Item 1B.
Unresolved Staff Comments.
None.
During the year ended May 31, 2017, we operated in the following locations:
In addition, we lease sales offices in various other jurisdictions.
*These two locations will be closed as part of the Operational Consolidation strategy during fiscal year 2018.
Item 3.
Item 3.
Legal Proceedings.
C.R. Bard, Inc. v. AngioDynamics, Inc.
On January 11, 2012, C.R. Bard, Inc. (“Bard”) filed a suit in the United States District Court of Utah claiming certain of our implantable port products infringe on three U.S. patents held by Bard (the "Utah Action"). Bard is seeking unspecified damages and other relief. The Court denied Bard’s motion for pre-trial consolidation with separate actions it filed on the same day against Medical Components, Inc. and Smiths Medical ASD, Inc., but had asked for supplemental briefing on the issue of whether to conduct a common Markman hearing. Meanwhile, we filed petitions for reexamination in the US Patent and Trademark Office ("PTO") which seek to invalidate all three patents asserted by Bard in the litigation. Our petitions were granted and 40 of Bard's 41 patent claims were rejected and, following further proceedings, the Patent Office issued a Final Rejection of all 40 claims subject to reexamination. Thereafter, Bard filed appeals to the PTO Board of Appeals and Interferences for all three reexams. The parties completed briefing on the appeals and oral argument was held on June 18, 2015. The Patent Office issued decisions in the three appeals. In one (issued on March 11, 2016 for US Patent No. 7,785,302), the rejections of six of the ten claims under reexamination were affirmed, but were reversed on four of the ten claims. In the second (issued on March 24, 2016 for U.S. Patent No. 7,959,615), the rejections of eight of the ten claims under reexamination were affirmed but the rejections of the other two of the ten claims were reversed. In the third (issued on March 29 for U.S. Patent No. 7,947.022) the rejections of all twenty claims under reexamination were affirmed. Bard then filed Requests for Rehearing in all three reexamination appeals and the Company filed Requests for Rehearing in two of the reexamination appeals (the ‘302 and ‘615 patent reexaminations). Each party filed comments in Opposition to the other party’s Rehearing Requests,. The PTO has since issued decisions denying all Rehearing Requests - - on February 1, 2017 for the ‘302; on February 17, 2017 for the ‘022; and on February 21, 2017 for the ‘615. In the ‘302 and ‘022, the PTO modified its characterization of one prior art reference. Bard has since filed a Notice of Appeal to the Federal Circuit Court of Appeals in all three reexams and we filed Cross-Appeals in the ‘302 and the ‘615 reexams. The parties are in the process of preparing and filing the various appellate briefs, starting with Bard’s Opening Brief which is currently due on July 31, 2017 and ending with our Reply Brief which is currently due on November 6, 2017. The Utah Action has been stayed pending final resolution of the PTO process. We believe these claims are without merit and intend to defend them vigorously. We have not recorded an expense related to the outcome of this litigation because it is not yet possible to determine if a potential loss is probable nor reasonably estimable.
On March 10, 2015, C.R. Bard, Inc. and Bard Peripheral Vascular, Inc. (“Bard”) filed suit in the United States District Court for the District of Delaware claiming certain of our implantable port products infringe on three U.S. patents held by Bard (the “Delaware Action). Bard is seeking unspecified damages and other relief. The patents asserted in the Delaware Action are different than those asserted in the Utah Action. On June 1, 2015, we filed two motions in response to Bard’s Complaint - one sought transfer to the District of Utah where the Utah Action is currently pending, and the other sought dismissal of the entire complaint on grounds that none of the claims in the asserted patents is directed to patent eligible subject matter under Section 101 of the Patent Statute and in light of recent authority from the U. S. Supreme Court. On January 12, 2016, the court issued a decision denying both motions. We have since served an Answer and Counterclaim to which Bard has served a Reply. On March 10, 2016, the Court held a case management conference, and, on March 14, 2016, the court entered a Scheduling Order which set, inter alia, a Markman hearing for March 10, 2017, a summary judgment hearing for December 8, 2017 and trial for March 12, 2018. The parties have served various discovery requests on each other, and have been producing documents to each other; on May 27, 2016 Bard served its Infringement Contentions which identified all the port products accused of infringement; and, on June 24, 2016, we served Invalidity Contentions which detail various grounds for invalidating the three asserted patents. The parties completed briefing on the claim construction issues and the Markman hearing was held on March 10, 2017. A decision is expected on or about May 12, 2017, and the Court issued its Claim Construction Order on May 19, 2017. The Court has since amended the Scheduling Order to provide for the completion of Expert Discovery on October 30, 2017; briefing on Case-Dispositive Motions between November 17, 2017 and January 24, 2018 with oral argument set for February 22, 2018 and trial to commence May 29, 2018. We believe these claims are without merit and intend to defend them vigorously. We have not recorded an expense related to the outcome of this litigation because it is not yet possible to determine if a potential loss is probable nor reasonably estimable.
AngioDynamics, Inc. v. C.R. Bard, Inc.
On May 30, 2017, we commenced an action in the United States District Court for the Northern District of New York entitled AngioDynamics, Inc. v. C.R. Bard, Inc. and Bard Access Systems, Inc. (“Bard”). In this action, we allege that Bard has illegally tied the sales of its tip location systems to the sales of its PICCs. We allege that this practice violates the federal antitrust laws and has had, and continues to have, an anti-competitive effect in the market for PICCs. We seek both monetary damages and injunctive relief. The Court has set an initial case management conference for August 29, 2017.
Governmental Investigations
In June 2014 we received a subpoena from the U.S. Department of Justice (the “DOJ”) requesting documents in relation to a criminal and civil investigation the DOJ is conducting regarding BTG International, Inc.’s LC Bead® product beginning in 2003. RITA Medical Systems and AngioDynamics, Inc., after its acquisition of RITA, was the exclusive distributor of LC Beads in the United States from 2006 through December 31, 2011. We are cooperating fully with this investigation.
In April 2015 we received a subpoena from the DOJ requesting documents in relation to a criminal and civil investigation the DOJ is conducting regarding purported promotion of certain of AngioDynamics’ VenaCure EVLT products for un-cleared indications. We are cooperating fully with this investigation.
As of May 31, 2017 the Company accrued $12.5 million for these matters and in August 2017, the Company agreed in principle with the government to resolve these matters for approximately $12.5 million.
Item 4.
Item 4.
Mine Safety Disclosures.
Not applicable.
Part II
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.
Our common stock is traded on The Global Select Market tier of The NASDAQ Stock Market LLC (formerly the Nasdaq National Market), under the symbol “ANGO.”
The following table sets forth, for the fiscal quarters indicated, the high and low sale prices for our common stock as reported by The NASDAQ Stock Market.
As of August 2, 2017, there were 197 holders of record of our common stock.
Dividends
We did not declare any cash dividends on our common stock during our last three fiscal years. We do not anticipate paying any cash dividends on our common stock for the foreseeable future.
Performance Graph
The graph below matches AngioDynamics, Inc.’s cumulative 5-year total shareholder return on common stock with the cumulative total returns of the NASDAQ Composite index, the RDG SmallCap Medical Devices index, and the NASDAQ Medical Equipment index. The graph tracks the performance of a $100 investment in our common stock and in each index
(with the reinvestment of all dividends) from May 31, 2012 to May 31, 2017. The stock price performance included in this graph is not necessarily indicative of future stock price performance.
Item 6.
Item 6.
Selected Financial Data.
You should read the following selected financial data in conjunction with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K.
The consolidated statements of operations data for the fiscal years ended May 31, 2017, May 31, 2016, and May 31, 2015, and the consolidated balance sheet data as of May 31, 2017 and May 31, 2016, are derived from the consolidated financial statements that are included elsewhere in this Annual Report on Form 10-K. The consolidated statements of operations data for the fiscal years ended May 31, 2014 and May 31, 2013, and the consolidated balance sheet data as of May 31, 2015, May 31, 2014 and May 31, 2013, are derived from our audited consolidated financial statements not included in this Annual Report on Form 10-K. Historical results are not necessarily indicative of the results of operations to be expected for future periods. See Note 14 of “Notes to Consolidated Financial Statements” for a description of the method that we used to compute our historical basic and diluted net income per share attributable to common stockholders.
(a)
Acquisition, restructuring and one-time items include restructuring expenses or expenses incurred as part of M&A, product discontinuance, legal settlements and legal costs that are related to litigation that is not in the ordinary course of business.
(1) See Note 1 for adoption of new accounting standard.
(2) See Note 3 for explanation on the change.
Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Conditions and Results of Operations.
The following information should be read together with the audited consolidated financial statements and the notes thereto and other information included elsewhere in this annual report on Form 10-K.
Forward-Looking Statements
This Annual Report on Form 10-K, 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, acquisitions, 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,” 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 from our expectations. Factors that may affect the actual results include, without limitation, our ability to develop our existing and new products, future actions by the FDA or other regulatory agencies, results of pending or future clinical trials, the results of ongoing litigation, overall economic conditions, general market conditions, market acceptance, foreign currency exchange rate fluctuations, the effects on pricing from group purchasing organizations and competition, the loss of any of our key customers or reduction in the purchase of our products by any such customers, and our ability to integrate acquired businesses as well as the risk factors listed in Part I, Item 1A of this Annual Report on Form 10-K.
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 Annual Report on Form 10-K 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, speak only as of the date made. We disclaim any obligation to update the forward-looking statements. 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 document.
EXECUTIVE OVERVIEW
Company and Market
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. Most of our products are intended to be used once and then discarded, or they may be temporarily implanted for short- or longer-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,
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 device; 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 to our product offerings are created through internal 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 business development opportunities and feel confident that our existing capital structure and free cash flow generation will allow us to properly fund those activities.
We sell our products in the United States through a direct sales force, and outside the U.S. through a combination of a direct sales and distributor relationships. We expect our businesses to grow in both sales and profitability through geographic expansion, market penetration, new product introductions and increasing our direct presence internationally.
Strategic Initiatives to Drive Growth
Throughout the year, we introduced strategic moves designed to streamline our business, improve our overall business operations and position ourselves for growth. Those initiatives included:
•
Introduction of new corporate strategy. As outlined in an Investor Day held in New York City in the fourth quarter, leadership introduced a strategic approach that would include portfolio management with product categories designated into “invest” and “maintain” businesses; continued efforts to improve operational performance; international expansion; and an ability to pursue growth through organic and inorganic opportunities through strong cash generation. In addition to introducing the strategy, the company also put forth projected financial metrics anticipated for the 2018, 2019 and 2020 fiscal years.
•
Operational Consolidation. The Company announced a planned consolidation of operations from the Manchester, GA and Denmead, UK facilities into the Glens Falls and Queensbury, NY manufacturing facilities in the third quarter. The consolidation will result in streamlined operations, reduced costs, optimized inventory management and gross margin improvement. As part of the plan, the Company expects to incur restructuring expenses, including severance and retention, equipment transfer, set-up and purchases, regulatory expenses, lease termination expenses and other miscellaneous expenses. The plan is expected to be completed in the third quarter of fiscal year 2018.
•
Implementation of a new product development process. The company introduced a robust product development process intended to improve the Company’s ability to bring new products to market.
•
Rationalization of underperforming or below-cost products. This initiative eliminated more than 900 SKUs and was partnered with a price increase on products that did not have a profitable cost structure.
•
New members of the executive leadership team. Following his arrival in April 2016, President and Chief Executive Officer James C. Clemmer welcomed several members to the AngioDynamics leadership team, including Executive Vice President and Chief Financial Officer Michael C. Greiner, Senior Vice President of Quality and Regulatory Affairs Warren G. Nighan, Senior Vice President and General Manager of the Vascular Access Global Business Unit Chad T. Campbell, Senior Vice President and General Manager of the Peripheral Vascular Global Business Unit Robert A. Simpson and Senior Vice President of Human Resources Heather J. Daniels Cariveau.
Recent Developments
In addition to the deliberate actions taken by management as listed above, several significant developments occurred over the course of the fiscal year which impacted our business, including:
The Company added two members to the Board of Directors, Eileen Auen and Jan Reed. Auen most recently served as Executive Chairman of Helios, a $1 billion healthcare services firm. Reed most recently was Senior Vice President, General Counsel and Corporate Secretary at Walgreens Boots Alliance.
The Company made the decision to discontinue its investment in the TiLo product that was acquired in August 2013 as part of the Clinical Devices acquisition. This decision resulted in the write-off of the acquired in-process research and development (IPR&D) of $3.6 million along with a $3.1 million gain from the reduction in the fair value of contingent consideration liability associated with future milestones that will no longer be met.
The Company revised the sales projections for the AngioVac product as a result of reviews performed by executive management across all products. The adjustments to the sales projections resulted in a $13.4 million gain from the reduction in the fair value of the contingent liability that is based on lower projected sales volume over the contractual earn out period.
The Company decided to terminate its agreements with EmboMedics. The termination of these agreements resulted in a write-off of the initial $2.0 million investment in EmboMedics (Note 2).
The Board of Directors approved a share repurchase program (the “Repurchase Program”) under which they authorized the Company the option to repurchase up to $25.0 million of its outstanding common stock during the twenty-four month period ending November 6, 2018. During the second and fourth quarter of fiscal year 2017, the Company repurchased a total of 870,000 shares of common stock in the open market at an aggregate cost of $13.6 million under the Repurchase Program.
The Company entered into a new credit agreement ("Credit Agreement") which provides for a $100.0 million senior secured term loan facility ("Term Loan") and a $150.0 million senior secured revolving credit facility ("Revolving Facility", and together with the Term Loan, "The Facilities") along with up to a $20.0 million sublimit for letters of credit and a $5.0 million limit for swing line loans. With the proceeds from the Credit Agreement, the existing credit facility that was entered into in September 2013 was paid down in full.
The Company announced to employees an Operational Consolidation strategy which included the consolidation of the Manchester, GA and Denmead, UK facilities into the Glens Falls and Queensbury, NY manufacturing facilities. As part of the plan, the Company expects to incur restructuring expenses, including severance and retention, equipment transfer, set-up and purchases, regulatory expenses, lease termination expenses and other miscellaneous expenses. The plan is expected to be completed in the third quarter of fiscal year 2018.
Following completion of the sale of common stock pursuant to the Underwriting Agreement, Avista Capital Partners’ beneficial ownership in AngioDynamics has been reduced to zero as they sold their entire position in AngioDynamics. As a result, in accordance with the terms of his appointment to AngioDynamics’ Board of Directors and the terms of the Stockholders Agreement, David Burgstahler resigned as a director on April 12, 2017.
The Company filed a lawsuit alleging that C.R. Bard has violated federal antitrust laws by illegally tying the sale of its tip location systems to its line of peripherally inserted central catheters. The Company claims that these actions by Bard are preventing competition in the marketplace and limiting patient access to superior technology.
The Company issued a voluntary recall of its Acculis probes that were sold over the past two years. As a result of this voluntary recall, the company decided to also do a voluntary market withdrawal of its Acculis capital systems and discontinue selling the product. The voluntary recall resulted in a deferral of revenue of $2.6 million and an increase of $2.6 million in inventory and hardware asset reserves. The total impact to income before taxes of the recall was $4.5 million. Additional costs will be incurred in fiscal year 2018 related to the market withdrawal of the Acculis capital systems.
The Company received notification in the fourth quarter of 2017 that a $1.8 million refund from the Internal Revenue Service related to prior medical device taxes paid would be received.
As of May 31, 2017 the Company accrued $12.5 million for these matters and in August 2017, the Company agreed in principle with the government to resolve these matters for approximately $12.5 million.
Management's Use of Non-GAAP Measures
Net sales “on a constant currency basis” is a non-GAAP measure. The Company analyzes net sales on a constant currency basis to better measure the comparability of results between periods. Because changes in foreign currency exchange rates have a non-operating impact on net sales, the Company believes that evaluating growth in net sales on a constant currency basis provides an additional and meaningful assessment of net sales to both management and the company’s investors. Constant currency growth rates are calculated by subtracting the current period's local currency sales at the prior period’s exchange rate from the current period’s local currency sales at the current period’s exchange rate.
Constant currency growth rates are not indicative of changes in corresponding cash flows. The limitation of these non-GAAP measures is that they do not reflect results on a standardized reporting basis. Non-GAAP measures are intended to supplement the applicable GAAP disclosures and should not be viewed as replacements of GAAP results.
Critical Accounting Policies and Use of Estimates
Our significant accounting policies are summarized in Note 1 to Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. While all these significant accounting policies affect the reporting of our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require us to use a greater degree of judgment and/or estimates. Actual results may differ from those estimates. The accounting policies identified as critical are as follows:
Revenue Recognition
We recognize revenue in accordance with generally accepted accounting principles as outlined in the SEC’s authoritative guidance on revenue recognition which requires that four criteria be met before revenue can be recognized: (i) persuasive evidence that an arrangement exists; (ii) the price is fixed or determinable; (iii) collectability is reasonably assured; and (iv) product delivery has occurred or services have been rendered. Decisions relative to criterion (iii) regarding collectability are based upon our judgments, as discussed under “Accounts Receivable” in Note 1, and should conditions change in the future and cause us to determine this criterion is not met; our results of operations may be affected. We recognize revenue, net of sales taxes assessed by any governmental authority, as products are shipped, based on F.O.B. shipping point terms when title and risk of loss passes to customers. We negotiate shipping and credit terms on a customer-by-customer basis and products are shipped at an agreed upon price. All product returns must be pre-approved by us and customers may be subject to a 20% restocking charge. To be accepted, a returned product must be unadulterated, undamaged and have at least 12 months remaining prior to its expiration date. Charges for discounts, returns, rebates and other allowances are recognized as a deduction from revenue on an accrual basis in the period in which the revenue is recorded. The accrual for product returns, discounts and other allowances is based on the Company’s history.
Income Taxes
We calculate income tax expense for each jurisdiction in which we operate. This involves estimating actual current taxes due plus assessing temporary differences arising from differing treatment for tax and accounting purposes that are recorded as deferred tax assets and liabilities. We periodically evaluate deferred tax assets, capital loss carryforwards and tax credit carryforwards to determine their recoverability based primarily on our ability to generate future taxable income and capital gains. Where it is more-likely-than-not these will not be recovered, we estimate a valuation allowance and record a corresponding additional tax expense in our statement of operations.
We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business we are subject to examination by taxing authorities throughout the world. Fiscal years 2014 through 2017 remain open to examination by the various tax authorities. We analyzed filing positions in all of the Federal and state jurisdictions where we are required to file income taxes, as well as all open tax years in these jurisdictions and believe that our income tax filing positions and deductions will be sustained on audit and we do not anticipate any adjustments will result in a material adverse effect on our financial condition, results of operations or cash flows.
Acquisitions and Contingent Consideration
In a business combination, the acquisition method of accounting requires that the identifiable assets acquired and liabilities assumed be measured at their fair value, with goodwill being the excess value of consideration paid over the fair value of the net identifiable assets acquired. IP R&D is capitalized and recorded as an indefinite-lived intangible asset at the acquisition date, contingent consideration is recorded at fair value at the acquisition date, and transaction costs are expensed as incurred. When the Company acquires net assets that are not accounted for as a business combination, no goodwill is recognized.
The fair value of the liability for contingent consideration recorded on the acquisition date is based on probability weighted estimated cash flow streams, discounted back to present value using a discount rate determined in accordance with accepted valuation methods. The liability for contingent consideration is remeasured to fair value at each reporting period with changes recorded in earnings until the contingency is resolved.
Goodwill and Intangible Assets
Intangible assets other than goodwill, indefinite lived intangible assets and in process research and development ("IP R&D") are amortized over their estimated useful lives, which range between two to eighteen years, on either a straight-line
basis over the expected period of benefit or as revenues are earned from the sales of the related products. We periodically review the estimated useful lives of our intangible assets and review such assets for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. If an intangible asset is considered to be impaired, the amount of the impairment will equal the excess of the carrying value over the fair value of the asset.
Acquired IP R&D is not amortized until completion and development of the project, at which time the IP R&D becomes an amortizable asset with an appropriate useful life and an amortization method is determined. If the related project is not completed in a timely manner or the project is terminated or abandoned, we may have an impairment related to the IP R&D, calculated as the excess of the asset’s carrying value over its fair value.
Our policy defines IP R&D as the value assigned to those projects for which the related products have not received regulatory approval and have no alternative future use. Determining the portion of the purchase price allocated to IP R&D requires us to make significant estimates. The amount of the purchase price allocated to IP R&D is determined by estimating the future cash flows of each project or technology and discounting the net cash flows back to their present values. The discount rate used is determined at the time of measurement in accordance with accepted valuation methods. These methodologies include consideration of the risk of the project not achieving commercial feasibility.
Goodwill and other intangible assets that have indefinite useful lives are not amortized, but rather, are tested for impairment annually or more frequently if impairment indicators arise. Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination. Goodwill and intangible assets have been recorded at either incurred or allocated cost. Allocated costs were based on respective fair market values at the date of acquisition.
For goodwill, the impairment test requires a comparison of the estimated fair value of the reporting unit to which the goodwill is assigned to the sum of the carrying value of the assets and liabilities of that unit. The determination of reporting units also requires management judgment. We consider whether a reporting unit exists within a reportable segment based on the availability of discrete financial information that is regularly reviewed by segment management. If the sum of the carrying value of the assets and liabilities of a reporting unit exceeds the fair value of the reporting unit, the carrying value of the reporting unit’s goodwill is reduced to its implied fair value through an adjustment to the goodwill balance, resulting in an impairment charge. The Company utilizes either discounted cash flow models or other valuation models, such as comparative transactions and market multiples, to determine the fair value of our reporting unit. We must make assumptions about future cash flows, future operating plans, discount rates, comparable companies, market multiples, purchase price premiums and other factors in those models. Different assumptions and judgment determinations could yield different conclusions that would result in an impairment charge to income in the period that such change or determination was made.
Contingencies
We are involved, both as a plaintiff and a defendant, in various legal proceedings that arise in the ordinary course of business, including patent infringement and product liability, as further discussed in Note 15 to our consolidated financial statements. Accruals recorded for various contingencies including legal proceedings, self insurance and other claims, are based on judgment, the probability of losses and, where applicable, the consideration of opinions of internal and/or external legal counsel, internal and/or external technical consultants and actuarially determined estimates. When a range is established but a best estimate cannot be made, we record the minimum loss contingency amount, which could be zero. An estimate is often initially developed substantially earlier than the ultimate loss is known and is reevaluated each accounting period. As information becomes known, additional loss provision is recorded when either a best estimate can be made or the minimum loss amount is increased. When events result in an expectation of a more favorable outcome than previously expected, our best estimate is changed to a lower amount. We record receivables from third-party insurers up to the amount of the related liability when we have determined that existing insurance policies will provide reimbursement. In making this determination, we consider applicable deductibles, policy limits and the historical payment experience of the insurance carriers. Receivables are not netted against the related liabilities for financial statement presentation.
Results of Operations for the years ended May 31, 2017 and 2016
For the fiscal year ended May 31, 2017, we reported net income of $5.0 million, or $0.14 income per diluted share, on net sales of $349.6 million compared to a fiscal 2016 net loss of $43.6 million, or $1.21 loss per diluted share, on net sales of $353.9 million.
Net Sales
Net sales - Net sales are derived from the sale of our products and related freight charges, less discounts and returns.
Net sales for the year ended May 31, 2017 and 2016 were:
For year ended May 31, 2017, net sales decreased $4.2 million to $349.6 million compared to the year ended May 31, 2016.
•
Consolidated and U.S. net sales decreased from the prior year as a result of decreased net sales from Vascular Access and Oncology Surgery. This decrease was partially offset by 1% year over year growth in our Peripheral Vascular franchise.
Peripheral Vascular
•
Total Peripheral Vascular sales increased $3.0 million primarily attributable to increased sales volume of Angiographic and Core products of $9.9 million. This increased sales volume was partially offset by a decrease of volume in Fluid Management, Venous and AngioVac of $5.6 million. The decrease in Fluid Management was attributed to a discontinuance of our inflation device and automation challenges in the European markets. Although AngioVac procedures were up year over year, AngioVac unit sales decreased by $1.4 million due to available inventory already in the market place.
•
US Peripheral Vascular sales increased $2.8 million and international Peripheral Vascular sales increased $0.2 million which was primarily due to increased sales volume of Angiographic catheters. This increased sales volume was offset by a decrease in volume in Fluid Management, Venous and AngioVac.
Vascular Access
•
Total Vascular Access sales decreased $2.9 million primarily in our non-BioFlo businesses. Our BioFlo product line grew by $4.8 million primarily driven by growth in Midlines.
•
US Vascular Access sales declined by 5% due to softness across the portfolio offset by Midline and BioFlo dialysis which continued to gain traction in the marketplace.
•
International Vascular Access sales increased 15% due to the market penetration of BioFlo PICCs.
Oncology/Surgery
•
Total Oncology/Surgery sales decreased $4.3 million year over year primarily due to fewer sales of capital units in Microwave and NanoKnife as well as the $2.6 million deferral of revenue related to the Acculis probe recall that was announced in the fourth quarter of fiscal year 2017.
•
U.S. Oncology/Surgery declined by 8%, driven primarily through lower capital and disposable sales in Radio Frequency and Microwave offset by NanoKnife growth. The decrease is also attributed to a $1.4 million deferral of revenue related to the Acculis probe recall that was announced in the fourth quarter of fiscal year 2017.
•
International Oncology/Surgery sales decreased 10% year over year as a result of lower NanoKnife capital and disposable sales and a $1.2 million deferral of revenue related to the Acculis probe recall that was announced in the fourth quarter of fiscal year 2017.
Gross Profit, Operating expenses, and Other income (expense)
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.
Gross profit increased by $1.9 million compared to the prior year. The increase is attributable to the following:
•
In fiscal year 2017, a net charge of $4.5 million was recorded as a result of the Acculis probe recall.
•
In fiscal year 2016, a $5.9 million charge related to the write-off of Celerity inventory on hand and hardware assets after the business decision to no longer pursue the Celerity Navigation project.
•
The remaining increase is driven by net productivity offset by price and mix of products.
•
The increase in gross profit as a percentage of 1.1% is attributed to the factors noted above.
Research and development expenses - Research and development (“R&D”) expenses include internal and external costs to develop new products, enhance existing products, validate new and enhanced products, manage clinical, regulatory and medical affairs.
R&D expense increased $0.2 million compared to the prior year. The increase is attributable to the following:
•
Increased headcount in the R&D department compared to the prior year resulted in $1.2 million in additional expense as well as expenses associated with consultants of $0.6 million and severance of $0.4 million.
•
These increases were partially offset by less project spend of $1.2 million, $0.6 million in samples and $0.2 million in travel and other expenses.
•
R&D expense as a percentage of sales remained consistent year over year.
Sales and marketing expenses - Sales and marketing (“S&M”) expenses consist primarily of salaries, commissions, travel and related business expenses, attendance at medical society meetings, product promotions and marketing activities.
S&M expense decreased by $4.9 million compared to the prior year. The decrease is attributable to the following:
•
There was a decrease in headcount from the prior year which resulted in a $2.5 million decrease in salaries and benefits.
•
The decrease in headcount along with a focus on reduced travel spend resulted in a decrease in travel expenses of $1.3 million.
•
There was a $0.7 million decrease in trade shows and meeting expenses along with a $0.7 million decrease in samples as a result of a focus on reducing expenses.
•
These decreases were partially offset by severance of $0.8 million.
•
As a result of these decreases in S&M expenses, the percentage of S&M to sales decreased 1.2%.
General and administrative expenses - General and administrative (“G&A”) expenses include executive management, finance, information technology, human resources, business development, legal, and the administrative and professional costs associated with those activities.
G&A expense increased by $0.8 million compared to the prior year. The increase is attributable to the following:
•
Increased stock based compensation expense related to the new grant for the CEO along with two new board members of $1.7 million. Along with the stock based compensation increase, bonus for fiscal year 2017 was accrued at a higher rate than the prior year which resulted in a $1.0 million increase to G&A expense.
•
Along with the appointment of new members in the executive leadership team, recruiting and relocation expenses resulted in an increase of $0.5 million from the prior year
•
There was also an increase in professional fees of $0.3 million related to audit fees and director fees partially offset by a decrease in legal fees.
•
These increases were partially offset by decreases in compensation benefits of $0.5 million as a result of a reduction in benefit claims, depreciation expense of $0.8 million, $0.2 million in facilities expenses including insurance, lease expenses and utilities, bad debt favorability of $0.4 million and other miscellaneous decreases in expenses of $0.4 million.
Amortization of intangibles - Represents the amount of amortization expense that was taken on intangibles assets held by the Company.
•
The decrease of $0.7 million is primarily related to intangible assets that became fully amortized.
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 decrease is due to a write-off of $13.4 million that was taken on the AngioVac product as a result of decreases in future sales projections that eliminated any payments above minimums and a write-off of $3.1 million on the TiLo product as the milestone will not be achieved. This was partially offset by normal amortization of the present value discount on the contingent liabilities.
Acquisition, restructuring and other items, net - 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 items, net increased by $14.9 million compared to the prior year. The increase is attributable to the following:
•
In Q2 fiscal year 2017, the intangible assets associated with TiLo were written off for $3.6 million as a result of the decision to discontinue our investment in the TiLo product along with a $2.0 million write-off of the investment in Embomedics due to termination of the agreement. The prior year had asset impairments of $0.4 million.
•
There was $1.3 million of expense related to the plant consolidation which consisted mainly of severance and start-up costs to move the product lines including equipment transfer expenses, accelerated depreciation for assets that will not be transferred, validation and other start up costs. The prior year had accelerated depreciation related to the Operational Excellence program of $1.0 million along with $0.5 million in other expenses.
•
A litigation settlement accrual for $12.5 million was recorded in the fourth quarter of fiscal year 2017.
•
Legal expenses of $7.0 million which was a decrease of $0.5 million from the prior year.
•
Other miscellaneous items decreased $2.2 million from the prior year primarily attributable to a decrease in M&A expenses of $2.5 million offset by a gain in the prior year of $0.7 million related to the modification of stock based compensation awards for the former CEO.
Medical device excise tax - Medical device excise tax is assessed on our U.S. product sales subject to exclusions and adjustments.
•
The Medical Device Excise Tax was suspended on January 1, 2016 therefore, fiscal year 2016 had seven months of the tax. In the current year, there is a $1.8 million refund from the Internal Revenue Service related to prior medical device taxes paid.
Other expenses - Other expenses include interest expense, foreign currency impacts, bank fees, and amortization of deferred financing costs.
•
The decrease in other expenses of $1.2 million was due to lower interest expense on lower outstanding debt and lower interest rates under the Credit Agreement along with unrealized foreign currency gains from re-measurement offset by the write off of the deferred financing fees from the original credit facility.
Income Tax Provision (Benefit)
Our effective tax rate was 49% for fiscal 2017 compared with (1,240)% for the prior year. The current year rate reflects expense of $4.8 million primarily driven by the impact of the US valuation allowance and the deferred tax liability related to intangibles that have an indefinite reversal period and cannot be used to support the deferred tax assets. The prior year rate primarily reflects income tax expense of $40.4 million related to full valuation allowance on our US net deferred tax assets that was established during fiscal 2016 and the deferred tax liability related to intangibles that have an indefinite reversal period and cannot be used to support the deferred tax assets.
At May 31, 2017, we had a net deferred tax liability of $26.1 million, after a valuation allowance on our US deferred tax assets of $48.3 million. The increase in the valuation allowance during fiscal 2017 was $6.1 million.
A valuation allowance is provided if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. After careful consideration and weighing of all the available positive and negative evidence, the weight given to the three year cumulative loss and lack of a recent history of core earnings was difficult to overcome and a full valuation allowance related to the U.S. deferred tax assets was established in the period ending May 31, 2016. Management considered all available positive and negative evidence at May 31, 2017, and considering the cumulative loss in the U.S. over the three year period, determined that the valuation allowance is still required. Management will continue to reevaluate the positive and negative evidence at each reporting period and if future results as projected in the U.S. and the Company's tax planning strategies are favorable, the valuation allowance may be removed, which could have a favorable material impact on the Company's results of operations in the period in which it is recorded.
Results of Operations for the years ended May 31, 2016 and 2015
For the fiscal year ended May 31, 2016, we reported net loss of $43.6 million, or $1.21 loss per basic and diluted common share, on net sales of $353.9 million compared to a fiscal 2015 net loss of $3.4 million, or $0.09 per basic and diluted common share, on net sales of $356.5 million.
Net Sales
Net sales - Net sales are derived from the sale of our products and related freight charges, less discounts and returns.
Net sales for the year ended May 31, 2016 and 2015 were:
For year ended May 31, 2016, net sales decreased $2.6 million to $353.9 million compared to the year ended May 31, 2015. As shown in the table above, while consolidated net sales decreased by 1% excluding the negative impact from fluctuations in currency exchange rates, our sales were flat year over year. The decline in net sales from vascular access and oncology surgery was partially offset by 4% year over year growth in our peripheral vascular franchise. Our international sales were significantly impacted by unfavorable movement in currency exchange rates, particularly the Euro, British pound and Canadian dollar
Peripheral Vascular sales increased $8.7 million primarily attributable to increased sales of AngioVac, Core and Venus products. While Vascular Access sales decreased $8.4 million primarily in our non-BioFlo businesses, our BioFlo line of products continued to gain traction in the marketplace. Oncology/Surgery sales decreased $3.0 million primarily due to fewer capital sales across all product lines compared to prior year. This was partially offset by increases in the sales of disposables in our Microwave and NanoKnife product lines.
U.S. sales increased $1.7 million due to growth in the Peripheral Vascular products, offset by a reduction in Vascular Access and Oncology/Surgery sales. While total US Vascular Access sales declined by $6.2 million overall, we saw growth in our U.S. BioFlo product lines of 18% year over year. U.S. Oncology/Surgery declined by $1.6 million, driven primarily through lower capital sales offset by growth in disposables. International sales decreased 2% on a constant-currency basis, due to a decline in Thermal Ablation and in the Vascular Access product lines.
Gross Profit, Operating expenses, and Other income (expense)
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. The $1.5 million decrease compared to 2015 is primarily attributable to a $5.9 million charge related to the write-off of Celerity inventory on hand and hardware assets after the business decision to no longer pursue the Celerity Navigation project. The prior year gross profit included a $4.8 million charge related to the voluntary Morpheus recall.
Research and development expenses - Research and development (“R&D”) expenses include internal and external costs to develop new products, enhance existing products, validate new and enhanced products, manage clinical, regulatory and medical affairs. The decrease in R&D costs for the year ended May 31, 2016 is due to reductions in project spend and restructuring. As a percentage of net sales, R&D expenses were 7.1% for fiscal 2016, compared to 7.5% for fiscal 2015.
Sales and marketing expenses - Sales and marketing (“S&M”) expenses consist primarily of salaries, commissions, travel and related business expenses, attendance at medical society meetings, product promotions and marketing activities. Increases in S&M expense for the year ended May 31, 2016 is the result of investments made in the US sales force focused around retention and improved sales performance along with an increase in credit card fees. As a percentage of net sales, S&M expenses were 23.7% for fiscal 2016 compared to 23.1% for fiscal 2015.
General and administrative expenses - General and administrative (“G&A”) expenses include executive management, finance, information technology, human resources, business development, legal, and the administrative and professional costs associated with those activities. Increases in G&A expenses for the year ended May 31, 2016 are primarily the result of increased legal and audit fees.
Amortization of intangibles - Amortization of intangibles for the year ended May 31, 2016 remained consistent with the prior year.
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 decrease from the prior year is due to a $10.5 million gain recognized as a result of reducing the estimated present value of future payments due on earn-outs in the prior year compared to $1 million in gains in 2016. These gains were partially offset in each period by amortization of the present value discount on the contingent liabilities.
Acquisition, restructuring and other items, net - Expense for fiscal 2016 consists of $7.5 million of litigation expense, $2.5 million of M&A related expenses, $1.9 million of severance, $0.7 million of a gain related to the modification of stock based compensation awards for the former CEO and $1.0 million of accelerated depreciation associated with our operational excellence program, and other miscellaneous items. Expense for fiscal 2015 consists of $9.1 million of fixed and long-term asset impairments, $6.4 million of impairment on the NAMIC trademark, other costs associated with litigation, the recall of Morpheus, our operational excellence program, and other miscellaneous items. The impairment charges were primarily driven by a change in strategy within our fluid management product development pipeline, as we moved away from our planned design of an Automated Power Injector.
Medical device excise tax - Medical device excise tax is assessed on our U.S. product sales subject to exclusions and adjustments. The decrease as compared to the prior year is attributable to the suspension of the medical device excise tax as of January 1, 2016.
Other expenses - Other expenses include interest expense, foreign currency impacts, bank fees, and amortization of deferred financing costs. The increase in other expenses was primarily related to foreign currency losses.
Income Tax Provision (Benefit)
Our effective tax rate was (1,240)% for fiscal 2016 compared with 58% for the prior year. The current year rate reflects expense of $40.4 million related to a full valuation allowance on our US net deferred tax assets. The prior year rate reflects the benefit of $9.2 million nontaxable adjustment to the contingent liabilities related to Vortex Medical and Clinical Devices, and a seven month benefit from the R&D tax credit that expired on December 31, 2014, offset by non-deductible interest expense related to contingent payments, true-ups of our fiscal year 2014 US income tax returns and the impact of the elimination of the ASC 718 APIC pool.
At May 31, 2016, we had a net deferred tax liability of $21.7 million, after recording a valuation allowance of $42.2 million. The increase in the valuation allowance was $40.4 million.
While the net deferred tax asset at May 31, 2016 before the valuation allowance was $19.9 million, the Company was required to record a valuation allowance of $40.4 million due to deferred tax liabilities related to intangibles of $20.5 million that have an indefinite reversal period and can not be used to support the deferred tax asset.
Liquidity and Capital Resources
Our cash and cash equivalents totaled $47.5 million as of May 31, 2017, compared with $32.3 million as of May 31, 2016. Marketable securities totaled $1.2 million and $1.7 million as of May 31, 2017 and 2016, respectively, and consist of auction rate securities. As of May 31, 2017, total debt outstanding was $97.5 million comprised of a term loan. The net debt to Consolidated EBITDA, as defined by the Credit Agreement (Note 11), is 1.4x. The fair value of contingent consideration liability as of May 31, 2017 was $12.8 million.
The table below summarizes our cash flows for the years ended May 31, 2017, 2016 and 2015:
During the twelve months ended May 31, 2017 and 2016, cash flows consisted of the following:
Cash provided by operating activities
•
Net income was driven by higher gross margins, lower sales and marketing expenses as well as the medical device tax refund. Also impacting net income, were non-cash items which consisted of $15.3 million of contingent consideration gains, $2.0 million in the write-off of the Embomedics investment and $3.6 million in intangible write-offs related to TiLo. In addition, the prior year net income included a full valuation allowance on the Company's net operating losses.
•
With regards to working capital, the Company focused on optimizing both DSO and DPO which contributed to $15.2 million of working capital improvement. With respect to inventory, the $2.4 million reserve for Acculis inventory partially offset the inventory build related to the plant consolidation.
Cash used in investing activities
•
$3.0 million in fixed asset additions compared to fixed asset additions of $2.3 million in the prior year.
•
$0.5 million in proceeds from an auction rate security that was called during fiscal year 2017.
•
The prior year also had $2.0 million in warrant additions related to EmboMedics and $3.3 million in intangible asset additions related to the Merz Distribution Agreement.
Cash used in financing activities
•
Net $23.9 million in repayments on long-term debt after the proceeds from the Credit Agreement and repayment of the old credit agreement compared to $16.3 million in repayments in the prior year. The increase from the prior year is due to the fact that the revolver was paid down in full as of the third quarter of fiscal year 2017.
•
$1.3 million in deferred financing fees related to the new credit agreement.
•
$10.7 million of proceeds from stock option and ESPP activity compared to $2.4 million in the prior year. The large increase is related to the exercise of stock based awards from executive management turnover that took place over the past year.
•
$9.9 million payment on earn-out liabilities which is consistent with the prior year.
•
$13.6 million from the repurchase of common shares in fiscal 2017.
On November 7, 2016, the Company entered into a Credit Agreement that provides for a $100.0 million senior secured term loan facility and a $150.0 million senior secured revolving credit facility, which includes up to a $20.0 million sublimit for letters of credit and a $5.0 million sublimit for swingline loans.
We believe that our current cash and investment balances, together with cash generated from operations and access to our revolving credit facility, will provide sufficient liquidity to meet our anticipated needs for capital for at least the next 12 months. If we seek to make significant acquisitions of other businesses or technologies in the future for cash, we may require external financing.
Our contractual obligations as of May 31, 2017 are set forth in the table below (in thousands). We have no variable interest entities or other off-balance sheet obligations.
(1)
The non-cancelable operating leases and inventory purchase obligations are not reflected on our consolidated balance sheets under accounting principles generally accepted in the United States of America.
(2)
Acquisition-related future obligations include scheduled minimum payments and contingent payments based upon achievement of performance measures or milestones such as sales or profitability targets, the achievement of research and development objectives or the receipt of regulatory approvals. The amount represents the undiscounted value of contingent liabilities recorded on the balance sheet. Timing of payments are as contractually scheduled, or where contingent, the Company's best estimate of payment timing.
Recent Accounting Pronouncements
Refer to Note 1 for Recently issued Accounting Pronouncements.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk.
FOREIGN CURRENCY EXCHANGE RATE RISK
We are exposed to market risk from changes in currency exchange rates, as well as interest rate fluctuations on our credit facility and investments that could impact our results of operations and financial position.
We transact sales in currencies other than the U.S. Dollar, particularly the Euro, British pound and Canadian dollar. Approximately 7.2% of our sales in fiscal 2017 were denominated in foreign currencies. We do not have expenses denominated in foreign currencies at the level of our sales and as a result, our profitability is exposed to currency fluctuations. When the U.S. Dollar strengthens, our sales and gross profit will be negatively impacted. In addition, we have assets and liabilities denominated in non-functional currencies which are remeasured at each reporting period, with the offset to changes presented as a component of Other (Expenses) Income. Significant non-functional balances include accounts receivable due from a sub-section of our international customers.
INTEREST RATE RISK
On November 7, 2016, we entered into the Credit Agreement which provides for a $100 million senior secured Term Loan and a $150 million Revolving Facility. Interest on both the Term Loan and Revolving Facility is based on a base rate or Eurodollar rate plus an applicable margin which increases as our total leverage ratio increases, with the base rate and Eurodollar rate having ranges of 0.50% to 1.25% and 1.50% to 2.25% respectively. In the event of default, the interest rate may be increased by 2.0%. A 50 basis point (0.50%) increase or decrease in the interest rate would result approximately in a $2.0 million increase or decrease in interest expense over the life of the agreement.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist primarily of cash and cash equivalents, our credit facility and trade accounts receivable.
The Company maintains cash and cash equivalents at various institutions and performs periodic evaluations of the relative credit standings of these financial institutions to ensure their credit worthiness. In addition, the Credit Agreement is structured across five above investment grade banks. The Company has the ability to draw equally amongst the five banks which limits the concentration of credit risk of one institution.
Concentration of credit risk with respect to trade accounts receivable is limited due to the large number of customers that purchase products from the Company. No single customer represents more than 10% of total sales. The Company monitors the creditworthiness of its customers to which it grants credit terms in the normal course of business. Although the Company does not currently foresee a significant credit risk associated with the outstanding accounts receivable, repayment is dependent upon the financial stability of our customers.
Item 8.
Item 8.
Financial Statements and Supplementary Data.
Financial statements and supplementary data required by Part II, Item 8 are included in Part IV of this report as indexed as Item 15 (a) (1) and (2) of this report, and are incorporated by reference into this Item 8.
Item 9.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Item 9A.
Controls and Procedures.
Evaluation of disclosure controls and procedures
As of the end of the period covered by this report, our management, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended. Based on
that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for our Company. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States and includes those policies and procedures that:
•
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
•
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that our receipts and expenditures are being made only in accordance with authorizations of our management and members of our board of directors; and
•
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management has assessed the effectiveness of our internal control over financial reporting as of May 31, 2017. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on this evaluation, management concluded that our internal control over financial reporting was effective as of May 31, 2017.
The effectiveness of our internal control over financial reporting as of May 31, 2017 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting for the fiscal quarter ended May 31, 2017 other than items described below related to our remediation actions, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Remediation of Prior Material Weakness in Internal Control Over Financial Reporting
Management of the Company previously identified and disclosed the following material weakness that existed as of May 31, 2016.
We did not design and maintain effective internal controls over the accounting for the annual goodwill impairment test. Specifically, we did not design and maintain effective controls to review in sufficient detail the cash flow projections and significant valuation model assumptions used in the goodwill impairment test as of December 31, 2015.
During 2017, management of the Company was actively engaged in remediation efforts to address the material weakness noted above. The following actions were taken:
•
The design of the annual goodwill impairment test control was updated to ensure the sufficiency of the control procedures. Specifically, if the discounted cash flow method is required for performing the goodwill impairment test, detailed procedures over the cash flow projections and valuation model assumptions are appropriately detailed to instruct the operating effectiveness of the control.
•
Sufficient documentation was prepared, reviewed and retained over the goodwill impairment test performed as of December 31, 2016.
Based upon the significant actions taken and the testing and evaluation of the effectiveness of our internal control over financial reporting, management of the Company has concluded the material weakness in the Company’s controls no longer existed as of May 31, 2017.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
AngioDynamics, Inc.
Latham, New York
We have audited the internal control over financial reporting of AngioDynamics, Inc. and subsidiaries (the "Company") as of May 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of May 31, 2017, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended May 31, 2017 of the Company and our report dated August 4, 2017 expressed an unqualified opinion on those consolidated financial statements and financial statement schedule.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
August 4, 2017
Item 9B.
Item 9B.
Other Information.
None.
Part III
Certain information required by Part III is omitted from this Annual Report on Form 10-K because we will file a definitive proxy statement within 120 days after the end of our fiscal year end pursuant to Regulation 14A (the “Proxy Statement”) for our annual meeting of Stockholders, currently scheduled for October 2017. The information included in the Proxy Statement under the respective headings noted below is incorporated herein by reference.
Item 10.
Item 10.
Directors, Executive Officers and Corporate Governance.
Information required in this Annual Report on Form 10-K with respect to Executive Officers is contained in the discussion titled “Executive Officers of the Company” in Part I of this Annual Report on Form 10-K. The balance of the information required by Item 10 is incorporated herein by reference to our Proxy Statement under the heading “Election of Directors”.
The information required by Item 11
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this caption is incorporated herein by reference to our Proxy Statement under the heading “Ownership of Securities”.
Item 13.
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
The information required by this caption is incorporated herein by reference to our Proxy Statement under the heading “Certain Relationships and Related Transactions”.
Item 14.
Item 14.
Principal Accounting Fees and Services.
The information required by this caption is incorporated herein by reference to our Proxy Statement under the headings “Audit Matters-Principal Accounting Fees and Services and-Policy on Audit Committee Pre-approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm”.
Part IV
Item 15.
Item 15.
Exhibits, Financial Statement Schedules.
(a)(1) Financial Statements
The following consolidated financial statements and supplementary data of Registrant and its subsidiaries required by Part II, Item 8, are included in Part IV of this report:
(2) Financial Statement Schedules
The following consolidated financial statement schedule is included in Part IV of this report:
Schedule II-Valuation and qualifying accounts
All other schedules are omitted because they are not applicable, or not required, or because the required information is included in the consolidated financial statements or notes thereto.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
AngioDynamics, Inc.
Latham, New York
We have audited the accompanying consolidated balance sheet of AngioDynamics, Inc. and subsidiaries (the "Company") as of May 31, 2017, and the related consolidated statement of operations, comprehensive income (loss), stockholders' equity, and cash flows for the year ended May 31, 2017. Our audit also included the financial statement schedule for the year ended May 31, 2017 listed in the Index at Item 15. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of AngioDynamics, Inc. and subsidiaries as of May 31, 2017, and the results of their operations and their cash flows for the year ended May 31, 2017, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of May 31, 2017, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 4, 2017 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
August 4, 2017
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of AngioDynamics, Inc.
In our opinion, the consolidated balance sheet as of May 31, 2016 and the related consolidated statements of operations, of comprehensive income (loss), of stockholders’ equity, and of cash flows for each of the two years in the period ended May 31, 2016 present fairly, in all material respects, the financial position of AngioDynamics, Inc. and its subsidiaries (the Company) as of May 31, 2016 and the results of their operations and their cash flows for each of the two years in the period ended May 31, 2016, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) for each of the two years in the period ended May 31, 2016 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
August 1, 2016
AngioDynamics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
AngioDynamics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
AngioDynamics, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
The accompanying notes are an integral part of these consolidated financial statements.
AngioDynamics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Year ended May 31, 2017, 2016 and 2015
(in thousands, except share data)
The accompanying notes are an integral part of these consolidated financial statements.
AngioDynamics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
AngioDynamics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS-(Continued)
(in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
AngioDynamics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION, BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Description of Business
The consolidated financial statements include the accounts of AngioDynamics, Inc. and its wholly owned subsidiaries, (collectively, the “Company”). The Company designs, manufactures and sells 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 in oncology and surgical settings. The devices are generally used in minimally invasive, image-guided procedures. Most of the Company's products are intended to be used once and then discarded, or they may be temporarily implanted for short- or long-term use.
Accounting Principles
The consolidated financial statements and accompanying notes have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP").
Principles of Consolidation
The consolidated financial statements include the accounts of AngioDynamics and it subsidiaries (all of which are wholly owned). All intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Estimates also affect reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to conform the prior year consolidated financial statements and notes to the current year presentation. These include a reclassification of bad debt expense from Sales and Marketing to General and Administrative. The amount of the reclassification related to fiscal year 2016 is $1.0 million and fiscal year 2015 is $0.9 million. The adoption of ASC Update No. 2015-03 resulted in a reclassification of $0.9 million from other assets to long-term debt in the Company's consolidated balance sheet as of May 31, 2016.
Cash and Cash Equivalents
The Company considers all unrestricted highly liquid investments with an initial maturity of less than three months at the date of purchase to be cash equivalents. The Company maintains cash and cash equivalent balances with financial institutions in the United States in excess of amounts insured by the Federal Deposit Insurance Corporation.
Marketable Securities
Marketable securities, which include auction rate investments, are classified as “available-for-sale securities” and are reported at fair value, with unrealized gains and losses excluded from operations and reported as a component of accumulated other comprehensive income (loss), net of the related tax effects, in stockholders’ equity. Cost is determined using the specific identification method. The Company holds investments in auction rate securities in order to generate higher than typical money market rate investment returns. Auction rate securities typically are high credit quality, generally achieved with municipal bond insurance. As of May 31, 2017 and 2016, the Company had $1.2 million and $1.7 million, respectively, in investments in two auction rate securities issued by New York state and local government authorities that failed auctions. The authorities are current in their interest payments on the securities.
Fair Value Instruments
The carrying amount of the Company's cash and cash equivalents, accounts receivable, accounts payable and long-term debt approximates fair value due to the short-term nature or market interest rates of these items. The Company bases the fair value of short-term investments on quoted market prices or other relevant information generated by market transactions involving identical or comparable assets. The Company measures and records derivative financial instruments at fair value. See Note 3 for further discussion of financial instruments that are carried at fair value on a recurring and nonrecurring basis.
Accounts Receivable
Accounts receivable, principally trade receivables, are generally due within 30 to 90 days and are stated at amounts due from customers, net of an allowance for estimated sales returns and doubtful accounts. The Company performs ongoing credit evaluations of customers and adjusts credit limits based upon payment history and the customer’s current creditworthiness, as determined by a review of their current credit information. The Company continuously monitors aging reports, collections and payments from customers, and a provision for estimated credit losses is maintained based upon historical experience and any specific customer collection issues that have been identified. While such credit losses have historically been within expectations and the provisions established, the Company cannot guarantee that the same credit loss rates will be experienced in the future. The Company writes off accounts receivable when they are determined to be uncollectible.
Inventories
Inventories are stated at the lower of cost (using the first-in, first-out method) or market. Appropriate consideration is given to deterioration, obsolescence, expiring and other factors in evaluating net realizable value.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Refer below for useful lives by category:
The Company evaluates property, plant and equipment for impairment periodically to determine if changes in circumstances or the occurrence of events suggest the carrying value of the asset or asset group may not be recoverable. Expenditures for repairs and maintenance are charged to expense as incurred. Renewals and betterments are capitalized.
Goodwill and Intangible Assets
Intangible assets other than goodwill and acquired IP R&D are amortized over their estimated useful lives, which range between two and eighteen years, on either a straight-line basis over the expected period of benefit or as revenues are earned from the sales of the related products. The Company periodically reviews the estimated useful lives of intangible assets and review such assets for impairment whenever events or changes in circumstances indicate that the carrying value of the asset or asset group is not recoverable. The Company determines the fair value of the reporting unit based on the market valuation approach or the income approach. If an intangible asset or asset group is considered to be impaired, the amount of the impairment will equal the excess of the carrying value over the fair value of the asset.
Acquired IP R&D has an indefinite life and is not amortized until completion of the development of the project, at which time the IP R&D becomes an amortizable asset. If the related project is not completed in a timely manner or the project is terminated or abandoned, the Company may have an impairment related to the IP R&D, calculated as the excess of the asset’s carrying value over its fair value.
The Company's policy defines IP R&D as the value assigned to those projects for which the related products have not received regulatory approval and have no alternative future use. Determining the portion of the purchase price allocated to IP R&D requires us to make significant estimates. The amount of the purchase price allocated to IP R&D is determined by estimating the future cash flows of each project or technology and discounting the net cash flows back to their present values.
The discount rate used is determined at the time of measurement in accordance with accepted valuation methods. These methodologies include consideration of the risk of the project not achieving commercial feasibility.
Goodwill is the amount by which the cost of acquired net assets in a business combination exceeded the fair value of net identifiable assets on the date of purchase. Goodwill and other intangible assets that have indefinite useful lives are not amortized, but rather, are tested for impairment annually or more frequently if impairment indicators arise.
For goodwill, the impairment test requires a comparison of the estimated fair value of the reporting unit to which the goodwill is assigned to carrying value of the assets and liabilities of that reporting unit. The determination of reporting units also requires management judgment. The Company considers whether a reporting unit exists within a reportable segment based on the availability of discrete financial information. If carrying value of the reporting unit exceeds the fair value of the reporting unit, the carrying value of the reporting unit’s goodwill is reduced to its implied fair value through an adjustment to the goodwill balance, resulting in an impairment charge. The Company utilizes either discounted cash flow models or other valuation models, such as comparative transactions and market multiples, to determine the fair value of our reporting unit. The Company makes assumptions about future cash flows, future operating plans, discount rates, comparable companies, market multiples, purchase price premiums and other factors in those models. Different assumptions and judgment determinations could yield different conclusions that would result in an impairment charge to income in the period that such change or determination was made.
Contingent Consideration
The fair value of the liability for contingent consideration recorded on the acquisition date for a business combination is based on probability weighted estimated cash flow streams, discounted back to present value using a discount rate determined in accordance with accepted valuation methods and reflective of the risk associated with the estimated cash flow streams. The liability for contingent consideration is remeasured to fair value at each reporting period with changes recorded in earnings until the contingency is resolved.
Revenue Recognition
The Company recognizes revenue when the following four criteria has been met: (i) persuasive evidence that an arrangement exists; (ii) the price is fixed or determinable; (iii) collectability is reasonably assured; and (iv) product delivery has occurred or services have been rendered. The Company recognizes revenue, net of sales taxes assessed by any governmental authority, as products are shipped, based on shipping terms, and when title and risk of loss passes to customers. The Company negotiates shipping and credit terms on a customer-by-customer basis and products are shipped at an agreed upon price. All product returns must be pre-approved by the Company and customers may be subject to a 20% restocking charge. To be accepted, a returned product must be unadulterated, undamaged and have at least twelve months remaining prior to its expiration date. Charges for discounts, returns, rebates and other allowances are recognized as a deduction from revenue on an accrual basis in the period in which the revenue is recorded. The accrual for product returns, discounts and other allowances is based on the Company’s history.
Shipping and handling costs, associated with the distribution of finished products to customers, are recorded in costs of goods sold and are recognized when the related finished product is shipped to the customer. Amounts charged to customers for shipping are recorded in net sales.
Research and Development
Research and development costs, including salaries, consulting fees, building costs, utilities and administrative expenses that are related to developing new products, enhancing existing products, validating new and enhanced products, managing clinical, regulatory and medical affairs are expensed as incurred.
Income Taxes
The Company calculates income tax expense for each jurisdiction in which it operates. This involves estimating actual current taxes due plus assessing temporary differences arising from differing treatment for tax and accounting purposes that are recorded as deferred tax assets and liabilities. The Company periodically evaluates deferred tax assets, capital loss carryforwards and tax credit carryforwards to determine their recoverability based primarily on the Company's ability to generate future taxable income and capital gains. Where it is more-likely-than-not these will not be recovered, the Company estimates a valuation allowance and records a corresponding additional tax expense in the consolidated statement of operations.
The Company recognizes and measures uncertain tax positions taken or expected to be taken in a tax return utilizing a two-step approach. The Company first determines if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is that the Company measures the tax benefit as the largest amount that is more likely than not to be realized upon ultimate settlement. The Company recognizes interest and penalties related to uncertain tax positions in the provision for income taxes on the consolidated statements of operations.
Warranty Costs
The Company makes periodic provisions for expected warranty costs. Historically, warranty costs have been insignificant.
Stock Based Compensation
Stock-based compensation expense reflects the fair value of stock-based awards measured at the grant date and recognized over the relevant service period. The Company estimates the fair value of each stock-based award on the measurement date using either the current market price of the stock, the Black-Scholes option valuation model, or the Monte Carlo Simulation valuation model. The Black-Scholes and Monte Carlo Simulation valuation models incorporate assumptions as to stock price volatility, the expected life of options or restricted stock units, a risk-free interest rate and dividend yield. The Company recognizes stock-based compensation expense related to options, restricted stock units and market based performance stock units on a straight-line basis over the service period of the award, which is generally 4 years for options and restricted stock units and 3 years for market based performance stock units.
Foreign Currency Translation
The functional currency of most of the Company's foreign subsidiaries is the local currency in which the subsidiary operates. For foreign operations where the local currency is considered to be the functional currency, the Company translates assets and liabilities into U.S. dollars at the exchange rate on the balance sheet date. The Company translates income and expense items at average rates of exchange prevailing during each period. The Company accumulates translation adjustments in accumulated other comprehensive loss, a component of stockholders’ equity.
For foreign operations where the U.S. dollar is considered to be the functional currency, the Company remeasures monetary assets and liabilities into U.S. dollars at the exchange rate on the balance sheet date and non-monetary assets and liabilities are remeasured into U.S. dollars at historical exchange rates. The Company translates income and expense items at average rates of exchange prevailing during each period. The Company recognizes remeasurement adjustments as a component of other expense in the consolidated statements of operations.
Transaction gains or losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in other expense in the statements of operations as incurred.
Derivative Financial Instruments
The Company is exposed to market risks, including changes in foreign currency and interest rates. The Company periodically enters into certain derivative financial instruments to hedge the underlying economic exposure.
Derivative instruments are presented in the consolidated financial statements at their fair value. Changes in the fair value of derivative financial instruments are either recognized periodically in income or in stockholders’ equity as a component of accumulated other comprehensive income (loss) depending on whether the derivative financial instrument qualifies for hedge accounting and, if so, whether it qualifies as a fair value or cash flow hedge. Generally, the changes in the fair value of derivatives accounted for as fair value hedges are recorded in income along with the portions of the changes in the fair value of hedged items that relate to the hedged risks. Changes in the fair value of derivatives accounted for as cash flow hedges, to the extent they are effective as hedges, are recorded in accumulated other comprehensive income (loss).
Contingencies
The Company is subject to various legal proceedings that arise in the ordinary course of business, including patent infringement and product liability matters. The Company records accruals for contingencies when it is probable the liability has been incurred and the amount can be reasonably estimated. Legal fees are expensed as incurred. Insurance recoveries related to potential claims are recognized up to the amount of the recorded liability when coverage is confirmed and the estimated recoveries are probable of payment. These recoveries are not netted against the related liabilities for financial statement presentation.
Recently Issued Accounting Pronouncements - Adopted
In April 2015, the Financial Accounting Standards Board ("FASB") issued ASC Update No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. Update No. 2015-03 requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Update No. 2015-03 is effective for annual reporting periods beginning after December 15, 2015 and interim periods within those reporting periods. This was adopted in the first quarter of fiscal 2017 and the Company reclassified $0.9 million from other assets to long-term debt, net in the balance sheet as of May 31, 2016.
Recently Issued Accounting Pronouncements - Not Yet Applicable or Adopted
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09). ASU 2014-09 provides a single, comprehensive accounting model for revenues arising from contracts with customers that supersedes most of the existing revenue recognition guidance, including industry-specific guidance. Under this model, revenue is recognized at an amount that an entity expects to be entitled to upon transferring control of goods or services to a customer, as opposed to when risks and rewards transfer to a customer under existing revenue recognition guidance. ASU 2014-09 is effective for the Company beginning in its fiscal year 2019, and may be applied retrospectively to all prior periods presented or through a cumulative adjustment to the opening retained earnings balance in the year of adoption. The Company is currently in the process of evaluating the impact of ASU 2014-09 on its consolidated financial statements.
In July 2015, the FASB issued ASC Update No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. Update No. 2015-11 more closely aligns the measurement of inventory in U.S. GAAP with the measurement of inventory in International Financial Reporting Standards by requiring companies using the first-in, first-out and average costs methods to measure inventory using the lower of cost and net realizable value, where net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Update No. 2015-11 is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those fiscal years. Update No. 2015-11 should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The adoption of Update No. 2015-11 is not expected to have a material impact on the Company's financial position or results of operations.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 increases transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. For leases with a term or twelve months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and liabilities. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and early application is permitted. The Company is currently in the process of evaluating the impact of ASU 2016-02 on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Based Compensation (Topic 718: Improvements to Employee Share-Based Payment Accounting). ASU 2016-09 simplifies and improves various aspects of ASC 718 for share-based payments, including income tax items and the classification of these items on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 31, 2016 and early application is permitted. The Company is currently in the process of evaluating the impact of ASU 2016-09 on its consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15). ASU 2016-15 identifies how certain cash receipts and cash payments are presented and classified in the Statement of Cash Flows under Topic 230. ASU 2016-15 is effective for the Company for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. ASU 2016-15 should be applied retrospectively and early adoption is permitted, including adoption in an interim period. The Company is currently in the process of evaluating the impact of ASU 2016-15 on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350), which simplifies the subsequent measurement of goodwill by eliminating steps from the goodwill impairment test. ASU 2017-04 should be adopted for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. ASU 2017-04 should be applied prospectively and early adoptions is permitted, including adoption in an interim period. The Company is currently evaluating the impact of ASU 2017-04 on its consolidated financial statements.
2. OTHER ASSETS
In 2015, the Company filed an 8-K stating that it executed a non-binding letter of intent to enter into a strategic relationship with privately-held EmboMedics Inc., which develops injectable and resorbable embolic microspheres.
The Company made an initial $2.0 million purchase of non-transferable warrants in a subsidiary of EmboMedics which become exercisable upon a change of control of EmboMedics. The Company did not have significant influence, or control of the subsidiary. This initial investment was recorded at cost and the Company reviewed for impairment at each balance sheet date.
In the second quarter of fiscal year 2017, the Company decided to terminate its agreements with EmboMedics. The termination of these agreements resulted in a write-off of the initial $2.0 million investment in EmboMedics which is included in acquisition, restructuring and other items, net on the consolidated statements of operations.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
On a recurring basis, the Company measures certain financial assets and financial liabilities at fair value based upon quoted market prices, where available. Where quoted market prices or other observable inputs are not available, the Company applies valuation techniques to estimate fair value. FASB ASC Topic 820, Fair Value Measurements and Disclosures, establishes a three-level valuation hierarchy for disclosure of fair value measurements. The categorization of financial assets and financial liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The three levels of the hierarchy are defined as follows:
•
Level 1 - Inputs to the valuation methodology are quoted market prices for identical assets or liabilities.
•
Level 2 - Inputs to the valuation methodology are other observable inputs, including quoted market prices for similar assets or liabilities and market-corroborated inputs.
•
Level 3 - Inputs to the valuation methodology are unobservable inputs based on management’s best estimate of inputs market participants would use in pricing the asset or liability at the measurement date, including assumptions about risk.
The Company's financial instruments include cash and cash equivalents, accounts receivable, marketable securities, accounts payable and contingent consideration. The carrying amount of cash and cash equivalents, accounts receivable, and accounts payable approximates fair value due to their immediate or short-term maturities. The recurring fair value measurements using significant unobservable inputs (Level 3) relate to marketable securities, which are comprised of auction rate securities, and contingent consideration liabilities.
The following tables provide information by level for assets and liabilities that are measured at fair value on a recurring basis:
There were no transfers in and out of Level 1, 2 and 3 measurements for the years ended May 31, 2017 and 2016.
The table below presents the changes in fair value components of Level 3 instruments in the year ended May 31, 2017 (in thousands of dollars):
The Company made the decision to discontinue its investment in the TiLo product that was acquired in August 2013 as part of the Clinical Devices acquisition. This decision resulted in the write-off of the acquired in-process research and development (IPR&D) of $3.6 million along with a $3.1 million gain from the reduction in the fair value of contingent consideration liability associated with future milestones that will no longer be met. The write-off of the IPR&D is included in acquisition, restructuring and other, net on the consolidated statement of operations.
The Company revised the sales projections for the AngioVac product as a result of reviews performed by executive management across all products. The adjustments to the sales projections resulted in a $13.4 million gain from the reduction in the fair value of the contingent liability that is based on lower projected sales volume over the contractual earn out period.
The Company decided to terminate its agreement with EmboMedics which resulted in a $2.0 million write-off of our investment in EmboMedics (Note 2).
The table below presents the changes in fair value components of Level 3 instruments in the year ended May 31, 2016 (in thousands of dollars):
(1) Change in the fair value of contingent consideration is included in earnings and comprised of changes in estimated earn out payments based on projections of company performance and amortization of the present value discount.
Marketable Securities
Marketable securities consist solely of an auction rate security. Assumptions associated with the auction rate security include the interest rate benchmarks, the probability of full repayment of the principal considering the credit quality and guarantees in place, and the rate of return required by investors to own such securities given the current liquidity risk.
Contingent Liability for Acquisition Earn Outs
Certain business combinations involve the potential for the payment of future contingent consideration upon the achievement of certain product development milestones and/or various other favorable operating conditions. Payment of the additional consideration is generally contingent on the acquired company reaching certain performance milestones, including attaining specified revenue levels or achieving product development targets. Contingent consideration is recorded at the estimated fair value of the contingent milestone payments on the acquisition date. The fair value of the contingent milestone consideration is remeasured at the estimated fair value at each reporting period with the change in fair value recognized as income or expense within change in fair value of contingent consideration in the consolidated statement of operations.
Contingent consideration liabilities will be remeasured to fair value each reporting period using projected net sales, discount rates, probabilities of payment and projected payment dates. Projected contingent payment amounts are discounted back to the current period using a discounted cash flow model. Projected net sales are based on internal projections and extensive analysis of the target market and the sales potential. Increases in projected net sales and probabilities of payment may result in higher fair value measurements in the future. Increases in discount rates and the projected time to payment may result in lower fair value measurements in the future. Increases or decreases in any valuation inputs in isolation may result in a significantly lower or higher fair value measurement in the future.
The recurring Level 3 fair value measurements of the contingent consideration liabilities include the following significant unobservable inputs as of May 31, 2017:
At May 31, 2017, the estimated potential amount of undiscounted future contingent consideration that the Company expects to pay as a result of all completed acquisitions is approximately $13.1 million, which represents the remaining contractual minimum payments.
4. MARKETABLE SECURITIES
As of May 31, 2017, marketable securities consisted of the following:
As of May 31, 2016, marketable securities consisted of the following:
The amortized cost and fair value of marketable securities as of May 31, 2017, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
(1) This auction rate security represents investments available for current operations and are classified as current in the consolidated balance sheets.
5. INVENTORIES
As of May 31, 2017 and 2016, inventories consisted of the following:
The Company periodically reviews for both obsolescence and loss of value. The Company makes assumptions about the future demand for and market value of the inventory. Based on these assumptions, the Company estimates the amount of obsolete, expiring and slow moving inventory. The total inventory reserve at May 31, 2017 and 2016 was $7.3 million and $12.6 million, respectively. Of the $7.3 million, $2.4 million relates to the inventory reserve for Acculis inventory as a result of the recall (Note 10). Of the $12.6 million in the prior year, $5.8 million relates to the reserve of Celerity inventory on-hand at May 31, 2016.
6. PREPAID EXPENSES AND OTHER
As of May 31, 2017 and 2016, prepaid expenses and other consisted of the following:
7. PROPERTY, PLANT AND EQUIPMENT, NET
As of May 31, 2017 and 2016, property, plant and equipment are summarized as follows:
Depreciation expense for fiscal 2017, 2016 and 2015 was $6.0 million, $8.2 million and $9.8 million, respectively.
8. GOODWILL AND INTANGIBLE ASSETS
Intangible assets other than goodwill are amortized over their estimated useful lives on either a straight-line basis or proportionately to the benefit being realized. Useful lives range from two to eighteen years. The Company periodically reviews the estimated useful lives of intangible assets and review such assets or asset groups for impairment whenever events or changes in circumstances indicate that the carrying value of the assets or asset groups may not be recoverable. If an intangible asset or asset group is considered to be impaired, the amount of the impairment will equal the excess of the carrying value over the fair value of the asset.
Goodwill is not amortized, but rather, is tested for impairment annually or more frequently if impairment indicators arise. Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination.
The Company's annual testing for impairment of goodwill was completed as of December 31, 2016. The Company operates as a single operating segment with one reporting unit and consequently evaluates goodwill for impairment based on an evaluation of the fair value of the Company as a whole. The Company determines the fair value of the reporting unit based on the market valuation approach and concluded that it was not more-likely-than-not that the fair value of the Company's reporting unit was less than its carrying value.
Even though the Company determined that there was no goodwill impairment as of December 31, 2016, the future occurrence of a potential indicator of impairment, such as a significant adverse change in legal, regulatory, business or economic conditions or a more-likely-than-not expectation that the reporting unit or a significant portion of the reporting unit will be sold or disposed of, would require an interim assessment for the reporting unit prior to the next required annual assessment as of December 31, 2017. The Company continued to assess for potential impairment through May 31, 2017 and noted no events that would be considered a triggering event. There were no adjustments to goodwill for the years ended May 31, 2017 and 2016.
As of May 31, 2017 and 2016, intangible assets consisted of the following:
Amortization expense was $17.3 million, $18.0 million and $18.0 million for fiscal years 2017, 2016 and 2015, respectively.
Annual amortization of these intangible assets is expected to approximate the following amounts for each of the next five fiscal years:
9. INCOME TAXES
The components of income (loss) before income tax expense (benefit) for the years ended May 31 are as follows:
Income tax expense (benefit) is comprised of the following:
In the fiscal years 2017 and 2016 income tax expense, the Company recorded tax expense of $4.8 million and $40.3 million, respectively, primarily driven by the impact of recording a deferred tax liability related to the amortization of intangibles, for tax purposes, that have an indefinite reversal period and cannot be used to support the deferred tax assets in fiscal 2017 and recording a valuation allowance of $40.4 million on the U.S. deferred tax assets in fiscal 2016.
In the fiscal year 2015 income tax benefit, the Company recorded a tax benefit of $4.7 million, primarily driven by a benefit of the $9.2 million nontaxable adjustment to the contingent liabilities related to Vortex Medical and Clinical Devices, and a seven month benefit from the R&D tax credit that expired on December 31, 2014, offset by non-deductible interest expense related to contingent payments, true-ups of our fiscal year 2014 US income tax returns and the impact of the elimination of the ASC 718 APIC pool.
Temporary differences that give rise to deferred tax assets and liabilities are summarized as follows:
The Company's Federal net operating loss carryforwards as of May 31, 2017 after considering IRC Section 382 limitations are $161.6 million. The expiration of the Federal net operating loss carryforwards are as follows: $29.8 million between 2017 and 2023 and $131.8 million between 2027 and 2037.
The Company's state net operating loss carryforwards as of May 31, 2017 after considering remaining IRC Section 382 limitations are $32.7 million which expire in various years from 2017 to 2037.
As a result of certain realization requirements of ASC 718, the table of deferred tax assets and liabilities shown above does not include certain deferred tax assets as of May 31, 2017 and 2016 that arose directly from tax deductions related to equity compensation greater than compensation recognized for financial reporting. Equity will be increased by $0.6 million if and when such excess tax benefits are ultimately realized.
A valuation allowance is provided if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. After careful consideration and weighing of all the available positive and negative evidence, the weight given to the three year cumulative loss and lack of a recent history of core earnings was difficult to overcome and a full valuation allowance related to the U.S. deferred tax assets was established in the period ending May 31, 2016. Management considered all available positive and negative evidence at May 31, 2017, and considering the cumulative loss in the U.S. over the three year period, determined that the valuation allowance is still required. Management will continue to reevaluate the positive and negative evidence at each reporting period and if future results as projected in the U.S. and the Company's tax planning strategies are favorable, the valuation allowance may be removed, which could have a favorable material impact on the Company's results of operations in the period in which it is recorded.
The net deferred tax liability as of May 31, 2017 and 2016 relates to tax amortization of intangibles that have an indefinite reversal period for book purposes and cannot be used to support the deferred tax asset.
The Company's consolidated income tax expense has differed from the amount that would be provided by applying the U.S. Federal statutory income tax rate to the Company's income before income taxes for the following reasons:
The following table provides a reconciliation of the beginning and ending amount of unrecognized tax benefits:
The table above includes unrecognized tax benefits associated with the calculation of limitations placed on the utilization of tax attributes related to an acquired company. If recognized, $0.1 million of the balance of unrecognized tax benefits as of May 31, 2017 would affect the effective tax rate and the balance of $0.8 million would result in adjustments to other tax accounts.
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. There are no accrued interest and penalties recognized in the consolidated balance sheet as of May 31, 2017 and May 31, 2016.
The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities throughout the world. Fiscal years 2014 through 2017 remain open to examination by the various tax authorities.
The Company does not anticipate that the amount of unrecognized tax benefits will significantly change in the next twelve months.
The accumulated undistributed earnings of the Company’s foreign operations were approximately $5.3 million, and are intended to remain indefinitely invested in foreign operations. Accordingly, no taxes have been provided on these earnings as of
May 31, 2017. If these earnings were distributed, the Company would be subject to both foreign withholding taxes and U.S. income taxes that may not be fully offset by foreign tax credits. A reasonable estimate of the deferred tax liability on these earnings is not practicable at this time.
10. ACCRUED LIABILITIES
As of May 31, 2017 and 2016, accrued liabilities consist of the following:
In the fourth quarter of fiscal year 2017, the Company issued a voluntary recall of its Acculis probes that were sold over the past two years. As a result of this voluntary recall, the Company decided to also do a voluntary market withdrawal of its Acculis capital systems and discontinue selling the product. The voluntary recall resulted in a deferral of revenue of $2.6 million and an increase of $2.6 million in inventory and hardware asset reserves. The total impact to income before taxes of the recall was $4.5 million.
11. LONG-TERM DEBT
On November 7, 2016, the Company entered into a Credit Agreement with the lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent, Bank of America, N.A. and Keybank National Association as co-syndication agents, and JPMorgan Chase Bank, N.A., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Keybank National Association as joint bookrunners and joint lead arrangers.
The Credit Agreement provides for a $100.0 million senior secured term loan facility and a $150.0 million senior secured revolving credit facility, which includes up to a $20.0 million sublimit for letters of credit and a $5.0 million sublimit for swingline loans.
On November 7, 2016, the Company borrowed $100.0 million under the Term Loan and approximately $16.5 million under the Revolving Facility to repay the balance of $116.5 million under the former credit agreement. In February 2017 the revolver was paid off in full. As of May 31, 2017 and 2016 the carrying value of long-term debt approximates its fair market value.
The proceeds of the Revolving Facility may be used for general corporate purposes of the Company and its subsidiaries. The Facilities have a five year maturity. Interest on both the Term Loan and Revolving Facility are based on a base rate or Eurodollar rate plus an applicable margin which increases as total leverage ratio increases, with the base rate and Eurodollar rate having ranges of 0.50% to 1.25% and 1.50% to 2.25% respectively. In case of default, the interest rate may be increased by 2.0%. The Revolving Facility carries a commitment fee of 0.20% to 0.35% per annum on the unused portion. The interest rate on the Term Loan at May 31, 2017 was 2.55%.
The Company's obligations under the Facilities are unconditionally guaranteed, jointly and severally, by the Company's material direct and indirect domestic subsidiaries (the “Guarantors”). All obligations of the Company and the Guarantors under the Facilities are secured by first priority security interests in substantially all of the assets of the Company and the Guarantors.
The Credit Agreement includes customary representations, warranties and covenants, and acceleration, indemnity and events of default provisions, including, among other things, two quarterly financial covenants as follows:
•maximum leverage ratio of consolidated total indebtedness* to consolidated EBITDA* of not greater than 3.50 to 1.00 (during certain periods following material acquisitions shall be increased to 3.75 to 1.00).
• fixed charge coverage ratio of consolidated EBITDA minus consolidated capital expenditures to consolidated interest expense paid or payable in cash plus scheduled principal payments in respect of indebtedness under the Credit Agreement of not less than 1.25 to 1.00.
* The definitions of consolidated total indebtedness and consolidated EBITDA are maintained in the credit agreement included as an exhibit to Form 8-k filed on November 10, 2016.
The Company was in compliance with both covenants as of May 31, 2017.
The Company's maturities of principal obligations under the credit agreement are as follows, as of May 31, 2017:
12. RETIREMENT PLANS
The Company has a 401(k) plan under which eligible employees can defer a portion of their compensation, part of which is matched by the Company. Matching contributions were $4.2 million, $3.7 million and $3.7 million in 2017, 2016 and 2015, respectively. There are also various immaterial foreign retirement plans.
13. STOCKHOLDERS’ EQUITY
Capitalization
On October 29, 2014, the Board of Directors approved the Amended and Restated Certificate of Incorporation (the “Amended Certificate”). Under the Amended Certificate, the authorized capital stock is 80,000,000 shares, consisting of 75,000,000 shares of common stock, par value $.01 per share and 5,000,000 shares of preferred stock, par value $.01 per share.
The holders of common stock are entitled to one vote for each share held. Subject to preferences applicable to any outstanding shares of preferred stock, the holders of common stock are entitled to receive ratably dividends, if any, as may be declared by the Board of Directors out of funds legally available for dividend payments. If the Company liquidates, dissolves, or winds up, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities and liquidation preferences of any outstanding shares of preferred stock. Holders of common stock have no pre-emptive rights or rights to convert their common stock into any other securities. There are no redemption or sinking fund provisions applicable to
the common stock. The rights, preferences and privileges of the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that the Company may designate in the future.
The board of directors has the authority to (i) issue the undesignated preferred stock in one or more series, (ii) determine the powers, preferences and rights and the qualifications, limitations or restrictions granted to or imposed upon any wholly un-issued series of undesignated preferred stock and (iii) fix the number of shares constituting any series and the designation of the series, without any further vote or action by the Company's stockholders.
Stock Options
2004 Stock and Incentive Award Plan
The 2004 Stock and Incentive Award Plan (the “2004 Plan”) provides for the grant of incentive options to employees and for the grant of non-statutory stock options, restricted stock, stock appreciation rights, performance units, performance shares and other incentive awards to employees, directors and other service providers. A total of 7,000,000 shares of common stock have been reserved for issuance under the 2004 Plan, of which up to 800,000 shares may be issued upon the exercise of incentive stock options. The compensation committee of the Board of Directors administers the 2004 Plan. The committee determines vesting terms and the exercise price of options granted under the 2004 Plan, but for all incentive stock options the exercise price must at least be equal to the fair market value of common stock on the date of grant. The term of an incentive stock option may not exceed ten years.
On October 25, 2016, the Company amended the 2004 Stock and Incentive Award Plan to increased the shares of common stock reserved for issuance by 250,000 shares.
As of May 31, 2017, there remained approximately 2.4 million shares available for granting under the 2004 Plan.
The following table summarizes information about stock option activity for the fiscal year ended May 31, 2017.
Stock options are granted at exercise prices equal to the quoted market price of common stock at the date of the grant. Options vest 25% per year over four years for employees and 100% after one year for consultants. Grants to directors vest 33.33% per year over three years. Stock options granted prior to May 1, 2007 expire on the tenth anniversary of the grant date. Stock options granted on or after May 1, 2007, expire on the seventh anniversary of the grant date.
The Company measures the fair value of each stock option grant at the date of grant using a Black-Scholes option pricing model. The weighted average grant-date fair value of options granted during the years ended May 31, 2017, 2016 and 2015 was $4.70, $4.16, and $4.74, respectively. The following assumptions were used in arriving at the fair value of options granted during 2017, 2016 and 2015, respectively: risk-free interest rates of 1.30%, 1.48% and 1.54%; expected volatility of 31%, 31%, and 31%; and expected lives of 4.80 years, 4.81 years, and 4.76 years. The Company does not declare dividends therefore a dividend yield of zero was used for the years ended May 31, 2017, 2016 and 2015. Risk-free interest rates reflect the yield on
zero-coupon U.S. Treasury bonds whose maturity period equals the expected term of the option. Expected volatilities are based on the historical volatility of the Company's stock. The expected option lives are based on historical experience of employee exercise behavior.
The total intrinsic value of options exercised during the years ended May 31, 2017, 2016 and 2015 was $2.8 million, $0.1 million, and $1.6 million, respectively. As of May 31, 2017, there was $3.7 million of total unrecognized compensation cost related to non-vested options, which is expected to be recognized over a weighted average period of 3 years.
Cash received from option exercises during 2017, 2016 and 2015 was $9.9 million, $1.3 million and $4.3 million, respectively. The tax benefit realized from stock options exercised during the years ended May 31, 2016 and 2015 were $0.1 million and $0.5 million, respectively. Due to the valuation allowance there was no tax benefit realized from stock option exercises during the year ended May 31, 2017.
Performance Share and Restricted Stock Unit Awards
The Company grants restricted stock units to certain employees under the 2004 Plan which give the recipients the right to receive shares of Company stock upon vesting. The restricted stock unit awards vest in equal annual installments over the term of the grants. Unvested restricted stock unit awards will be forfeited if the recipient ceases to be employed by the Company.
The following table summarizes information about restricted stock unit activity for the year ended May 31, 2017.
The fair value of each restricted stock unit is the market price of Company stock on the date of grant. The weighted average grant date fair value of restricted stock units granted during the years ended May 31, 2017, 2016 and 2015 was $16.54, $15.21 and $14.75, respectively. The total intrinsic value of restricted stock units (meaning the fair value of the units on the date of vest) vesting during the years ended May 31, 2017, 2016 and 2015 was $2.9 million, $2.5 million, and $2.4 million, respectively. As of May 31, 2017, there was $4.9 million of total unrecognized compensation cost related to non-vested restricted stock awards, which is expected to be recognized over a weighted average period of 3 years.
The Company grants performance share awards to certain employees under the 2004 Plan which gives the recipients the right to receive shares of Company stock if certain criteria is met. The performance criteria is established by the compensation committee for vesting of the performance share awards and may include factors such as the achievement of relative total shareholder return ("TSR"), certain sales, operating income and earnings per share (“EPS”) goals. Performance share awards are subject to additional conditions, including the recipient’s continued employment with the Company.
The following table summarizes information about performance unit award activity for the year ended May 31, 2017.
During fiscal years 2017, 2016 and 2015, we granted performance unit awards that include a three-year market condition. Vesting of the performance unit awards is based on the Company's level of attainment of specified total shareholder return ("TSR") targets relative to the percentage appreciation of a specified index of companies for the respective three-year periods. It is also subject to the continued employment of the grantees. In order to estimate the fair value of such awards, we used a Monte Carlo Simulation valuation model on the date of the grant. For the years ended May 31, 2017, 2016 and 2015, the weighted average grant date fair market value for new grants was $22.61, $18.07 and $19.83, respectively. Compensation cost is recognized over the performance period which is typically three years. As of May 31, 2017, 0.4 million performance share units with a weighted average remaining contractual term of 3 years and $4.2 million of unrecognized compensation cost were outstanding.
Compensation Expense
The following tables represents the break out of share-based compensation included in the Company's consolidated statement of operations.
The income tax benefit on the compensation expense recognized for all share-based compensation arrangements was $2.2 million, $1.0 million and $2.0 million for the years ended May 31, 2017, 2016 and 2015, respectively. The income tax benefit for 2017 and 2016 are negated by the full valuation allowance established as of May 31, 2016.
Employee Stock Purchase Plan
The Employee Stock Purchase Plan (the “Stock Purchase Plan”) provides a means by which employees (the “participants”) are given an opportunity to purchase the Company's common stock through payroll deductions. A total of 2,500,000 shares of common stock have been reserved for issuance under the Stock Purchase Plan. Shares are offered through two purchase periods, each with duration of approximately 6 months, commencing on the first business day of the first and third fiscal quarters. An employee is eligible to participate in an offering period if, on the first day of an offering period, he or she has been employed in a full-time capacity for at least six months, with a customary working schedule of 20 or more hours per week and more than five months in a calendar year. Employees who own stock possessing 5% or more of the total combined voting power or value of all classes of stock are not eligible to participate in the Stock Purchase Plan. The purchase price of the shares of common stock acquired on each purchase date will be the lower of (i) 85% of the fair market value of a share of common stock on the first day of the offering period or (ii) 85% of the fair market value of a share of common stock on the last day of the purchase period, subject to adjustments made by the Board of Directors. The Stock Purchase Plan is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423 of the Internal Revenue Code. During the year ended May 31, 2015, an additional 800,000 shares of the Company's common stock have been reserved for issuance under the Stock Purchase Plan. During the year ended May 31, 2017, an additional 500,000 shares of the Company's common stock have been reserved for issuance under the Stock Purchase Plan.
The Company uses the Black-Scholes option-pricing model to calculate the purchase date fair value of the shares issued under the Stock Purchase Plan and recognize expense related to shares purchased ratably over the offering period. During the years ended May 31, 2017, 2016 and 2015, 129,185, 137,957 and 119,001 shares, respectively, were issued at an average price of $11.00, $10.67 and $11.89, respectively, under the Stock Purchase Plan. As of May 31, 2017, 1.3 million shares remained available for future purchases under the Stock Purchase Plan.
Share Repurchases
On November 6, 2016, the Board of Directors approved the Repurchase Program under which they authorized the Company the option to repurchase up to $25.0 million of its outstanding common stock during the twenty-four month period ending November 6, 2018. During the second quarter of fiscal year 2017, the Company repurchased 500,000 shares of common stock in the open market at an aggregate cost of $7.8 million under the Repurchase Program. During the fourth quarter of fiscal year 2017, the Company repurchased 370,000 shares of common stock in the open market at an aggregate cost of $5.7 million under the Repurchase Program. As of May 31, 2017, $11.4 million remained available for repurchase under the Repurchase Program.
In February 2017, the Company retired 642,305 shares of treasury stock. These retired shares are now included in the Company’s pool of authorized but unissued shares. The retired stock had a carrying value of approximately $9.9 million and $0.01 was the par value that was deducted from common stock and the remaining $9.9 million was deducted from additional paid-in capital.
14. EARNINGS PER SHARE
Basic earnings per share are based on the weighted average number of common shares outstanding. In addition, diluted earnings per share include the dilutive effect of potential common stock consisting of stock options, restricted stock units and performance stock units, provided that the inclusion of such securities is not anti-dilutive. In periods with a net loss, stock options and restricted stock units are not included in the computation of basic loss per share as the impact would be anti-dilutive.
The following table reconciles basic to diluted weighted average shares outstanding for the years ended May 31, 2017, 2016 and 2015:
15. COMMITMENTS AND CONTINGENCIES
Leases
The Company is committed under non-cancelable operating leases for facilities and equipment. During fiscal 2017, 2016 and 2015, aggregate rental costs under all operating leases were approximately $2.5 million, $2.5 million and $3.4 million, respectively. Future annual payments under non-cancelable operating leases in the aggregate, of which one includes an escalation clause, with initial remaining terms of more than one year at May 31, 2017, are summarized as follows (in thousands):
Other Commitments and Contingencies
The following table summarizes the Company's other future commitments and contingencies as of May 31, 2017.
(1)
The non-cancelable inventory purchase obligations are not reflected on our consolidated balance sheets under accounting principles generally accepted in the United States of America.
Legal Proceedings
The Company is involved in various legal proceedings, including commercial, intellectual property, product liability, and regulatory matters of a nature considered normal for its business. The Company accrues for amounts related to these matters if it is probable that a liability has been incurred, and an amount can be reasonably estimated. The Company discloses such matters when there is at least a reasonable possibility that a material loss may have been incurred. However, the Company cannot predict the outcome of any litigation or the potential for future litigation.
C.R. Bard, Inc. v. AngioDynamics, Inc.
On January 11, 2012, C.R. Bard, Inc. (“Bard”) filed a suit in the United States District Court of Utah claiming certain of our implantable port products infringe on three U.S. patents held by Bard (the "Utah Action"). Bard is seeking unspecified damages and other relief. The Court denied Bard’s motion for pre-trial consolidation with separate actions it filed on the same day against Medical Components, Inc. and Smiths Medical ASD, Inc., but had asked for supplemental briefing on the issue of whether to conduct a common Markman hearing. Meanwhile, we filed petitions for reexamination in the US Patent and Trademark Office ("PTO") which seek to invalidate all three patents asserted by Bard in the litigation. Our petitions were granted and 40 of Bard's 41 patent claims were rejected and, following further proceedings, the Patent Office issued a Final Rejection of all 40 claims subject to reexamination. Thereafter, Bard filed appeals to the PTO Board of Appeals and Interferences for all three reexams. The parties completed briefing on the appeals and oral argument was held on June 18, 2015. The Patent Office issued decisions in the three appeals. In one (issued on March 11, 2016 for US Patent No. 7,785,302), the rejections of six of the ten claims under reexamination were affirmed, but were reversed on four of the ten claims. In the second (issued on March 24, 2016 for U.S. Patent No. 7,959,615), the rejections of eight of the ten claims under reexamination were affirmed but the rejections of the other two of the ten claims were reversed. In the third (issued on March 29 for U.S. Patent No. 7,947.022) the rejections of all twenty claims under reexamination were affirmed. Bard has since filed Requests for Rehearing in all three reexamination appeals and the Company filed Requests for Rehearing in two of the reexamination appeals (the ‘302 and ‘615 patent reexaminations). Each party has filed comments in Opposition to the other party’s Rehearing Requests,. The PTO has since issued decisions denying all Rehearing Requests - - on February 1, 2017 for the ‘302; on February 17, 2017 for the ‘022; and on February 21, 2017 for the ‘615. In the ‘302 and ‘022, the PTO modified its characterization of one prior art reference. Bard has since filed a Notice of Appeal to the Federal Circuit Court of Appeals in all three reexams and we filed Cross-Appeals in the ‘302 and the ‘615 reexams. The parties are in the process of preparing and filing the various appellate briefs, starting with Bard’s Opening Brief which is currently due on July 31, 2017 and ending with our Reply Brief which is currently due on November 6, 2017. The Utah Action has been stayed pending final resolution of the PTO process. We believe
these claims are without merit and intend to defend them vigorously. We have not recorded an expense related to the outcome of this litigation because it is not yet possible to determine if a potential loss is probable nor reasonably estimable.
On March 10, 2015, C.R. Bard, Inc. and Bard Peripheral Vascular, Inc. (“Bard”) filed suit in the United States District Court for the District of Delaware claiming certain of our implantable port products infringe on three U.S. patents held by Bard (the “Delaware Action). Bard is seeking unspecified damages and other relief. The patents asserted in the Delaware Action are different than those asserted in the Utah Action. On June 1, 2015, we filed two motions in response to Bard’s Complaint - one sought transfer to the District of Utah where the Utah Action is currently pending, and the other sought dismissal of the entire complaint on grounds that none of the claims in the asserted patents is directed to patent eligible subject matter under Section 101 of the Patent Statute and in light of recent authority from the U. S. Supreme Court. On January 12, 2016, the court issued a decision denying both motions. We have since served an Answer and Counterclaim to which Bard has served a Reply. On March 10, 2016, the Court held a case management conference, and, on March 14, 2016, the court entered a Scheduling Order which set, inter alia, a Markman hearing for March 10, 2017, a summary judgment hearing for December 8, 2017 and trial for March 12, 2018. The parties have served various discovery requests on each other, and have been producing documents to each other; on May 27, 2016 Bard served its Infringement Contentions which identified all the port products accused of infringement; and, on June 24, 2016, we served Invalidity Contentions which detail various grounds for invalidating the three asserted patents. The parties completed briefing on the claim construction issues and the Markman hearing was held on March 10, 2017 and the Court issued its Claim Construction Order on May 19, 2017. The Court has since amended the Scheduling Order to provide for the completion of Expert Discovery on October 30, 2017; briefing on Case-Dispositive Motions between November 17, 2017 and January 24, 2018 with oral argument set for February 22, 2018 and trial to commence May 29, 2018. We believe these claims are without merit and intend to defend them vigorously. We have not recorded an expense related to the outcome of this litigation because it is not yet possible to determine if a potential loss is probable nor reasonably estimable.
AngioDynamics, Inc. v. C.R. Bard, Inc.
On May 30, 2017, we commenced an action in the United States District Court for the Northern District of New York entitled AngioDynamics, Inc. v. C.R. Bard, Inc. and Bard Access Systems, Inc. (“Bard”). In this action, we allege that Bard has illegally tied the sales of its tip location systems to the sales of its PICCs. We allege that this practice violates the federal antitrust laws and has had, and continues to have, an anti-competitive effect in the market for PICCs. We seek both monetary damages and injunctive relief. The Court has set an initial case management conference for August 29, 2017.
Governmental Investigations
In June 2014 we received a subpoena from the U.S. Department of Justice (the “DOJ”) requesting documents in relation to a criminal and civil investigation the DOJ is conducting regarding BTG International, Inc.’s LC Bead® product beginning in 2003. RITA Medical Systems and AngioDynamics, Inc., after its acquisition of RITA, was the exclusive distributor of LC Beads in the United States from 2006 through December 31, 2011. We are cooperating fully with this investigation.
In April 2015 we received a subpoena from the DOJ requesting documents in relation to a criminal and civil investigation the DOJ is conducting regarding purported promotion of certain of AngioDynamics’ VenaCure EVLT products for un-cleared indications. We are cooperating fully with this investigation.
As of May 31, 2017 the Company accrued $12.5 million for these matters and in August 2017, the Company agreed in principle with the government to resolve these matters for approximately $12.5 million.
16. SEGMENTS AND GEOGRAPHIC INFORMATION
Segment information
The Company considers its business to be a single segment entity related to the development, manufacture and sale on a global basis of medical devices for vascular access, surgery, peripheral vascular disease and oncology. The Company's chief operating decision maker (CEO) evaluates the various global product portfolios on a net sales basis. Executives reporting in to the CEO include those responsible for operations and supply chain management, research and development, sales, franchise
marketing and certain corporate functions. The CEO evaluates profitability, investment and cash flow metrics on a consolidated worldwide basis due to shared infrastructure and resources.
Total sales by product category are summarized below (in thousands):
Geographic information
Total sales for geographic areas are summarized below (in thousands):
For fiscal years 2017, 2016 and 2015, International sales as a percentage of total net sales were 19%, 19% and 20%, respectively. Sales to any one country outside the U.S., as determined by shipment destination, did not comprise a material portion of net sales in any of the last three fiscal years. In addition, no one customer represents more than 10% of consolidated net sales. 99% of long-lived assets are located within the United States.
17. ACQUISITION, RESTRUCTURING AND OTHER ITEMS, NET
For the years ended May 31, 2017, 2016 and 2015 acquisition, restructuring and other items, net consisted of:
Of the $19.5 million in legal for fiscal year 2017, $12.5 million relates to a reserve for DOJ litigation settlement (see Note 15) and the remaining legal expenses relates to DOJ matters.
Restructuring
The Company evaluates its performance and looks for opportunities to improve the overall operations of the Company on an ongoing basis. As a result of this evaluation, certain restructuring initiatives are taken to enhance the Company’s overall operations.
Operational Consolidation
On February 1, 2017, the Company announced to employees an operational consolidation plan (the “plan”) to consolidate manufacturing facilities in Manchester, GA and Denmead, UK into the Glens Falls and Queensbury, NY facilities. This plan will streamline and optimize the manufacturing functions into one centralized location increasing the utilization of the Glens Falls and Queensbury facilities, optimizing inventory and reducing cost of goods sold through savings in overhead expenses and direct labor. The restructuring activities associated with the plan are expected to be completed in the third quarter of fiscal year 2018.
The following table provides a summary of estimated costs associated with the plan:
(1) Equipment transfer, validation and other start-up costs to prepare the facilities for the new product lines.
The Company recorded restructuring charges related to the plan during the year ended May 31, 2017 of $1.3 million. There were no costs associated with this plan in the prior year. Termination benefits are only earned if an employee stays until their termination date; therefore, the expenses related to termination benefits are being recorded ratably over the service period.
The following table presents a rollforward of the restructuring reserve for the year ended May 31, 2017:
The Company’s restructuring liability of $1.0 million is mainly comprised of accruals for termination benefits which are expected to be paid in the next twelve months and are included in accrued expenses on the consolidated balance sheet.
18. ACCUMULATED OTHER COMPREHESIVE INCOME (LOSS)
Changes in each component of accumulated other comprehensive income (loss), net of tax, are as follows for fiscal 2017 and 2016:
19. QUARTERLY INFORMATION (unaudited)
Quarterly results of operations during the fiscal years ended May 31, 2017 and 2016 are as follows:
(1) Included within net income (loss) during the fourth quarter of fiscal 2017 is the $12.5 million charge for a litigation reserve (Note 15) and $4.5 million impact relating to the Acculis recall (Note 10).
(1) Included within net income (loss) during the fourth quarter of fiscal year 2016 is the $40.4 million valuation allowance that was recorded (Note 9).
The data in the schedules above has been intentionally rounded to the nearest thousand and therefore the quarterly amounts may not sum to the full year amounts.
AngioDynamics, Inc. and Subsidiaries
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ANGIODYNAMICS, INC.
Date:
August 4, 2017
By:
/S/ HOWARD W. DONNELLY
Howard W. Donnelly,
Chairman of the Board, Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
EXHIBITS