Volume 14, No. 2, Fall 2009

Click here to download a PDF of Valuation Viewpoint Fall 2009

Market Transaction: Business Valuation

AGA Medical Holdings, Inc.

AGA Medical Holdings, Inc. makes a variety of occlusion devices to repair structural defects in the heart and blood vessels. Headquartered in Plymouth, Minnesota, the company has approximately 470 employees. For twelve months ending Dec. 2008 and the first six months of 2009, the company reported net sales of 167 million and 9 million in profits. Shenehon Company has been involved in valuations and other corporate issues for AGA from its inception in 1995.

In the bio-engineering development sector, the company and its products are quite remarkable.

AGA first filed to go public in 2008. The initial application was rejected by the investment community due to the decline in the financial markets. By the fall of 2009, the markets had recovered somewhat and the company made another bid to go public. However, the stock price was reduced from the original range of $19 to $21 per share to $15 to $16 per share. We understand AGA’s initial public offering (IPO) of stock was $14.50 per share - the price at which the stock opened on October 21, 2009. The November 4, 2009 closing price of $13.43 reflects a 7.4% decline in two weeks.

Through 2008, the company made significant profits. However, more recently, the company has been pre-occupied with a host of patent infringement cases brought by AGA to protect its patents. Additionally, there are a number of lawsuits claiming that AGA infringed on others’ patents. In our opinion, the lawsuits are more to blame for the decline in per-share-value than the state of the markets. Using 2008 numbers, AGA posts a price to earnings (P/E) ratio of roughly 34. With no profits for the first nine months of 2009, a P/E based on current financial results cannot be calculated. This may have contributed to a reduction in the stock price when the company went public. In addition, AGA’s debt burden becomes more of a factor when earnings are down. Nonetheless, the company has an outstanding line of products with very high profit margins. Providing the company can keep its house in order, AGA should perform well.

It is more likely that the decline in AGA’s stock price was due to the costs of defending and pursuing patent infringement cases than to market conditions.

PER SHARE DATA

PRO FORMA WEIGHTED AVERAGE SHARES OUTSTANDING	21,482,000*
IPO Market Cap	$311,489,000
Nov. 4 Market Cap	$288,503,260

*Assumes 2,062,500 Underwriter Options Not Execised

As of...	12/31/2008 FYE	9/30/2009 TTM
EPS	$0.42	$(0.05)
IPO Price	$14.50	$14.50
Nov. 4 Closing Price	$13.43	$13.43
Implied IPO P/E	34.24	N/A
Implied Current P/E	31.72	N/A

INCOME STATEMENTS

YEAR	2006	2007	2008	2009 to Sept. 30
Net Sales	127,529	147,255	166,896	144,540
Cost of Goods Sold	24,985	22,819	26,635	23,603
Gross Profit	102,544	124,436	140,261	120,937
Selling, General & Administrative	37,515	50,190	65,669	71,897
Research & Development	12,096	26,556	32,760	24,905
Amortization of Intangible Assets	12,682	15,233	15,540	14,972
Change in Purchas Consideration	0	0	0	-1,051
(Loss)Gain on Disposal of Equipment	790	-3	68	-23
Operating Income (Loss)	39,542	30,460	26,224	10,237
Investment Income (Loss)	754	-751	-1,202	-2352
Interest Income	1,174	432	230	80
Interest Expense	-22,893	-21,213	-16,492	-12,143
Other Income, (Expense), Net	957	-1006	722	1595
Income (Loss) Before Income Taxes	19,534	9,922	9,482	-2,582
(Provision) Benefit for Income Taxes	-6,909	-3,844	-386	-573
Net Income (Loss)	12,625	6,078	9,096	-2,010