Third Quarter Financial Results…
On August 25, 2010, Angeion Corp (ANGN) reported financial results for the third quarter ending July 31, 2010. This was the first quarter since Q4 2008 that the company generated positive earnings and EPS. In addition, this was the second consecutive quarter that Angeion beat both our top-line and EPS estimates.
As a result, we have again adjusted our full-year revenue and EPS estimates upwards. We have also raised our longer range EPS forecast for Angeion, mostly as a result of significantly improving gross margins. We are cautiously optimistic that Angeion will continue to benefit from some manufacturing leverage gained from higher production volumes. EPS is very sensitive to only a very slight movement in the gross margin, so this will be something to keep an eye on going forward.
Revenue
Revenue in the third quarter of $7.120 million increased by 14.2% y-o-y and consisted of $6.207 million (up 14.6%) in equipment and supplies and $913k (up 11.9%) in services revenue. International sales were $1.666 million, an increase of 28% and accounted for 23.4% of total revenue, compared to 20.8% of total sales in Q3 2009.
Total revenue came in 1.6% ahead of our $7.008 million estimate with both equipment and supplies, as well as services revenue beating our estimates by $1.6%. Revenue growth in the quarter benefited from continued international penetration (especially in Europe +66% and Latin America +57%), ongoing strong demand for the recently launched Ultima CardiO2 machine as well as the company’s MedGraphics Certified products (refurbished products used sparingly in clinical research studies or demonstrations), and the introduction of Angeion’s TRUcal system which debuted during the quarter. Management noted that they have seen some very slight improvement in hospital capital expenditures which also contributed to sales growth.
Gross Margin
Gross margin came in at 57.8% in the quarter with product margin at 54.1% and service margin at 82.9%. Gross margin was significantly better than our 51.5% forecast and compared very favorably to the 54.4% posted in Q3 2009 as well as the 52% in the second quarter 2010. Management attributed the improvement to increased manufacturing efficiencies from higher product volumes, higher margins on the MedGraphics Certified products and reduced provisions for obsolete inventory.
Management noted that at least 50% of the y-o-y improvement was attributable to manufacturing efficiencies. As the Certified products business will not likely generate much in the way of sales going forward, this portion of the improvement in the gross margin may not be sustainable. The same may be the case for inventory provisions.
We do, however expect sales to continue to grow and for Angeion to continue to benefit from some manufacturing leverage. Expectations for greater manufacturing leverage relative to prior years is our basis for increasing our EPS estimates for both the remainder of 2010 as for later periods (2011 – 2013).
Operating Expenses
Operating expenses of $3.877 million were about 2.7% lower than our $3.983 million forecast and were up 14.8% compared to the third quarter 2009. Sequentially, operating expenses fell 3.4%. The company capitalized $101k worth of R&D during the quarter relating to the development of certain software that will be used on the MedGraphics products — related costs had been expensed in prior periods but as the software is now functional, much of these costs will be brought over to the balance sheet and amortized.
This contributed to R&D expense falling by 28% from Q2 2010 and accounted for a significant portion of the difference between our estimate and actual expense. We expect R&D expense in the fourth quarter to be similar to that in Q3.
Operating expenses came in lower than our forecast despite being negatively impacted by a $245k one-time charge related to the departure of the company’s CFO during the quarter. Pro forma for this one-time charge, operating expenses increased only 7.6% y-o-y and fell 9.5% sequentially.
EPS
EPS came in at $0.03 compared to our estimate of ($0.12). Roughly $0.11 of the $0.15 difference between our estimated and actual EPS was a result of the significantly better than forecasted gross margin (57.8% A vs. 51.5% E).
Pro forma for the $245k one-time charge mentioned above, EPS came in at $0.09.
Cash
Angeion exited the quarter with $10.8 million in cash and investments, down slightly from $11.1 million at the end of the second quarter. Operating cash flow was negative $299k during the quarter but ex-changes in working capital, CFO was $331k. For the first nine months operating cash flow was $76k (negative $92k ex-changes in working capital). The balance sheet remains debt free.
The company bought back $163 worth of stock in the most recent quarter. To date, Angeion has repurchased $299k of stock under their recently announced $1 million share repurchase program. We expect operating cash flow to accelerate along with sales in the coming quarters. The current cash balance and operating cash flow will be more than satisfactory to fund the remainder of the share buyback program and a potential small (~$5 million in revenue) acquisition. The company also has a significant amount of borrowing capacity to fund a larger acquisition.
We also believe due to the recent changes being made to the board of directors that, barring a near-term acquisition, that the company may implement a larger share repurchase program.
Our Forecast
We have slightly increased our revenue forecast for the remainder of 2010 as well as for future years (we model through 2013). As we noted above we have also made slight adjustments to our gross margin forecast for all periods.
We model revenue and EPS of $7.3 million and $0.03 for the fourth quarter 2010. This implies full-year 2010 revenue and EPS of $27.9 million and ($0.27), growth of 9.6% and 30.7% respectively from the same periods in 2009. Due almost exclusively to our adjustments to gross margin we are also raising our EPS estimates for every year through 2013.
We are maintaining our Outperform rating on Angeion with a near-term price target of $6.00. Go to Zacks.com to access our full 16-page report on ANGN.
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