AGA Medical second-quarter 2010 net sales increase 7.6% to $53.8 million

Aug 3 2010

AGA Medical Holdings, Inc. (AGA Medical) (NASDAQ: AGAM), a leading developer of interventional medical devices for the minimally invasive treatment of structural heart defects and vascular abnormalities, today reported financial results for the second quarter ended June 30, 2010.

“Reconciliation of Reported Results to Non-GAAP Financial Measures”

Highlights of the Second Quarter of 2010 include:

• Enrolled first patient in the feasibility phase of the prospective, multicenter, randomized AMPLATZER^® Cardiac Plug U.S. clinical trial, designed to evaluate this device in closing the left atrial appendage for the prevention of stroke in atrial fibrillation patients;
• Issuance of new guidelines by the U.K.'s National Institute for Health and Clinical Excellence (NICE) concluding that the percutaneous closure of the left atrial appendage reduces stroke risk in atrial fibrillation;
• Awarded €2.1 million in damages by the Düsseldorf Regional Court as a result of a patent infringement case filed by AGA Medical against Occlutech GmbH, based in Jena, Germany; and
• Continued enrollment in its RESPECT clinical trial, designed to evaluate the link between a patent foramen ovale (PFO) and stroke, with 762 patients enrolled in the study and 1,514 patient follow-up years as of July 31, 2010.

Financial Results for Second Quarter 2010 vs. Second Quarter 2009

Net sales for the second quarter of 2010 were $53.8 million, a 7.6% increase over $50.0 million for the second quarter of 2009. On a constant currency basis, net sales grew 10.0% year over year.

John Barr, President and Chief Executive Officer of AGA Medical, commented, "We achieved another quarter of solid top line growth, despite the significant impact of currency. We also significantly increased net income while continuing to invest in our future by investing in our pipeline programs, which include our clinical trials. Overall, our results clearly demonstrate the strength of our business with strong operating performance and significant cash generation."

Gross margins for the second quarter of 2010 were 85.5% (85.8% on a constant currency basis) compared to 83.6% in the prior year period.

Total operating expenses for the second quarter of 2010 were $40.6 million as compared to $36.4 million in the second quarter of 2009. Total operating expenses for the second quarter of 2010 were essentially flat from the first quarter of 2010, excluding the impact of the litigation settlement expense, at $40.6 million versus $40.7 million, respectively.

Selling, general and administrative expenses totaled $24.5 million in the second quarter of 2010 versus $23.8 million in the prior year period, an increase of 2.8%, related primarily to expanding our direct sales force in Europe and North America and partially offset by lower legal expenses. Research and development spending totaled $11.5 million in the second quarter of 2010, an increase of $2.9 million from the second quarter of 2009, primarily due to increased spending on clinical trials as a result of strong patient enrollment in the company's U.S. clinical trials.

Barr commented, "We continue to see strong and steady enrollment in RESPECT and continue to be pleased with our enrollment progress in PREMIUM, our U.S. clinical trial evaluating the link between PFO and migraine. With the commencement of our U.S. clinical trial evaluating our Amplatzer Cardiac Plug for left atrial appendage closure, we now have four major multicenter, randomized clinical trials underway, each representing a significant revenue opportunity and each with the potential to change the current standard of care."

Operating income for the second quarter of 2010 was $5.4 million versus $5.4 million in the prior year period. However, operating income increased $2.0 million, or 58%, in the second quarter from the first quarter of 2010, excluding the impact of the litigation settlement with Medtronic.

Barr commented further, "With a focus on sustaining our strong gross margins and managing operating expenses, we realized a 58% increase in operating income from the first quarter of 2010, excluding the Medtronic litigation settlement. This allows us to continue to make a significant investment in our R&D programs. As we head in to the second half of the year, we will remain focused on continuing these positive trends in operating performance."

EBITDA (net income/(loss) before interest income, interest expense, provision/(benefit) for income tax, depreciation and amortization) was $11.9 million in the second quarter 2010 versus $12.1 million in the prior year period. EBITDA margin was 22.1% for the second quarter 2010, compared to 24.3% for the second quarter 2009.

Net income for the second quarter was $3.6 million versus $2.2 million in the prior year period, an increase of 68%. Including dividends for Series A and Series B preferred and Class A common stock accrued in the second quarter of 2009, the company reported net income/(loss) applicable to common stockholders of $3.6 million, or $0.07 per fully diluted and basic share, for the quarter ended June 30, 2010, compared to ($2.1) million, or ($0.10) per fully diluted and basic share, for the prior year period. The accrued dividends on these securities and the securities associated with these dividends were converted into common stock in connection with the company's initial public offering in the fourth quarter 2009.

Non-GAAP adjusted net income for the quarter ended June 30, 2010 was $6.9 million versus $7.4 million in the prior year period and non-GAAP adjusted net income per fully diluted share was $0.13 for the quarter ended June 30, 2010 versus $0.18 for the prior year period calculated using fully diluted shares outstanding of approximately 51.2 million and 41.0 million respectively. The significant increase in fully diluted weighted average shares outstanding was primarily due to the company's initial public offering in the fourth quarter of 2009.

Cash and cash equivalents were $14.7 million as of June 30, 2010, representing a $1.5 million increase from cash and cash equivalents of $13.2 million as of March 31, 2010. This increase is net of a $7.5 million payment to Medtronic as a result of the litigation settlement agreement.

Fiscal 2010 Outlook

AGA Medical has updated its fiscal 2010 sales guidance to reflect the recent strengthening of the U.S. dollar against certain foreign currencies, primarily the Euro. In the event the Euro remains at a rate of 1.32 or above, the company's 2010 financial guidance remains unchanged. In the event the Euro averages 1.25 on a sustained basis, the low end of the company's sales guidance will be $217 million. This compares with prior sales guidance of $221 million to $226 million.

There are no changes to the company's previous full year 2010 expectations for gross margin (85%), effective tax rate (35%) or fully-diluted shares outstanding (51 million).

In addition, if the Euro averages 1.25 on a sustained basis, the low end of the company's 2010 financial guidance for non-GAAP adjusted earnings per share, excluding the impact of amortization and certain one-time items, will be $0.46. This compares with prior non-GAAP adjusted earnings per share guidance of $0.49 and $0.54.