ANGIODYNAMICS INC 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following information should be read together with the consolidated financial statements and the notes thereto and other information included elsewhere in this quarterly report on Form 10-Q. The following discussion should be read in conjunction with the Company's 2023 Annual Report on Form 10-K, and the consolidated financial statements and notes thereto included elsewhere in the Form 10-Q. Disclosure Regarding Forward-Looking Statements This quarterly report on Form 10-Q, including the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements regarding AngioDynamics' expected future financial position, results of operations, cash flows, business strategy, budgets, projected costs, capital expenditures, products, competitive positions, growth opportunities, plans and objectives of management for future operations, as well as statements that include the words such as "expects," "reaffirms," "intends," "anticipates," "plans," "believes," "seeks," "estimates," "projects," "optimistic," or variations of such words and similar expressions, are forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. Investors are cautioned that actual events or results may differ materially from AngioDynamics' expectations, expressed or implied. Factors that may affect the actual results achieved by AngioDynamics include, without limitation, the ability of AngioDynamics to develop its existing and new products, technological advances and patents attained by competitors, infringement of AngioDynamics' technology or assertions that AngioDynamics' technology infringes the technology of third parties, the ability of AngioDynamics to effectively compete against competitors that have substantially greater resources, future actions by the FDA or other regulatory agencies, domestic and foreign health care reforms and government regulations, results of pending or future clinical trials, overall economic conditions (including inflation, labor shortages and supply chain challenges including the cost and availability of raw materials), the results of on-going litigation, challenges with respect to third-party distributors or joint venture partners or collaborators, the results of sales efforts, the effects of product recalls and product liability claims, changes in key personnel, the ability of AngioDynamics to execute on strategic initiatives, the effects of economic, credit and capital market conditions, general market conditions, market acceptance, foreign currency exchange rate fluctuations, the effects on pricing from group purchasing organizations and competition, the ability of AngioDynamics to obtain regulatory clearances or approval of its products, or to integrate acquired businesses. Other risks and uncertainties include, but are not limited to, the factors described from time to time in our reports filed with the Securities and Exchange Commission (the "SEC"). Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this quarterly report on Form 10-Q will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. Any forward-looking statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, investors are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date stated, or if no date is stated, as of the date of this report. AngioDynamics disclaims any obligation to update the forward-looking statements. Disclosure Regarding Trademarks This report includes trademarks, tradenames and service marks that are our property or the property of other third parties. Solely for convenience, such trademarks and tradenames sometimes appear without any “™” or “®” symbol. However, failure to include such symbols is not intended to suggest, in any way, that we will not assert our rights or the rights of any applicable licensor, to these trademarks and tradenames. For a complete listing of all our trademarks, tradenames and service marks please visit www.angiodynamics.com/IP. Information on our website or connected to our website is not incorporated by reference into this Quarterly Report on Form 10-Q. Executive Overview AngioDynamics is a leading and transformative medical technology company focused on restoring healthy blood flow in the body's vascular system, expanding cancer treatment options and improving quality of life for patients. We design, manufacture and sell a wide range of medical, surgical and diagnostic devices used by professional healthcare providers for vascular access, for the treatment of peripheral vascular disease and for use in oncology and surgical settings. Our devices are generally used in minimally invasive, image-guided procedures. Many of our products are intended to be used once and then discarded, or they may be temporarily implanted for short- or long-term use. Our business operations cross a variety of markets. Our financial performance is impacted by changing market dynamics, which have included an emergence of value-based purchasing by healthcare providers, consolidation of healthcare providers, 21 Table of Content the increased role of the consumer in health care decision-making and an aging population, among others. In addition, our growth is impacted by changes within our sector, such as the merging of competitors to gain scale and influence; changes in the regulatory environment for medical devices; and fluctuations in the global economy. Our sales and profitability growth also depends, in part, on the introduction of new and innovative products, together with ongoing enhancements to our existing products. Expansions of our product offerings are created through internal and external product development, technology licensing and strategic alliances. We recognize the importance of, and intend to continue to make investments in research and development activities and selective business development opportunities to provide growth opportunities. We sell our products in the United States primarily through a direct sales force, and outside the U.S. through a combination of direct sales and distributor relationships. Our end users include interventional radiologists, interventional cardiologists, vascular surgeons, urologists, interventional and surgical oncologists and critical care nurses. We expect our businesses to grow in both sales and profitability by expanding geographically, penetrating new markets, introducing new products and increasing our presence internationally. The current macroeconomic environment continues to impact our business and may continue to pose future risks. The Company's ability to manufacture products, the reliability of our supply chain, labor shortages, backlog and inflation (including the cost and availability of raw materials, direct labor and shipping) have impacted our business, trends that may continue. Accordingly, management continues to evaluate the Company’s liquidity position, communicate with and monitor the actions of our customers and suppliers, and review our near-term financial performance. On June 8, 2023, the Company completed the sale of the dialysis and BioSentry businesses to Merit Medical Systems, Inc. The Company also entered into various agreements to facilitate the transition to Merit, including a Transition Services Agreement and Contract Manufacturing Agreement. Total consideration received by the Company for the Divestiture was $100.0 million in cash and resulted in a pre-tax book gain of $47.8 million. On June 8, 2023 and in connection with the completion of the Divestiture, the Company repaid all amounts outstanding under its existing Credit Agreement, and as a result, the Credit Agreement was extinguished. In evaluating the operating performance of our business, management focuses on company-wide and segment revenue and gross margin and company-wide operating income, earnings per share and cash flow from operations. A summary of these key financial metrics for the three months ended August 31, 2023 compared to the three months ended August 31, 2022 are as follows: Three months ended August 31, 2023: • Revenue decreased by 3.5% to $78.7 million • Med Tech growth of 13.3% and Med Device declined by 10.0% • Gross profit decreased 100 bps to 50.9% • Med Tech gross profit increased 150 bps to 64.7% and Med Device gross profit decreased 330 bps to 44.2% • Net income increased by $58.9 million to $45.9 million • Earnings per share increased by $1.48 to $1.15 • Cash used in operations increased by $1.2 million to $25.9 million The decrease in revenue is due to the sale of the dialysis and BioSentry businesses which closed on June 8, 2023 and impacted sales by $7.1 million compared to the prior year. Our Med Tech revenue, comprised of Auryon, the thrombus management platform and NanoKnife, grew 13.3% in the first quarter of fiscal year 2024. The growth in Auryon and NanoKnife was partially offset by continued softness in the thrombus management platform. Our Med Device revenue declined by 10.0% in the first quarter of fiscal year 2024 driven mainly by the sale of the dialysis and BioSentry businesses. Results of Operations For the three months ended August 31, 2023, the Company reported net income of $45.9 million, or diluted earnings per share of $1.15, on net sales of $78.7 million, compared with a net loss of $13.0 million, or a loss of $0.33 per diluted share, on net sales of $81.5 million during the same quarter of the prior year. 22 Table of Content Net sales - Net sales are derived from the sale of products and related freight charges, less discounts, rebates and returns. Three Months Ended (in thousands) Aug 31, 2023 Aug 31, 2022 $ Change Net Sales Med Tech $ 25,860 $ 22,817 $ 3,043 Med Device 52,819 58,720 $ (5,901) Total $ 78,679 $ 81,537 $ (2,858) Three Months Ended (in thousands) Aug 31, 2023 Aug 31, 2022 $ Change Net Sales United States $ 64,399 $ 69,023 $ (4,624) International 14,280 12,514 $ 1,766 Total $ 78,679 $ 81,537 $ (2,858) For the three months ended August 31, 2023, net sales decreased $2.9 million to $78.7 million compared to the same period in the prior year. At August 31, 2023, the Company had a backlog of $3.3 million, an increase of $0.6 million from May 31, 2023. The Med Tec h segment net sales increased $3.0 million fo r the three months ended August 31, 2023 compared to the same period in the prior year. The change in sales from the prior year was primarily driven by: • Increased Auryon sales of $2.3 million; • Decreased sales of the thrombus management platform of $0.7 million, which was driven by a decrease in AngioVac sales of $0.5 million; and • Increased NanoKnife sales of $1.4 million, which was driven by increased capital and disposable sales both domestically and internationally. The Me d Device segment net sales decreased $5.9 million for the three months ended August 31, 2023 compared to the same period in the prior year. The backlog, which primarily impacted sales of Core and Vascular Access products, was $3.3 million, an increase of $0.6 million from May 31, 2023. The change in sales from the prior year was primarily driven by: • Decreased sales of dialysis and BioSentry of $5.5 million and $1.6 million, respectively, which was due to the divestiture of these businesses on June 8, 2023; and • Decreased sales of PICCs, Core and Other Oncology and Vascular Access sales of $0.8 million, $0.1 million and $0.5 million, respectively. These decreases were partially offset by increased sales of Ports, Midlines and Microwave products of $1.5 million, $0.3 million and $1.1 million, respectively. Gross Profit Three Months Ended (in thousands) Aug 31, 2023 Aug 31, 2022 $ Change Med Tech $ 16,727 $ 14,429 $ 2,298 Gross profit % of sales 64.7 % 63.2 % Med Device $ 23,333 $ 27,876 $ (4,543) Gross profit % of sales 44.2 % 47.5 % Total $ 40,060 $ 42,305 $ (2,245) Gross profit % of sales 50.9 % 51.9 % 23 Table of Content Gross profit - Gross profit consists of net sales less the cost of goods sold, which includes the costs of materials, products purchased from third parties and sold by us, manufacturing personnel, royalties, freight, business insurance, depreciation of property and equipment and other manufacturing overhead, exclusive of intangible amortization. Total Company gross profit decreased by $2.2 million for the three months ended August 31, 2023 compared to the same period in the prior year. The change from the prior year was primarily driven by: • The sale of the dialysis and BioSentry businesses, which negatively impacted gross profit by $4.2 million; • Sales volume, which positively impacted gross profit by $2.2 million; • Production volume, price and other incentives which positively impacted gross profit by $1.5 million; • Sales mix, which negatively impacted gross profit by $0.8 million; • Inflationary costs on raw materials, labor shortages and freight costs, which negatively impacted gross profit by $0.4 million; and • Incremental depreciation on placement units of $0.4 million. The Med Tech segment gross profit increased by $2.3 million for the three months ended August 31, 2023 compared to the same period in the prior year. The change from the prior year was primarily driven by: • Sales volume, which positively impacted gross profit by $2.1 million; • Price and other incentives which positively impacted gross profit by $1.2 million; • Sales mix, which negatively impacted gross profit by $0.6 million; • Inflationary costs on raw materials, labor shortages and freight costs, which negatively impacted gross profit by $0.1 million; and • Incremental depreciation on placement units of $0.2 million. The Med Device segment gross profit decreased by $4.5 million for the three months ended August 31, 2023 compared to the same period in the prior year. The change from the prior year was primarily driven by: • The sale of the dialysis and BioSentry businesses, which negatively impacted gross profit by $4.2 million; • Sales volume, which positively impacted gross profit by $0.5 million; • Production volume and price, which positively impacted gross profit by $0.4 million; • Sales mix, which negatively impacted gross profit by $0.7 million; • Inflationary costs on raw materials, labor shortages and freight costs, which negatively impacted gross profit by $0.3 million; and • Incremental depreciation on placement units of $0.1 million. Operating Expenses and Other Income (Expense) Three Months Ended (in thousands) Aug 31, 2023 Aug 31, 2022 $ Change Research and development $ 7,941 $ 8,333 $ (392) % of sales 10.1 % 10.2 % Selling and marketing $ 27,368 $ 26,543 $ 825 % of sales 34.8 % 32.6 % General and administrative $ 10,856 $ 10,101 $ 755 % of sales 13.8 % 12.4 % Research and development expense - Research and development (“R&D”) expense includes internal and external costs to develop new products, enhance existing products, validate new and enhanced products, and manage clinical, regulatory and medical affairs. R& D expense decreased $0.4 million for t he three months ended August 31, 2023 compared to the same period in the prior year. The change from the prior year was primarily driven by: • The timing of certain projects and clinical spend associated with the ongoing clinical trials, which decreased R&D expense by $0.6 million; and • Compensation and benefits expenses, which increased $0.2 million. 24 Table of Content Sales and marketing expense - Sales and marketing (“S&M”) expense consists primarily of salaries, commissions, travel and related business expenses, attendance at medical society meetings, product promotions and marketing activities. S&M expense increased $0.8 million for t he three months ended August 31, 2023 compared to the same period in the prior year. The change from the prior year was primarily driven by: • Compensation and benefits expense, which increased by $1.4 million; and • Trade show expenses, which increased $0.3 million. This was partially offset by travel and other selling expenses, which decreased $0.8 million. General and administrative expense - General and administrative (“G&A”) expense includes executive management, finance, information technology, human resources, business development, legal, and the administrative and professional costs associated with those activities. G&A e xpense increased $0.8 million for th e three months ended August 31, 2023 compared to the same period in the prior year. The change from the prior year was primarily driven by: • Compensation and benefits expenses, which increased $0.9 million. This increase was primarily driven by a change in the vesting of equity grants to members of the Board from a one-year vest period to immediate vesting which resulted in additional expense of $1.1 million in the first quarter of fiscal year 2024; and • Other outside consultant spend for legal and IT, which increased $0.1 million. This was partially offset by decreased travel expenses of $0.2 million. Three Months Ended (in thousands) Aug 31, 2023 Aug 31, 2022 $ Change Amortization of intangibles $ 3,625 $ 4,837 $ (1,212) Change in fair value of contingent consideration $ (130) $ 211 $ (341) Acquisition, restructuring and other items, net $ 3,212 $ 5,581 $ (2,369) Other expense, net $ (169) $ (556) $ 387 Amortization of intangibles - Represents the amount of amortization expense that was taken on intangibles assets held by the Company. • Amortization expense decreased $1.2 million for the three months ended August 31, 2023 compared to the same period in the prior year due to the intangible assets that were included in the sale of the dialysis and BioSentry businesses. Change in fair value of contingent consideration - Represents changes in contingent consideration driven by changes to estimated future payments on earn-out liabilities created through acquisitions and amortization of present value discounts on long-term contingent consideration. • The change in the fair value for the three months ended August 31, 2023 is related to the Eximo contingent consideration. Acquisition, restructuring and other items, net - Represents costs associated with mergers and acquisitions, restructuring expenses, legal costs that are related to litigation that is not in the ordinary course of business, legal settlements and other one-time items. Acquisition, restructuring and other item s, net, decreased by $2.4 million for the three months ended August 31, 2023, compared to the same period in the prior year. The change from the prior year was primarily driven by: • Manufacturing relocation expense related to the move of certain manufacturing lines to Costa Rica, which increased $0.5 million; • A transition services agreement that was entered into as a result of the sale of the dialysis and BioSentry businesses. The Company invoiced Merit Medical Systems, Inc. $0.2 million in the first quarter of fiscal year 2024; • The payment to the Israeli Innovation Authority of $3.5 million related to grant funds that were provided to Eximo to develop the Auryon laser prior to the acquisition in the second quarter of fiscal year 2020. These grant funds were fully repaid in the first quarter of fiscal year 2023 to satisfy the obligation which was otherwise being paid as a royalty based on a percentage of sales; and • $0.9 million of deferred financing fees that were written-off in conjunction with the sale of the Dialysis and BioSentry businesses and concurrent extinguishment of the debt. 25 Table of Content Other expense, net - Other expenses include interest expense, foreign currency impacts, bank fees, and amortization of deferred financing costs. • The change in other expe nse of $0.4 million for the three months ended August 31, 2023, compared to the same period in the prior year, is primarily due to decreased interest expense of $0.3 million, increased interest income of $0.2 million and unrealized foreign currency fluctuations of $0.1 million. Income Tax Benefit Three Months Ended (in thousands) Aug 31, 2023 Aug 31, 2022 Income tax benefit $ (11.0) $ (0.9) Effective tax rate including discrete items (31.6) % 6.2 % Our effective tax rate including discrete items for the three months ended August 31, 2023 and 2022 was (31.6)% and 6.2%, respectively. In fiscal year 2024, the Company’s effective tax rate differs from the U.S. statutory rate primarily due to the impact of the valuation allowance, foreign taxes, and other non-deductible permanent items (such as non-deductible meals and entertainment, Section 162(m) excess compensation and non-deductible share-based compensation). Liquidity and Capital Resources We regularly review our liquidity and anticipated capital requirements and we believe that our current cash on hand provides sufficient liquidity to meet our anticipated needs for capital for at least the next 12 months. Our cash and cash equivalents totaled $57.6 million as of August 31, 2023, compared with $44.6 million as of May 31, 2023. As of August 31, 2023 there was no outstanding debt as the Credit Agreement was extinguished in connection with the Divestiture (see Note 7 "Long-Term Debt" set forth in the Notes to our consolidated financial statements included in this Quarterly Report on Form 10-Q). As of May 31, 2023, total debt outstanding related to the Credit Agreement was $50.0 million. The fair value of contingent consideration liability as of August 31, 2023 and May 31, 2023, was $9.2 million and $19.3 million, respectively. The table below summarizes our cash flows: Three Months Ended (in thousands) Aug 31, 2023 Aug 31, 2022 Cash provided by (used in): Operating activities $ (25,899) $ (24,745) Investing activities 98,442 (3,576) Financing activities (59,590) 24,376 Effect of exchange rate changes on cash and cash equivalents 13 (316) Net change in cash and cash equivalents $ 12,966 $ (4,261) During the quarters ended August 31, 2023 and 2022, cash flows consisted of the following: Cash used in operating activities Three months ended August 31, 2023 and 2022: • Net income of $45.9 million and a net loss of $13.0 million, respectively, plus the non-cash items, primarily driven by depreciation and amortization and stock based compensation, along with the changes in working capital below, contributed to cash used in operations of $25.9 million and $24.7 million, respectively, for these periods. • For the period ended August 31, 2023, working capital was unfavorably impacted by decreased accounts payable, accrued liabilities and other liabilities of $16.5 million, along with increased in ventory and prepaid expenses of $4.6 million and $4.2 million, respectively. This was partially offset by decreased accounts rec eivable of $3.2 million . • For the period ended August 31, 2022, working capital was unfavorably impacted by decreased accounts payable, accrued liabilities and other liabilities of $9.0 million, along with increased receivables, inventory and prepaid expenses of $1.4 million, $6.2 million and $5.7 million, respectively. Cash provided by (used in) investing activities 26 Table of Content Three months ended August 31, 2023 and 2022: • $0.8 million and $0.8 million, respectively, of cash was used for fixed asset additions; • $0.8 million and $2.2 million, respectively, of cash was used for Auryon placement and evaluation unit additions; • $100.0 million of cash was received for the divestiture of the dialysis and BioSentry businesses in the first quarter of fiscal year 2024; and • $0.5 million of cash was used for the acquisition of an exclusive license in the first quarter of fiscal year 2023. Cash provided by financing activities Three months ended August 31, 2023 and 2022: • $50.0 million repayment of the Credit Agreement in connection with the completion of the dialysis and BioSentry divestiture in the first quarter of fiscal year 2024; • $70.0 million in proceeds on long-term debt less the repayment of $45.0 million associated with the then new Credit Agreement in the first quarter of fiscal year 2023; • $0.7 million of deferred financing costs associated with the then new Credit Agreement in the first quarter of fiscal year 2023; • $10.0 million contingent consideration payment made in the first quarter of fiscal year 2024; and • $0.4 million and $0.1 million, respectively, of proceeds from stock option and ESPP activity. On June 8, 2023 and in connection with the completion of the dialysis and BioSentry divestiture, the Company repaid all amounts outstanding under its existing Credit Agreement, and as a result, the Credit Agreement was extinguished. Pursuant to the terms of the Credit Agreement, AngioDynamics had the option to repay this facility prior to the maturity date without penalty. We believe that our current cash balance, together with cash generated from operations will provide sufficient liquidity to meet our anticipated needs for capital for at least the next 12 months. If we seek to make acquisitions of other businesses or technologies in the future for cash, we may require external financing. New Accounting Pronouncements Information regarding new accounting pronouncements is included in Note 17 to our consolidated financial statements in this Quarterly Report on Form 10-Q. 27 Table of Content