AngioDynamics, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended November 30, 2017 (fiscal 2018 second quarter). The filing’s financial statements are unaudited. Amounts below are in millions except per-share data and percentages.
Financial results
| Metric | Three months ended Nov. 30, 2017 | Prior-year quarter | Six months ended Nov. 30, 2017 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $86.7 | $89.0 | $172.1 | $177.1 |
| Gross profit / margin | $42.7 / 49.3% | $45.0 / 50.6% | $84.0 / 48.8% | $90.0 / 50.8% |
| Operating income | $1.1 | $15.6 | $1.3 | $19.2 |
| Net income | $0.2 | $13.7 | $0.2 | $15.0 |
| Diluted EPS | $0.01 | $0.37 | $0.01 | $0.41 |
| Operating cash flow | Not separately stated for the quarter | $13.2 | $22.4 |
Quarterly operating margin was approximately 1.3%, compared with 17.5% a year earlier; six-month operating margin was approximately 0.7%, compared with 10.8%. The prior-year operating income comparison was materially affected by a $16.0 million gain from reducing contingent consideration in the prior-year quarter ($15.5 million for the six-month period); the current-year periods recorded $0.1 million and $0.2 million of expense, respectively.
- Sales by product, quarter: Peripheral Vascular $51.4 million, down 4%; Vascular Access $22.6 million, down 4%; Oncology/Surgery $12.8 million, up 8%. For six months, the respective changes were down 4%, down 6%, and up 10%.
- Sales by geography: U.S. sales fell 4% in both the quarter and six-month period; international sales rose 5% and 4%, respectively.
- Cash and liquidity: Cash and equivalents were $49.9 million at November 30, 2017, versus $47.5 million at May 31, 2017; marketable securities were $1.3 million. Current assets were $152.5 million and current liabilities $59.7 million.
- Debt: Principal debt outstanding was $95.0 million, including $5.0 million current; carrying value of long-term debt was $94.0 million. The term-loan rate was 2.75%, the revolver was undrawn, and the company reported compliance with credit covenants.
- Six-month cash flows: Operating activities provided $13.2 million; investing activities used $1.2 million, primarily for capital expenditures; financing activities used $10.3 million, including $9.5 million of contingent-consideration payments and $2.5 million of debt repayment.
Changes and operating drivers
- Sales declined 2.6% in the quarter and 2.8% for six months. Management attributed weakness primarily to Venous and Angiographic products in Peripheral Vascular and non-BioFlo products in Vascular Access. Venous sales faced reimbursement challenges; prior-year Angiographic sales benefited from competitor-recall-related backorders.
- Growth in Oncology/Surgery partly offset declines elsewhere. Solero microwave ablation contributed $1.7 million of year-over-year quarterly growth and $3.2 million for six months following FDA clearance in the quarter. BioFlo products grew 2% year over year and represented 49% of Vascular Access sales.
- Gross margin fell 1.3 percentage points in the quarter and 2.0 points over six months. Management cited a $1.7 million inventory provision following the decision to discontinue Radiofrequency Ablation sales in Japan, volume softness, product mix, and approximately 1% pricing headwinds. These pressures were partly offset by an expired royalty agreement and productivity.
- Quarterly acquisition, restructuring and other costs were $4.8 million, including $3.2 million of legal costs and $1.4 million of restructuring expense. Six-month costs were $7.8 million, including $5.0 million of legal costs and $2.6 million of restructuring expense.
Outlook, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management said cash, expected operating cash generation, and up to $150 million of revolving-credit capacity were expected to fund anticipated needs for at least the next 12 months; significant acquisitions could require additional financing.
- A manufacturing consolidation moving operations from Georgia and the U.K. to New York was expected to be completed in fiscal 2018’s third quarter. Estimated total costs were $6.25 million to $7.75 million; $4.0 million had been recorded through November 30, 2017.
- After quarter-end, the Tax Cuts and Jobs Act was enacted on December 22, 2017. The company estimated an approximately $9.3 million tax benefit, principally from remeasuring deferred tax liabilities on long-lived intangibles. It maintained a full U.S. valuation allowance on other net deferred tax assets.
- Two Bard patent-infringement cases remained pending; the Utah action was stayed while patent appeals proceeded, and the Delaware case was scheduled for trial beginning July 23, 2018. The company had not accrued for possible losses because they were not then considered both probable and reasonably estimable. AngioDynamics’ separate antitrust suit against Bard was also pending.
- The company had accrued $12.5 million for two DOJ investigations and said it agreed in principle with the government in August 2017 to resolve them for approximately that amount. It continued to cooperate with the investigations.
- The company reported an Acculis probe recall-related liability of $0.1 million at November 30, 2017, down from $2.6 million at May 31, 2017. Inventory reserves included $1.4 million related to the recall and a new $1.7 million reserve tied to termination of a Japanese distributor agreement.
- Risks identified include product development and market acceptance, regulatory actions and clinical outcomes, litigation, pricing and competition, foreign exchange, and integration of acquired businesses. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether sales and margins stabilize in the declining Peripheral Vascular and Vascular Access product lines, and whether Solero and BioFlo growth continues.
- The recurring operating earnings picture excluding the large prior-year contingent-consideration gain, and the ongoing impact of legal and restructuring costs.
- Timing and final cost of the manufacturing consolidation, and the outcome and accounting treatment of the DOJ matters and Bard litigation.
- Realization and timing of the estimated $9.3 million tax benefit, given the company’s valuation allowance position.
- Cash conversion, debt repayment capacity, and the usability and terms of the undrawn revolving facility; also note the $1.3 million auction-rate security matures in 2029 and may not be readily liquidated.