AngioDynamics Inc. ANGO reported unimpressive third-quarter fiscal 2015 results. EPS adjusted for one-time expenses were 12 cents, which missed the Zacks Consensus Estimate by 4 cents and fell 14.3% from the year-ago quarter. The decline can be primarily attributed to lower sales and contracting margins in the quarter.
Sales declined 1.8% (flat at constant currency) year over year to $86.6 million and also fell below the Zacks Consensus Estimate of $89 million. During the quarter, the company voluntarily recalled the Morpheus PICC product, which coupled with currency headwinds (a stronger dollar against Euro and Canadian dollar) and extreme winter weather conditions in the U.S. impacted sales.
AngioDynamics also announced partnership with EmboMedics – a developer of injectable and resorbable microspheres. The alliance will help the company to re-enter the embolic market, which is currently worth approximately $150 million.
However, the news failed to cheer investors as evident from the share price decline of 5.75% ($1.05) in after-hours trading.
Segment Details
Peripheral Vascular business sales were down 2.5% to $46.2 million. Fluid management business reported stable growth, while EVLT sales declined 7%. Management noted in the conference call that “the U.S. increase in family deductibles is having an impact on the seasonality of elected procedures like Venous Ablation”. This negatively impacted EVLT sales in the quarter.
AngioVac sales inched up 4% from the year-ago quarter to $2.3 million, while procedure volumes moved up from 111 to 132. The modest growth in AngioVac sales was due to less numbers of account openings, which was primarily impacted by the launch of the second generation product.
Vascular Access revenues declined 3.2% to $26.4 million. Meanwhile, Ports and Dialysis product lines sales were up 4% and 6%, respectively. PICC sales declined 11% owing to the product recall. BioFlo products now account for 31% of all vascular access products.
Sales at the Oncology/Surgery business increased 9.2% from the year-ago quarter to $13.1 million. In the Oncology/Surgery business, Microwave sales surged 25%. NanoKnife sales were up 12% on 25% growth in NanoKnife disposable sales.
U.S. sales decreased 2% from the year-ago quarter to $68.4 million, while international sales climbed 3% (8% at constant currency) to $17.3 million. Of the international sales, 70% came from distributed revenues and 30% were from direct markets (up from 25% in the year-ago quarter).
Operational Details
Gross margin contracted 140 basis points (bps) from the year-ago quarter to 49.5%, primarily due to the negative impact of inventory provision, foreign exchange, shut down costs during holiday and higher warranty expenses.
Adjusted EBITDA, as a percentage of revenues, increased 10 bps to 15.9%.
Operating expenses including medical device tax ($1.1 million), as a percentage of revenues, decreased 50 bps to 39.4%. The year-over-year decrease in operating expenses can be attributed to 10 bps decline in research & development (R&D) expenses and 110 bps plunge in sales & marketing expenses, partially offset by a 70 bps increase in general & administrative (G&A) expenses.
The R&D expense decline can be attributed to benefits from restructuring savings and delays in the clinical project, partially offset by higher spending on second generation Microwave products. Sales and marketing expenses declined owing to lower U.S. commissions and open territory benefits, and cost-control actions. Meanwhile, G&A expenses increased which reflects a rebalancing in the company’s bonus plan.
Meanwhile, adjusted operating margin expanded 50 bps on a year-over-year basis to 60.6% in the quarter.
Balance Sheet & Cash Flow
As of Feb 28, 2015, AngioDynamics’ cash and cash equivalents totaled $21.4 million, up from $16.6 million as of Nov 30, 2014. Cash flow from operating activities was $12.2 million at the end of the quarter. Also, the company generated free cash flow of $9 million.
Guidance
For the fourth quarter, AngioDynamics expects adjusted EPS in the range of 13–16 cents on sales of $90–$94 million. The sales guidance reflects 2% growth at the high end on a constant currency basis and excludes the supply agreement impact.
For fiscal 2015, EPS is forecasted in the range of 57–60 cents (down from previous guidance of 66–72 cents) on revised sales estimation of $356–$360 million (down from $362–$368 million). Management forecasts negative impact of 1% each from the product recall and volatile foreign exchange.
EVLT remains a concern for AngioDynamics as sales in the early fourth quarter remains soft. However, management believes that the business will gain some momentum in the beginning of the next fiscal.
AngioDynamics expects an increase in G&A expenses of more than $1 million on a year-over-year basis in the fourth quarter.
Moreover, the company expects to generate operating cash flow of approximately $30 million and free cash flow in the high teens to low $20 million range for fiscal 2015.
Our Take
We believe that an expanding product portfolio that includes AngioVac, Bioflo, NanoKnife and Celerity significantly enhances AngioDynamics’ market opportunities. Improving operating efficiency is expected to result in cost savings, which will in turn boost the company’s gross margin.
Nevertheless, intensifying competition, foreign exchange headwind, sluggish macro-economic environment and the product recall are major concerns in the near term.
Although the partnership with EmboMedics will help AngioDynamics to re-enter the embolic market, we believe that it will take considerable time for the company to gain significant momentum in this industry. This will remain an overhang on the stock, in our view.
Stocks to Consider
Currently, AngioDynamics carries a Zacks Rank #3 (Hold). Better-ranked stocks include Inogen INGN, Abiomed ABMD and Fluidigm FLDM. Inogen sports a Zacks Rank #1 (Strong Buy), while both Abiomed and Fluidigm carry a Zacks Rank #2 (Buy).
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