AngioDynamics, Inc. — Form 10-Q Summary
Reporting period: Three months ended August 31, 2014 (the first quarter of fiscal 2015). AngioDynamics develops, manufactures and sells medical devices for vascular access, peripheral vascular disease, oncology and surgery. Figures below are in U.S. dollars; financial statements are unaudited. Prior-period comparisons reflect revisions described in the filing.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Net sales | $87.3 million | $83.6 million |
| Gross profit / margin | $45.8 million / 52.5% | $42.6 million / 50.9% |
| Operating income / margin | $3.2 million / 3.7% | $1.4 million / 1.7% |
| Net income (loss) | $0.5 million | ($0.4 million) |
| Diluted earnings (loss) per share | $0.01 | ($0.01) |
| Operating cash flow | $5.4 million | $7.3 million |
| Capital expenditures | $5.1 million | $2.9 million |
- Sales increased 4.4% year over year. Peripheral Vascular sales rose 3.8% to $47.3 million; Vascular Access rose 4.9% to $26.5 million; Oncology/Surgery rose 10.8% to $12.4 million. Supply-agreement sales fell 28.3% to $1.2 million.
- International sales increased 18.6% to $17.6 million; U.S. sales rose 2.1% to $68.6 million. Growth was attributed mainly to AngioVac, port products, microwave and NanoKnife products, and international fluid-management sales; RFA and supply-agreement sales declined.
- Gross margin improved primarily from operating efficiencies and product mix. Operating expenses included $2.7 million of acquisition, restructuring and other items, including $1.1 million of severance, $0.8 million for the operational excellence program, and $0.8 million of litigation and other costs.
- Income tax expense was $0.9 million; management reported a 67% effective rate including discrete items, including a $0.354 million charge related to depletion of the share-based compensation APIC pool. The expired R&D tax credit also affected the comparison.
Balance sheet and liquidity
- At August 31, 2014, cash and cash equivalents were $13.8 million and marketable securities were $1.7 million. Cash declined $2.3 million during the quarter.
- Total debt was approximately $141.4 million: $5.0 million current term debt, $90.0 million long-term term debt and $46.4 million drawn on the revolving facility. The company had $53.6 million of remaining revolver capacity and reported compliance with debt covenants.
- Contingent consideration had a fair value of $66.0 million, of which $10.9 million was current. Estimated undiscounted future contingent consideration was approximately $77.0 million.
- Operating cash flow fell to $5.4 million, with inventory and prepaid-asset increases and lower accounts payable/accruals among the cash uses. Investing outflow was $5.3 million, primarily fixed-asset additions; financing outflow was $2.4 million, including debt repayment and contingent-consideration payments.
- Management stated that cash and investments, operating cash generation and available revolver capacity were expected to meet anticipated capital needs for at least 12 months. Significant cash acquisitions could require external financing.
Changes, outlook and material matters
- Management cited new-product sales, operating efficiencies and product mix as contributors to improved results. It continued to emphasize product development and operational excellence, and expected expense growth to be managed below sales growth; the filing provides no specific financial guidance.
- The company initiated a restructuring of finance, R&D and sales and marketing organizations to improve profitability. The quarter included $1.1 million of severance expense.
- The company corrected immaterial errors dating back to 2011, primarily involving recognition of prepaid-asset expenses and depreciation. It concluded the errors were not material individually or in aggregate to previously issued statements, but revised comparative information. The fiscal 2014 annual report was to be amended.
- Management identified material weaknesses in internal control over financial reporting and concluded disclosure controls were ineffective as of May 31 and August 31, 2014. Issues included account-reconciliation controls, financial-reporting expertise and ERP-related processing. Remediation included hiring accounting resources and a Global Controller, improving policies and training, and reviewing ERP processes. The company expected remediation and testing during fiscal 2015, while noting efforts might not succeed.
- Litigation and investigations include a $74.9 million judgment in AngioDynamics’ favor against Biolitec-related defendants, which is on appeal; a separate Biolitec bankruptcy proceeding; a stayed patent case brought by C.R. Bard, with 40 of 41 challenged claims rejected by the Patent Office but appeals pending; and a DOJ subpoena concerning BTG’s LC Bead product. The filing says the company cannot predict the scope, duration or outcome of the DOJ investigation.
- The company held $1.7 million in two auction-rate securities with failed auctions; issuers remained current on interest payments, but the investments may not be readily liquidated. Other cited risks include product development and acceptance, regulatory actions, clinical trials, litigation, competition, pricing and integration of acquisitions.
Important facts for investors to verify
- Progress and testing of the internal-control remediation plan, and the expected amendment to the fiscal 2014 Form 10-K.
- Whether sales growth and gross-margin gains continue, particularly across new products and international markets, and whether RFA and supply-agreement declines persist.
- Cash conversion, inventory growth, capital spending, debt repayments, covenant compliance and capacity under the revolving facility.
- Timing, probability and amounts of contingent acquisition payments, and the collectability and appeal status of the Biolitec judgments.
- Developments in the Bard patent proceedings, the DOJ investigation, and liquidity or valuation of the failed-auction securities.