Bovie Medical Corporation (now Apyx Medical Corp.) — Q2 2012 Form 10-Q
Period: Three and six months ended June 30, 2012; filed August 14, 2012. The filing is under the name Bovie Medical Corporation. Financial amounts below are in U.S. dollars; “million” is used for readability.
Business context
Bovie manufactured and marketed electrosurgical devices, battery-operated cauteries, and other medical products. Sales were primarily through distributors serving more than 6,000 hospitals and other healthcare customers; products were sold in more than 150 countries. The filing describes ongoing development of J-Plasma, ICON VS vessel-sealing technology, and Aaron 1450.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Sales | $7.440m | $6.841m | $14.173m | $12.995m |
| Gross profit | $2.856m | $3.045m | $5.652m | $5.478m |
| Gross margin | 38.4% | 44.5% | 39.9% | 42.2% |
| Operating income | $0.240m | $0.549m | $0.636m | $1.135m |
| Net income | $0.152m | $0.429m | $0.339m | $0.921m |
| Diluted EPS | $0.01 | $0.02 | $0.02 | $0.05 |
| Operating cash flow | Not separately presented | Not separately presented | $0.454m | $2.217m |
Second-quarter sales rose 8.8%, while net income fell 64.5%. For the first half, sales increased 9.1%, but net income declined 63.2%. First-half sales gains came from all three product categories: electrosurgical products rose 4.0%, cauteries 5.1%, and other products 71.0%.
Quarterly gross profit declined despite higher sales, largely because of a less favorable product mix, including more lower-margin OEM generators and third-party medical lighting systems, and higher labor costs. First-half gross profit increased 3.2%, but gross margin still contracted. Operating expenses were broadly lower year over year for the first half, while R&D and professional services costs increased.
First-half 2011 results included a $0.750m gain from a Salient/Medtronic litigation settlement. Under that settlement, Bovie agreed to exit the saline-enhanced monopolar and bipolar RF device business worldwide through February 2015. The gain was nonrecurring and contributed to the year-over-year net-income comparison.
Financial position and liquidity
At June 30, 2012, cash and cash equivalents were $4.983m, working capital was approximately $14.4m, total assets were $28.037m, and total liabilities were $5.517m. Net inventory was $7.355m, down from $8.178m at December 31, 2011. Trade receivables were $2.625m; days sales outstanding increased to 39.4 from 34.7 a year earlier.
Industrial revenue bonds outstanding were approximately $3.5m, refinanced in October 2011 at a fixed 5.6% rate, amortizing over 20 years and ballooning in November 2018. First-half bond repayments were $0.064m. The $6m secured revolving credit line had no borrowings; reported borrowing availability was approximately $3.8m. A separate equipment facility had up to $1m available. The company said it was covenant-compliant and expected cash and operating cash flows to meet commitments for the next 12 months.
Investing cash outflow was $0.287m in the first half, primarily for property and equipment. Cash increased by $0.103m to $4.983m. Operating cash generation was materially below the prior-year period; the filing attributes part of the comparison to the prior-year settlement gain, though the cash-flow statement also shows working-capital movements.
Management commentary, outlook, and risks
Management gave no quantified revenue or earnings guidance. It said development spending, including for J-Plasma and ICON VS, was expected to be funded from operating cash flows and that no material asset purchase or acquisition beyond ordinary cash-flow or credit capacity was contemplated over the next 12 months. Management characterized the business as generally nonseasonal.
International sales fell 17.9% in the first half and represented approximately 18.5% of revenue, versus 24.2% in the comparable 2011 period. Customer concentration increased: two customers represented 15% and 11% of first-half 2012 sales, and the ten largest customers accounted for 68% of revenue.
Key risks identified include competition and pricing pressure, demand and acceptance of new products, dependence on major customers and OEM arrangements, supply interruptions or cost changes (including foreign suppliers), inventory obsolescence, and litigation. The company reported no material changes to the risk factors in its 2011 Form 10-K. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Contingencies and unusual items
- A July 2012 action by Steven Livneh and related entities alleges breach of the February 2012 settlement and seeks, among other relief, damages exceeding $4m. Bovie disputed the claims, sought dismissal and arbitration, and said the potential loss could not be estimated; no accrual was recorded for this new action.
- A stockholder derivative action remained pending; Bovie said the outcome and potential loss could not be estimated and recorded no provision.
- A former executive’s employment-related action had an estimated possible loss range of zero to approximately $0.6m, plus indeterminable legal fees. No provision was recorded; a motion to dismiss had been filed after the complaint was amended in July 2012.
- Remaining Livneh settlement installments were reported at $0.372m ($0.279m current and $0.093m long term). The agreement also included asset and intellectual-property transfers, royalties, and a China license for Seal-N-Cut.
- Terminating the amended Bulgarian supplier arrangement before July 1, 2014 could trigger approximately $0.259m of contingent liabilities. The filing also lists $3.807m in 2012 purchase commitments and $0.368m in future operating lease payments.
Important facts for investors to verify
- Whether sales growth can translate into improved gross margin given product mix and the cost profile of third-party lighting products.
- Whether operating cash flow recovers from the first-half $0.454m level and how receivables, inventory, and customer concentration evolve.
- Current bond balances, credit-facility availability, covenant compliance, and the terms and usage of the equipment facility.
- Developments and potential financial exposure in the Livneh, derivative, and former-executive litigation, as well as compliance with the Livneh settlement.
- Progress, commercialization, and funding needs for J-Plasma, ICON VS, and other product-development initiatives.