Surmodics Reports Third Quarter Fiscal 2016 Results

EDEN PRAIRIE, Minn.--(BUSINESS WIRE)--

Surmodics, Inc. SRDX, a leading provider of medical device and in vitro diagnostic technologies to the healthcare industry, today announced results for its fiscal 2016 third quarter, ended June 30, 2016.

"Surmodics continued to advance all key strategic growth priorities while delivering against our fiscal 2016 financial commitments," said Gary Maharaj, president and chief executive officer. "We are pleased to say that the integration of the Creagh Medical and NorMedix acquisitions are on track. We have earned revenue from our first customer with fully integrated Surmodics coatings and Creagh Medical balloon technologies. We also continue to make excellent progress in enrollment for our investigational device exemption (IDE) study of our SurVeil™ drug-coated balloon platform with nine patients enrolled in the study."

Third Quarter Revenue and Earnings Summary

GAAP revenue for the fiscal 2016 third quarter totaled $20.0 million, compared with $15.9 million a year earlier. Third quarter fiscal 2016 revenue included $1.2 million from Surmodics' fiscal 2016 acquisitions as well as a previously disclosed $2.9 million, or $0.14 per share, hydrophilic royalty catch-up payment, of which $2.6 million related to periods prior to fiscal 2016.

Diluted GAAP earnings per share from continuing operations in the third quarter of fiscal 2016 were $0.30, same as a year ago. On a non-GAAP basis, earnings per share increased 19% to $0.37 in the third quarter of fiscal 2016 versus $0.31 last year. Fiscal 2016 third quarter non-GAAP earnings exclude $0.07 per share from acquisition-related transaction costs, including integration, contingent consideration accretion, amortization, foreign currency transaction and other expenses.

Medical Device Segment

This segment, which includes hydrophilic coatings, device drug delivery technologies and balloon catheter products, posted revenue of $15.7 million in the third quarter of fiscal 2016, an increase of 35 percent compared to the year-ago period. The gain stems from higher hydrophilic coating royalties, reagent product sales and acquisition revenue. Fiscal third quarter 2016 hydrophilic coating royalty and license fee revenue included the $2.9 million catch-up payment and aggregated $10.5 million, an increase of 34 percent compared to the year-earlier period. The Medical Device business unit generated $6.7 million of operating income in the third quarter compared to $6.3 million in the prior-year quarter. Increased revenue offset by increased research and development expense as well as acquisition-related expenses accounted for the change in operating income.

In Vitro Diagnostics Segment

Revenue for the third quarter of fiscal 2016 grew one percent to $4.3 million, as compared to an exceptionally strong year-ago period. The IVD business unit operating income in the third quarter of fiscal 2016 increased to $1.7 million versus $1.2 million in the prior-year quarter. Operating income benefited from lower legal costs.

Update on SurVeil Drug-Coated Balloon

As previously disclosed, Surmodics has enrolled the ninth patient in its IDE study of the SurVeil drug-coated balloon. This study is part of the Company's strategy of providing highly differentiated intravascular whole product solutions. Up to 15 patients can be enrolled. Surmodics plans to complete enrollment in this clinical study during the fourth quarter of fiscal 2016. "There is an opportunity with the next wave of DCB technology to continue to improve patient outcomes as the technology is advanced," said D. Christopher Metzger, M.D., at Wellmont Holston Valley Medical Center in Kingsport, Tennessee and National Principal Investigator for the PreVeil Study. "I am pleased to be part of Surmodics' U.S. early feasibility trial as we continue to evaluate this promising, next-generation technology available with the SurVeil DCB."

Balance Sheet and Cash Flow

As of June 30, 2016, the Company had $44.2 million of cash and investments. Surmodics generated cash from operating activities of $18.5 million in the first nine-months of fiscal 2016. Capital expenditures totaled $4.9 million for the first nine-months of fiscal 2016. In addition, the Company used $25.1 million of net cash to acquire Creagh Medical and NorMedix in the first nine-months of fiscal 2016.

Fiscal 2016 Outlook

According to Maharaj, "Through the first three quarters of fiscal 2016, our revenue increased 19 percent. As a result, we are raising our revenue and earnings guidance for fiscal 2016."

Surmodics is increasing full-year revenue guidance to be in the range of $68.0 million to $70.0 million as well as diluted GAAP earnings per share in the range of $0.52 to $0.59. Surmodics also is increasing non-GAAP earnings per share to a range of $0.98 to $1.08, up from a range of $0.75 to $0.85. Surmodics is reaffirming its anticipated capital expenditures in the range of $8.0 million to $9.0 million.

Live Webcast

Surmodics will host a webcast at 7:30 a.m. CT (8:30 a.m. ET) today to discuss third quarter results. To access the webcast, go to the investor relations portion of the Company's website at www.surmodics.com and click on the webcast icon. A replay of the third quarter conference call will be available by dialing 888-203-1112 and entering conference call ID passcode 8648070. The audio replay will be available beginning at 10:30 a.m. CT today until 10:30 a.m. CT on Thursday, August 4, 2016. In addition, the conference call audio and transcript will be archived on the Company's website following the call.

About Surmodics SurVeil™ Drug-Coated Balloon

The SurVeil drug-coated balloon incorporates Surmodics' decades of experience as a leading supplier of surface modification technologies to the medical device industry. It includes a Surmodics-proprietary drug-excipient formulation for the balloon coating, and a new and proprietary manufacturing process for the coating applications. It also includes the Surmodics Serene™ low-friction, low-particulate hydrophilic coating on the catheter shaft. The SurVeil DCB is not available for sale in the US and is for investigational use only. We initiated a first-in-human clinical trial using Surmodics SurVeil drug-coated balloon on April 5, 2016.

About Surmodics, Inc.

Surmodics is the global leader in surface modification technologies for intravascular medical devices and a leading provider of chemical components for in vitro diagnostic (IVD) tests and microarrays. Following two recent acquisitions of Creagh Medical and NorMedix, the Company is executing a key growth strategy for its medical device business by expanding to offer total intravascular product solutions to its medical device customers. The combination of proprietary surface technologies, along with enhanced device design, development and manufacturing capabilities, enables Surmodics to significantly increase the value it offers with highly differentiated intravascular solutions designed and engineered to meet the most demanding requirements. With this focus on offering total product solutions, Surmodics' mission remains to improve the detection and treatment of disease. Surmodics is headquartered in Eden Prairie, Minnesota. For more information about the company, visit www.surmodics.com. The content of Surmodics' website is not part of this press release or part of any filings that the company makes with the SEC.

Safe Harbor for Forward-Looking Statements

This press release contains forward-looking statements. Statements that are not historical or current facts, including statements about beliefs and expectations regarding the Company's performance in the near- and long-term, including our revenue, earnings and cash flow expectations for fiscal 2016, our fiscal 2016 priorities, and our SurVeil drug-coated balloon, are forward-looking statements. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated, including (1) our ability to successfully develop, obtain regulatory approval for, and commercialize our SurVeil drug-coated balloon product, including progress in our IDE study; (2) our reliance on third parties (including our customers and licensees) and their failure to successfully develop, obtain regulatory approval for, market and sell products incorporating our technologies; (3) our ability to successfully identify, acquire, and integrate target companies, and achieve expected benefits from acquisitions that are consummated; (4) possible adverse market conditions and possible adverse impacts on our cash flows, and (5) the factors identified under "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2015, and updated in our subsequent reports filed with the SEC. These reports are available in the Investors section of our website at www.surmodics.com and at the SEC website at www.sec.gov. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update them in light of new information or future events.

Use of Non-GAAP Financial Information

In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, Surmodics is reporting non-GAAP financial results including non-GAAP operating income, non-GAAP income before income taxes, non-GAAP net income, and non-GAAP diluted net income per share. We believe that these non-GAAP measures provide meaningful insight into our operating performance excluding certain event-specific matters, and provide an alternative perspective of our results of operations. We use non-GAAP measures, including those set forth in this release, to assess our operating performance and to determine payout under our executive compensation programs. We believe that presentation of certain non-GAAP measures allows investors to review our results of operations from the same perspective as management and our board of directors and facilitates comparisons of our current results of operations. The method we use to produce non-GAAP results is not in accordance with GAAP and may differ from the methods used by other companies. Non-GAAP results should not be regarded as a substitute for corresponding GAAP measures but instead should be utilized as a supplemental measure of operating performance in evaluating our business. Non-GAAP measures do have limitations in that they do not reflect certain items that may have a material impact on our reported financial results. As such, these non-GAAP measures should be viewed in conjunction with both our financial statements prepared in accordance with GAAP and the reconciliation of the supplemental non-GAAP financial measures to the comparable GAAP results provided for the specific periods presented, which are attached to this release.

Surmodics, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(in thousands, except per share data)
			Three Months Ended										Nine Months Ended
			June 30,										June 30,
			2016					2015					2016					2015
			(Unaudited)										(Unaudited)
Revenue:
Royalties and license fees			$	10,556				$	7,908				$	25,207				$	22,566
Product sales				7,512					6,583					22,866					18,082
Research and development				1,904					1,423					5,139					3,887
Total revenue				19,972					15,914					53,212					44,535
Operating costs and expenses:
Product costs				2,777					2,174					8,069					6,031
Research and development				4,693					3,860					13,195					11,839
Selling, general and administrative				4,483					3,872					12,984					11,387
Acquisition transaction, integration and other costs				61				―						3,192				―
Intangible asset amortization				806					151					1,940					454
Contingent consideration accretion expense				555				―						1,056				―
Total operating costs and expenses				13,375					10,057					40,436					29,711
Operating income				6,597					5,857					12,776					14,824
Other income (loss), net				263					(4	)				72					645
Income before income taxes				6,860					5,853					12,848					15,469
Income tax provision				(2,857	)				(1,929	)				(5,507	)				(4,879	)
Net income			$	4,003				$	3,924				$	7,341				$	10,590
Basic net income per share			$	0.31				$	0.30				$	0.57				$	0.81
Diluted net income per share			$	0.30				$	0.30				$	0.56				$	0.79
Weighted average number of shares outstanding:
Basic				12,995					13,002					12,969					13,057
Diluted				13,284					13,279					13,203					13,324

Surmodics, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands)
			June 30,				September 30,
			2016				2015
			(Unaudited)
Assets
Cash and short-term investments			$	34,656			$	55,588
Available-for-sale securities				9,523			―
Accounts receivable				5,859				7,478
Inventories				3,345				2,979
Other current assets				686				1,744
Total current assets				54,069				67,789
Property and equipment, net				17,183				12,968
Intangible assets, net				22,889				2,760
Goodwill				26,544				8,010
Other assets				6,229				7,183
Total assets			$	126,914			$	98,710
Liabilities and Stockholders' Equity
Current liabilities				8,069				4,700
Total current liabilities				8,069				4,700
Contingent consideration				13,950			―
Other liabilities				2,089				2,137
Total stockholders' equity				102,806				91,873
Total liabilities and stockholders' equity			$	126,914			$	98,710

Surmodics, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
			Nine Months Ended
			June 30,
			2016					2015
			(Unaudited)
Operating Activities:
Net income			$	7,341				$	10,590
Depreciation and amortization				3,703					2,083
Stock-based compensation				2,729					1,841
Contingent consideration accretion and foreign currency transaction loss expenses				1,369				―
Deferred taxes				2					450
Gain on sales of available-for-sale securities and strategic investments				(377	)				(496	)
Net other operating activities				(82	)				(478	)
Change in operating assets and liabilities:
Accounts receivable				1,999					(1,244	)
Accounts payable and accrued liabilities				746					132
Income taxes				1,137					(221	)
Net change in other operating assets and liabilities				(67	)				(581	)
Net cash provided by operating activities from continuing operations				18,500					12,076
Investing Activities:
Payments for acquisitions, net of cash acquired				(25,054	)			―
Net purchases of property and equipment				(4,854	)				(354	)
Cash received from sale of strategic assets				377					21
Cash transferred to discontinued operations			―						(45	)
Net other investing activities				(9,562	)				18,822
Net cash (used in) provided by investing activities from continuing operations				(39,093	)				18,444
Financing Activities:
Purchase of common stock to fund employee taxes				(371	)				(810	)
Repurchase of common stock			―						(20,000	)
Net other financing activities				46					887
Net cash used in financing activities from continuing operations				(325	)				(19,923	)
Net cash (used in) provided by continuing operations				(20,918	)				10,597
Discontinued operations:
Net cash used in operating activities			―						(45	)
Net cash provided by financing activities			―						45
Net cash provided by discontinued operations			―					―
Effect of exchange rate changes on cash				(14	)			―
Net change in cash and cash equivalents				(20,932	)				10,597
Cash and Cash Equivalents:
Beginning of period				55,588					43,511
End of period			$	34,656				$	54,108

Surmodics, Inc. and Subsidiaries
Supplemental Segment Information
(in thousands)
(Unaudited)
			Three Months Ended June 30,
			2016										2015										% Change
Revenue								% of Total										% of Total
Medical Device			$	15,654					78.4	%			$	11,629					73.1	%			34.6	%
In Vitro Diagnostics				4,318					21.6					4,285					26.9				0.8
Total revenue			$	19,972					100.0	%			$	15,914					100.0	%			25.5	%
			Nine Months Ended June 30,
			2016										2015										% Change
Revenue								% of Total										% of Total
Medical Device			$	39,500					74.2	%			$	32,827					73.7	%			20.3	%
In Vitro Diagnostics				13,712					25.8					11,708					26.3				17.1
Total revenue			$	53,212					100.0	%			$	44,535					100.0	%			19.5	%
			Three Months Ended June 30,										Nine Months Ended June 30,
			2016					2015					2016					2015
Operating Income
Medical Device			$	6,673				$	6,295				$	12,825				$	16,507
In Vitro Diagnostics				1,673					1,191					5,298					3,220
Corporate				(1,749	)				(1,629	)				(5,347	)				(4,903	)
Total operating income			$	6,597				$	5,857				$	12,776				$	14,824

Surmodics, Inc., and Subsidiaries
Net Income and Diluted EPS GAAP to Non-GAAP Reconciliation
For the Three Months Ended June 30, 2016
(in thousands, except per share data)
(Unaudited)
															Income
											Operating				Before
			Total				Operating				Income				Income					Net
			Revenue				Income				Percentage				Taxes					Income					Diluted EPS
GAAP			$	19,972			$	6,597			33.0	%			$	6,860				$	4,003				$	0.30
Adjustments:
Contingent consideration expense (1)			―					555			2.8					555					555					0.04
Foreign exchange gain (2)			―				―				―					(250	)				(250	)				(0.02	)
Amortization of intangible assets (3)			―					806			4.0					806					688					0.05
Non-GAAP			$	19,972			$	7,958			39.8	%			$	7,971				$	4,996				$	0.37

(1)			The contingent consideration adjustment represents accounting adjustments to state contingent consideration liabilities at their estimated fair value.
(2)			Foreign exchange gain related to marking contingent consideration to market.
(3)			To exclude amortization of acquisition related intangible assets and associated tax impact.
			The above table is a summary of the pro forma adjustments to GAAP earnings and EPS, columns may not foot due to rounding.

Surmodics, Inc., and Subsidiaries
Net Income and Diluted EPS GAAP to Non-GAAP Reconciliation
For the Three Months Ended June 30, 2015
(in thousands, except per share data)
(Unaudited)
															Income
											Operating				Before
			Total				Operating				Income				Income				Net				Diluted
			Revenue				Income				Percentage				Taxes				Income				EPS
GAAP			$	15,914			$	5,857			36.8	%			$	5,853			$	3,924			$	0.30
Adjustments:
Amortization of intangible assets (1)			―					151			0.9					151				100				0.01
Non-GAAP			$	15,914			$	6,008			37.8	%			$	6,004			$	4,024			$	0.31

(1)			To exclude amortization of acquisition related intangible assets and associated tax impact.
			The above table is a summary of the pro forma adjustments to GAAP earnings and EPS; columns may not foot due to rounding.

Surmodics, Inc., and Subsidiaries
Net Income and Diluted EPS GAAP to Non-GAAP Reconciliation
For the Nine Months Ended June 30, 2016
(in thousands, except per share data)
(Unaudited)
											Operating
			Total				Operating				Income				Income Before
			Revenue				Income				Percentage				Income Taxes					Net Income					Diluted EPS
GAAP			$	53,212			$	12,776			24.0	%			$	12,848				$	7,341				$	0.56
Adjustments:
Acquisition transaction, integration and other costs (1)			―					3,192			6.0					3,192					2,865					0.22
Contingent consideration expense (2)			―					1,056			2.0					1,056					1,056					0.08
Foreign exchange loss (3)			―				―				―					316					316					0.02
Research and development tax credit (4)			―				―				―				―						(222	)				(0.02	)
Amortization of intangible assets (5)			―					1,940			3.6					1,940					1,655					0.13
Gain on strategic investment (6)			―				―				―					(361	)				(361	)				(0.03	)
Non-GAAP			$	53,212			$	18,964			35.6	%			$	18,991				$	12,650				$	0.96

(1)			Represents acquisition related costs, including due diligence and integration expenses. Due diligence and other fees include legal, tax, investment banker and other expenses associated with acquisitions that can be highly variable and not representative of on-going operations.
(2)			The contingent consideration adjustment represents accounting adjustments to state contingent consideration liabilities at their estimated fair value.
(3)			Foreign exchange loss related to marking contingent consideration to market.
(4)			Represents the estimated discrete income tax benefit associated with the December 2015 signing of the Protecting Americans from Tax Hikes Act of 2015— which retroactively reinstated federal R&D income tax credits for calendar 2015 and the discrete fiscal 2015 provision to tax return true-up.
(5)			To exclude amortization of acquisition related intangible assets and associated tax impact.
(6)			Represents the gain recognized on the sale of a strategic investment.
			The above table is a summary of the pro forma adjustments to GAAP earnings and EPS, columns may not foot due to rounding.

Surmodics, Inc., and Subsidiaries
Net Income and Diluted EPS GAAP to Non-GAAP Reconciliation
For the Nine Months Ended June 30, 2015
(in thousands, except per share data)
(Unaudited)
															Income
											Operating				Before
			Total				Operating				Income				Income					Net
			Revenue				Income				Percentage				Taxes					Income					Diluted EPS
GAAP			$	44,535			$	14,824			33.3	%			$	15,469				$	10,590				$	0.79
Adjustments:
Research and development tax credit (1)			―				―				―				―						(201	)				(0.01	)
Gain on strategic investment (2)			―				―				―					(523	)				(523	)				(0.04	)
Amortization of intangible assets (3)			―					454			1.0					454					300					0.02
Non-GAAP			$	44,535			$	15,278			34.3	%			$	15,400				$	10,166				$	0.76

(1)			Represents a discrete income tax benefit associated with the December 2014 signing of the Tax Increase Prevention Act of 2014 which retroactively reinstated federal R&D income tax credits for calendar 2014.
(2)			Represents the gain recognized on the sale of a strategic investment.
(3)			To exclude amortization of acquisition related intangible assets and associated tax impact.
			The above table is a summary of the pro forma adjustments to GAAP earnings and EPS, columns may not foot due to rounding.

View source version on businesswire.com: http://www.businesswire.com/news/home/20160728005396/en/