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Surmodics Reports Third Quarter Fiscal 2018 Results

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Raises Fiscal 2018 Revenue Guidance

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 2018 third quarter ended June 30, 2018,
and updated its financial outlook for fiscal 2018.

Summary of Third Quarter Fiscal 2018 and Recent Highlights

  • Revenue of $22.2 million, up 24.9%
  • Raising revenue guidance range to $79.0 to $81.0 million
  • GAAP EPS of ($0.20), Non-GAAP EPS of $0.27
  • Acquisition of thrombectomy platform strengthens product pipeline

"We are pleased to report strong operating performance and meaningful
advances on our strategic objectives during the quarter," said Gary
Maharaj, President and CEO of Surmodics. "We are on track to complete
enrollment in our TRANSCEND U.S. pivotal clinical trial in fiscal 2019.
The acquisition of Embolitech's promising thrombectomy technology
platform leverages our unique capabilities and advances our focus on
developing highly differentiated products."

Third Quarter Fiscal 2018 Financial Results

Total revenue for the third quarter of fiscal 2018 was $22.2 million, as
compared with $17.8 million in the prior-year period. Medical Device
revenue was $16.7 million in the third quarter of fiscal 2018, as
compared with $12.8 million in the year-ago period, an increase of
30.7%, and includes $1.7 million from our SurVeil® agreement
with Abbott. In Vitro Diagnostics revenue was $5.5 million for the third
quarter of fiscal 2018 as compared with $5.0 million in the same
prior-year quarter, an increase of 10.3%.

Diluted GAAP loss per share in the third quarter of fiscal 2018 was
$(0.20) as compared with diluted GAAP earnings per share of $0.05 in the
year-ago period. On a non-GAAP basis, earnings per share were $0.27 in
the third quarter of fiscal 2018, as compared with $0.09 in the year-ago
period. GAAP results were negatively affected by the current-quarter
acquisition of in-process research and development assets from
Embolitech, which resulted in a $0.47 charge in the period, after tax.

As of June 30, 2018, cash and investments were $62.4 million. Surmodics
generated cash from operating activities of $29.2 million in the first
nine months of fiscal 2018. Capital expenditures totaled $6.9 million
for the first nine months of fiscal 2018.

Fiscal 2018 Guidance Revised

As a result of revenue performance in the first nine months of fiscal
2018 and to reflect the Embolitech technology acquisition, Surmodics is
raising its fiscal 2018 revenue and non-GAAP earnings guidance, while
narrowing its diluted GAAP earnings guidance. Surmodics expects fiscal
year 2018 revenue to range from $79.0 million to $81.0 million, up from
previous expectations in the range of $75.0 million to $79.0 million.
The Company expects diluted loss in the range of ($0.25) to ($0.30) per
share as compared with the prior guidance of ($0.20) to ($0.35) per
share. Non-GAAP diluted earnings guidance now ranges from $0.39 to $0.44
per share as compared with prior guidance of ($0.06) to $0.09 per share.

Conference Call

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 https://surmodics.gcs-web.com
and click on the webcast icon. The webcast will be archived on the
Company's website for 90 days. A replay of the third quarter conference
call will be available by dialing 888-203-1112 and entering conference
call ID passcode 8313933. The audio replay will be available beginning
at 10:30 a.m. CT on Monday, August 6, 2018, until 10:30 a.m. CT on
Monday, August 13, 2018.

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) immunoassay tests and
microarrays. Surmodics is pursuing highly differentiated whole-product
solutions that are designed to address unmet clinical needs for its
medical device customers and engineered to the most demanding
requirements. This key growth strategy leverages the combination of the
Company's expertise in proprietary surface technologies, along with
enhanced device design, development and manufacturing capabilities. The
Company mission remains to improve the detection and treatment of
disease. Surmodics is headquartered in Eden Prairie, Minnesota. For more
information, 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 (including
realization of the full potential benefits of our agreement with
Abbott), 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) possible adverse market
conditions and possible adverse impacts on our cash flows, and (4) 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, 2017, and
updated in our subsequent reports filed with the SEC. These reports are
available in the Investors section of our website at https://surmodics.gcs-web.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 EBITDA and Adjusted
EBITDA, non-GAAP operating income, non-GAAP income before income taxes,
non-GAAP net income, and non-GAAP diluted earnings per share, and the
non-GAAP effective income 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 Operations

(in thousands, except per share data)

(Unaudited)

       
Three Months Ended Nine Months Ended
June 30,

June 30,

2018     2017 2018     2017
(Unaudited) (Unaudited)
Revenue:
Product sales $ 10,475 $ 8,327 $ 27,249 $ 23,964
Royalties and license fees 9,597 7,244 25,101 22,564
Research, development and other   2,155     2,219     5,948     6,526  
Total revenue   22,227     17,790     58,298     53,054  
Operating costs and expenses:
Product costs 4,104 2,914 9,908 8,104
Research and development 9,778 7,927 28,383 22,105
Selling, general and administrative 5,977 5,232 17,606 15,170
Acquired in-process research and development 7,888 7,888
Acquired intangible asset amortization 624 603 1,878 1,790
Contingent consideration expense (gain)   106     (629 )   (1,006 )   (803 )
Total operating costs and expenses   28,477       16,047       64,657       46,366  
Operating (loss) income (6,250 ) 1,743 (6,359 ) 6,688
Other income (loss), net   955     (490 )   856     153  
(Loss) Income before income taxes (5,295 ) 1,253 (5,503 ) 6,841
Income tax benefit (provision)   2,613     (533 )   2,799     (3,315 )
Net (loss) income $ (2,682 ) $ 720   $ (2,704 ) $ 3,526  
 
Basic (loss) income per share: $ (0.20 ) $ 0.05 $ (0.21 ) $ 0.27
 
Diluted (loss) income per share: $ (0.20 ) $ 0.05 $ (0.21 ) $ 0.26
 
Weighted average number of shares outstanding:
Basic 13,203 13,155 13,117 13,190
Diluted 13,203 13,385 13,117 13,404
 

 
Surmodics, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets

(in thousands)

(Unaudited)

       
June 30, September 30,
2018 2017
Assets (Unaudited)
Current Assets:
Cash and cash equivalents $ 27,273 $ 16,534
Restricted cash 350
Available-for-sale securities 34,760 31,802
Accounts receivable, net 8,312 7,211
Inventories, net 3,975 3,516
Prepaids and other   4,176   1,820
Total Current Assets 78,846 60,883
Property and equipment, net 27,976 22,942
Deferred tax assets 5,981 4,027
Intangible assets, net 18,430 20,562
Goodwill 27,132 27,282
Other assets   1,622   897
Total Assets $ 159,987 $ 136,593
Liabilities and Stockholders' Equity
Current Liabilities:
Contingent consideration, current portion 11,708 1,750
Deferred revenue 10,319 62
Other current liabilities   9,558   7,991
Total Current Liabilities 31,585 9,803
Contingent consideration, less current portion 1,151 13,114
Deferred revenue, less current portion 12,825 181
Other long-term liabilities   5,681   1,938
Total Liabilities 51,242 25,036
Total Stockholders' Equity   108,745   111,557
Total Liabilities and Stockholders' Equity $ 159,987 $ 136,593
 

 
Surmodics, Inc. and Subsidiaries
Supplemental Segment Information

(in thousands)

(Unaudited)

       
Three Months Ended June 30,
2018     2017
Revenue:   % of Total     % of Total % Change
Medical Device $ 16,701 75.1 % $ 12,778 71.8 % 30.7 %
In Vitro Diagnostics   5,526   24.9 %   5,012   28.2 % 10.3 %
Total revenue $ 22,227   $ 17,790   24.9 %
 
Nine Months Ended June 30,
2018 2017
Revenue: % of Total % of Total % Change
Medical Device $ 43,527 74.7 % $ 39,260 74.0 % 10.9 %
In Vitro Diagnostics   14,771   25.3 %   13,794   26.0 % 7.1 %
Total revenue $ 58,298   $ 53,054   9.9 %
 
Three Months Ended Nine Months Ended
June 30, June 30,
2018 2017 2018 2017
Operating (loss) income:
Medical Device $ (6,193 ) $ 1,403 $ (6,351 ) $ 6,627
In Vitro Diagnostics   2,176     2,230     6,269     5,922  
Total segment operating (loss) income (4,017 ) 3,633 (82 ) 12,549
Corporate   (2,233 )   (1,890 )   (6,277 )   (5,861 )
Total operating (loss) income $ (6,250 ) $ 1,743   $ (6,359 ) $ 6,688  
 

 
Surmodics, Inc. and Subsidiaries
Reconciliation of GAAP Measures to Non-GAAP Amounts
Schedule of EBITDA, Adjusted EBITDA and Cash Flows from Operations

(in thousands)

(Unaudited)

       
Three Months Ended Nine Months Ended
June 30, June 30,
2018     2017 2018     2017
Net (loss) income $ (2,682 ) $ 720 $ (2,704 ) $ 3,526
Income tax (benefit) provision (2,613 ) 533 (2,799 ) 3,315
Depreciation and amortization 1,605 1,405 4,711 4,006
Investment income, net   (303 )   (104 )   (566 )   (274 )
EBITDA   (3,993 )   2,554     (1,358 )   10,573  
 
Adjustments:
Contingent consideration expense (gain) (1) 106 (629 ) (1,006 ) (803 )
Foreign exchange (gain) loss (2) (592 ) 594 (74 ) 121
Gain on strategic investment (4) (177 )
Claim settlement accrual (6) 1,000
Acquired in-process research and development (7)   7,888         7,888      
Adjusted EBITDA $ 3,409   $ 2,519   $ 6,273   $ 9,891  
 
 
Net Cash Provided by Operating Activities $ 1,791   $ 3,393   $ 29,222   $ 7,656  
 
 
Estimated Non-GAAP Net Earnings per Common Share Guidance
Reconciliation
For the Fiscal Year Ended September 30, 2018

(Unaudited)

   
Full Fiscal Year Estimate
Low     High
GAAP results $ (0.30 ) $ (0.25 )
Contingent consideration gain (1) (0.08 ) (0.08 )
Foreign exchange gain (2) (0.01 ) (0.01 )
Amortization of acquired intangibles (3) 0.18 0.18
Gain on strategic investment (4) (0.01 ) (0.01 )
Tax reform impact (5) 0.09 0.09
Claim settlement accrual (6) 0.06 0.06
Acquired in-process research and development (7) 0.47 0.47
Dilutive effect of outstanding stock awards (8)   (0.01 )   (0.01 )
Non-GAAP results $ 0.39   $ 0.44  
 

 
Surmodics, Inc., and Subsidiaries
Net Income (Loss) and Diluted EPS (LPS) GAAP to Non-GAAP
Reconciliation

(in thousands, except per share data)

(Unaudited)

                           
For the Three Months Ended June 30, 2018

(Loss)

Operating

Income

Operating

(Loss)

Before

Net

Total

(Loss)

Income

Income

(Loss)

Diluted

Effective

Revenue

Income

Percentage

Taxes

Income (9)

EPS

tax rate

GAAP $ 22,227 $ (6,250 ) (28.1 %) $ (5,295 ) $ (2,682 ) $ (0.20 ) 49.3 %
Adjustments:
Contingent consideration expense (1) 106 0.5 106 106 0.01
Foreign exchange gain (2) (592 ) (592 ) (0.04 )
Amortization of acquired intangible assets (3) 624 2.8 624 584 0.04
Acquired in-process research and development (7) 7,888 35.5 7,888 6,232 0.47
Dilutive effect of outstanding stock awards (8)                   (0.01 )  
Non-GAAP $ 22,227 $ 2,368   10.7 % $ 2,731   $ 3,648   $ 0.27   (33.6 %)
 
 
For the Three Months Ended June 30, 2017

Income

Operating

Before

Net

Total

Operating

Income

Income

Income

Diluted

Effective

Revenue

Income

Percentage Taxes

(9)

EPS

tax rate

GAAP $ 17,790 $ 1,743 9.8 % $ 1,253 $ 720 $ 0.05 42.5 %
Adjustments:
Contingent consideration accretion gain (1) (629 ) (3.5 ) (629 ) (629 ) (0.05 )
Foreign exchange loss (2) 594 594 0.05
Amortization of acquired intangible assets (3)   603   3.4     603     524     0.04    
Non-GAAP $ 17,790 $ 1,717   9.7 % $ 1,821   $ 1,209   $ 0.09   33.6 %
 

   
For the Nine Months Ended June 30, 2018
           

(Loss)

           

Operating

Income

Net

 

Operating

(Loss)

Before

(Loss)

 

 

Total

(Loss)

Income

Income

Income

Diluted

Effective

Revenue

Income

Percentage

Taxes

(9)

EPS

tax rate

GAAP $ 58,298 $ (6,359 ) (10.9 %) $ (5,503 ) $ (2,704 ) $ (0.21 ) 50.9 %
Adjustments:
Contingent consideration gain (1) (1,006 ) (1.7 ) (1,006 ) (1,006 ) (0.08 )
Foreign exchange gain (2) (74 ) (74 ) (0.01 )
Amortization of acquired intangible assets (3) 1,878 3.2 1,878 1,721 0.13
Gain on strategic investment (4) (177 ) (177 ) (0.01 )
Tax reform impact (5) 1,246 0.09
Claim settlement accrual (6) 1,000 1.7 1,000 755 0.06
Acquired in-process research and development (7) 7,888 13.5 7,888 6,232 0.47
Dilutive effect of outstanding stock awards (8)   (0.01 )  
Non-GAAP $ 58,298 $ 3,401   5.8 % $ 4,006   $ 5,993   $ 0.44   (49.6 %)
 
 
For the Nine Months Ended June 30, 2017

Income

 

 

Operating

Before

Net

 

 

Total

Operating

Income

Income

Income

Diluted

Effective

Revenue

Income

Percentage

Taxes

(9)

EPS

tax rate

GAAP $ 53,054 $ 6,688 12.6 % $ 6,841 $ 3,526 $ 0.26 48.5 %
Adjustments:
Contingent consideration gain (1) (803 ) (1.5 ) (803 ) (803 ) (0.06 )
Foreign exchange loss (2) 121 121 0.01
Amortization of acquired intangible assets (3)   1,790   3.4     1,790     1,554     0.12    
Non-GAAP $ 53,054 $ 7,675   14.5 % $ 7,949   $ 4,398   $ 0.33   44.7 %
 
(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. 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 as determined at the
end of the current quarter. These amounts are not taxable or tax
deductible.

(2)

Foreign exchange gains and losses 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. These gains and losses
are not taxable or tax deductible.

(3)

Amortization of acquisition-related intangible assets and
associated tax impact.

(4)

Represents the gain recognized on the sale of a strategic
investment which was not tax-affected as it was offset by
previously recognized capital losses.

(5)

Income tax expense from the re-measurement of net deferred tax
assets recognized after the enactment of the Tax Cuts and Jobs Act
in December 2017.

(6)

Represents an estimated royalty-related customer claim settlement
accrued as of June 30, 2018 and associated tax impact.

(7)

Represents the acquisition of the Embolitech in-process research
and development assets during the third quarter of fiscal 2018 and
associated tax impact.

(8)

Options to purchase common stock as well as unvested restricted
stock and performance stock units are considered to be potentially
dilutive common shares but have been excluded from the calculation
of GAAP net loss per share as their effect is anti-dilutive for
the three and nine months ended June 30, 2018 and in our guidance
for the year ended September 30, 2018 as a result of the net loss
for these periods on a GAAP basis. However, as the Non-GAAP
adjustments result in Non-GAAP net income, the dilutive effect of
these options and other outstanding stock awards have been
included in the calculation of Non-GAAP earnings per share.
Accordingly, Diluted EPS includes these adjustments.

(9)

Net income (loss) includes the effect of the above adjustments on
the income tax provision, taking into account deferred taxes and
non-deductible items. Effective rates of 24.5% (fiscal 2018) and
between 34-35% (fiscal 2017) were 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 and acquired in-process research and
development, which is calculated using a 21% effective tax rate.

 

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