Business context and reporting period
AngioDynamics, Inc. designs, manufactures and sells medical devices for vascular access, peripheral vascular disease, oncology and surgery. This unaudited Form 10-Q covers the fiscal second quarter and first six months ended November 30, 2012; comparisons are with the periods ended November 30, 2011.
Results reflect the May 2012 Navilyst acquisition and the October 2012 Vortex acquisition, as well as the loss of U.S. distribution rights for LC Beads after December 31, 2011. Effective June 1, 2012, the company began reporting as one operating segment.
Key financial metrics
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Three months ended Nov. 30, 2012 | Three months ended Nov. 30, 2011 | Six months ended Nov. 30, 2012 | Six months ended Nov. 30, 2011 |
|---|---|---|---|---|
| Net sales | $87.0 | $58.1 | $170.4 | $112.5 |
| Gross profit | $44.1 | $33.2 | $83.5 | $65.4 |
| Gross margin | 50.7% | 57.2% | 49.0% | 58.1% |
| Operating income | $5.1 | $3.9 | $5.8 | $6.6 |
| Net income | $2.0 | $2.3 | $1.2 | $3.7 |
| Diluted EPS | $0.06 | $0.09 | $0.04 | $0.15 |
| Operating cash flow | Not separately reported for quarter | $5.5 | $5.7 |
For the six months, investing cash flow was negative $6.4 million and financing cash flow was negative $3.3 million; cash and cash equivalents declined $4.2 million to $19.3 million. Cash, cash equivalents, escrow receivable and marketable securities totaled $24.0 million at November 30, versus $40.1 million at May 31, 2012. Total debt was approximately $146.3 million, including $7.5 million current and $138.8 million long-term. The $50 million revolving facility was undrawn; the company reported compliance with its debt covenants.
At November 30, current assets were $151.5 million and current liabilities $60.4 million. Inventory was $62.3 million. In addition to debt, the balance sheet included $60.5 million of Vortex contingent consideration, of which $8.1 million was classified current.
Material changes versus prior periods
- Second-quarter sales rose $28.9 million, approximately 50%; six-month sales rose $57.9 million, approximately 51%. Growth primarily reflected Navilyst products, higher EVLT sales and international microwave-product sales through the Microsulis relationship.
- Peripheral Vascular and Vascular Access sales increased substantially, while Oncology/Surgery sales fell 39% in the quarter and 38% year to date, mainly because LC Beads sales ceased. LC Beads sales in the comparable 2011 periods were $9.1 million for the quarter and $17.1 million for six months.
- Gross margin fell to 50.7% for the quarter and 49.0% year to date, primarily due to the acquired Navilyst product mix. Six-month gross profit also included $3.4 million of Navilyst inventory step-up amortization and $0.8 million of Quality Call to Action costs.
- Despite higher quarterly operating income, six-month operating income declined. Net income and EPS declined in both comparisons, with higher acquisition-related interest expense and lower gross margins among the factors.
- Weighted-average basic shares rose to 34.8 million for the quarter from 25.2 million, largely reflecting shares issued for Navilyst; this affected per-share comparisons.
Outlook, commentary, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expects continued substantial R&D investment, notes that margins depend on product mix, technology and pricing, and says current cash and investments, operating cash generation and the revolving facility should meet anticipated capital needs for at least 12 months. Significant future cash acquisitions may require external financing.
- A 2.3% U.S. medical-device excise tax was scheduled to take effect January 1, 2013. The company estimated that approximately 60–65% of worldwide sales would be subject to it; the taxable base is generally 75% of the selling price.
- FDA inspections produced multiple Form 483 observations at Queensbury and Fremont, following an earlier Warning Letter. The company reported corrective actions and continued engagement with FDA; unresolved issues could lead to additional regulatory action, including restrictions, fines, seizure or recall. The FDA also requested further information and protocol changes for the proposed NanoKnife pancreatic-cancer trial; the company intended to continue working with FDA.
- Vortex was acquired for estimated consideration of $75.4 million, including $15.1 million paid at closing and $60.3 million estimated fair value of earn-out consideration. The earn-out is linked to AngioVac sales over ten years, has guaranteed minimum payments, and has no cap on total sales-based payments. Its fair value depends on Level 3 estimates and is subject to remeasurement.
- Other unusual items included Navilyst transaction and severance costs, Vortex transaction costs, UK facility closure costs, litigation costs and a $0.8 million net gain on sale of the PDT laser product line. The UK facility closure was expected to cost approximately $3.4 million in total.
- Key legal matters include a $16.4 million partial judgment, plus prejudgment interest, in the company’s case against biolitec; patent litigation brought by C.R. Bard, stayed pending patent-office proceedings; and Cardinal Health arbitration and related Ontario litigation. The company said outcomes and potential financial effects of certain matters were not determinable. Cirrex voluntarily dismissed its suit in December 2012.
- Interest-rate exposure is partly hedged with a $100 million swap. Two failed-auction municipal securities totaling $1.85 million remained held; issuers were current on interest payments, but near-term liquidity was uncertain.
Most important facts for investors to verify
- Whether acquired-product sales and integration deliver sustainable growth, and how much reported growth reflects acquisitions versus organic performance.
- Whether gross margins recover from the Navilyst-related mix and inventory step-up effects, and the ongoing impact of amortization and acquisition costs.
- Cash generation, inventory levels, debt repayment and covenant headroom, alongside the cash requirements of Vortex’s potentially uncapped earn-out.
- Progress on FDA quality-system remediation and the regulatory path for the NanoKnife trial and other products, including the effect of the medical-device excise tax.
- Developments in material litigation, including collection of the biolitec judgment and outcomes that could create financial exposure.