AngioDynamics, Inc. — Form 10-Q Summary
Reporting period: The filing covers the quarter ended February 29, 2016 and the first nine months of fiscal 2016. The request metadata says “2015 Q3,” but the filing itself is for fiscal 2016 Q3.
Business context and reporting period
AngioDynamics develops, manufactures and sells medical devices used in vascular access, peripheral vascular disease, oncology and surgery. It reports one operating segment. The unaudited results compare the three and nine months ended February 29, 2016 with the comparable periods ended February 28, 2015.
Key financial metrics
| Metric | Three months ended Feb. 29, 2016 | Three months ended Feb. 28, 2015 | Nine months ended Feb. 29, 2016 | Nine months ended Feb. 28, 2015 |
|---|---|---|---|---|
| Net sales | $87.4 million | $86.6 million | $260.3 million | $266.1 million |
| Gross profit | $43.5 million | $37.9 million | $132.5 million | $131.3 million |
| Gross margin | 49.8% | 43.7% | 50.9% | 49.4% |
| Operating income (loss) | $2.7 million | $(10.2) million | $5.1 million | $(2.3) million |
| Net income (loss) | $0.6 million | $(4.3) million | $(0.5) million | $(2.5) million |
| Diluted earnings (loss) per share | $0.02 | $(0.12) | $(0.01) | $(0.07) |
- Cash flow: For the nine months, operating cash flow was $26.7 million, investing cash outflow was $3.9 million and financing cash outflow was $19.2 million. Cash increased $3.5 million to $21.9 million.
- Liquidity and debt: At February 29, 2016, cash and cash equivalents were $21.9 million, marketable securities were $1.7 million, and current assets were $149.4 million against current liabilities of $61.6 million. Total debt was $126.4 million; $58.6 million of revolving-facility capacity remained. The company reported compliance with its debt covenants.
- Other balance-sheet items: Contingent consideration was $37.9 million at fair value, including $12.7 million current. Goodwill was $361.3 million and net intangible assets were $168.1 million.
Material changes versus the prior comparable period
- Quarterly sales rose 1% reported, or 2% on a constant-currency basis. Peripheral Vascular sales increased 8%; Vascular Access declined 6% and Oncology/Surgery declined 8%.
- Nine-month sales declined 2% reported and 1% on a constant-currency basis. Peripheral Vascular grew 3%, while Vascular Access fell 8% and Oncology/Surgery fell 9%. The company cited the Morpheus PICC recall and discontinuance, sales-force disruption and fewer NanoKnife capital sales among the factors weighing on results.
- Quarterly gross margin improved to 49.8% from 43.7%, largely because the prior-year quarter included $5.0 million of Morpheus inventory expense. Excluding that prior-year charge, management said quarterly gross profit decreased $0.4 million, citing currency, pricing pressure and offsets from volume and cost reductions.
- Operating results improved substantially year over year, but comparisons were affected by prior-year impairment and recall charges and a large prior-year gain from revaluing contingent consideration. Current-quarter acquisition, restructuring and other items included $2.8 million of litigation expense and $0.3 million of accelerated depreciation.
Outlook, management commentary, risks and unusual items
- Management said it anticipated a return to profitability in fiscal 2016. It also said current cash, investments, operating cash generation and revolver availability should fund anticipated needs for at least 12 months. The filing provides no numerical revenue or earnings guidance.
- The company expects growth from new and existing products and operational-efficiency initiatives. Management noted that the medical-device excise tax was suspended for two years beginning January 1, 2016; absent further legislation, it is scheduled to return January 1, 2018. Cumulative tax expense through the quarter was $12.0 million.
- On March 31, 2016, CEO Joseph DeVivo decided to pursue other interests; James C. Clemmer was appointed CEO on April 4. CFO Mark Frost had resigned in the second quarter, and Michael Trimarchi was serving as interim CFO while a permanent successor was sought.
- The FDA closed out all outstanding warning letters in November 2015. The company entered an exclusive U.S. vein-market distribution agreement for Asclera on March 1, 2016, paying $4.3 million in fees. It also invested $2.0 million in EmboMedics warrants, with potential additional warrant purchases and milestone payments described in the filing.
- Contingencies include patent litigation with C.R. Bard, two DOJ investigations involving LC Beads and VenaCure EVLT, and efforts to collect judgments against biolitec-related defendants. The company said potential losses in the Bard matters could not be determined as probable or reasonably estimable; the scope and outcomes of the DOJ investigations were uncertain.
- Goodwill was not impaired in the December 2015 annual test, but fair value exceeded carrying value by only 9.2%, making the assessment sensitive to assumptions including sales growth, margins and discount rates. Management also noted that weaker-than-projected U.S. results could require a valuation allowance against deferred tax assets.
Important facts for investors to verify
- Whether the company achieves its stated expectation of returning to profitability in fiscal 2016, and whether sales and margins improve in the businesses affected by the Morpheus discontinuance.
- Debt repayment, covenant headroom and cash generation, including the effect of the interest-rate swap’s May 2016 maturity and subsequent floating-rate exposure.
- Developments and potential financial exposure in the Bard litigation, DOJ investigations and biolitec judgment-collection efforts.
- Whether assumptions supporting goodwill recoverability and realization of the $19.8 million U.S. net deferred tax asset remain supportable.
- Execution and financial impact of the Asclera and EmboMedics arrangements, including any additional contingent payments.