AngioDynamics, Inc. — Q2 FY2016 Form 10-Q
Reporting period: Three and six months ended November 30, 2015; unaudited. The company develops, manufactures and sells medical devices for vascular access, peripheral vascular disease, oncology and surgery.
Financial performance
| Metric | Q2 FY2016 | Q2 FY2015 | Six months FY2016 | Six months FY2015 |
|---|---|---|---|---|
| Net sales | $89.2m | $92.1m | $172.9m | $179.5m |
| Gross profit / margin | $45.8m / 51.4% | $47.7m / 51.7% | $89.0m / 51.5% | $93.5m / 52.1% |
| Operating income | $1.3m | $4.6m | $2.4m | $7.8m |
| Net income (loss) | $(0.4)m | $1.3m | $(1.1)m | $1.8m |
| Diluted EPS | $(0.01) | $0.04 | $(0.03) | $0.05 |
Cash flow, first six months: Operating cash flow was $14.3m, versus $3.2m a year earlier; investing cash outflow was $1.1m, versus $7.8m; financing cash outflow was $12.4m, versus $3.4m of inflow. Cash increased $0.6m to $19.0m.
Liquidity and debt, November 30, 2015: Cash and cash equivalents were $19.0m, with $1.6m of marketable securities. Total debt was $133.9m ($11.3m current and $122.7m long-term); $53.6m of revolving credit capacity remained available. Current assets were $151.6m and current liabilities $60.1m. Management said available cash, operating cash generation and revolver capacity should meet anticipated needs for at least 12 months.
Other items: The fair value of contingent consideration was $37.8m; the company estimated approximately $43.5m of undiscounted future payments. The six-month period included $6.1m of acquisition, restructuring and other expense, primarily litigation expense, accelerated depreciation, and M&A diligence costs.
Material changes and management commentary
- Quarterly sales fell 3% reported and 2% on a constant-currency basis, excluding the planned supply-agreement wind-down. Six-month sales fell 4% reported and 3% on a constant-currency basis.
- Peripheral Vascular grew 3% in Q2 and 1% for the six-month period. Vascular Access declined 11% and 9%, respectively, primarily following the Morpheus PICC recall and product discontinuance, with sales-force disruption also affecting performance. Oncology/Surgery declined 9% in both periods.
- Gross margin declined year over year, which management attributed to lower sales and currency effects that reduced revenue with limited corresponding cost relief; cost reductions from its Operational Excellence Program partly offset the pressure. Operating income and net income also declined.
- Management cited AngioVac, NanoKnife disposables and other new products as potential growth drivers, and said it expects a return to U.S. profitability in fiscal 2016. The filing provides no numerical sales or earnings guidance.
- The CFO resigned during the quarter; the Global Controller became interim CFO while the company sought a permanent successor. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Outlook, risks and contingencies
- A law enacted December 18, 2015 imposed a two-year moratorium on the 2.3% medical-device excise tax beginning January 1, 2016; the tax was scheduled to resume January 1, 2018 absent further action. Q2 included $1.0m of the tax, and the company reported $11.6m cumulatively since its introduction. Management said it would seek to invest tax savings in growth opportunities.
- The FDA closed out all outstanding warning letters in November 2015, including those concerning NanoKnife promotional activities and two facilities.
- AngioDynamics reported a $74.9m judgment against Biolitec entities; the U.S. Supreme Court denied their review petition on November 30, 2015. Collection and related proceedings remained ongoing, and the filing does not establish that the judgment will be collected.
- Bard patent-infringement suits concerning implantable ports remained unresolved. The company also disclosed DOJ investigations relating to LC Beads and alleged promotion of certain VenaCure EVLT products for uncleared indications; it said it could not predict their scope, duration or outcome.
- The company identified foreign-currency exposure, interest-rate exposure, potentially illiquid auction-rate securities ($1.6m), and possible future goodwill or intangible-asset impairment. It noted that its market capitalization was below book value and that future impairment could be material.
- The company had a cumulative U.S. pretax loss over the three years ended November 30, 2015, but recorded no valuation allowance against its $19.8m U.S. net deferred tax asset. Less favorable future results could require a material valuation allowance.
Important facts for investors to verify
- Whether the Morpheus-related disruption and declines in Vascular Access and international sales stabilize, and whether new products offset weakness.
- Whether projected fiscal 2016 profitability and the stated 12-month liquidity outlook are achieved, including compliance with debt covenants.
- The collectability and timing of the Biolitec judgment, and the outcomes of Bard litigation and the DOJ investigations.
- The financial impact of the medical-device-tax moratorium and its scheduled reinstatement, as well as the realization of deferred tax assets.
- Potential future impairment of goodwill and intangible assets, and the amount and timing of acquisition-related contingent payments.