AngioDynamics, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended November 30, 2014 (fiscal 2015); compared with the prior-year periods. Financial statements are unaudited. Prior-period figures were revised for identified immaterial errors.
Business context and financial performance
AngioDynamics develops, manufactures and sells medical devices for vascular access, peripheral vascular disease, oncology and surgery. It reports one operating segment. Second-quarter revenue grew across product categories and in U.S. and international markets, partly offset by lower supply-agreement sales.
| Metric | Three months ended Nov. 30, 2014 | Prior year | Six months ended Nov. 30, 2014 | Prior year |
|---|---|---|---|---|
| Net sales | $92.1 million | $88.6 million | $179.5 million | $172.2 million |
| Gross profit / margin | $47.7 million / 51.7% | $44.9 million / 50.7% | $93.5 million / 52.1% | $87.5 million / 50.8% |
| Operating income / margin | $4.6 million / 5.0% | $1.4 million / 1.6% | $7.8 million / 4.4% | $2.8 million / 1.7% |
| Net income (loss) | $1.3 million | ($0.3 million) | $1.8 million | ($0.6 million) |
| Diluted EPS | $0.04 | ($0.01) | $0.05 | ($0.02) |
Quarterly sales increased 4%; six-month sales increased 4%. Quarterly growth was led by Vascular Access (+9%) and Oncology/Surgery (+9%); six-month growth included Oncology/Surgery (+10%), Vascular Access (+7%) and Peripheral Vascular (+3%). International sales rose 9% in the quarter and 14% over six months. Supply-agreement sales fell 32% and 30%, respectively.
Cash flow, debt and liquidity
- Cash and cash equivalents were $14.9 million at November 30, 2014, down from $16.1 million at May 31; marketable securities were $1.7 million. The securities include auction-rate securities whose auctions had failed, although issuers remained current on interest.
- Six-month operating cash flow was $3.2 million, down from $15.8 million. Higher inventory and lower accounts payable/accrued liabilities were significant uses of cash; inventory rose to $75.3 million from $61.2 million.
- Investing cash outflow was $7.8 million, primarily for fixed assets; financing cash inflow was $3.4 million. Cash declined by $1.2 million during the period.
- Total debt was approximately $155 million. The company had $38.6 million of unused revolving-credit capacity and reported compliance with both credit-agreement financial covenants at quarter-end. Debt is secured by substantially all company and guarantor assets.
- Management said cash and investment balances, 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.
Material changes and management commentary
- Gross margin improved, which management attributed to operating efficiencies and a more favorable product mix. Operating income rose substantially versus the prior-year quarter and six-month period.
- R&D expense declined, partly due to restructuring savings and project timing. G&A expense increased, primarily from ERP implementation costs and stock-based compensation.
- The company initiated a restructuring of finance, R&D and sales and marketing functions to improve profitability; six-month severance expense was $1.1 million. Acquisition, restructuring and other costs totaled $5.0 million for the six months.
- Income-tax expense was $2.4 million for the six months, versus a tax benefit in the prior-year period. The company cited the absence of the expired R&D tax-credit benefit and a discrete tax charge following depletion of its share-based compensation APIC pool. A retroactive extension of the research credit was expected to benefit the following quarter.
- No specific revenue or earnings guidance was provided. Management identified new products, operational excellence and slower growth in operating expenses than sales as intended drivers of future growth and margin improvement.
Risks, contingencies and unusual items
- Internal controls: Management concluded disclosure controls and internal control over financial reporting were ineffective as of May 31 and November 30, 2014, due to material weaknesses involving account reconciliations, financial-reporting expertise and ERP-related processes. The company revised prior-period financial information for errors management considered immaterial individually and in aggregate, including approximately $1.2 million of prepaid-asset expense and $0.4 million of depreciation; approximately $5.4 million of contingent consideration was reclassified from current to long-term. Remediation was underway, with completion and testing expected during fiscal 2015.
- FDA: A November 5, 2014 Warning Letter cited manufacturing and design-control issues involving packaging validation, aging tests, PICC product testing and non-conforming product controls. The company planned a comprehensive response and did not expect a material adverse financial effect.
- Legal matters: The company is pursuing judgments against biolitec entities, including a $74.9 million judgment under appeal. It is also defending a patent suit by C.R. Bard concerning implantable ports; the case is stayed during Patent Office proceedings. The DOJ subpoenaed the company in an investigation involving BTG’s LC Bead product, and the outcome is unknown. EndoVention filed an unserved complaint alleging AngioVac patent infringement.
- Contingent consideration: Fair value was $57.4 million, including $9.8 million current and $47.6 million long-term; the company estimated approximately $67.7 million of undiscounted potential future payments. Valuation depends on projected sales, payment probabilities and timing.
- Additional risks include debt covenants and interest rates, product development and acceptance, regulatory actions, litigation, competition, foreign exchange and execution of acquisitions and remediation. The filing states there were no material changes to previously disclosed risk factors other than the internal-control risk.
Most important facts for investors to verify
- Progress and independent effectiveness of the internal-control remediation plan, and whether further financial-statement revisions are required.
- Whether operating cash flow recovers as inventory and working-capital needs normalize.
- Compliance with debt covenants, refinancing or repayment needs, and the capacity available under the revolving facility.
- Resolution and potential financial impact of the FDA Warning Letter, DOJ investigation and pending litigation.
- Realization of product-led growth and margin improvements, and the cash and earnings effects of contingent acquisition payments and tax items.