San Diego, Calif.-based Volcano revealed in Securities & Exchange Commission filings Monday that Welling’s firm purchased some 5.1% shares of VOLC stock and is demanding changes at the company, including revisions to management compensation packages, a $200 million share buyback and calling for the company to resist acquiring any more companies to focus solely on "organic growth."
"We do not intend to address that filing on today’s call or take questions about it," Volcano CEO R. Scott Huennekens said on an earnings call with investors. "We obviously have seen the 13D and appreciate and take very seriously the perspectives of our shareholders. We intend to address the 13D at an appropriate time in the future."
Volcano officials reported an $8.5 million loss on $95.8 million in sales for the 3-month period ended Sept. 30, down considerably from a $1.98 profit on $93.6 million in sales for the same period last year.
On Monday, Welling told Bloomberg that his firm has been in discussions with Volcano management since June and that he sees the company as under-valued and a potential take-over target.
"Volcano is a very attractive acquisition candidate for the large medical device players within the cardiac space," Welling told the news service. "We don’t believe they should sell themselves today – once the stock is more fairly valued, and once they’ve achieved some of the targets."
In SEC filings Engaged Capital credited Volcano’s management team with doing "an outstanding job building market-leading franchises in both IVUS and FFR. Consistent operational execution led to the Issuer’s meeting or exceeding consensus revenue expectations in 22 of the first 23 quarters that the Issuer was a publicly traded company."
Engaged officials added, however, that "recent operating results have failed to meet analyst expectations, as the Issuer has delivered quarterly revenues that have fallen short of consensus estimates in six of the past seven quarters. Further, the Reporting Persons note that management has reduced full-year constant currency revenue guidance in 4 of the past 6 quarters. As a result, investors have grown skeptical of management’s assertions that the Issuer can deliver sustainable low-to-mid teens revenue growth."
Engaged officials said they were concerned that a recent $500 million convertible debt financing, executed last year, left the company "overcapitalized" and could result in Volcano making "dilutive acquisitions." Engaged officials said they didn’t have faith in the company’s long-range plan, which promises a return to double-digit sales growth over the next 5 years, suggesting instead that the Volcano should re-allocate $200 million of the company’s cash towards buying back shares of VOLC stock.
Engaged further took issue with executive compensation packages, recommending that Volcano "include metrics that are more closely associated with shareholder value creation, such as EBITDA, free cash flow ("FCF"), return on invested capital ("ROIC"), and total shareholder return."
Newport Beach, Calif.-based Engaged Capital was founded by Welling in 2012 with an $85 million seed investment from Grosvenor Capital Management. The fund was created to serve "as stewards of shareholder’s capital and believe by working constructively with company management and the Board we become a catalyst for positive change," according to its web site.