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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to                 
Commission file number 0-50761

 
AngioDynamics, Inc.
(Exact name of registrant as specified in its charter)
 
 

Delaware
 
11-3146460
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
14 Plaza Drive Latham, New York
 
12110
(Address of principal executive offices)
 
(Zip Code)
(518) 795-1400
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common stock, par value $.01
 
NASDAQ Global Select Market
Preferred Stock Purchase Rights
 
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
 



 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ¨    No  x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
¨
  
Accelerated filer
 
x
 
 
 
 
Non-accelerated filer
 
¨
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Indicate the number of shares outstanding of each of the Issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding as of January 2, 2015
Common Stock, par value $.01
 
35,821,165
 




AngioDynamics, Inc. and Subsidiaries
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.

2


PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements.
AngioDynamics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(unaudited)
(in thousands of dollars, except per share data)
 
 
Three Months Ended
 
Six Months Ended
 
Nov 30, 2014
 
Nov 30, 2013
 
Nov 30, 2014
 
Nov 30, 2013
Net sales
$
92,149

 
$
88,571

 
$
179,480

 
$
172,215

Cost of sales
44,493

 
43,686

 
85,999

 
84,750

Gross profit
47,656

 
44,885

 
93,481

 
87,465

Operating expenses
 
 
 
 
 
 
 
Research and development
6,069

 
7,003

 
12,787

 
13,712

Sales and marketing
20,983

 
21,073

 
41,050

 
41,036

General and administrative
7,973

 
6,411

 
15,296

 
12,922

Amortization of intangibles
4,061

 
4,339

 
8,076

 
8,623

Change in fair value of contingent consideration
617

 
940

 
1,418

 
1,673

Acquisition, restructuring and other items, net
2,302

 
2,679

 
4,966

 
4,681

Medical device excise tax
1,076

 
999

 
2,071

 
1,975

Total operating expenses
43,081

 
43,444

 
85,664

 
84,622

Operating income
4,575

 
1,441

 
7,817

 
2,843

Other (expenses) income
 
 
 
 
 
 
 
Interest expense
(793
)
 
(959
)
 
(1,592
)
 
(2,205
)
Interest income
1

 

 
1

 

Other expense
(954
)
 
(832
)
 
(1,979
)
 
(1,551
)
Total other expenses, net
(1,746
)
 
(1,791
)
 
(3,570
)
 
(3,756
)
Income (loss) before income tax expense (benefit)
2,829

 
(350
)
 
4,247

 
(913
)
Income tax expense (benefit)
1,491

 
(89
)
 
2,439

 
(279
)
Net income (loss)
$
1,338

 
$
(261
)
 
$
1,808

 
$
(634
)
Income (loss) per share
 
 
 
 
 
 
 
Basic
$
0.04

 
$
(0.01
)
 
$
0.05

 
$
(0.02
)
Diluted
$
0.04

 
$
(0.01
)
 
$
0.05

 
$
(0.02
)
Basic weighted average shares outstanding
35,595

 
35,132

 
35,475

 
35,041

Diluted weighted average shares outstanding
36,127

 
35,132

 
36,012

 
35,041

The accompanying notes are an integral part of these financial statements.

3


AngioDynamics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
(in thousands of dollars)
 
 
Three Months Ended
 
Six Months Ended
 
Nov 30, 2014
 
Nov 30, 2013
 
Nov 30, 2014
 
Nov 30, 2013
Net Income (Loss)
$
1,338

 
$
(261
)
 
$
1,808

 
$
(634
)
Other comprehensive income (loss), before tax:
 
 
 
 
 
 
 
Unrealized gain (loss) on interest rate swap
(25
)
 
(522
)
 
156

 
(203
)
Unrealized gain (loss) on marketable securities
29

 

 
(112
)
 

Foreign currency translation gain (loss)
(104
)
 
70

 
(104
)
 
140

Other comprehensive income (loss), before tax
(100
)
 
(452
)
 
(60
)
 
(63
)
Income tax (expense) benefit related to items of other comprehensive income
(1
)
 
193

 
(16
)
 
75

Other comprehensive income (loss), net of tax
(101
)
 
(259
)
 
(76
)
 
12

Total comprehensive income (loss), net of tax
$
1,237

 
$
(520
)
 
$
1,732

 
$
(622
)
The accompanying notes are an integral part of these financial statements.


4


AngioDynamics, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands of dollars, except share data)
 
Nov 30, 2014
 
May 31, 2014
ASSETS
 
 
 
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
14,877

 
$
16,105

Marketable securities
1,698

 
1,809

Accounts receivable, net of allowances of $2,067 and $1,736, respectively
58,556

 
61,968

Inventories
75,315

 
61,234

Deferred income taxes
4,091

 
4,625

Prepaid income taxes
2,156

 
510

Prepaid expenses and other
6,753

 
5,471

Total current assets
163,446

 
151,722

PROPERTY, PLANT AND EQUIPMENT-AT COST, net
67,552

 
66,590

OTHER ASSETS
2,741

 
3,926

INTANGIBLE ASSETS, net
197,362

 
205,256

GOODWILL
360,473

 
360,473

DEFERRED INCOME TAXES, long term
7,236

 
10,403

PREPAID ROYALTIES
521

 
521

TOTAL ASSETS
$
799,331

 
$
798,891

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES
 
 
 
Accounts payable
$
21,969

 
$
32,895

Accrued liabilities
19,177

 
16,652

Income Taxes Payable
686

 
689

Current portion of long-term debt
6,250

 
5,000

Current portion of contingent consideration
9,795

 
10,918

Other current liabilities
60

 
599

Total current liabilities
57,937

 
66,753

LONG-TERM DEBT, revolving credit facility
61,410

 
46,410

LONG-TERM DEBT, term loan, net of current portion
87,500

 
91,250

DEFERRED INCOME TAXES, long term
1,146

 
1,146

Contingent consideration, net of current portion
47,643

 
56,413

Other long term liabilities
124

 
84

Total liabilities
255,760

 
262,056

COMMITMENTS AND CONTINGENCIES

 

STOCKHOLDERS’ EQUITY
 
 
 
Preferred stock, par value $.01 per share, 5,000,000 shares authorized; no shares issued and outstanding

 

Common stock, par value $.01 per share, 45,000,000 shares authorized; issued and outstanding 35,759,021 and 35,442,004 shares at November 30, 2014 and May 31, 2014, respectively
358

 
353

Additional paid-in capital
513,353

 
508,354

Retained earnings
33,309

 
31,501

Treasury stock, 142,305 shares, at cost
(2,104
)
 
(2,104
)
Accumulated other comprehensive loss
(1,345
)
 
(1,269
)
Total stockholders’ equity
543,571

 
536,835

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
799,331

 
$
798,891

The accompanying notes are an integral part of these financial statements.

5


AngioDynamics, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands of dollars)
 
Six Months Ended
 
Nov 30, 2014
 
Nov 30, 2013
Cash flows from operating activities:
 
 
 
Net income (loss)
$
1,808

 
$
(634
)
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
13,999

 
13,870

Stock based compensation
2,901

 
2,423

Change in fair value of contingent consideration
1,418

 
1,673

Deferred income taxes
3,685

 
1,155

Bad debt expense
345

 
312

Tax effect on exercise of stock options and issuance of performance shares

 
(146
)
Other
(89
)
 
(24
)
Amortization of acquired inventory basis step-up

 
75

Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Accounts receivable
3,069

 
(123
)
Inventories
(14,081
)
 
(4,351
)
Prepaid expenses and other assets
(3,712
)
 
(1,882
)
Accounts payable, accrued and other liabilities
(6,138
)
 
3,410

Net cash provided by operating activities
3,205

 
15,758

Cash flows from investing activities:
 
 
 
Additions to property, plant and equipment
(7,523
)
 
(7,191
)
Acquisition of business, net of cash acquired

 
(4,169
)
Acquisition of intangible
(250
)
 
(150
)
Proceeds from sale or maturity of marketable securities

 
303

Net cash used in investing activities
(7,773
)
 
(11,207
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of long-term debt
15,000

 
100,000

Proceeds from borrowings on revolving credit facility

 
41,410

Repayment of long-term debt
(2,500
)
 
(143,750
)
Deferred financing costs on long-term debt

 
(677
)
Payment of contingent consideration previously established in purchase accounting
(11,222
)
 
(9,300
)
Proceeds from exercise of stock options and employee stock purchase plan
2,103

 
1,133

Net cash provided by (used in) financing activities
3,381

 
(11,184
)
Effect of exchange rate changes on cash and cash equivalents
(41
)
 
4

Increase (decrease) in cash and cash equivalents
(1,228
)
 
(6,629
)
Cash and cash equivalents at beginning of period
16,105

 
21,802

Cash and cash equivalents at end of period
$
14,877

 
$
15,173

Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Contractual obligations for acquisition of intangibles and business
$

 
$
4,970

Contractual obligations for acquisition of fixed assets
$
54

 
$
724

The accompanying notes are an integral part of these financial statements.

6


AngioDynamics, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(unaudited)
(in thousands of dollars, except share data)

 
 
Common Stock
 
Additional
paid in
capital
 
Retained
earnings
 
Accumulated
other
comprehensive
loss
 
Treasury Stock
 
 
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
Total
Balance at May 31, 2014
35,442,004

 
$
353

 
$
508,354

 
$
31,501

 
$
(1,269
)
 
(142,305
)
 
$
(2,104
)
 
$
536,835

Net income
 
 
 
 
 
 
1,808

 
 
 
 
 
 
 
1,808

Exercise of stock options
118,334

 
2

 
1,348

 
 
 
 
 
 
 
 
 
1,350

Purchase of common stock under ESPP
62,574

 
1

 
750

 
 
 
 
 
 
 
 
 
751

Issuance of performance shares
136,109

 
2

 


 
 
 
 
 
 
 
 
 
2

Stock based compensation
 
 
 
 
2,901

 
 
 
 
 
 
 
 
 
2,901

Other comprehensive loss, net of tax
 
 
 
 
 
 
 
 
(76
)
 
 
 
 
 
(76
)
Balance at November 30, 2014
35,759,021

 
$
358

 
$
513,353

 
$
33,309

 
$
(1,345
)
 
(142,305
)
 
$
(2,104
)
 
$
543,571

The accompanying notes are an integral part of these financial statements.

7


AngioDynamics, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE A – CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheet as of November 30, 2014, the consolidated statement of stockholders’ equity and consolidated statement of cash flows for the six months ended November 30, 2014, the consolidated statements of income and the consolidated statements of comprehensive income for the three and six months ended November 30, 2014 and 2013 have been prepared by us without audit. The consolidated balance sheet as of May 31, 2014 was derived from audited consolidated financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to state fairly the financial position, changes in stockholders’ equity and comprehensive income, results of operations and cash flows as of and for the period ended November 30, 2014 (and for all periods presented) have been made.
Certain information and footnote disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these unaudited interim consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Annual Report on Form 10-K/A for the fiscal year ended May 31, 2014, as revised. Our most significant accounting policies are disclosed in Note A to the consolidated financial statements included in the aforementioned Form 10-K/A for the fiscal year ended May 31, 2014. The results of operations in the fiscal periods ended November 30, 2014 and 2013 are not necessarily indicative of the operating results for the respective full fiscal years.
The unaudited interim consolidated financial statements for the three and six months ended November 30, 2014 and November 30, 2013 include the accounts of AngioDynamics, Inc. and its wholly owned subsidiaries, collectively, the “Company”. All intercompany balances and transactions have been eliminated.

During the financial closing process for the first quarter of fiscal year 2015, the Company determined that financial management had incorrectly accounted for certain asset, liability and income statement balances, beginning in 2011. The Company has identified amounts and concluded that they were not material individually or in the aggregate to any of its previously issued annual and interim financial statements. Although management has determined the amounts individually and in the aggregate are not material to prior periods, in accordance with authoritative accounting literature on considering the effects of misstatements in prior years when quantifying misstatements in the current year, the financial statements included herein have been adjusted to correct for the impact of these items. Refer to Note P for further details.
NOTE B – ACQUISITIONS
Acquisition of Clinical Devices
On August 15, 2013 we acquired all the outstanding shares of capital stock of Clinical Devices, B.V., exclusive distributor of our fluid management products in the Netherlands. The stock purchase agreement provided for the payment of $3.7 million in cash at closing, which was subject to a working capital adjustment and $400,000 holdback, plus future earn out consideration payable in cash. Earn out consideration was based on our net sales of the fluid management products during the five quarters following the closing as well as milestone payments for achieving regulatory approvals of certain in process research and development for a next-generation tip location technology. The holdback and net sales amounts were paid in September 2014. The total purchase consideration of $8.7 million included the upfront payment and the estimated fair value of contingent consideration at the time of acquisition of $5.0 million.
Goodwill recorded as a result of the acquisition was approximately $4.8 million and is not deductible for tax purposes. Intangible assets acquired, other than goodwill, totaled approximately $5.1 million, of which $3.6 million has been identified as in-process research and development, $1.4 million as customer relationships (15-year estimated useful life) and $70,000 as trademarks (5-year estimated useful life). We also recorded a deferred tax liability of $1.2 million.
The acquisition has been accounted for as a purchase and, accordingly, we have included the results of operations in the financial statements effective August 15, 2013. The pro forma effects of the acquisition on our income statement and balance sheet were not material.


8


NOTE C – INVENTORIES
Inventories are stated at lower of cost (using the first-in, first-out method) or market. As of November 30, 2014 and May 31, 2014, inventories consisted of the following:
 
Nov 30, 2014
 
May 31, 2014
 

 
(As revised)
 
(in thousands)
Raw materials
$
30,000

 
$
24,734

Work in process
11,774

 
11,992

Finished goods
33,541

 
24,508

Inventories
$
75,315

 
$
61,234


NOTE D – GOODWILL AND INTANGIBLE ASSETS
Intangible assets other than goodwill and indefinite lived intangible assets are amortized over their estimated useful lives, which range between three and fifteen years, on either a straight-line basis or proportionately to the benefit being realized. We periodically review the estimated useful lives of our intangible assets and review such assets for impairment, based on estimated future cash flows, 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.
Goodwill and 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 costs based on respective fair market values at the date of acquisition.
For goodwill, the impairment test requires a comparison of the estimated fair value, based on future cash flows, 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. 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.
Adjustments to goodwill for the six months ended November 30, 2014 are as follows (in thousands of dollars):
 
 
 
Balance, May 31, 2014
$
360,473

 

Balance, November 30, 2014
$
360,473

As of November 30, 2014 and May 31, 2014, intangible assets consisted of the following:
 

9


 
November 30, 2014
 
Gross
carrying
value
 
Accumulated
amortization
 
Net carrying
value
 
Weighted
avg useful
life
 
(in thousands)
 
(years)
Product technologies
$
150,288

 
$
(37,430
)
 
$
112,858

 
10.3
Customer relationships
86,347

 
(40,523
)
 
45,824

 
12.0
Trademark-NAMIC
28,600

 

 
28,600

 
Indefinite
Licenses
7,702

 
(5,288
)
 
2,414

 
8.1
Trademarks
6,345

 
(2,279
)
 
4,066

 
8.0
In-process R&D acquired
3,600

 

 
3,600

 
Indefinite
Distributor relationships
900

 
(900
)
 

 
3.0
 
$
283,782

 
$
(86,420
)
 
$
197,362

 
 
 
 
May 31, 2014
 
Gross
carrying
value
 
Accumulated
amortization
 
Net carrying
value
 
Weighted
avg useful
life
 
(in thousands)
 
(years)
Product technologies
$
150,298

 
$
(32,930
)
 
$
117,368

 
10.2
Customer relationships
86,645

 
(37,848
)
 
48,797

 
11.9
Trademark-NAMIC
28,600

 

 
28,600

 
Indefinite
In process R&D acquired
3,600

 

 
3,600

 
Indefinite
Licenses
7,639

 
(5,211
)
 
2,428

 
8.4
Trademarks
6,345

 
(1,882
)
 
4,463

 
8.0
Distributor relationships
900

 
(900
)
 

 
3.0
 
$
284,027

 
$
(78,771
)
 
$
205,256

 
 


NOTE E – ACCRUED LIABILITIES
As of November 30, 2014 and May 31, 2014, accrued liabilities consisted of the following:
 
 
Nov 30, 2014
 
May 31, 2014
 

 
As revised
 
(in thousands)
Payroll and related expenses
$
8,797

 
$
8,114

Royalties
2,343

 
2,620

Accrued severance
1,020

 
765

Sales and franchise taxes
1,398

 
1,327

Interest rate swap liability
400

 
555

Other
5,219

 
3,271

Total
$
19,177

 
$
16,652


NOTE F – LONG TERM DEBT
On September 19, 2013, we entered into a Credit Agreement (the “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 J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Keybank National Association as joint bookrunners and joint lead arrangers.

10


The Credit Agreement provides for a $100 million senior secured term loan facility (“Term Loan”) and a $100 million senior secured revolving credit facility, which includes up to a $20 million sublimit for letters of credit and a $5 million sublimit for swingline loans (the “Revolving Facility”, and together with the Term Loan, the “Facilities”).
The proceeds of the Revolving Facility may be used for general corporate purposes of AngioDynamics and its subsidiaries. The Facilities have a five year maturity. The Term Loan has a quarterly repayment schedule equal to 5%, 5%, 10%, 15% and 65% of its principal amount in years one through five. Interest on both the Term Loan and Revolving Facility will be 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 1.5% to 2.25% respectively. After default, the interest rate may be increased by 2.0%. The Revolving Facility will also carry a commitment fee of 0.2% to 0.35% per annum on the unused portion.
Our obligations under the Facilities are unconditionally guaranteed, jointly and severally, by our material direct and indirect domestic subsidiaries (the “Guarantors”). All obligations of AngioDynamics and the Guarantors under the Facilities are secured by first priority security interests in substantially all of the assets of AngioDynamics and the Guarantors.
We have entered into an interest rate swap agreement, (the “Swap Agreement”), with an initial notional amount of $100 million, to limit the effect of rising of interest rates. The Swap Agreement, which qualified for hedge accounting under authoritative guidance, was a contract to exchange floating interest rate payments for fixed interest rate payments on the outstanding balance of the loan over the life of the agreement without the exchange of the underlying notional amounts. The Swap Agreement provides for a fixed rate of 0.74% above the applicable rate provided for in the Credit Agreement.
On September 19, 2013, we borrowed $100 million under the Term Facility and approximately $41.4 million under the Revolving Facility to repay the Former Credit Agreement. As of November 30, 2014, $93.8 million and $61.4 million were outstanding under the Term Facility and Revolving Facility, respectively. The Credit Agreement includes customary representations, warranties and covenants, and acceleration, indemnity and events of default provisions, including, among other things, two financial covenants. The first financial covenant requires us to maintain, as of the end of each of our fiscal quarters, a ratio of consolidated adjusted 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 1.35 to 1.00. The second financial covenant requires us to maintain, as of the end of each of our fiscal quarters, a ratio of consolidated total indebtedness to consolidated adjusted EBITDA of not greater than 3.75 to 1.00. We were in compliance with both covenants as of November 30, 2014.

NOTE G - INCOME TAXES
The following table presents the components of income tax expense(benefit) for the three and six months ended November 30, 2014 and 2013 (in thousands of dollars):
 
Three Months Ended
 
Six Months Ended
 
Nov 30, 2014
 
Nov 30, 2013
 
Nov 30, 2014
 
Nov 30, 2013
 
 
 
(As revised)
 
 
 
(As revised)
Income tax expense (benefit) based on income (loss) from continuing operations at estimated tax rates of 40.9% and 38.8% for the three and six months ended November 30, 2014 and 2013, respectively
$1,140
 
$(150)
 
$1,738
 
$(354)
Discrete tax expense (benefit):
 
 
 
 
 
 
 
Adjustment for elimination of the ASC 718 APIC pool
330
 
61
 
685
 
61
Adjustments to prior period tax liabilities
21
 
 
16
 
14
Total income tax expense (benefit)
$1,491
 
$(89)
 
$2,439
 
$(279)
The second quarter estimated effective tax rate prior to discrete items was 40.9% in 2014, as compared to 38.8% for the same period in 2013.
Our ASC 718 APIC pool was depleted in the quarter ended November 30, 2014. Prior to its depletion, the APIC pool was reduced when share-based compensation cost previously recognized by us was greater than the deduction allowed for income tax purposes based on the price of our common stock on the date of exercise or vesting. Due to its depletion we recorded a discrete tax expense of $330 thousand and $61 thousand in the second quarters of fiscal 2015 and 2014, respectively.

11


We currently believe that we will generate taxable income in the future sufficient to realize the benefit of all of our deferred tax assets which consisted primarily of net operating loss carry forwards recorded in business acquisitions. However, some or all of these deferred tax assets could expire unused if we are unable to generate taxable income in the future sufficient to utilize them. We will need to generate $10.0 million of taxable income each year from 2015 to 2023 and then $6.5 million per year until 2033 in order to utilize all of our net operating loss carry forwards. If it becomes more likely than not that our deferred tax assets will expire unused, a valuation allowance will be recorded, which may significantly increase our income tax expense, and therefore adversely affect our results of operations in the period in which it is recorded.
During the fiscal third quarter of 2014, The Tax Increase Prevention Act of 2014 (H.R. 5771) was enacted and retroactively extended the research credit from January 1, 2014 to December 31, 2014. Accordingly, the retroactive benefit related to this renewal will be reflected in our third quarter results.

NOTE H - SHARE-BASED COMPENSATION

We have two stock-based compensation plans that provide for the issuance of up to approximately 5.8 million shares of common stock. The 2004 Stock and Incentive Award Plan (the "2004 Plan") provides for the grant of incentive options to our employees and for the grant of non-statutory stock options, restricted stock, stock appreciation rights, performance units, performance shares and other incentive awards to our employees, directors and other service providers. We also have an employee stock purchase plan.

For the quarters ended November 30, 2014 and 2013, share-based payment expense was $1.5 million and $1.3 million, respectively.

In the second quarter of fiscal year 2015 and 2014, the company granted stock options and restricted stock units under the 2004 Plan to certain employees and members of the Board of Directors. Stock option awards are valued using the Black-Scholes option-pricing model and then amortized on a straight-line basis over the requisite service period of the award. Restricted stock unit awards are valued based on the closing trading value of our shares on the date of grant and then amortized on a straight-line basis over the requisite service period of the award.

In the first quarter of fiscal year 2015 and the second quarter of 2014, the company granted performance share awards under the 2004 Plan to certain employees. The awards may be earned by achieving relative performance levels over the three year requisite service period. The performance criteria are based on the total shareholder return ("TSR") of the company's common stock relative to the TSR of the common stock of a pre-defined industry peer-group. The fair value of these awards are based on the closing trading value of our shares on the date of grant and use a Monte Carlo simulation model.

As of November 30, 2014, there were $13.3 million of unrecognized compensation expenses related to share-based payment arrangements. These costs are expected to be recognized over a weighted-average period of approximately four years. The company has sufficient shares to satisfy expected share-based payment arrangements.

 
NOTE I – EARNINGS PER SHARE
Basic earnings per share are based on the weighted average number of common shares outstanding without consideration of potential common stock. 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 antidilutive. 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 three and six months ended November 30, 2014 and 2013 (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
Nov 30, 2014
 
Nov 30, 2013
 
Nov 30, 2014
 
Nov 30, 2013
Basic
35,595

 
35,132

 
35,475

 
35,041

Effect of dilutive securities
532

 

 
537

 

Diluted
36,127

 
35,132

 
36,012

 
35,041


12


Excluded from the calculation of diluted earnings per common share are stock options issued to employees and non-employees to purchase 0.8 million shares and 0.9 million shares of common stock for the three and six months ended November 30, 2014, respectively, as their inclusion would be antidilutive. For the three and six months ended November 30, 2013 options and restricted stock awards issued to employees and non-employees to purchase 2.3 million shares and 2.7 million shares of common stock, respectively, were also excluded as their inclusion would have been antidilutive.

NOTE J – SEGMENT AND GEOGRAPHIC INFORMATION
We consider our business to be a single operating segment entity engaged in the development, manufacture and sale on a global basis of medical devices for vascular access, surgery, peripheral vascular disease and oncology. Our chief operating decision maker (CEO) evaluates the various global product portfolios on a net sales basis. Executives reporting 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.
The table below summarizes net sales by product category (in thousands of dollars): 
 
Three Months Ended
 
Six Months Ended
 
Nov 30, 2014
 
Nov 30, 2013
 
Nov 30, 2014
 
Nov 30, 2013
 
 
 
As revised
 
 
 
As revised
Net sales
 
 
 
 
 
 
 
Peripheral Vascular
$
49,440

 
$
48,815

 
$
96,801

 
$
94,360

Vascular Access
27,968

 
25,571

 
54,393

 
50,854

Oncology/Surgery
13,634

 
12,557

 
25,996

 
23,724

Supply Agreement
1,107

 
1,628

 
2,290

 
3,277

Total
$
92,149

 
$
88,571

 
$
179,480

 
$
172,215


The table below presents net sales by geographic area based on external customer location (in thousands of dollars):
 
 
Three Months Ended
 
Six Months Ended
 
Nov 30, 2014
 
Nov 30, 2013
 
Nov 30, 2014
 
Nov 30, 2013
 
 
 
As revised
 
 
 
As revised
Net sales
 
 
 
 
 
 
 
United States
$
72,058

 
$
69,485

 
$
140,438

 
$
136,652

International
18,984

 
17,458

 
36,752

 
32,286

Supply Agreement
1,107

 
1,628

 
2,290

 
3,277

Total
$
92,149

 
$
88,571

 
$
179,480

 
$
172,215



NOTE K – FAIR VALUE
Our financial instruments include cash and cash equivalents, accounts receivable, marketable securities, accounts payable, interest rate swap agreement and contingent earn outs. The carrying amount of cash and cash equivalents, accounts receivable, marketable securities and accounts payable approximates fair value due to the immediate or short-term maturities. The interest rate swap agreement has been recorded at its fair value based on a valuation received from an independent third party. The contingent earn out has been recorded at fair value using the income approach.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This policy establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The policy describes three levels of inputs that may be used to measure fair value which are provided in the table below.
 

13



Level 1 Quoted prices in active markets for identical assets or liabilities. Level 1 assets include bank time deposits, money market funds, mutual funds and U.S. Treasury securities that are traded in an active exchange market.

Level 2 Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets include US government securities and corporate bonds. When quoted market prices are unobservable, we obtain pricing information from an independent pricing vendor. The pricing vendor uses various pricing models for each asset class that are consistent with what other market participants would use. The inputs and assumptions to the model of the pricing vendor are derived from market observable sources including: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers, and other market-related data. Since many fixed income securities do not trade on a daily basis, the methodology of the pricing vendor uses available information as applicable such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. The pricing vendor considers all available market observable inputs in determining the evaluation for a security. Thus, certain securities may not be priced using quoted prices, but rather determined from market observable information. These investments are included in Level 2 and primarily comprise our portfolio of corporate and government fixed income securities. Additionally included in Level 2 are interest rate swap agreements which are valued using a mid-market valuation model.

Level 3 Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category currently includes the auction rate securities where independent pricing information was not able to be obtained and the contingent earn out. Our investments in auction-rate securities were classified as Level 3 as quoted prices were unavailable since these auction rate securities issued by New York state and local government authorities failed auction. Due to limited market information, we utilized a discounted cash flow (“DCF”) model to derive an estimate of fair value for all periods presented. The assumptions used in preparing the DCF model included estimates with respect to the amount and timing of future interest and principal payments, forward projections of 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 associated with auction-rate securities. The contingent earn outs were valued utilizing a discounted cash flow method as detailed below.


14


The following tables provide information by level for assets and liabilities that are measured at fair value on a recurring basis as of November 30, 2014 and May 31, 2014 (in thousands of dollars):
 
 
Fair Value Measurements using
inputs considered as:
 
Fair Value at November 30, 2014
 
Level 1
 
Level 2
 
Level 3
 
Financial Assets
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
Money market funds
$
1

 
$

 
$

 
$
1

Total
$
1

 
$

 
$

 
$
1

Marketable securities
 
 
 
 
 
 
 
U.S. government agency obligations
$

 
$

 
$
1,698

 
$
1,698

Total

 

 
1,698

 
1,698

Total Financial Assets
$
1

 
$

 
$
1,698

 
$
1,699

Financial Liabilities
 
 
 
 
 
 
 
Interest rate swap agreements
$

 
$
400

 
$

 
$
400

Contingent liability for acquisition earn out

 

 
57,438

 
57,438

Total Financial Liabilities
$

 
$
400

 
$
57,438

 
$
57,838

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value Measurements using
inputs considered as:
 
Fair Value at May 31, 2014
 
Level 1
 
Level 2
 
Level 3
 
Financial Assets
 
 
 
 
As revised
 
As revised
Cash equivalents
 
 
 
 
 
 
 
Money market funds
$
445

 
$

 
$

 
$
445

Total
$
445

 
$

 
$

 
$
445

Marketable securities
 
 
 
 
 
 
 
U.S. government agency obligations
$

 
$

 
$
1,809

 
$
1,809

Total

 

 
1,809

 
1,809

Total Financial Assets
$
445

 
$

 
$
1,809

 
$
2,254

Financial Liabilities
 
 
 
 
 
 
 
Interest rate swap agreements
$

 
$
555

 
$

 
$
555

Contingent liability for acquisition earn out

 

 
67,331

 
67,331

Total Financial Liabilities
$

 
$
555

 
$
67,331

 
$
67,886

There were no transfers in and out of Level 1, 2 and 3 measurements for the six months ended November 30, 2014.

15


The table below presents the components of Level 3 fair value instruments as of November 30, 2014 (in thousands of dollars):
 
 
Financial Assets
 
Financial Liabilities
 
Fair Value Measurements
Using Significant
Unobservable Inputs
(Level 3)
 
Fair Value Measurements
Using Significant
Unobservable Inputs
(Level 3)
 


 
As revised
Balance, May 31, 2014
$
1,809

 
$
67,331

Earnings revaluation expense - included in earnings

 
1,418

Currency (gain) loss

 
(89
)
Included in other comprehensive income
(111
)
 

Contingent consideration - Microsulis

 
(11,222
)
Balance, November 30, 2014
$
1,698

 
$
57,438

Contingent Liabilities for Acquisition Earn Outs
Certain of our business combinations involve the potential for the payment of future contingent consideration upon the achievement of certain product development milestones or various other performance conditions. Payment of the additional consideration is generally contingent on the acquired company reaching certain performance milestones, including attaining specified revenue levels or product development targets. Contingent consideration is recorded at the estimated fair value of the contingent 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 statements of income. We measure the initial liability and remeasure the liability on a recurring basis using Level 3 inputs as defined under authoritative guidance for fair value measurements.
Contingent consideration liabilities fair value is determined using a discounted cash flow model applied to projected net sales, using probabilities of payment and projected payment dates. Projected net sales are based on our internal projections and extensive analysis of the target market and the sales potential. 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 November 30, 2014 (in thousands of dollars):
 
 
Fair value at
 
Valuation
 
 
 
 
 
Nov 30, 2014
 
Technique
 
Unobservable Input
 
Range
Revenue based payments
$
54,160

 
Discounted cash flow
 
Discount rate
 
4%-10%
 
 
 
 
 
Probability of payment
 
75-100%
 
 
 
 
 
Projected fiscal year of payment
 
2016 - 2022
Milestone based payments
3,278

 
Discounted cash flow
 
Discount rate
 
16%-20%
 
 
 
 
 
Probability of payment
 
75-100%
 
 
 
 
 
Projected fiscal year of payment
 
2017
Total
$
57,438

 
 
 
 
 
 
At November 30, 2014, the estimated potential amount of undiscounted future contingent consideration that we expect to pay as a result of all completed acquisitions is approximately $67.7 million. The milestones associated with the contingent consideration must be reached in future periods ranging from fiscal years 2016 to 2022 in order for the associated consideration to be paid.
The fair value of contingent milestone payments associated with the acquisitions was analyzed as of November 30, 2014 and $47.6 million was reflected in “Contingent consideration, net of current portion” and $9.8 million was reflected in “Current portion of contingent consideration” on the consolidated balance sheet.

16


The following table provides a reconciliation of the beginning and ending balances of contingent milestone payments measured at fair value that used significant unobservable inputs (Level 3) (in thousands of dollars):
 
 
 
 
Total Contingent Consideration
 
 
 
As revised
Beginning balance -
May 31, 2014
 
$
67,331

Contingent payments
 
(11,222
)
Earnings revaluation expense
 
1,418

Currency (gain) loss

 
(89
)
Ending balance -
November 30, 2014
 
$
57,438


NOTE L – MARKETABLE SECURITIES
Marketable securities, which are principally government agency bonds, auction rate investments and corporate commercial paper, are classified as “available-for-sale securities” in accordance with authoritative guidance issued by FASB and are reported at fair value, with unrealized gains and losses excluded from operations and reported as accumulated other comprehensive income (loss), net of the related tax effects, in stockholders’ equity. Cost is determined using the specific identification method. We hold 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. Credit risks are eased by the historical track record of bond insurers, which back a majority of this market. Sell orders for any security traded through an auction process could exceed bids and, in such cases, the auction fails and we may be unable to liquidate our position in the securities in the near term. As of November 30, 2014 and May 31, 2014, we had $1.7 million and $1.8 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.
As of November 30, 2014 and May 31, 2014, marketable securities consisted of the following (in thousands of dollars):
 
As of November 30, 2014
Amortized
cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Available-for-sales securities
 
 
 
 
 
 
 
U.S. government agency obligations
$
1,825

 
$

 
$
(127
)
 
$
1,698

 
$
1,825

 
$

 
$
(127
)
 
$
1,698

 
As of May 31, 2014
Amortized
cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Available-for-sales securities
 
 
 
 
 
 
 
U.S. government agency obligations
$
1,825

 
$

 
$
(16
)
 
$
1,809

 
$
1,825

 
$

 
$
(16
)
 
$
1,809



NOTE M – COMMITMENTS AND CONTINGENCIES    

Legal Proceedings
The Company is involved in various legal proceedings, including commercial, intellectual property, product liability, regulatory and environmental 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.
 

17


AngioDynamics v. biolitec
On January 2, 2008, we commenced an action in the United States District Court for the Northern District of New York entitled AngioDynamics, Inc. v. biolitec, Inc. In this action, we sought judgment against biolitec for defense and indemnification in two lawsuits which we previously settled. Our claims arise out of a Supply and Distribution Agreement (“SDA”) entered into with biolitec on April 1, 2002. On September 27, 2011, the U.S. District Court granted key portions of our motion for summary judgment in our legal case against biolitec. The Court also dismissed biolitec’s counterclaims against us. The court denied one portion of our summary judgment motion, which sought to recover additional costs from biolitec, leaving this for adjudication at trial. On November 8, 2012, the Court granted partial judgment to us in the amount of $23.2 million. Biolitec appealed this judgment. On August 23, 2013, the U.S. Court of Appeals for the Second Circuit dismissed biolitec’s appeal.
In October 2009, we commenced an action in the United States District Court for the District of Massachusetts entitled AngioDynamics, Inc. v. biolitec AG and Wolfgang Neuberger. The Complaint in this action was amended in March 2010. This action seeks to recover against biolitec, Inc.’s parent entities and CEO for tortuously interfering with biolitec, Inc.’s contractual obligation to defend and indemnify us, and also seeks to pierce the corporate veil of biolitec, Inc. and to invalidate certain alleged fraudulent transfers in order to hold biolitec, Inc.’s parent entities jointly and severally liable for the alleged breach of the SDA. On September 13, 2012, the Massachusetts Court granted our request for a preliminary injunction prohibiting the downstream merger of biolitec AG with its Austrian subsidiary. On April 1, 2013, the U.S. Court of Appeals for the First Circuit affirmed the preliminary injunction. On January 14, 2014, the District Court entered judgment in our favor as to liability. On March 18, 2014, the District Court entered judgment in our favor against Biolitec AG, Biomed Technology Holdings, Ltd., and Wolfgang Neuberger, jointly and severally, in the amount of $74.9 million. The defendants have appealed this judgment.
August 29, 2013, we became co-plaintiffs in an adversary proceeding in the United States Bankruptcy Court for the District of New Jersey entitled Cyganowski, Trustee, et al. v. Biolitec U.S., Inc., et al. In this action, we assert claims of conversion, unjust enrichment, tortious interference, and unfair competition against various biolitec entities for alleged violation of Bankruptcy Court settlement and sale orders under which we acquired certain assets of Biolitec, Inc. On September 3, 2013, we, along with our co-plaintiff, obtained a temporary restraining order against the defendants in this action. The restraining order is still in place and the Bankruptcy Court is currently considering our request for permanent injunctive relief.
C.R. Bard, Inc. v. AngioDynamics, Inc.
On January 11, 2012, C.R. Bard, Inc. filed a suit in the United States District Court of Utah claiming certain of our implantable port products infringe on patents held by Bard. 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 in the litigation. Our petitions have been granted and 40 of 41 patent claims have been and remain rejected. The Patent Office has issued a Final Rejection of all the claims subject to reexamination and Bard has filed appeals. The parties are currently in the midst of the briefing process for these appeals. The case 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.

BTG International, Inc.    

We received a subpoena from the U.S. Department of Justice (the “DOJ”) requesting documents in relation to a purported criminal 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 and at this time are unable to predict its scope, duration or outcome.

EndoVention v. AngioDynamics


18


On November 21, 2014, EndoVention, Inc. filed a complaint in the United States District Court for the Northern District of California, alleging that our AngioVac products infringe two of EndoVention’s patents.  The complaint has not been served.   We believe these allegations are without merit and we intend to defend them vigorously.

Regulatory Matter

On November 5, 2014, the Company received a Warning Letter from the FDA relating to observations noted during FDA’s inspection of the Company’s Navilyst Medical facilities located in Marlborough, Massachusetts and Glens Falls, New York in 2014.  The matters raised in the Warning Letter and observations focused on design control processes related to packaging validations and accelerated and real time aging testing in connection with the Company’s fluid management and PICC families of products, inconsistency of a manufacturing product test process used among similar valved PICC products, a particular verification test of valved PICC products and non-conforming product control procedures.  The Company takes these matters seriously and is committed to complying with all applicable laws, regulations and rules in connection with the manufacturing, sale and marketing of its products.  The Company intends to make a comprehensive response to the issues raised in the letter and is committed to working with FDA to resolve all outstanding issues. The Company does not expect this matter will have a material adverse effect on its financial position or results of operations.


NOTE N – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB and the International Accounting Standards Board (“IASB”) issued their final standard on revenue from contracts with customers. The standard, issued as an ASU by the FASB and as International Financial Reporting Standards 15 by the IASB, outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU is effective for the Company in its first quarter beginning January 1, 2017 and is not expected to have a material impact on the Company’s consolidated financial statements.
In June 2014, the FASB issued an ASU that clarified that entities should treat performance targets that can be met after the requisite service period of a share-based payment award as performance conditions that affect vesting. Therefore, an entity would not record compensation expense related to an award for which transfer to the employee is contingent on the entity’s satisfaction of a performance target until it becomes probable that the performance target is met. This ASU is effective for the Company in its first quarter beginning January 1, 2016 and is not expected to have a material impact on the Company’s consolidated financial statements.

NOTE O – RESTRUCTURING
During the three and six months ended November 30, 2014 we initiated a restructuring of finance, R&D and S&M organizations to improve our profitability. As part of the restructuring, we recorded $0.1 million and $1.1 million of severance expense, respectively, which is included in “Acquisition, restructuring and other items, net” in the statements of income.


NOTE P – IMMATERIAL ERROR CORRECTIONS

During the financial closing process for the first quarter of fiscal year 2015, the Company determined that financial management had incorrectly accounted for certain asset, liability and income statement balances, beginning in 2011. The Company has identified amounts and concluded that they were not material individually or in the aggregate to any of its previously issued annual and interim financial statements. Although management has determined the amounts individually and in the aggregate are not material to prior periods, in accordance with authoritative accounting literature on considering the effects of misstatements in prior years when quantifying misstatements in the current year, the financial statements included herein have been adjusted to correct for the impact of these items.

The Company has corrected the relevant financial information from previous reporting periods contained in these financial statements. The immaterial error corrections identified were primarily related to our failure to recognize the expense associated with prepaid and other assets in accordance with the underlying contractual terms (cumulative impact of approximately $1.2 million) and depreciation expense (cumulative impact of approximately $0.4 million), and other individually

19


immaterial items. Also, approximately $5.4 million of contingent consideration liabilities that had been classified as current are classified as long term in the balance sheet.
The impacts of these revisions are shown in the tables below:

 
Three months ended August 31, 2013
 
As previously reported
 
Adjustments
 
As revised
Net sales
$
83,579

 
$
65

 
$
83,644

Cost of sales
41,097

 
(33
)
 
41,064

Gross profit
42,482

 
98

 
42,580

Total operating expenses
41,195

 
(17
)
 
41,178

Operating income
1,287

 
115

 
1,402

Total other income (expenses)
(1,934
)
 
(31
)
 
(1,965
)
Income (loss) before taxes
(647
)
 
84

 
(563
)
Income tax benefit (expense)
221

 
(31
)
 
190

Net income (loss)
(426
)
 
53

 
(373
)
Total comprehensive income (loss), net of tax
(155
)
 
53

 
(102
)

 
Three months ended November 30, 2013
 
As previously reported
 
Adjustments
 
As revised
Net sales
$
88,616

 
$
(45
)
 
$
88,571

Cost of sales
43,686

 

 
43,686

Gross profit
44,930

 
(45
)
 
44,885

Total operating expenses
43,356

 
88

 
43,444

Operating income
1,574

 
(133
)
 
1,441

Total other income (expense)
(1,660
)
 
(131
)
 
(1,791
)
Income (loss) before taxes
(86
)
 
(264
)
 
(350
)
Income tax benefit (expense)
(13
)
 
102

 
89

Net income (loss)
(99
)
 
(162
)
 
(261
)
Total comprehensive income (loss), net of tax
(358
)
 
(162
)
 
(520
)

 
Six months ended November 30, 2013
 
As previously reported
 
Adjustments
 
As revised
Net sales
$
172,195

 
$
20

 
$
172,215

Cost of sales
84,783

 
(33
)
 
84,750

Gross profit
87,412

 
53

 
87,465

Total operating expenses
84,551

 
71

 
84,622

Operating income
2,861

 
(18
)
 
2,843

Total other income (expense)
(3,594
)
 
(162
)
 
(3,756
)
Income (loss) before taxes
(733
)
 
(180
)
 
(913
)
Income tax benefit (expense)
208

 
71

 
279

Net income (loss)
(525
)
 
(109
)
 
(634
)
Total comprehensive income (loss), net of tax
(513
)
 
(109
)
 
(622
)


20


 
Three months ended February 28, 2014
 
As previously reported
 
Adjustments
 
As revised
Net sales
$
88,195

 
$
(45
)
 
$
88,150

Cost of sales
43,277

 
80

 
43,357

Gross profit
44,918

 
(125
)
 
44,793

Total operating expenses
38,066

 
214

 
38,280

Operating income
6,852

 
(339
)
 
6,513

Total other income (expense)
(1,985
)
 
15

 
(1,970
)
Income (loss) before taxes
4,867

 
(324
)
 
4,543

Income tax benefit (expense)
(176
)
 
148

 
(28
)
Net income (loss)
4,691

 
(176
)
 
4,515

Total comprehensive income (loss), net of tax
4,869

 
(176
)
 
4,693


 
Nine months ended February 28, 2014
 
As previously reported
 
Adjustments
 
As revised
Net sales
$
260,390

 
$
(25
)
 
$
260,365

Cost of sales
128,060

 
47

 
128,107

Gross profit
132,330

 
(72
)
 
132,258

Total operating expenses
122,617

 
285

 
122,902

Operating income
9,713

 
(357
)
 
9,356

Total other income (expense)
(5,579
)
 
(147
)
 
(5,726
)
Income (loss) before taxes
4,134

 
(504
)
 
3,630

Income tax benefit (expense)
32

 
219

 
251

Net income (loss)
4,166

 
(285
)
 
3,881

Total comprehensive income (loss), net of tax
4,356

 
(285
)
 
4,071


 
Three months ended May 31, 2014
 
As previously reported
 
Adjustments
 
As revised
Net sales
$
94,065

 
$
(5
)
 
$
94,060

Cost of sales
46,534

 
116

 
46,650

Gross profit
47,531

 
(121
)
 
47,410

Total operating expenses
43,796

 
30

 
43,826

Operating income
3,735

 
(151
)
 
3,584

Total other income (expense)
(1,489
)
 
15

 
(1,474
)
Income (loss) before taxes
2,246

 
(136
)
 
2,110

Income tax benefit (expense)
(3,324
)
 
(1
)
 
(3,325
)
Net income (loss)
(1,078
)
 
(137
)
 
(1,215
)
Total comprehensive income (loss), net of tax
(1,003
)
 
(137
)
 
(1,140
)


21


 
Year ended May 31, 2014
 
As previously reported
 
Adjustments
 
As revised
Net sales
$
354,455

 
$
(30
)
 
$
354,425

Cost of sales
174,594

 
163

 
174,757

Gross profit
179,861

 
(193
)
 
179,668

Total operating expenses
166,413

 
315

 
166,728

Operating income
13,448

 
(508
)
 
12,940

Total other income (expense)
(7,068
)
 
(132
)
 
(7,200
)
Income (loss) before taxes
6,380

 
(640
)
 
5,740

Income tax benefit (expense)
(3,292
)
 
218

 
(3,074
)
Net income (loss)
3,088

 
(422
)
 
2,666

Total comprehensive income (loss), net of tax
3.353

 
(422
)
 
2.931


 
Year ended May 31, 2014
 
As previously reported
 
Adjustments
 
As revised
Net cash provided by (used in) operating activities
$
25,280

 
$
(599
)
 
$
24,681

Net cash provided by (used in) investing activities
(17,047
)
 
599

 
(16,448
)
Net cash provided by (used in) financing activities
(14,016
)
 

 
(14,016
)

 
As of May 31, 2014
 
As previously reported
 
Adjustments
 
As revised
Accounts receivable, net of allowances
$
62,148

 
$
(180
)
 
$
61,968

Inventories
61,056

 
178

 
61,234

Prepaid expenses and other
5,975

 
(504
)
 
5,471

Total current assets
152,228

 
(506
)
 
151,722

Property, plant and equipment, net
67,208

 
(618
)
 
66,590

Other assets
4,876

 
(950
)
 
3,926

Goodwill
360,294

 
179

 
360,473

Deferred income taxes, long term
9,767

 
636

 
10,403

Total assets
800,150

 
(1,259
)
 
798,891

Accrued liabilities
16,762

 
(110
)
 
16,652

Current portion of contingent payments
16,341

 
(5,423
)
 
10,918

Total current liabilities
72,286

 
(5,533
)
 
66,753

Contingent consideration, net of current portion
51,080

 
5,333

 
56,413

Total liabilities
262,256

 
(200
)
 
262,056

Additional paid-in capital
508,263

 
91

 
508,354

Retained earnings
32,651

 
(1,150
)
 
31,501

Total stockholders' equity
537,894

 
(1,059
)
 
536,835



22


 
Year ended May 31, 2013
 
As previously reported
 
Adjustments
 
As revised
Net sales
$
342,026

 
$
(110
)
 
$
341,916

Cost of sales
173,037

 
365

 
173,402

Gross profit
168,989

 
(475
)
 
168,514

Total operating expenses
161,895

 
331

 
162,226

Operating income
7,094

 
(806
)
 
6,288

Total other income (expense)
(7,737
)
 
(138
)
 
(7,875
)
Income (loss) before taxes
(643
)
 
(944
)
 
(1,587
)
Income tax benefit (expense)
31

 
345

 
376

Net income (loss)
(612
)
 
(599
)
 
(1,211
)
Total comprehensive income (loss), net of tax
(872
)
 
(599
)
 
(1,471
)

 
Year ended May 31, 2013
 
As previously reported
 
Adjustments
 
As revised
Net cash provided by (used in) operating activities
$
26,883

 
$
(231
)
 
$
26,652

Net cash provided by (used in) investing activities
(22,238
)
 

 
(22,238
)
Net cash provided by (used in) financing activities
(6,286
)
 

 
(6,286
)
 
As of May 31, 2013
 
As previously reported
 
Adjustments
 
As revised
Accounts receivable, net of allowances
$
47,791

 
$
(110
)
 
$
47,681

Inventories
55,062

 
17

 
55,079

Prepaid expenses and other
7,554

 
(269
)
 
7,285

Total current assets
141,516

 
(362
)
 
141,154

Property, plant and equipment, net
62,650

 
(259
)
 
62,391

Other assets
5,559

 
(651
)
 
4,908

Intangible assets, net
214,848

 
(175
)
 
214,673

Goodwill
355,458

 
179

 
355,637

Deferred income taxes, long term
11,007

 
418

 
11,425

Total assets
791,584

 
(850
)
 
790,734

Accounts payable
24,522

 
(52
)
 
24,470

Accrued liabilities
16,426

 
(70
)
 
16,356

Total current liabilities
63,437

 
(122
)
 
63,315

Total liabilities
264,754

 
(122
)
 
264,632

Retained earnings
29,563

 
(728
)
 
28,835

Total stockholders' equity
526,830

 
(728
)
 
526,102



23


 
Year ended May 31, 2012
 
As previously reported
 
Adjustments
 
As revised
Net sales
$
221,787

 
$
130

 
$
221,917

Cost of sales
95,829

 
779

 
96,608

Gross profit
125,958

 
(649
)
 
125,309

Total operating expenses
128,920

 
297

 
129,217

Operating income
(2,962
)
 
(946
)
 
(3,908
)
Total other income (expense)
(2,320
)
 
806

 
(1,514
)
Income (loss) before taxes
(5,282
)
 
(140
)
 
(5,422
)
Income tax expense (benefit)
188

 
51

 
239

Net income (loss)
(5,094
)
 
(89
)
 
(5,183
)
Total comprehensive income (loss), net of tax
(5,095
)
 
(89
)
 
(5,184
)

 
Year ended May 31, 2012
 
As previously reported
 
Adjustments
 
As revised
Net cash provided by (used in) operating activities
$
11,497

 
$
105

 
$
11,602