AngioDynamics, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and nine months ended February 28, 2013, AngioDynamics’ fiscal third quarter. The company develops, manufactures and sells medical devices for vascular access, peripheral vascular disease, oncology and surgery. Results include Navilyst from May 22, 2012, Vortex from October 15, 2012, and Microsulis assets acquired February 1, 2013. The company reported as one operating segment beginning in fiscal 2013. Interim financial statements are unaudited.
Key financial metrics
| Metric | Three months ended Feb. 28, 2013 | Nine months ended Feb. 28, 2013 |
|---|---|---|
| Net sales | $81.6 million | $252.0 million |
| Gross profit / margin | $41.2 million / 50.5% | $124.7 million / 49.5% |
| Operating income | $0.1 million | $5.9 million |
| Net income (loss) | $(1.0) million | $0.3 million |
| Diluted earnings (loss) per share | $(0.03) | $0.01 |
| Cash from operating activities | Not separately reported for the quarter | $15.5 million |
At February 28, 2013, cash, cash equivalents and marketable securities totaled $18.8 million (cash and equivalents alone: $16.6 million). Total debt was approximately $144.4 million, comprising $7.5 million current and $136.9 million long-term debt. The company also recorded $74.3 million in contingent acquisition consideration, including $9.1 million current. Its $50 million revolving credit facility was undrawn, and it was in compliance with its debt covenants.
Material changes versus prior comparable periods
- Quarterly sales rose 58% from $51.6 million; nine-month sales rose 54% from $164.1 million. Growth was primarily driven by Navilyst products and, internationally, microwave products. The acquired businesses make year-over-year comparisons less directly comparable.
- Quarterly gross margin fell to 50.5% from 57.0%; nine-month gross margin fell to 49.5% from 57.8%. Management attributed the decline mainly to the acquired Navilyst product mix, inventory step-up amortization, and, year to date, quality-program costs.
- Quarterly operating results improved from a $2.8 million loss to near breakeven; nine-month operating income increased from $3.9 million to $5.9 million. However, nine-month net income declined from $1.9 million to $0.3 million, as net other expense rose to $5.7 million, primarily due to interest on acquisition-related debt.
- Oncology/Surgery sales declined 23% for the quarter and 34% year to date, mainly because U.S. LC Bead distribution rights expired at the end of 2011. Vascular product categories grew significantly following the Navilyst acquisition.
- Nine-month operating cash flow increased to $15.5 million from $12.5 million. Cash declined by $6.9 million during the period, reflecting investing and financing outflows; investing included acquisition spending and capital expenditures, while financing primarily reflected debt repayment.
Outlook, management commentary, risks and unusual items
- Management said current cash and investments, operating cash generation and the undrawn revolver should meet anticipated capital needs for at least 12 months. Significant future cash acquisitions may require external financing. No specific revenue or earnings guidance was provided.
- The company expects continued substantial R&D investment, while noting that business downturns could lead to spending reductions. Management identified product mix, new technologies and pricing pressure as factors that could limit or reduce gross margins.
- The 2.3% medical device excise tax took effect January 1, 2013; the company estimated 60–65% of worldwide sales would be subject to it and recorded $0.7 million expense for the quarter.
- Acquisition and restructuring items included a $1.6 million charge for discontinuing the Benephit product (impairment and inventory obsolescence), Navilyst-related transaction and severance costs, UK facility closure costs, litigation costs and Vortex acquisition costs. The nine-month period also included a $0.8 million net gain on sale of the PDT laser product line.
- Acquisition contingent consideration is based on projected sales and includes uncapped potential payments. The estimated undiscounted future consideration expected to be paid was approximately $93 million; its $74.3 million recorded fair value uses significant unobservable inputs and is subject to remeasurement.
- FDA quality matters remain important: prior Warning Letter and Form 483 observations involved quality systems, reporting, complaint handling and related controls. The company warned that unresolved matters could result in regulatory or legal action, including operating restrictions, recalls, fines or penalties. FDA had also requested additional information and protocol changes for the proposed NanoKnife pancreatic cancer trial.
- Goodwill was not impaired at the December 2012 annual test, but estimated reporting-unit fair value exceeded carrying value by only 5%. Management noted that adverse business, regulatory or market developments could prompt interim testing and possible impairment.
- Material litigation includes a $23.2 million partial judgment for AngioDynamics against biolitec, with related proceedings ongoing; Bard patent litigation concerning implantable ports remains stayed pending patent reexamination. Cardinal Health-related proceedings also remain unresolved. The company stated that the outcomes and potential impacts of certain cases could not be determined.
Important facts for investors to verify
- Whether acquired-product growth can be sustained and translated into improved gross margins and profitability, particularly after LC Bead distribution ended.
- The timing, conditions and potential cash burden of Vortex and Microsulis earn-outs, including the sensitivity of their fair-value estimates to sales assumptions.
- Progress on FDA quality remediation and the NanoKnife trial application, and any new regulatory findings or restrictions.
- Debt repayment capacity, covenant headroom and liquidity after acquisition obligations and working-capital needs.
- Whether litigation outcomes, goodwill valuation assumptions or acquisition purchase-price allocations change materially.