales increased by $17.2 million, or 18%, to $114.8 million in fiscal 2010 compared to $97.6 million in fiscal 2009. The increase in International sales was due to an increased volume of sales of AEDs, Temperature Management products and the AutoPulse. The increased volume of sales also included a positive impact from foreign currency exchange rate fluctuations, excluding Canada, of approximately $2.9 million. The increased volume of sales was driven primarily by sales growth in Australia, Latin America, Europe and Japan.
Total rental revenue of the LifeVest product increased 61% to $70.7 million in fiscal 2010 compared to $43.9 million in fiscal 2009. The increased volume was attributable to increased acceptance of the product, improved productivity of existing sales representatives and to the increase in sales personnel as we continued to penetrate this large market potential.
Total sales of AEDs to all of our markets increased $10.3 million, or 17%, from $61.3 million in fiscal 2009 to $71.6 million in fiscal 2010. This growth was primarily attributable to increased International sales.
Total sales of the AutoPulse product to all of our markets increased 5% to $17.5 million in fiscal 2010, compared to $16.7 million for fiscal 2009. An increase in sales volume of the AutoPulse in the International market was partially offset by a decrease in sales volume in the North American pre-hospital market, which we believe was due to funding restrictions within the public agencies for capital equipment.
Overall, gross margins for fiscal 2010 increased to approximately 54% compared to 51% in fiscal 2009. Approximately two percentage points of the increase was attributable to higher pricing. Other factors affecting the fluctuation in gross margin each individually represented less than one percentage point of our overall gross margin, including the positive impact of foreign exchange rate fluctuations and the LifeVest business. Our gross margin tends to fluctuate from period to period as a result of unit volume levels, mix of product and customer class, geographical mix, foreign exchange rate fluctuations and overall market conditions.
We ended fiscal 2010 with a backlog of approximately $14 million, compared to approximately $14 million at the end of the prior quarter. Backlog was approximately $20 million at September 27, 2009. Typically, our backlog decreases during the first and second quarters, remains relatively flat during the third quarter, and increases during the fourth quarter due to the purchasing practices of our customers. During fiscal 2010, we had higher levels of backlog earlier in the year and a lower level at the end of the year due to variation of the timing of orders over the course of the year relative to our shipments. Due to possible changes in delivery schedules, cancellation of orders and delays in shipments, our backlog at any particular date is not necessarily an accurate predictor of revenue for any succeeding period.
Investment and Other Income (Expense)
Investment and other income (expense) decreased to $0.9 million in fiscal 2010, as compared to $1.8 million in the previous fiscal year. This decrease primarily reflected significant foreign exchange gains on marking our foreign denominated intercompany receivable balances to the spot rate at the end of fiscal 2009.
Our effective tax rate for fiscal 2010 increased to 33% compared to 29% in fiscal 2009. The increased rate resulted from a discrete benefit provided by the research and development tax credit being applied to expected annual earnings in fiscal 2009. The prior-year effective tax rate benefited from the retroactive extension of the research and development tax credit, retroactively from January 1, 2008, during the first quarter of fiscal 2009. This extension allowed a full-year tax credit estimate for fiscal 2009 to be included in our fiscal 2009 rate calculation along with a discrete period adjustment of approximately $400,000 recognized during the first quarter of fiscal 2009 to record the tax credit related to the retroactive application of the credit extension. The fiscal 2010 annual rate only contains one quarter of a full-year credit. The increase in the current year rate was partially offset by the release of approximately $836,000 of tax liabilities due to the expiration of tax statutes, completion of tax audits and the resolution of uncertain tax positions in the third quarter of fiscal 2010. Additionally, during the third quarter of 2010, we undertook a detailed review of our international tax positions and concluded that our deferred tax liabilities should be decreased by approximately $664,000. This adjustment was immaterial to all prior periods.
At October 3, 2010 and September 27, 2009, we had $3.8 million and $4.9 million, respectively, of gross unrecognized tax benefits, of which, $2.2 million, if recognized, would affect our effective tax rate compared to $2.8 million at September 27, 2009 which, if recognized, would have impacted our effective tax rate.
Liquidity and Capital Resources
We believe our overall financial condition remains strong. Our cash, cash equivalents and short-term marketable securities at October 2, 2011 totaled $75.5 million compared with $62.3 million at October 3, 2010. We continue to have no long-term debt.
We have used cash, and it is possible we will use additional cash, to assist customers who transition to our products with various financing arrangements. We also may use cash to assist creditworthy customers with various financing arrangements as a result of the current difficult liquidity and credit environment.
On November 15, 2011, our Board of Directors authorized a stock repurchase program of up to $50 million.
We believe that the combination of existing cash, cash equivalents, and highly liquid short-term investments, together with future cash to be generated by operations and amounts available under our line of credit, will be sufficient to meet our ongoing operating and capital expenditure requirements for the foreseeable future. We believe we have, and will maintain, sufficient cash to meet future contingency payments related to acquisitions made in prior periods. We may also need to use these funds in the future for potential acquisitions. On October 11, 2011, we exercised our option to purchase the LifeVest facility in Pittsburgh, Pennsylvania for cash in the amount of $10.8 million.
Cash provided by operating activities increased approximately $23.2 million in fiscal 2011 to $45.2 million compared to $22.0 million in fiscal 2010. This increase in cash provided by operating activities was primarily attributable to higher net income.
Cash used in investing activities increased approximately $19.1 million in fiscal 2011 to $42.3 million as compared to $23.1 million in the prior year. This increase in the use of cash was primarily attributable to the $26.3 million earn-out payment to LifeCor, Inc. (‚ÄúLifecor‚ÄĚ), compared to $12.8 million in earnout payments in 2010, higher capital expenditures and fewer proceeds from sales of marketable securities.
Cash provided by financing activities increased approximately $4.6 million in fiscal 2011 to $13.5 million as compared to approximately $8.8 million in the previous year. The change reflects a substantially higher number of stock options exercised during fiscal 2011 (approximately 564,000 shares exercised in 2011 compared to approximately 426,000 shares exercised in 2010), and a larger tax benefit related to the options that were exercised.
In March 2004, we acquired substantially all the assets of Infusion Dynamics, Inc. (‚ÄúInfusion Dynamics‚ÄĚ). Under the terms of the acquisition, we are obligated to make additional earn-out payments through 2011 (‚Äúcontingencies‚ÄĚ) based on performance of the acquired business. As these contingencies are resolved and the consideration is distributable, we record the fair value of the additional consideration as additional cost of the acquired assets. Our earn-out payments, in the form of cash, for fiscal 2009 and fiscal 2010 were approximately $19,000 and $25,000, respectively. We have accrued, but not yet paid, an earn-out for fiscal 2011 of approximately $25,000, which is expected to be paid in cash during the first half of fiscal 2012, and will be the final earn-out payment for the assets of Infusion Dynamics.
We exercised our option to acquire the business and assets of Lifecor and acquired the business and assets on April 10, 2006. We assumed Lifecor‚Äôs outstanding debt (plus an additional $3.0 million owed to us, which was cancelled) and certain stated liabilities. We paid the third-party debt in April 2006. We agreed to pay additional consideration in the form of earn-out payments to Lifecor based upon future revenue growth of the acquired business over a five-year period. Earn-out payments to Lifecor were made in the form of cash for fiscal 2009 and fiscal 2010 in the approximate amounts of $12.8 million and $26.3 million, respectively. For both annual earn-outs, the additional consideration was accrued during the fiscal period when earned and paid out in the subsequent fiscal period. The fiscal 2010 payment was the final earn-out payment for the Lifecor acquisition.
In October 2010, we acquired the assets and assumed certain liabilities of Road Safety International, Inc. (‚ÄúRoad Safety‚ÄĚ). The Road Safety product is installed in an ambulance or fire vehicle and provides real-time feedback via audible alerts in situations such as speeding or hard cornering to help the driver avert an accident. The Road Safety product encourages a safer ambulance environment during patient treatment, records vehicle operating data for analysis, and can also be used to help reduce vehicle maintenance costs. The acquisition provides for consideration to be paid in the form of possible annual earn-out payments based on revenues for the next two fiscal years. If both earn-outs are achieved, total consideration (including liabilities assumed) could approximate $550,000.
Debt Instruments and Related Covenants
We maintain an unsecured working capital line of credit with our bank. Under this working capital line, we may borrow, on a demand basis and with no expiration date, up to $12 million. This line of credit bears interest at the rate of LIBOR plus 2%. No borrowings were outstanding on this line during either fiscal 2011 or 2010. There are no covenants related to this line of credit.
Off-Balance Sheet Arrangements
Our only off-balance sheet arrangements consist of non-cancelable operating leases entered into in the ordinary course of business and one minimum purchase commitment contract for a critical raw material component. The table below in the next section titled ‚ÄúContractual Obligations and Other Commercial Commitments‚ÄĚ shows the amounts of our operating lease commitments and purchase commitments payable by year. For liquidity purposes, in general, we choose to lease our facilities instead of purchasing them.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Cost of sales consists primarily of material, direct labor, overhead, and freight associated with the manufacturing of our various medical equipment devices, data collection software and disposables. These products are primarily sold to the hospital, pre-hospital and International markets. We rent the LifeVest product and sell our data collection software mainly to the pre-hospital market.
Gross margin for the three months ended January 1, 2012 increased to 59%, as compared to 54% during the same period in the prior year. This increase primarily reflected an improvement in product mix, lower factory costs, and improved North American capital equipment related pricing. Other factors, including foreign exchange rate fluctuations, affecting the change in gross margin each individually represented less than one percentage point of our change in overall gross margin. Our gross margin tends to fluctuate from period to period as a result of unit volume levels, mix of product and customer class, geographical mix, foreign exchange rate fluctuations and overall market conditions.
Backlog increased to approximately $24 million at January 1, 2012, compared to approximately $13 million at January 2, 2011. Backlog was approximately $30 million at October 2, 2011. Typically, we expect our backlog to decrease sequentially during the first and second quarters, remain flat during the third quarter, and increase during the fourth quarter due to the purchasing practices of our customers. We believe the maintenance of a modest backlog helps to improve our efficiency, lower our costs and improve our profitability as we believe it reduces the likelihood that we will be required to incur substantial additional costs at the end of the quarter. Due to possible changes in delivery schedules, cancellation of orders and delays in shipments, our backlog at any particular date is not necessarily an accurate predictor of revenue for any succeeding period.
Our effective tax rate for the three months ended January 1, 2012 and January 2, 2011 was 38% and 31%, respectively. The difference between the effective rates is primarily due to the impact the U.S. research and development tax credit had on the respective periods. Our 2012 effective rate includes just one quarter of a full year‚Äôs credit in the annual rate calculation due to the expiration of the U.S. research and development credit on December 31, 2011. Our 2011 effective rate not only reflected a full year‚Äôs research and development credit, but it also included the impact of the retroactive extension of the credit back to January 1, 2010, when the credit had previously expired. This retroactive reinstatement occurred in our first quarter of 2011, resulting in a total of seven quarters of credits benefitting the 2011 effective tax rate.
As of January 1, 2012 and October 2, 2011, we had approximately $2.9 million of uncertain tax positions, of which $2.2 million, if recognized, could impact the effective tax rate. $780,000 of the uncertain tax positions are expected to reverse in fiscal 2012. Of the $780,000 reduction, approximately $450,000 is expected to reduce a deferred tax asset. We recognize interest and penalties related to unrecognized tax benefits in income tax expense in the consolidated statement of income. We had $248,000 and $218,000 of accrued interest and penalties in income tax payables as of January 1, 2012 and October 2, 2011, respectively.
We are subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. We have concluded all U.S. federal and most state and foreign income tax matters through fiscal 2007. The acquired losses from the business acquired from Revivant Corporation in fiscal 2005 for tax years 2003 and 2004 remain open to examination by the IRS to the extent losses are claimed in open years.
Liquidity and Capital Resources
We believe that our overall financial condition remains strong. Our cash, cash equivalents and short-term marketable securities at January 1, 2012 totaled $77.9 million compared with $75.5 million at October 2, 2011. We continue to have no long-term debt. We used $10.8 million in October 2011 to purchase the building where we manufacture our LifeVest product in Pittsburgh, Pennsylvania. Additionally, in November 2011, we announced a stock repurchase program of up to $50 million, which was authorized by our Board of Directors. Repurchases will take place on the open market or in privately negotiated transactions from time to time based on market and other conditions. The timing and number of any shares repurchased will be determined by the Company‚Äôs management, based on their evaluation of market conditions and other factors. Repurchases may also be made under a Rule 10b5-1 plan. The repurchase program may be modified, suspended or discontinued at any time. The repurchase program will be funded using the Company‚Äôs available cash and cash equivalents, borrowings available under its current line of credit, and supplementary borrowings if necessary. During the quarter ended January 1, 2012, we repurchased 27,546 shares for approximately $1.3 million.
As we have previously stated, we have used cash, and it is possible we will use additional cash, to assist customers who transition to our products with various financing arrangements. We also may use cash to assist creditworthy customers with various financing arrangements as a result of the current difficult liquidity and credit environment.
We believe that the combination of existing cash, cash equivalents, and highly liquid short-term investments, together with future cash to be generated by operations and amounts available under our unsecured line of credit of up to $12 million, will be sufficient to meet our ongoing operating and capital expenditure requirements for the foreseeable future. We believe we have, and will maintain, sufficient cash to meet future contingency payments related to acquisitions made in prior periods.
Cash used for investing activities during three months ended January 1, 2012 increased by approximately $14.3 million compared to cash used in investing activities during the three months ended January 2, 2011. This increase is primarily attributable to the purchase in October 2011 of the LifeVest building in Pittsburgh, Pennsylvania for approximately $10.8 million. This increase also was the result of more additions to fixed assets and less cash having been generated from sales of marketable securities during the three months ended January 1, 2012 as compared to the same period in the prior year. These increases were partially offset by fewer additions to other assets during the three months ended January 1, 2012 compared to the three months ended January 2, 2011.
Cash (used for) provided by financing activities during the three months ended January 1, 2012 decreased compared to the three months ended January 2, 2011. The reduction is primarily due to the repurchase of approximately $1.3 million of company stock, during the three months ended January 1, 2012, pursuant to our stock repurchase program, as well as a lower number of stock options being exercised during the three months ended January 1, 2012, as compared to the same period last year.
In October 2010, we acquired the assets and assumed certain liabilities of Road Safety International, Inc. (‚ÄúRoad Safety‚ÄĚ). The Road Safety product is installed in an ambulance or fire vehicle and provides real-time feedback via audible alerts in situations such as speeding or hard cornering to help the driver avert an accident. The Road Safety product encourages a safer ambulance environment during patient treatment, records vehicle operating data for analysis, and can also be used to help reduce vehicle maintenance costs. The acquisition provides for consideration to be paid in the form of possible annual earn-out payments based on revenues for calendar 2011 and 2012. The earn-out for 2011 of $250,000 was paid in cash during the Company‚Äôs second quarter of fiscal 2012. If both earn-outs are achieved, total consideration (including liabilities assumed) could approximate $550,000.
Debt Instruments and Related Covenants
We maintain an unsecured working capital line of credit with our bank. Under this working capital line, we may borrow, on a demand basis, up to $12 million. This line of credit bears interest at the rate of LIBOR plus 2%. No borrowings were outstanding on this line during fiscal 2011 or fiscal 2012 to date. There are no covenants related to this line of credit.
Off-Balance Sheet Arrangements
Our only off-balance sheet arrangements consist of non-cancelable operating leases entered into in the ordinary course of business and one minimum purchase commitment contract for critical raw material components. For liquidity purposes, we generally choose to lease our facilities instead of purchasing them. There were no material changes to amounts owed under contractual obligations during three months ended January 1, 2012.
We lease certain office and manufacturing space under operating leases. Our office leases are subject to adjustments based on actual floor space occupied. The leases also require payment of real estate taxes and operating costs. In addition to the office leases, we lease automobiles for business use by a portion of the sales force.
Our executive headquarters and defibrillator and fluid resuscitation manufacturing operations are located in Chelmsford, Massachusetts. We entered into a new 10-year lease for our Chelmsford facility on December 29, 2010 which commenced on June 30, 2011 and expires on June 30, 2021. The new lease agreement includes an option to renew the lease for two successive periods of five years each. We will continue to pay a pro-rata amount of the landlord‚Äôs real estate tax and operating expenses based upon square footage.
Purchase obligations include all legally binding contracts that are non-cancelable. Purchase orders represent authorizations to purchase rather than binding agreements. Purchase obligations for the purchase of goods and services are defined as agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Our purchase orders are based upon our current inventory needs and are fulfilled by our suppliers within short time periods. We also enter into contracts for outsourced services; however, the obligations under these contracts are not significant and the contracts generally contain provisions allowing for cancellation without significant penalty.
Contractual obligations that are contingent upon future performance and growth of sales are the additional earn-out payments for the assets of Infusion Dynamics, through fiscal 2013, and the assets of Road Safety, through calendar 2012.
At times, we use forward contracts to reduce our exposure to foreign currency risk due to fluctuations in exchange rates underlying the value of forecasted sales to subsidiaries denominated in foreign currencies as well as intercompany accounts receivable denominated in foreign currencies.
As of January 1, 2012 we had two foreign currency forward contracts designated as cash flow hedges in the amount of approximately $5.5 million, each of which matures in less than twelve months. The net settlement amount of these contracts on January 1, 2012 was an unrealized gain of approximately $311,000, which is included within ‚ÄúAccumulated other comprehensive income‚ÄĚ on our condensed consolidated balance sheet. We had a net realized gain of approximately $167,000 from foreign currency forward contracts designated as cash flow hedges during the quarter ended January 1, 2012, which was included in earnings within ‚ÄúProduct sales‚ÄĚ in the condensed consolidated statement of income. As of January 2, 2011 we had three foreign currency forward contracts designated as cash flow hedges in the amount of approximately $8 million, all maturing in less than twelve months. The net settlement amount of these contracts on January 2, 2011 was an unrealized gain of approximately $10,000, which is included within ‚ÄúAccumulated other comprehensive income‚ÄĚ on our condensed consolidated balance sheet. We had a net realized gain of approximately $4,000 from foreign currency forward contracts designated as cash flow hedges during the quarter ended January 2, 2011, which was included in earnings within ‚ÄúInvestment and other income (expense), net‚ÄĚ in the condensed consolidated statement of income.
We did not have any foreign currency forward contracts not designated as hedging instruments outstanding at January 1, 2012 or at October 2, 2011. We had net realized gains from foreign currency forward contracts not designated as hedging instruments of $199,000 during the quarter ended January 2, 2011 which are included in ‚ÄúInvestment and other income (expenses), net‚ÄĚ in the condensed consolidated statement of income. Any gains or losses on the fair value of the derivative contract would be largely offset by the losses and gains on the underlying transactions. These offsetting gains and losses are not reflected above.
Legal and Regulatory Affairs
On June 18, 2010, Koninklijke Philips Electronics N.V. and Philips Electronics North America Corporation filed a lawsuit against us in U.S. District Court, Boston, MA, alleging that fifteen patents owned by the Philips entities are infringed by certain of our defibrillators and associated products and seeking monetary and equitable remedies for infringement. The plaintiffs filed an amended complaint on October 13, 2010. On July 12, 2010, we filed a lawsuit against Philips Electronics North America Corporation in U.S. District Court, Boston, MA, alleging that five of our patents are infringed by certain of their defibrillators and associated products and seeking monetary and equitable remedies for infringement. The two cases have been consolidated through the pre-trial phase and bifurcated into an initial liability phase and a later damages phase. Discovery has commenced in the liability phase.
On January 5, 2012, Koninklijke Philips Electronics N.V. and Philips Electronics North America Corporation filed a lawsuit against us in U.S. District Court, Seattle, WA, alleging that six additional patents owned by the Philips entities are infringed by certain of our other defibrillator products and seeking monetary and equitable remedies for infringement.
We received a warning letter from the FDA, dated April 22, 2011, addressing certain aspects of battery life claims on our AED Plus product. We have provided the FDA with additional data and action plans, which are ongoing, concerning battery life claims. The FDA has reviewed the material and has indicated that our response appears to be adequate, pending re-inspection, to ensure that all actions have been implemented. We have always complied with warning letters we have received in the past, and we intend to address this warning letter to the full satisfaction of the FDA.
Good morning and thank you for joining us this morning. Jon Rennert, our President; and Ernie Whiton, our CFO are with me this morning to help provide some inside on our business and answer your questions.
As this tradition, Ernie will start with our Safe Harbor.
The matters we will be discussing today, which are not historical information consist of forward-looking statements. Reliance should not be placed on forward-looking statements because they involve risks and uncertainties, which may cause actual results, performance and achievements of the company to differ materially from the anticipated future results, performance and achievements expressed or implied in such forward-looking statements.
Forward-looking statements may contain estimates and the actual results may vary materially from estimates. Factors such as overall economic conditions, the demand for the company‚Äôs products and services, availability of raw materials and manufacturing capacity, risks of non-payment of accounts receivable, risks associated with foreign operations, risks involved in litigation.
Other risks and uncertainties described from time-to-time in the companies filings with the Securities and Exchange Commission may cause actual results to differ materially from management‚Äôs current estimates and expectations. The company disclaims any current intention to update forward-looking statements in the event of any changes in the facts, circumstances or expectations that underlie those statements.
Thanks, Ernie. Turning to the business, we‚Äôre proud to end fiscal year 2009 on a high note with our revenues once again growing and we‚Äôre obviously happy to get ‚Äė09 with its unprecedented market conditions behind us.
As we have stated throughout the year, our mission in ‚Äė09 was to get through this period with the company squarely in the black, our people intact, having made continued large investments to push the LifeVest and Temperature Management forward, and continuing to have a very strong balance sheet. In fiscal 2009 we accomplished all of that and more.
So, as we look forward with the market in North America showing some although very small, signs of life, we believe we are poised for another period of good revenue growth and a rebound in our profitability and while our official outlook will remain unchanged and conservative, we certainly feel more confident in our short term prospects than we have in a few quarters.
This confidence springs mainly from our robust backlog, which is at a level we have not enjoyed since 2007. Continued sustainable growth from the LifeVest, new growth from Temperature Management, and a number of strong elements from the military business allowed us to grow revenues while at the same time adding significant backlog.
So, while we are reporting revenue growth of only 2%, our overall order growth was obviously much higher around 12% and on a sequential basis was over 20%. So, some signs of recovery, but still a ways to go until the North American capital equipment markets recover.
Now turning to the hospital market in North America, we are still experiencing decline over last year‚Äôs record numbers, but much like the U.S. unemployment picture, the rate of deterioration is slowing. In fact, Q4 was our second quarter in a row with sequential growth and while that growth was only about 4% on a shipment basis, accounting for backlog, order growth was much stronger in the U.S. hospital market.
We believe the U.S. hospital market is stabilized, and as we now start easier comps compared to the prior year, we will see continued progress and the pipeline of good sized deals looks much better than last year. We continue to believe, based on wins and losses that we have picked up some market share in this market during 2009.
Going forward, our product offering has been further enhanced by the addition of non-invasive blood pressure and entitle CO2 monitoring as new features on the R Series platform. Combined with the basic life support version of the R Series, which was introduced last spring this completes the major elements of the R Series platform. We shipped these new monitoring parameters in September, and we will now be able to move customers more rapidly from our M series to our higher margin R Series product. Our sales force is very happy to have this added capability.
As mentioned earlier, we had good military business this quarter. We had an expected lift from the completion of one contingency contract and it was pleased to win the follow on contingency contract. In addition, we had additional strong order flow from various parts of the military. For all of 2009, we were just over $25 million for U.S. military, which obviously helped a lot. As always, this business remains lumpy and unpredictable.
So when Ernie provides forward guidance in a moment you will hear our typical view that next year will not be as high as we planned conservatively. This in spite of the fact that in 2010, we should have the benefit of a new military defib that we inherited from Welch Allyn.
This defib was essential tailored for the military by Welch Allyn, using some R&D grants from the military to get the research and development going and is built on the market leading pro pack monitor, which adds key resuscitation features. This product has been submitted to FDA for 510(k) clearance, and we look forward to telling you more about its status in January.
Turning to U.S. EMS; as expected, results were down from last year, as the buying environment slows and while we experienced sequential growth, we are not expecting much from that market in the next couple of quarters, as we face some difficult comps. We expect to launch carbon monoxide monitoring parameter on the E Series at the end of Q1.
This will line our features up directly with Physio-Control‚Äôs, White Pack 15 and give us an added advantage over Phillips‚Äôs MRx product. So our product offering remains very strong in EMS and it is simply a matter of grinding it out in a smaller market and seeing if we can continue to take small bits of market share in the U.S. EMS market.
In international, our results bounced back nicely from a weak Q3. The economies are not as much affected internationally as they are in North America. So we continue to make good process in Asia, Latin America, and the Middle East. In fact, our biggest AutoPulse sale this quarter went to Brazil, 30 units.
Our international results have been depressed all year due to foreign exchange headwinds, but now that the U.S. government has fixed that problem with a nice weak US dollar. We look for a tailwind in 2010 that will certainly make things easier.
A couple of quick updates on some product before I finish with the LifeVest, obviously our AutoPulse results were the one real disappointment in Q4. Clearly U.S. EMS sales of the AutoPulse are being affected by the economy and we can‚Äôt do much about that. However, equally important, our sales efforts in 2009 suffered on the AutoPulse as our sales forces struggled with buying uncertainty and gravitated back to their tried and true defib customers.
The AutoPulse is still a missionary sale and it is natural that when times get tough, sales people will pullback from the harder sale to maximize their results in larger product categories like defibs. We can do something about that and we will work hard with our sales forces to put effort into AutoPulse and regain its momentum.
Additional clinical data will help and the CIRC trial continues on track. We are up to 1300 patients and the first dataset, which is part of that 1300, goes to the DSMB in December. We don‚Äôt expect any results from that smaller dataset, but we continue to be hopeful that we will hit our targeted 2500 patients in 2010 and that the data will then be compelling. Very briefly, on the Welch Allyn transaction, we shipped our first AED‚Äôs to Welch Allyn for resale internationally. We continue to work with the FDA to get the product cleared in the United States.
As I am sure you are hearing from all points in the industry, the FDA has become very conservative in their approach to everything and 510(k) product approvals are taking much longer, but at least we have the AED internationally to add to the service business, providing some contribution to support the Chicago R&D facility that we inherited from Welch Allyn. As all the pieces ramp up during the course of the next year, we expelled Welch Allyn elements to contribute positively in the back half of 2010.
On Temperature Management, results were outstanding in Q4, as we got through the transition from Altheus and probably benefited from pent up demand. We added to our U.S. sales force and put a ZOLL person in Europe in-charge of our European efforts. We will add a few more selling resources this year, but our prime focus will be on the factory and costs, so that we can get our gross margins above 50% by the end of 2010, so far so good on Temperature Management.
Additionally, we continue preliminary discussions with the FDA on the shape and scope of trial work needed to get a label on our products for used with sudden cardiac arrest. We anticipate this negotiation will take many months, but we would like to get a trial started before 2010 is finished. Last but not least, turning to the LifeVest, great progress continues with this product and this marketplace. Sales growth is strong, and again this quarter the business was mildly profitable on a stand-alone basis in spite of adding many new sales people over the last six months.
Hiring progress was very good here in the United States, as we were aiming to be at 85 by the end of the year and ended up at 89. So we‚Äôre well along to our goal of 125 or so sales people to cover the U.S. market. We plan on adding at least 15 or so in 2010, maybe more if we can support it with other elements of the company, and still hit our financial goals. We are making good progress with key opinion leaders and at the AHA this weekend; we will have more clinical data presented to add to our growing stack of evidence.
Also of significance, with the LifeVest, we recently completed a negotiation with our current distributor in Germany to allow ZOLL to takeover the Vest business in Germany and do it on a direct basis. We believe Germany, where reimbursement already exists, is another major opportunity for the LifeVest. We currently sell only about a $1.5 million in Germany due to a lack of focus by our current distributor and we believe we can grow this significantly.
As reimbursement is essentially equal to the U.S., we expect this to be equally profitable, once we have sales coverage. We intend to reevaluate the LifeVest business model in Germany for the international markets and then, expand the LifeVest internationally to other developed countries. Overtime, we believe the international markets represent another $1 billion of opportunity for the LifeVest. I continue to encourage anyone interested in ZOLL to closely monitor our rapid progress with the LifeVest, while they patiently wait for the North American capital equipment markets to return to normal.
Now, let me turn the call over to Ernie for brief comments on Q4 and our 2010 outlook and then we will take your questions.
Thanks, Rick. Let me start with a couple of observations on the P&L. I‚Äôll review our balance sheet, then discuss our forward outlook. We covered our revenue in detail in our press release, so I will not repeat that here. As we indicated in our press release, our Q4 gross margin decreased from 55% year ago to 50%. Part of this was related to reduced factory absorption as we reduced defibrillator production levels, adjusting for the lower levels of defib orders that we received over the past year.
A second part of this was related to foreign exchange and foreign mix of products. The third element related to starting up of our Temperature Management business, which currently is lower than corporate average margins. Another element related to North America incentives and promotions that we‚Äôre in the pipeline as we tried to get capital equipment customers to move forward with purchase orders that had been delayed.
So this quarter, we had a bundle of things that pushed gross margin down, all of which are addressable, and we believe do not represent long term trends. This was partially offset by an improvement in the mix of LifeVest sales as these margins are higher than corporate average, and these sales are growing faster than our corporate average. Again, all of these elements I‚Äôve just described provide gross margin opportunity as we move through 2010, which I will cover later in my forward guidance.
Q4 operating expenses increased four points as a percentage of sales from 42% to 46% reflecting our investments in the LifeVest and Temperature Management businesses as well as the R&D associated with the Welch Allyn transaction. R&D increased from 7% to 10% of sales reflecting the acquisition of Welch Allyn Chicago, R&D facility and other defib focused spending increased spending on Temperature Management and increased clinical affairs spending.
G&A increased roughly one point as a percentage of sales reflecting increased Temperature Management costs, accrued sales tax and professional services. Selling and marketing increased $1 million in Q4 ‚Äė09 versus Q4 ‚Äė08 reflecting increased spending on the LifeVest and Temperature Management sales forces, partially offset by selling and marketing related to the core defib business.
The improvement in other income in Q4 and the year reflex a favorable foreign exchange impact or Q4, ‚Äė09 effective tax rate decreased to 28% from 30% in Q4 of ‚Äė08, our effective tax rate for fiscal ‚Äė09 was 29% versus 34% for fiscal ‚Äė08. Our reduced tax rates for the quarter and the year are the result of the expansion of the R&D tax credit through the end of the calendar year 2009 by the U.S. Congress in October of 2008.
The expansion allowed us to book seven quarters worth of R&D credits in 2009 versus only one quarter of credits during fiscal 2008. We expect our tax rate for 2010 to look something like 34% to 35%. Our balance sheet remains in excellent shape our cash and short term investments totaled approximately $59 million as of the end of Q4. During Q4 we generated approximately $6 million in positive cash flow from operations.
During the year we generated approximately $32 million in positive cash flow from operations. Our DSO in account receivable decreased to approximately 67 days at the end of Q4 as compared to 74 days and 72 days at the end of Q3 and the end of Q4 of ‚Äė08 respectively.
As a result of the expiration of the military contingency contract our DSOs fell just over three days as we had $5 million in revenues and no corresponding receivable at the end of Q4. Consequently in Q1 of ‚Äė10 expect DSOs to move back into the low ‚Äė70s. Our inventory turns increased from 2.4 times at the end of Q3 to 3.1 times at the end of Q4 reflecting a $9 million decrease in our core defibrillator related inventory, they were flat with Q4 of ‚Äė08.
The increase in accrued expenses and other liabilities in Q4 of ‚Äė09 versus Q4 of ‚Äė08, primarily related to earn out payments owed on the Lifecor acquisition, partially offset by a reduction in the obligation to the U.S. Government under the military contingency contract. Capital expenditures during Q4 approximated $4 million while depreciation and amortization totaled approximately $5 million. CapEx and depreciation and amortization each approximated $19 million for fiscal 2009.
So now let me turn to our forward outlook. From an overall perspective, our view of 2010 has not changed since our last call, although Q4 was pretty good from an orders perspective as evidenced by the strong backlog build we believe it is prudent to remain conservative until we see a number of data points showing recovery in hospital spending. We anticipate revenue in the vicinity of $440 million and EPS in the range of $0.80 in 2010.
Our view of the details is a little different so let me walk you through these. With respect to the North American hospital customer class, we see overall growth of low teens. With respect to the individual components, this might imply the following; core North American hospital organic defibrillator growth of about 7%. We believe this is pretty conservative given the comps and pent-up demand.
On top of this 7% we see approximately $4 million in Welch Allyn AED, $2 million of AutoPulse business, $12 million of Temperature Management business, and $20 million of military business. Given that we just did $25 million of military business, and as Rick said, we have a new military product on the horizon, we think our military view is also conservative. Given the unpredictable timing of military orders, this seems appropriate.
With respect to the North American pre-hospital customer class, we see overall growth of low double digit say, 12% with respect to the individual components we see core EMS defibrillators decreasing 20%. This is consistent with what we saw in the EMS in the second half of 2009 and reflects that we had some big Canadian business in 2009.
Regarding other components within pre-hospital, we might see mid teens AutoPulse growth, 10% Data Management growth, flat public access AEDs as we wait for signs that the AED market is growing again, and 60% to 65% LifeVest growth. With respect to the international customer class, we see mid teens constant currency growth, 4% growth from foreign exchange based upon today‚Äôs rates, and $7.5 million of Temperature Management business. This equates to overall growth in the low 20% range.
From a product perspective, this model would imply total AutoPulse revenue of around $20 million, or mid-to-high teens growth. Recall that AutoPulse is included in each major customer class as I have described. Adjusting for the transition, as Temperature Management started up, this essentially equates to about 30% inherent Temperature Management growth. Recall that Temperature Management is included in the North American hospital and international customer classes as I have described.
This view of the business would lead us to about $440 million of revenue in 2010. Another way of thinking about this view, is that it represents about $12 million in growth from total Temperature Management product sales companywide, $28 million in growth from LifeVest, and $17 million in growth from international excluding Temperature Management, with all other growth in the company essentially netting to zero in the aggregate.
So soft we think this is pretty conservative as all growth can be accounted for by LifeVest, Temperature Manage, and international, meaning all we have to do is repeat last year in North America overall marks to make our plan. Obviously, we believe there is some up side in our North American plans, but this seems a good conservative deal. We believe, we can pick up two percentage points improvement in gross margin in 2010 versus 2009, this comes primarily from the LifeVest foreign exchange and factory absorption.
We also believe, we can pick up a point or so of leverage in our operating expenses as a percentage of sales. This leverage would most likely come from selling and marketing expense. This view would imply our operating return on sales improves from 3% to 6%, pretty modest in our view. This model assumes the 35% tax rate. With respect to the quarters, we expect to see a significant ramp up over the course of the year as the economy improves.
This might look like double digit revenue growth in Q1 versus Q1 of ‚Äė08, or ‚Äė09, rather, low teens in Q2, mid-to-high teens in Q3 and Q4. One scenario might be $100 million in Q1, slightly better in Q2, $110 million or so in Q3, and $125 million or so in Q4. With respect to EPS, recognizing that any individual quarter could be plus or minus a few cents the quarters might look like $0.10 in Q1, $0.10 to 12 in Q 2, 20 to 25 in Q3, and $0.33 to $0.40 in Q4.
While this view might yield an annual range of $0.73 to $0.87, if you take the conservative end of the range for Q‚Äôs 1, 2, and 3, and the higher end of the range for Q4, you get to $0.80, this represents our current view. This model reflects our intent to continue to invest in our LifeVest business, Temperature Management business, and the AutoPulse as Rick described.
We continue to each of these areas as significant growth opportunities for ZOLL. This model also leaves intact, our core selling and marketing infrastructure, which we believe will allow us to take advantage of pent up demand in both hospital and EMS, as the economic outlook improves.
So with that, let me turn the discussion back to you, Rick.
Thank you, Ernie. Jonathan, if you‚Äôd now like to conduct the question-and-answer for us.