##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D. C. 20549
 
 FORM 10-Q
 (Mark one)þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Quarterly Period Ended March 31, 2009o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from  to.
 Commission File Number: 001-33027
 HOME DIAGNOSTICS, INC.
  DELAWARE
(State or other jurisdiction 
of incorporation or organization)
    
    22-2594392
(I.R.S. Employer
Identification Number)
 2400 NW 55th Court 
Fort Lauderdale, Florida
(Address of principal executive offices)
    
    33309
(Zip Code)
 954-677-9201
  Title of Each Class
Common Stock, $0.01 par value
    
    Name of Exchange on Which Registered
The NASDAQ Stock Market LLC
 None
 þ o
 o o
  Large accelerated filero
    
    Accelerated filerþNon-accelerated filero
    
    Smaller reporting companyo(Do not check if smaller reporting company)
 o þ




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##### 



HOME DIAGNOSTICS, INC.
INDEX
 PageForward-Looking Statements
    
    
    3Part I     FINANCIAL INFORMATION
    
    
    4Item 1.
    
    Financial Statements
    
    
    4Condensed Consolidated Balance Sheets as of December 31, 2008 and March 31, 2009
(Unaudited)
    
    
    4Condensed Consolidated Statements of Operations for the Three Months Ended March 31,
2008 and 2009 (Unaudited)
    
    
    5Condensed Consolidated Statement of Changes in Stockholders Equity for the Three
Months Ended March 31, 2009 (Unaudited)
    
    
    6Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31,
2008 and 2009 (Unaudited)
    
    
    7Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    8Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    18Item 4.
    
    Controls and Procedures
    
    
    18Part II     OTHER INFORMATION
    
    
    18Item 1.
    
    Legal Proceedings
    
    
    18Item 1A.
    
    Risk Factors
    
    
    19Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    20Item 6.
    
    Exhibits
    
    
    20SIGNATURES
    
    
    
    
    21EXHIBIT INDEX
    
    
    
    
    22CERTIFICATIONSEX-10.19EX-31.1EX-31.2EX-32.1EX-32.2
   
 2




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Caution concerning forward-looking statements
  3




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Part I  FINANCIAL INFORMATION
 
 Item 1   Financial Statements
 
 HOME DIAGNOSTICS, INC. AND SUBSIDIARIES
 (Unaudited)December 31,
    
    
    March 31,2008
    
    
    2009AssetsCurrent assets:Cash and cash equivalents
    
    $
    30,366,785
    
    
    $
    21,543,805Accounts receivable, net
    
    
    18,698,486
    
    
    
    18,161,620Inventories, net
    
    
    17,131,156
    
    
    
    18,144,141Prepaid expenses and other current assets
    
    
    1,683,658
    
    
    
    1,619,137Income taxes receivable
    
    
    1,082,423
    
    
    
    2,206,343Deferred tax asset
    
    
    4,316,688
    
    
    
    4,364,668Total current assets
    
    
    73,279,196
    
    
    
    66,039,714Property and equipment, net
    
    
    31,547,776
    
    
    
    34,538,013Goodwill
    
    
    35,573,462
    
    
    
    35,573,462Other intangible assets, net
    
    
    363,245
    
    
    
    310,759Deferred tax asset
    
    
    439,865
    
    
    
    74,993Other assets, net
    
    
    136,157
    
    
    
    145,485Total assets
    
    $
    141,339,701
    
    
    $
    136,682,426Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    7,746,180
    
    
    $
    7,823,001Accrued liabilities
    
    
    21,527,560
    
    
    
    21,341,943Total current liabilities
    
    
    29,273,740
    
    
    
    29,164,944Commitments and contingencies (Note 11)Stockholders equity:Common stock, $.01 par value; 60,000,000 shares
authorized; 17,482,144 and 17,059,611 shares
issued and outstanding at December 31, 2008 and
March 31, 2009, respectively
    
    
    174,822
    
    
    
    170,597Additional paid-in capital
    
    
    94,033,346
    
    
    
    91,977,576Retained earnings
    
    
    18,568,582
    
    
    
    16,510,960Accumulated other comprehensive income (loss)
    
    
    (710,789
    )
    
    
    (1,141,651
    )Total stockholders equity
    
    
    112,065,961
    
    
    
    107,517,482Total liabilities and stockholders equity
    
    $
    141,339,701
    
    
    $
    136,682,426
 The accompanying notes are an integral part of these condensed consolidated financial statements.
 4




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HOME DIAGNOSTICS, INC. AND SUBSIDIARIES
 Three Months EndedMarch 31,2008
    
    
    2009Net sales
    
    $
    25,120,280
    
    
    $
    24,601,628Cost of sales
    
    
    10,531,933
    
    
    
    13,018,394Gross profit
    
    
    14,588,347
    
    
    
    11,583,234Operating expensesSelling, general and administrative (including stock-based
compensation expense of $233,001 and $306,589, for the three months
ended March 31, 2008 and 2009, respectively)
    
    
    11,870,718
    
    
    
    12,108,847Research and development
    
    
    2,356,848
    
    
    
    1,883,603Total operating expenses
    
    
    14,227,566
    
    
    
    13,992,450Income (loss) from operations
    
    
    360,781
    
    
    
    (2,409,216
    )Other income (expense)Interest income, net
    
    
    327,868
    
    
    
    50,148Other income (expense), net
    
    
    (526,581
    )
    
    
    119,805Total other income (expense)
    
    
    (198,713
    )
    
    
    169,953Income (loss) before benefit for income taxes
    
    
    162,068
    
    
    
    (2,239,263
    )Benefit for income taxes
    
    
    (559,298
    )
    
    
    (540,264
    )Net income (loss)
    
    $
    721,366
    
    
    $
    (1,698,999
    )Earnings (loss) per common share:Basic
    
    $
    0.04
    
    
    $
    (0.10
    )Diluted
    
    $
    0.04
    
    
    $
    (0.10
    )Weighted average shares used in computing earnings per common share:Basic
    
    
    17,898,772
    
    
    
    17,326,013Diluted
    
    
    18,996,852
    
    
    
    17,326,013
 The accompanying notes are an integral part of these condensed consolidated financial statements.
 5




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HOME DIAGNOSTICS, INC. AND SUBSIDIARIES
 Common Stock
    
    
    
    
    
    
    
    
    
    
    AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    TotalNumber of
    
    
    
    
    
    
    Paid-in
    
    
    Retained
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Loss
    
    
    EquityBalance at
December 31, 2008
    
    
    17,482,144
    
    
    $
    174,822
    
    
    $
    94,033,346
    
    
    $
    18,568,582
    
    
    $
    (710,789
    )
    
    $
    112,065,961Stock-based
compensation expense
    
    
    
    
    
    
    
    
    
    
    306,589
    
    
    
    
    
    
    
    
    
    
    
    306,589Stock options
exercised, including
tax benefit of $10,245
    
    
    50,155
    
    
    
    502
    
    
    
    196,345
    
    
    
    
    
    
    
    
    
    
    
    196,847Repurchases of
common stock
    
    
    (472,688
    )
    
    
    (4,727
    )
    
    
    (2,558,704
    )
    
    
    (358,623
    )
    
    
    
    
    
    
    (2,922,054
    )Comprehensive income:Foreign currency
translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (430,862
    )
    
    
    (430,862
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,698,999
    )
    
    
    
    
    
    
    (1,698,999
    )Total
comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,129,861
    )Balance at
March 31, 2009
    
    
    17,059,611
    
    
    $
    170,597
    
    
    $
    91,977,576
    
    
    $
    16,510,960
    
    
    $
    (1,141,651
    )
    
    $
    107,517,482
 The accompanying notes are an integral part of these condensed consolidated financial statements.
 6




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HOME DIAGNOSTICS, INC. AND SUBSIDIARIES
 Three Months EndedMarch 31,2008
    
    
    2009Cash flows from operating activitiesNet income (loss)
    
    $
    721,366
    
    
    $
    (1,698,999
    )Adjustments to reconcile net income to net cash provided by
(used in) operating activities:Depreciation and amortization
    
    
    922,481
    
    
    
    1,658,990Loss on asset disposal
    
    
    96,197
    
    
    
    2,872Bad debt expense
    
    
    15,000
    
    
    
    Deferred income taxes
    
    
    667,312
    
    
    
    316,892Stock-based compensation expense
    
    
    233,001
    
    
    
    306,589Changes in assets and liabilities:Accounts receivable
    
    
    1,936,756
    
    
    
    536,866Inventories
    
    
    (662,714
    )
    
    
    (1,166,688
    )Prepaid expenses and other current and non-current assets
    
    
    (762,778
    )
    
    
    53,521Income taxes receivable and income taxes payable
    
    
    (1,819,760
    )
    
    
    (1,123,692
    )Accounts payable
    
    
    994,466
    
    
    
    76,821Accrued liabilities
    
    
    (1,431,534
    )
    
    
    (185,617
    )Net cash provided by (used in) operating activities
    
    
    909,793
    
    
    
    (1,222,445
    )Cash flows from investing activitiesCapital expenditures
    
    
    (1,726,361
    )
    
    
    (4,619,271
    )Net cash used in investing activities
    
    
    (1,726,361
    )
    
    
    (4,619,271
    )Cash flows from financing activitiesProceeds from exercise of stock options
    
    
    102,547
    
    
    
    186,602Excess tax benefits from stock-based compensation expense
    
    
    43,779
    
    
    
    10,245Repurchases of common stock
    
    
    (127,886
    )
    
    
    (2,922,055
    )Net cash used in financing activities
    
    
    18,440
    
    
    
    (2,725,208
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    282,988
    
    
    
    (256,056
    )Net decrease in cash and cash equivalents
    
    
    (515,140
    )
    
    
    (8,822,980
    )Cash and cash equivalentsBeginning of period
    
    
    32,695,803
    
    
    
    30,366,785End of period
    
    $
    32,180,663
    
    
    $
    21,543,805
 The accompanying notes are an integral part of these condensed consolidated financial statements.
 7




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HOME DIAGNOSTICS, INC. AND SUBSIDIARIES
 1. Basis of presentation
   Use of estimates
  Recent accounting pronouncements
    8




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2. Stock-based compensation
 WeightedRange of
    
    
    AverageExercise
    
    
    ExerciseOptions/SARs
    

    Prices
    
    PricesOutstanding at December 31, 2008
    
    
    3,146,334
    
    
    $
    2.99  12.00
    
    
    $
    5.93Granted
    
    
    754,000
    
    
    $
    5.73  6.61
    
    
    $
    6.20Exercised
    
    
    (50,155
    )
    
    $
    2.99  4.49
    
    
    $
    3.72Forfeited/ Cancelled
    
    
    (93,665
    )
    
    $
    3.63  12.00
    
    
    $
    9.45Outstanding at March 31, 2009
    
    
    3,756,514
    
    
    $
    2.99  12.00
    
    
    $
    5.92Exercisable at March 31, 2009
    
    
    2,356,258
    
    
    $
    2.99  12.00
    
    
    $
    4.92
   Three months EndedMarch 31, 2008
    
    March 31, 2009Weighted average expected term of options (in years,
using the simplified method)
    
    
    4.50
    
    
    
    4.77Expected volatility factor (based on peer group volatility)
    
    
    30
    %
    
    
    40
    %Expected dividend yield
    
    none
    
    noneWeighted average risk-free interest rate (based on
applicable U.S. Treasury rates)
    
    
    2.5
    %
    
    
    1.7
    %
   9




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3. Inventories, net
 December 31,
    
    
    March 31,2008
    
    
    2009Raw materials
    
    $
    10,059,194
    
    
    $
    7,815,760Work-in-process
    
    
    4,868,764
    
    
    
    6,898,465Finished goods
    
    
    2,203,198
    
    
    
    3,429,916$
    17,131,156
    
    
    $
    18,144,141
 4. Property and equipment, net
 December 31,
    
    
    March 31,2008
    
    
    2009Machinery and equipment
    
    $
    32,119,057
    
    
    $
    33,366,472Leasehold improvements
    
    
    4,997,859
    
    
    
    4,993,251Furniture, fixtures, and office equipment
    
    
    4,332,707
    
    
    
    4,326,531Computer software
    
    
    2,102,246
    
    
    
    2,115,135Equipment not yet placed in service
    
    
    9,340,174
    
    
    
    12,500,69252,892,043
    
    
    
    57,302,081Less: Accumulated depreciation and amortization
    
    
    (21,344,267
    )
    
    
    (22,764,068
    )$
    31,547,776
    
    
    $
    34,538,013
  10




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5. Accrued liabilities
 December 31,
    
    
    March 31,2008
    
    
    2009Accrued salaries and benefits
    
    $
    4,757,671
    
    
    $
    4,240,669Sales returns reserve
    
    
    4,629,056
    
    
    
    4,185,958Accrued customer liabilities
    
    
    7,782,322
    
    
    
    8,403,653Managed care rebates
    
    
    2,731,880
    
    
    
    2,666,395Other accrued liabilities
    
    
    1,626,631
    
    
    
    1,845,268$
    21,527,560
    
    
    $
    21,341,943
 6. Credit facility and long-term debt
  7. Income taxes
  8. Earnings (loss) per common share
 11




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Three Months Ended March 31,Three Months Ended2008
    
    
    2009Weighted average number of common shares
outstanding for basic earnings per share
    
    
    17,898,772
    
    
    
    17,326,013Effect of dilutive securities: stock options and SARs
    
    
    1,098,080
    
    
    
    Weighted average number of common and common
equivalent shares outstanding
    
    
    18,996,852
    
    
    
    17,326,013
  9. Common stock repurchase program
 10. Fair Value Measurements
  11. Contingencies
Litigation
 FDA Matter
 12




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12. Significant concentrations of business and credit risk
 13




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Item 2. Managements discussion and analysis of financial condition and results of operations
  Company overview
    
    
    Retail  the retail channel generates the majority of
sales of blood glucose monitoring products in the United
States and includes chain drug stores, food stores and
mass merchandisers. We sell our products into the retail
channel on a direct basis or through domestic
distributors. Our retail net sales include products we
sell directly into the retail channel for the larger food
and drug retailers.
    
    Domestic distribution  the domestic distribution
channel includes sales to domestic wholesalers, including
AmerisourceBergen, Cardinal Health, McKesson, and
Invacare, who sell products to independent and chain food
and drug retailers, primary and long-term care providers,
durable medical equipment suppliers and mail service
providers.
    
    Mail service  the mail service channel includes sales
to leading mail service providers, who market their
products primarily to the Medicare population.
    
    International  the international channel consists of
sales on a direct basis in the United Kingdom and Canada
and through distributors in Latin America, Europe,
Australia and China.
 14




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Three Months Ended March 31,2008
    
    
    2009(in thousands)Net sales by channel:Retail
    
    $
    6,478
    
    
    
    25.8
    %
    
    $
    8,113
    
    
    
    33.0
    %Domestic distribution
    
    
    11,323
    
    
    
    45.1
    %
    
    
    9,176
    
    
    
    37.3
    %Mail service
    
    
    4,337
    
    
    
    17.3
    %
    
    
    5,284
    
    
    
    21.5
    %International
    
    
    2,982
    
    
    
    11.8
    %
    
    
    2,029
    
    
    
    8.2
    %Net sales
    
    $
    25,120
    
    
    
    100.0
    %
    
    $
    24,602
    
    
    
    100.0
    %
     15




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Results of operations
 Three Months Ended March 31,2008
    
    
    
    2009Net sales
    
    $
    25,120,280
    
    
    
    100.0
    %
    
    $
    24,601,628
    
    
    
    100.0
    %Cost of sales
    
    
    10,531,933
    
    
    
    41.9
    %
    
    
    13,018,394
    
    
    
    52.9
    %Gross profit
    
    
    14,588,347
    
    
    
    58.1
    %
    
    
    11,583,234
    
    
    
    47.1
    %Operating Expenses:Selling, general and administrative
    
    
    11,870,718
    
    
    
    47.3
    %
    
    
    12,108,847
    
    
    
    49.2
    %Research and development
    
    
    2,356,848
    
    
    
    9.4
    %
    
    
    1,883,603
    
    
    
    7.7
    %Total operating expenses
    
    
    14,227,566
    
    
    
    56.7
    %
    
    
    13,992,450
    
    
    
    56.9
    %Income (loss) from operations
    
    
    360,781
    
    
    
    1.4
    %
    
    
    (2,409,216
    )
    
    
    (9.8
    )%Interest income, net
    
    
    327,868
    
    
    
    1.3
    %
    
    
    50,148
    
    
    
    0.2
    %Other income (expense), net
    
    
    (526,581
    )
    
    
    (2.1
    )%
    
    
    119,805
    
    
    
    0.5
    %Other, net
    
    
    (198,713
    )
    
    
    (0.8
    )%
    
    
    169,953
    
    
    
    0.7
    %Income (loss) before income taxes
    
    
    162,068
    
    
    
    0.6
    %
    
    
    (2,239,263
    )
    
    
    (9.1
    )%Benefit for income taxes
    
    
    (559,298
    )
    
    
    (2.3
    )%
    
    
    (540,264
    )
    
    
    (2.2
    )%Net income (loss)
    
    $
    721,366
    
    
    
    2.9
    %
    
    $
    (1,698,999
    )
    
    
    (6.9
    )%
 Three months ended March 31, 2008 as compared to three months ended March 31, 2009
     16




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Liquidity and capital resources
     17




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Recent accounting pronouncements
 
 Item 3. Quantitative and qualitative disclosures about market risk
   
 Item 4. Controls and procedures
 Evaluation of Disclosure Controls and Procedures
 Changes in Internal Control Over Financial Reporting
 
 Part II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Litigation
  18




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FDA Matter
 
 Item 1A. Risk Factors
 The FDA has expressed concern over the use of blood glucose monitoring systems that use test strips
with the GDH-PQQ enzyme. Failure to resolve the FDAs concerns could materially harm our business.
 Competitive bidding for durable medical equipment suppliers could negatively affect our business.
 19




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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Purchases of Equity Securities by the Issuer and Affiliated Purchasers
 ISSUER PURCHASES OF EQUITY SECURITIES
 Appropriate DollarTotal Number of
    
    Value of SharesShares Purchased as
    
    That May Yet BeTotal Number of
    
    Average Price Paid
    
    Part of the
    
    Purchased Under thePeriod
    
    Shares purchased
    
    Per Share
    
    Repurchase Program
    
    Repurchase ProgramJanuary 1, 2009 to
January 31, 2009
    
    
    148,167
    
    
    $
    6.02
    
    
    
    148,167
    
    
    $
    4,103,660February 1, 2009 to
February 28, 2009
    
    
    99,836
    
    
    $
    6.66
    
    
    
    99,836
    
    
    $
    3,436,122March 1, 2009 to March 31,
2009
    
    
    224,685
    
    
    $
    6.01
    
    
    
    224,685
    
    
    $
    2,077,945Total at March 31, 2009
    
    
    472,688
    
    
    $
    6.15
    
    
    
    472,688
 
 Item 6. Exhibits
 20




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SIGNATURES
  HOME DIAGNOSTICS, INC.Date: May 8, 2009
    By:
    /s/ JOSEPH H. CAPPERName:
    Joseph H. CapperTitle:
    President and Chief Executive Officer
(principal executive officer) Date: May 8, 2009
    By:
    /s/ RONALD L. RUBINName:
    Ronald L. RubinTitle:
    Senior Vice President and Chief
Financial Officer (principal financial and
accounting officer) 21




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Exhibit Index
 ExhibitNumber
    
    Description10.7
    
    
    Sixth Amended and Restated Loan Agreement with Wachovia Bank N.A. dated April 30,
2009 (incorporated by reference to Exhibit 10.1 to Registration Content Report on
Form 8-K filed with the SEC on May 4, 2009).10.19
    *
    
    Form of Stock Appreciation Rights Award Agreement under 2006 Equity Incentive Plan.31.1
    
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934.31.2
    
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934.32.1
    
    
    Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350.32.2
    
    
    Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350.
 
 *
    
    Included herein. 22