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Surmodics Reports Fourth Quarter Fiscal 2017 Results and Provides Fiscal 2018 Guidance

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Surmodics, Inc. (NASDAQ:SRDX), a leading provider of medical device and
in vitro diagnostic technologies to the healthcare industry, today
announced results for its fiscal 2017 fourth quarter, ended September
30, 2017 and financial outlook for fiscal 2018.

Recent Highlights

  • First Patient Enrolled in TRANSCEND Pivotal Clinical Trial for SurVeil®
    Drug-Coated Balloon
  • Global Approvals of .014" Low-Profile PTA Balloon Dilation Catheter
  • Q4 2017 Revenue of $20.1 Million, up 10.5%
  • EPS of $0.03, Non-GAAP EPS of $0.18

"We are pleased with the execution of our whole-product solutions
strategy with the recently announced first patient enrolled in
TRANSCEND, the pivotal clinical trial for the SurVeil®
drug-coated balloon (DCB), and global approvals of our .014" Low-Profile
PTA Balloon Dilation Catheter," said Gary Maharaj, President & CEO of
Surmodics. "We have made meaningful advancements on several key
development and clinical initiatives through our fiscal 2017 and look
forward to expanding on those achievements in fiscal 2018. Further, our
fourth fiscal quarter was marked by strong revenue growth and
operational execution across our business."

Fourth Quarter Fiscal 2017 Financial Results
Total revenue
for the fourth quarter of fiscal 2017 was $20.1 million, as compared
with $18.2 million in the prior-year period.

Medical Device revenue was $14.7 million in the fourth quarter of fiscal
2017, as compared with $13.7 million the year-ago period, an increase of
7.5%. In Vitro Diagnostics revenue was $5.3 million for the fourth
quarter of fiscal 2017 as compared with $4.5 million in the same
prior-year quarter, an increase of 19.8%.

Diluted GAAP earnings per share in the fourth quarter of fiscal 2017
were $0.03 as compared with $0.20 in the year-ago period. On a non-GAAP
basis, earnings per share were $0.18 in the fourth quarter of fiscal
2017 versus $0.26 last year. The decrease in earnings per share in the
current quarter period reflects previously announced increased
investments in research, development and other operating expenses to
support the Company's whole-product solutions strategy, including the SurVeil
DCB and other proprietary products as well as lower hydrophilic royalty
revenue, partially offset by a $1.1 million license fee earned in the
fourth quarter of fiscal 2017.

As of September 30, 2017, cash and investments were $48.3 million.
Surmodics generated cash from operating activities of $14.1 million in
fiscal 2017. Capital expenditures totaled $6.4 million for fiscal 2017.

Fiscal 2018 Outlook
Surmodics expects fiscal year 2018
revenue to range from $72.0 million to $75.0 million. The Company
expects diluted loss in the range of $0.50 to $0.75 per share, which
reflects the Company's commitment to accelerate execution of its
whole-product solutions strategy with increased research and development
investments. Non-GAAP diluted loss is expected to be in the range of
$0.16 to $0.41 per share.

Conference Call
Surmodics will host a webcast at 7:30 a.m.
CT (8:30 a.m. ET) today to discuss fourth 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 fourth quarter conference
call will be available by dialing 888-203-1112 and entering conference
call ID passcode 1387738. The audio replay will be available beginning
at 10:30 a.m. CT on Wednesday, November 8, 2017, until 10:30 a.m. CT on
Wednesday, November 15, 2017.

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 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 and earnings expectations for fiscal
2018, and our SurVeil DCB and other proprietary products,
including the timing, impact and success of the TRANSCEND clinical
trial, 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 DCB, and other
proprietary products; (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, 2016, 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 U.S. 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, EBITDA and non-GAAP diluted
net income per share, and the non-GAAP effective tax rate. We believe
that these non-GAAP measures, when read in conjunction with the
Company's GAAP financial statements, 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)
(Unaudited)

 
Three Months Ended Years Ended
September 30, September 30,
2017   2016 2017   2016
(Unaudited) (Unaudited)
Revenue:
Product sales $ 8,826 $ 8,133 $ 32,790 $ 30,999
Royalties and license fees 9,223 7,996 31,787 33,203
Research, development and other   2,009   2,025   8,535   7,164
Total revenue   20,058   18,154   73,112   71,366
Operating costs and expenses:
Product costs 3,317 2,839 11,422 10,908
Research and development 9,713 5,303 31,817 18,498
Selling, general and administrative 5,307 5,011 20,478 18,000
Acquisition transaction, integration and other costs 3,187
Acquired intangible asset amortization 629 482 2,419 2,422
Contingent consideration expense (gain)   676   436   (127 )   1,492
Total operating costs and expenses   19,642     14,071   66,009   54,507
Operating income 416 4,083 7,103 16,859
Other income (loss), net   (224 )   17   (70 )   89
Income from operations before income taxes 192 4,100 7,033 16,948
Income tax benefit (provision)   208   (1,456 )   (3,107 )   (6,963 )
Net income $ 400 $ 2,644 $ 3,926 $ 9,985
 
Basic income per share: $ 0.03 $ 0.20 $ 0.30 $ 0.77
 
Diluted income per share: $ 0.03 $ 0.20 $ 0.29 $ 0.76
 
Weighted average number of shares outstanding:
Basic 13,041 13,088 13,153 12,998
Diluted 13,365 13,408 13,389 13,219
 

 

Surmodics, Inc. and Subsidiaries
Condensed
Consolidated Balance Sheets

(in thousands)
(Unaudited)

 
September 30,
2017     2016
Assets (Unaudited)
Current Assets:
Cash and cash equivalents $ 16,534 $ 24,987
Available-for-sale securities 31,802 21,954
Accounts receivable, net 7,211 6,869
Inventories, net 3,516 3,579
Prepaids and other   1,820   1,169
Total Current Assets 60,883 58,558
Property and equipment, net 22,942 19,601
Deferred tax assets 4,027 5,027
Intangible assets, net 20,562 22,525
Goodwill 27,282 26,555
Other assets   897   628
Total Assets $ 136,593 $ 132,894
Liabilities and Stockholders' Equity
Current Liabilities 9,803 10,135
Contingent consideration, less current portion 13,114 13,592
Other long-term liabilities   2,119   2,334
Total Liabilities 25,036 26,061
Total Stockholders' Equity   111,557   106,833
Total Liabilities and Stockholders' Equity $ 136,593 $ 132,894
 

 

Surmodics, Inc. and Subsidiaries
Supplemental
Segment Information

(in thousands)
(Unaudited)

   
Three Months Ended September 30
2017   2016
Revenue:   % of Total   % of Total

%
Change

Medical Device $ 14,723 73.4% $ 13,702 75.5% 7.5%
In Vitro Diagnostics   5,335 26.6%   4,452 24.5% 19.8%
Total revenue $ 20,058 $ 18,154 10.5%
 
Years Ended September 30,
2017 2016
Revenue: % of Total % of Total

%
Change

Medical Device $ 53,983 73.8% $ 53,202 74.5% 1.5%
In Vitro Diagnostics   19,129 26.2%   18,164 25.5% 5.3%
Total revenue $ 73,112 $ 71,366 2.4%
 
Three Months Ended

Years Ended

September 30, September 30,
2017 2016 2017 2016
Operating income:
Medical Device $ 276 $ 4,150 $ 6,902 $ 16,975
In Vitro Diagnostics   2,371   1,817   8,293 $ 7,115
Total segment operating income 2,647 5,967 15,195 24,090
Corporate   (2,231 )   (1,884 )   (8,092 ) $ (7,231 )
Total income from operations $ 416 $ 4,083 $ 7,103 $ 16,859
 

   

Surmodics, Inc. and Subsidiaries
Reconciliation of
GAAP Measures to Non-GAAP Amounts

Schedule of Adjusted
EBITDA and Cash Flows from Operations

(in thousands)
(Unaudited)

 
Three Months Ended Years Ended
September 30, September 30,
2017   2016 2017   2016
Net Income $ 400 $ 2,644 $ 3,926 $ 9,985
Income tax (benefit) provision (208 ) 1,456 3,107 6,963
Depreciation and amortization   1,549   1,170   5,555   4,875
EBITDA   1,742   5,270   12,588   21,823
 
Adjustments:
Contingent consideration (gain) loss (1) 676 436 (127 ) 1,492
Foreign exchange loss (2) 347 146 474 481
Gain on strategic investment (4) (43 ) (136 ) (43 ) (497 )
Asset impairment (5) 427 427
Acquisition transaction, integration and other costs (7)         3,187
Adjusted EBITDA $ 3,149 $ 5,716 $ 13,319 $ 26,486
 
 
Net Cash Provided by Operating Activities $ 6,397 $ 6,671 $ 14,053 $ 25,166
 
 

Estimated Non-GAAP Net Loss per Common Share Reconciliation
For
the Fiscal Year Ended September 30, 2018

(Unaudited)

 
Fiscal 2018 Full-Year Estimate
 
Low High
GAAP results $ (0.75 ) $ (0.50 )
Contingent consideration adjustments (1) 0.18 0.18
Amortization of acquired intangibles (3)   0.16   0.16
Non-GAAP results $ (0.41 ) $ (0.16 )
 

 

Surmodics, Inc., and Subsidiaries
Net Income and
Diluted EPS GAAP to Non-GAAP Reconciliation

(in
thousands, except per share data)
(Unaudited)

 
For the Three Months Ended September 30, 2017

Total
Revenue

   

Operating
Income

   

Operating
Income
Percentage

 

Income
Before
Income
Taxes

 

Net
Income
(8)

 

Diluted
EPS

 

Effective
tax rate

GAAP $ 20,058 $ 416 2.1 % $ 192 $ 400 $ 0.03 (108.3 )%
Adjustments:
Contingent consideration expense (1) 676 3.4 676 676 0.05 83.9
Foreign exchange loss (2) 347 347 0.03 6.8
Amortization of acquired intangible assets (3) 629 3.1 629 550 0.04 10.1
Gain on strategic investment (4) (43 ) (43 ) (0.00 ) (0.2 )
Asset impairment (5)   427 2.1   427   427   0.03 1.4
Non-GAAP $ 20,058 $ 2,148 10.7 % $ 2,228 $ 2,357 $ 0.18 (5.8 )%
 
For the Three Months Ended September 30, 2016

Total
Revenue

Operating
Income

Operating
Income
Percentage

Income
Before
Income
Taxes

Net
Income
(8)

Diluted
EPS

Effective
tax rate

GAAP $ 18,154 $ 4,083 22.5 % $ 4,100 $ 2,644 $ 0.20 35.5 %
Adjustments:
Contingent consideration accretion expense (1) 436 2.4 436 436 0.03 (3.4 )
Foreign exchange loss (2) 146 146 0.01 (1.0 )
Amortization of acquired intangible assets (3) 482 2.7 482 392 0.03 (1.2 )
Gain on strategic investment (4)     (136 )   (136 )   (0.01 ) 0.8
Non-GAAP $ 18,154 $ 5,001 27.6 % $ 5,028 $ 3,482 $ 0.26 30.7 %
 

 

Surmodics, Inc., and Subsidiaries
Net Income and
Diluted EPS GAAP to Non-GAAP Reconciliation – continued

(in
thousands, except per share data)
(Unaudited)

 
For the Year Ended September 30, 2017

Total
Revenue

   

Operating
Income

 

Operating
Income
Percentage

 

Income
Before
Income
Taxes

 

Net
Income
(8)

 

Diluted
EPS

 

Effective
tax rate

GAAP $ 73,112 $ 7,103 9.7 % $ 7,033 $ 3,926 $ 0.29 44.2 %
Adjustments:
Contingent consideration gain (1) (127 ) (0.2 ) (127 ) (127 ) (0.01 ) 0.8
Foreign exchange loss (2) 474 474 0.04 (2.9 )
Amortization of acquired intangible assets (3) 2,419 3.3 2,419 2,105 0.16 (7.2 )
Gain on strategic investment (4) (43 ) (43 ) (0.00 ) 0.2
Asset impairments (5)   427 0.6   427   427   0.03 (1.5 )
Non-GAAP $ 73,112 $ 9,822 13.4 % $ 10,183 $ 6,762 $ 0.51 33.6 %
 
For the Year Ended September 30, 2016

Total
Revenue

Operating
Income

Operating
Income
Percentage

Income
Before
Income
Taxes

Net
Income
(8)

 

Diluted
EPS

Effective
tax rate

GAAP $ 71,366 $ 16,859 23.6 % $ 16,948 $ 9,985 $ 0.76 41.1 %
Adjustments:
Contingent consideration expense (1) 1,492 2.1 1,492 1,492 0.11 (3.3 )
Foreign exchange loss (2) 481 481 0.03 (1.0 )
Amortization of acquired intangible assets (3) 2,422 3.4 2,422 2,047 0.15 (2.4 )
Gain on strategic investment (4) (497 ) (497 ) (0.04 ) 0.8
Research and development tax credit (6) (222 ) (0.02 ) 1.1
Acquisition transaction, integration and other costs (7)   3,187 4.5   3,187   2,860   0.22 (3.4 )
Non-GAAP $ 71,366 $ 23,960 33.6 % $ 24,033 $ 16,146 $ 1.21 32.8 %
 

 
(1) Represents accounting adjustments to state acquisition-related
contingent consideration liabilities at their estimated fair value,
including accretion for the passage of time as well as adjustments
to the liabilities' fair values related to changes in the timing
and/or probability of achieving milestones which trigger payment.
The tables include contingent consideration liability adjustments in
each respective historical period and do not include in
future-period fair value changes, other than estimated accretion
expense determined at the end of the current quarter.
(2) Foreign exchange gain and loss are related to marking non-U.S.
dollar contingent consideration to period-end exchange rates. The
tables include foreign currency exchange loss or gain recorded in
each respective historical period and do not include forecasted
currency fluctuations in future periods.
(3) Amortization of acquisition-related intangible assets and associated
tax impact.
(4) Represents the gain recognized on the sale of strategic investments.
(5) Impairment of indefinite-lived intangible assets.
(6) Represents a 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.
(7) 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. Most of these costs were not deductible for
income tax purposes.
(8) Net income includes the effect of the above adjustments on the
income tax provision, taking into account deferred taxes and
non-deductible items. An effective rate between 34-35% was used to
estimate the income tax impact of the adjustments, except that
expenses occurring in Ireland have not been tax-affected as all tax
benefits are offset by a full valuation allowance.
 

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