AngioDynamics, Inc. — Q1 FY2019 10-Q
Reporting period: Three months ended August 31, 2018. AngioDynamics develops, manufactures, and sells medical devices for vascular access, vascular interventions, and oncology. Comparisons below are to the three months ended August 31, 2017 unless otherwise noted.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Net sales | $85.3 million | $85.4 million |
| Gross profit / margin | $44.5 million / 52.1% | $41.2 million / 48.3% |
| Operating income | $0.3 million | $0.1 million |
| Net loss | $0.5 million; $(0.01) per diluted share | $0.04 million; approximately $0.00 per share |
| Cash from operations | $(8.9) million | $3.0 million |
- Revenue was nearly unchanged. Vascular Interventions & Therapies grew 0.3% to $50.0 million and Vascular Access grew 2.4% to $23.8 million; Oncology declined 6.1% to $11.6 million. U.S. sales fell 1.8%, while international sales rose 7.1%.
- Gross margin increased 3.8 percentage points. Management attributed the improvement principally to an expired royalty agreement, manufacturing consolidation, productivity and favorable sales volume/mix, partly offset by freight and pricing pressures.
- Operating expenses included $4.4 million of acquisition, restructuring, and other items, up from $3.0 million. R&D expense rose 19% to $7.7 million; selling and marketing was broadly flat at $19.4 million; G&A increased 5% to $8.5 million.
- At August 31, cash and cash equivalents were $24.8 million, marketable securities $1.4 million, and total current assets $120.9 million versus current liabilities of $45.8 million. The filing reports $91.3 million of principal debt outstanding ($90.4 million carrying value); the term-loan rate was 3.58%. The company reported covenant compliance.
- Operating cash outflow reflected, among other items, the $12.5 million DOJ settlement payment, increased inventory, and a two-day increase in days sales outstanding. Investing cash outflow was $37.7 million, including $37.0 million paid for BioSentry. Cash declined $49.3 million during the quarter.
Material changes and notable items
- On August 14, the company acquired BioSentry for $40.0 million: $37.0 million paid and $3.0 million contingent consideration. BioSentry contributed $0.4 million of quarterly sales; its purchase-price allocation includes $21.7 million of goodwill.
- On September 21, after quarter-end, AngioDynamics acquired RadiaDyne for $50.0 million plus up to $40.0 million of contingent consideration tied to technology and revenue milestones. The company subsequently drew $55.0 million on its revolver. It stated that approximately $70.0 million of additional borrowing capacity was available under its leverage limits.
- The company completed and paid approximately $12.7 million to settle DOJ matters concerning LC Beads and VenaCure EVLT promotion. The related $12.5 million accrual had been recorded previously.
- ASC 606 was adopted effective June 1, 2018; management said adoption did not materially affect the financial statements. The company continues to carry a valuation allowance on certain deferred tax assets, citing its history of losses and lack of sustained profitability.
Outlook, risks, and contingencies
No quantified revenue or earnings guidance is provided in the filing. Management expects growth from geographic expansion, market penetration, new products, and a greater international direct presence, and cited its capital structure and expected operating cash generation as supporting investment and business-development activity. It stated that available cash, operating cash generation, and revolver capacity were expected to cover anticipated needs for at least 12 months, while noting significant acquisitions could require additional financing.
- Management highlighted reimbursement challenges in Venous, continued PICC declines, competitive and pricing pressure, and the prior-year timing of $1.6 million in Acculis replacement shipments as factors affecting sales comparisons. Oncology sales were also affected by lower ablation product sales.
- Patent litigation with C.R. Bard remains unresolved. The Delaware patent case was rescheduled for March 2019; the separate Utah action remains stayed pending patent proceedings. The company says it cannot determine whether a loss is probable or reasonably estimable and has not accrued for these cases.
- AngioDynamics’ antitrust case against Bard survived Bard’s motion to dismiss; the company seeks monetary damages and injunctive relief. Outcome and potential recovery are uncertain.
- Other disclosed risks include foreign-exchange and floating-interest-rate exposure, integration and milestone risks related to acquisitions, and potential inventory obsolescence. The filing reported no material changes to the risk factors in the prior Form 10-K.
Important facts for investors to verify
- Whether the BioSentry and RadiaDyne acquisitions deliver expected commercial growth and how RadiaDyne’s contingent consideration and revolver borrowing affect leverage and liquidity.
- Whether operating cash flow improves after the DOJ settlement payment and working-capital outflows, particularly inventory and receivables.
- Whether Oncology sales recover and growth in Vascular Access and international markets offsets U.S. declines and competitive pressures.
- Developments, potential costs, and outcomes in the Bard litigation and remaining DOJ-related matters.
- Future gross-margin sustainability, deferred-tax valuation-allowance judgments, and recoverability of inventory and the auction-rate security.