DJ Orthopedics (NYSE:DJO)
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DJO Incorporated (NYSE:DJO), a global provider of products and services
that promote musculoskeletal and vascular health, today announced
financial results for the first quarter of 2007, ended March 31, 2007.
Net revenues for the first quarter of 2007 were $114.9 million,
reflecting an increase of approximately 39 percent, compared with net
revenues of $82.6 million in the first quarter of 2006. The first
quarters of 2007 and 2006 each included 64 shipping days. Revenues for
the first quarter of 2007 included a contribution from the Company’s
Aircast acquisition, which closed in April 2006. On a pro forma basis,
as if Aircast had been acquired as of January 1, 2006, net revenues for
the first quarter of 2007 reflected growth of approximately 9 percent
compared to pro forma net revenues for the first quarter of 2006.
Non-GAAP net income for the first quarter of 2007 was $5.6 million, or
$0.23 per share, compared with non-GAAP net income of $6.5 million, or
$0.28 per share, for the first quarter of 2006. Non-GAAP results for the
first quarters of 2007 and 2006 exclude certain amounts aggregating $1.6
million, or $0.06 per share, and $0.6 million, or $0.02 per share,
respectively, which are not deemed to be reflective of the ongoing
operations of the Company. For the first quarter of 2007, the excluded
amounts reflect certain costs and expenses related to the integration of
the acquired Aircast business and costs related to the settlement of
outstanding litigation. For the first quarter of 2006, the excluded
amounts reflect purchase accounting adjustments to write up acquired
Axmed inventories to fair value and the write-off of previously deferred
expenses related to a discontinued acquisition. Beginning with the first
quarter of 2007, the Company has no longer excluded the impact of
stock-based compensation expense from its non-GAAP results as such
expense is now included in both the current and comparable prior year
periods. GAAP net income for the first quarter of 2007 was $4.0 million,
or $0.17 per share, compared with GAAP net income of $6.0 million, or
$0.26 per share, for the first quarter of 2006.
The Company defines adjusted EBITDA as earnings before interest, taxes,
depreciation and amortization, stock-based compensation expense and
certain charges and expenses not deemed to be reflective of the ongoing
operations of the Company, as discussed above. Adjusted EBITDA for the
first quarter of 2007 was $25.4 million, or 22.1 percent of net
revenues, reflecting growth of approximately 40 percent over adjusted
EBITDA of $18.2 million for the first quarter of 2006.
“The first quarter of 2007 generated mixed
results for DJO, with strong revenue results offset by gross profit
margins and earnings that did not meet our expectations,”
said Les Cross, president and CEO of DJO Incorporated. “On
the positive side, the first quarter was marked by continued strong
revenue growth across the Company’s three
business segments. We also achieved the improved operating expense
levels we had expected. We are disappointed, however, that gross profit
was lower than expected in the first quarter. Maintaining excellent
customer service post-integration was our top priority in the first
quarter. Our revenue results show that we accomplished that goal, but it
came at a higher cost than originally forecast. With our production and
distribution activities fully integrated for the first time this
quarter, we have realized that we require additional time to stabilize
our significantly larger operations to the point where we begin to
generate the cost reductions and expanded gross margins we anticipated
would result post-integration. Our current operations structure is
requiring greater overhead cost than we anticipated and higher material
costs, due partly to material efficiency issues. We also incurred
freight and other distribution-related costs, included in costs of goods
sold, in excess of our original forecasts. We are now moving more
inventory from Mexico throughout our newly expanded distribution network
that includes our Indianapolis distribution center, over 1,100
OfficeCare locations and multiple distribution points in Europe. This
expanded distribution strategy is requiring a higher level of cost than
anticipated, but has been very effective. With product inventory closer
to our customers, we have improved our service levels and delivery
times. This has helped us continue to grow our top line at rates
significantly in excess of the underlying market rates of growth.
“It is very important to note that the cost
structure issues we are dealing with are not related solely to the
Aircast integration. Rather they are based on the fact that we have
rapidly increased the size and scale of our Company very significantly
through our recent acquisitions and our successful internal growth
strategies. On an annualized basis, we grew the size of the Company by
over 50% in 2006. We believe a majority of our cost issues are
short-term and that they can and will be addressed through our
continuous improvement processes, which have been very successful in
generating cost reductions in the past. We have several active
performance improvement initiatives in process designed to quickly
reduce our costs of goods sold and also further improve our operating
expense levels. We are already seeing meaningful cost reductions in the
areas that contributed the largest cost overruns in the first quarter.
However, based on our actual first quarter results, we are now expecting
a delay of approximately two quarters in the margin expansion we
originally expected would begin to take place in the first quarter. Much
of the delay beyond the first quarter is due to the fact that certain of
the unfavorable first quarter spending variances were required to be
capitalized into the cost of the inventory we built in the first
quarter, which will be sold and charged to costs of goods sold in the
second quarter. Although we expect to see modest margin improvement in
the second quarter, the inventory effect will constrain our ability to
see significant gross margin expansion until the third quarter.
“As a result of the issues discussed above,
our non-GAAP consolidated gross profit margin was 60.5% of net revenues
in the first quarter of 2007 as compared to our non-GAAP consolidated
gross profit margin of 62.1% of net revenues in the first quarter of
2006. Our GAAP gross profit margin of 58.7% in the first quarter of 2007
was also reduced by certain expenses related to the Aircast integration
of $2.1 million, which we do not believe are reflective of our ongoing
operations.
“Our non-GAAP operating income margin in the
first quarter of 2007 was 13.1% of net revenues compared to our non-GAAP
operating income margin of 15.3% of net revenues in the first quarter of
2006. Our GAAP operating income margin was 10.9% in the first quarter of
2007 and was also reduced by certain charges aggregating $2.6 million,
which we do not believe are reflective of our ongoing operations,
including the Aircast integration costs noted above and the settlement
of a lawsuit for $0.6 million.
“Despite the fact that we fell short of some
of our goals in the first quarter, we have made tremendous progress in
many areas. Our recent acquisitions have added significant value to DJO
and will continue to add increasing value as time progresses. Our
adjusted EBITDA level, reflecting growth of approximately 40% over the
first quarter of 2006, is one measure of the significant value
contributed from our acquisitions and the strength of our cash earnings
potential. As we continue to improve the costs of goods sold of our
newly integrated business, and continue to derive earnings accretion
from the pay down of acquisition-related debt balances, we remain
confident that we will see the accretive nature of the acquisitions
translate into growth in earnings per share in the near future.
“Revenue growth in the first quarter of 2007
was again a highlight. With strong first quarter revenues of $114.9
million, slightly ahead of our expectation, we began 2007 on a positive
note at the top line. Net revenues for the Company’s
Domestic Rehabilitation, Regeneration and International business
segments grew by 33.6%, 10.0% and 98.4%, respectively. In our Domestic
Rehabilitation segment, first quarter revenue was driven by the
contribution from Aircast and by continued strength within our
OfficeCare channel, which posted year-over-year growth of over 20%. In
our Regeneration segment, SpinaLogic sales continued to benefit from our
expanded selling strategy, with over 17% growth over the prior year in
the first quarter. Finally, we continue to see very strong growth in our
International segment, driven by the successful integration of the DJO,
Axmed and Aircast sales forces in France and the DJO and Aircast sales
forces in each of our other major international markets. On a pro forma
basis, as if Aircast had been acquired as of January 1, 2006, net
revenues for the first quarter of 2007 in our International segment
reflected growth of over 17% compared to pro forma net revenues for the
first quarter of 2006, or over 13% when measured in constant currency.
“The total after-tax impact on our first
quarter 2007 earnings of stock-based compensation expense was
approximately $1.6 million, or approximately $0.07 per share. The total
after-tax impact on our first quarter 2007 earnings from other costs and
expenses not deemed to be reflective of the Company’s
ongoing operations was approximately $1.6 million, or approximately
$0.06 per share.
“With strong first quarter sales results
behind us, we are pleased to increase the low end of our revenue
expectations for 2007 and confirm that we now expect total 2007 revenue
to be between $470 million and $480 million, representing year-over-year
growth of approximately 14% to 16%. Assuming the momentum we saw in the
first quarter continues, we would expect our full year revenue to be
closer to the high end of this range. With respect to earnings, the
expected delay in realization of gross margin expansion requires us to
reduce our full year earnings forecast. Our current earnings outlook for
2007 calls for improvement as we sequentially move through the second,
third and fourth quarters. As mentioned, the costs of our inventories on
hand will constrain the possible margin improvement in the second
quarter and we expect a stronger level of sequential improvement
beginning in the third quarter. Based upon our continuous improvement
objectives for the year, we now expect our gross margins to trend up to
reach approximately 64% by the fourth quarter. Our expectations around
gross margin improvement drive our expectations around earnings per
share for 2007. We are now targeting full year non-GAAP earnings per
share of $1.35 to $1.40, excluding those items incurred in the first
quarter that are not deemed to be reflective of our ongoing operations,
but including the impact of stock-based compensation expense. Our new
earnings target reflects growth over our comparable 2006 non-GAAP
earnings of 36% to 41%. We are very focused on driving performance
improvement and margin expansion as quickly as possible with the
objective of exceeding this new range of expectation. We intend to
update our full year outlook as the year progresses and we believe that
there could be upside to our current range of expectation to the extent
our performance improvement initiatives deliver results faster or
greater than the amounts built into our current forecast. We also expect
sequential margin improvement to continue into 2008, contributing, along
with continued revenue growth and reduced interest expense due to debt
repayment, to our expectation for strong double-digit earnings growth in
2008.
“Because the second calendar quarter is
seasonally slower than the first quarter, we target only modest
sequential growth in our average daily revenues for the second quarter.
We expect the second quarter of 2007, which contains 64 shipping days,
the same number of days as in the first quarter, to generate revenues of
approximately $116 million.”
Conference Call Information
DJO has scheduled a conference call to discuss this announcement
beginning at 1:00 PM, Eastern Time today, May 8, 2007. Individuals
interested in listening to the conference call may do so by dialing
706-634-0177, using the reservation code 5523897. A telephone replay
will be available for 48 hours following the conclusion of the call by
dialing 706-645-9291 and using the above reservation code. The live
conference call also will be available via the Internet at www.djortho.com,
and a recording of the call will be available on the Company’s
website.
About DJO Incorporated
DJO Incorporated is a global provider of solutions for musculoskeletal
and vascular health, specializing in rehabilitation and regeneration
products for the non-operative orthopedic, spine and vascular markets.
Marketed under the Aircast®, DonJoy®
and ProCare® brands, the Company’s
broad range of over 700 rehabilitation products, including rigid knee
braces, soft goods and pain management products, are used in the
prevention of injury, in the treatment of chronic conditions and for
recovery after surgery or injury. The Company’s
regeneration products consist of bone growth stimulation devices that
are used to treat nonunion fractures and as an adjunct therapy after
spinal fusion surgery. The Company’s vascular
systems products help prevent deep vein thrombosis and pulmonary
embolism that can occur after orthopedic and other surgeries. Together,
these products provide solutions throughout the patient’s
continuum of care. The Company sells its products in the United States
and in more than 70 other countries through networks of agents,
distributors and its own direct sales force. Customers include
orthopedic, podiatric and spine surgeons, orthotic and prosthetic
centers, third-party distributors, hospitals, surgery centers, physical
therapists, athletic trainers, other healthcare professionals and
individual and team athletes. For additional information on the Company,
please visit www.djortho.com.
Safe Harbor Statement
This press release contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934. Such statements relate to, among
other things, the Company’s revenue and
earnings guidance for 2007. The words “believe,”
“should,” “expect,”
“intend,” “estimate”
and “anticipate,”
variations of such words and similar expressions identify
forward-looking statements, but their absence does not mean that a
statement is not a forward-looking statement. These forward-looking
statements are based on the Company’s current
expectations and are subject to a number of risks, uncertainties and
assumptions. The Company undertakes no obligation to update any
forward-looking statements, whether as a result of new information,
future events or otherwise. Among the important factors that could cause
actual results to differ significantly from those expressed or implied
by such forward-looking statements are risks related to the successful
execution of the Company’s business
strategies relative to its Domestic Rehabilitation, Regeneration and
International businesses; the realization of substantial operational
synergies from the integration of Aircast’s
administrative, manufacturing and distribution operations into the
Company’s existing operations in Vista,
Mexico and Indianapolis respectively; the successful combination of the
Company’s and Aircast’s
respective operations in several countries in Europe; the realization of
expected revenue synergies from the Aircast product lines; the success
of the Company’s performance improvement
initiatives designed to improve gross profit margins and reduce
operating expenses; the continued growth of the markets the Company
addresses; the impact of potential reductions in reimbursement levels by
Medicare and other governmental and commercial payors; the Company’s
ability to successfully develop, license or acquire, and timely
introduce and market new products or product enhancements; the Company’s
dependence on orthopedic professionals, agents and distributors for
marketing its products; the Company’s
dependence on third-party agents to manage insurance billing and
collections; risks relating to the Company’s
international operations; resources needed and risks involved in
complying with government regulations and in developing and protecting
intellectual property; and the effects of healthcare reform, Medicare
competitive bidding, managed care and buying groups on the prices of the
Company’s products. Other risk factors are
detailed in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2006, filed on March 1, 2007,
with the Securities and Exchange Commission.
DJO Incorporated
Unaudited Condensed Consolidated Statements of Income
(In thousands, except per share data and number of operating days)
Three Months Ended
March 31,
2007
April 1,
2006
Net revenues
$ 114,898
$ 82,563
Costs of goods sold (A),(B)
47,426
31,709
Gross profit
67,472
50,854
Operating expenses:
Sales and marketing (A),(B)
35,955
26,535
General and administrative (A),(B)
12,377
9,024
Research and development (B)
2,169
1,849
Amortization of acquired intangibles
4,489
1,634
Total operating expenses
54,990
39,042
Income from operations
12,482
11,812
Interest expense and other, net (A)
(5,676)
(1,120)
Income before income taxes
6,806
10,692
Provision for income taxes
(2,811)
(4,711)
Net income
$ 3,995
$ 5,981
Net income per share:
Basic
$ 0.17
$ 0.27
Diluted
$ 0.17
$ 0.26
Non-GAAP diluted net income per share (excluding the impact of
purchase accounting adjustments to write up acquired inventories
to fair value, certain other charges and expenses related to
acquisitions, costs related to a litigation settlement and the
write-off of previously deferred expenses related to a
discontinued acquisition)
$ 0.23
$ 0.28
Weighted average shares outstanding used to
calculate per share information:
Basic
23,407
22,329
Diluted
23,963
23,194
Number of operating days
64
64
(A) Includes purchase accounting adjustments to write up
acquired inventories to fair value, certain other charges and
expenses related to acquisitions, costs related to a litigation
settlement and the write-off of previously deferred expenses related
to a discontinued acquisition, as follows (C):
Gross profit
$ 2,067
$ 613
Sales and marketing
-
107
General and administrative
550
131
Interest expense and other, net
-
91
$ 2,617
$ 942
(B) Includes stock-based compensation expense, as follows (C):
Gross profit
$ 268
$ 131
Sales and marketing
1,108
881
General and administrative
902
639
Research and development
122
105
$ 2,400
$ 1,756
(C) See reconciliation of non-GAAP financial measures in
table at end of press release.
DJO Incorporated
Unaudited Condensed Consolidated Balance Sheets
(In thousands)
March 31,
December 31,
Assets
2007
2006
Current assets:
Cash and cash equivalents
$ 7,545
$ 7,006
Accounts receivable, net
95,744
90,236
Inventories, net
46,964
47,214
Deferred tax asset, current portion
10,799
10,797
Prepaid expenses and other current assets
14,059
14,521
Total current assets
175,111
169,774
Property, plant and equipment, net
31,815
32,699
Goodwill, intangible assets and other assets
445,342
447,610
Deferred tax asset
17,824
18,251
Total assets
$ 670,092
$ 668,334
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and other accrued liabilities
$ 58,026
$ 66,331
Long-term debt, current portion
1,661
831
Total current liabilities
59,687
67,162
Long-term debt, less current portion
325,589
326,419
Accrued pension
90
201
Other long-term accrued liabilities
4,691
4,283
Total stockholders’ equity
280,035
270,269
Total liabilities and stockholders’ equity
$ 670,092
$ 668,334
DJO Incorporated
Unaudited Segment Information
(In thousands, except number of operating days)
Three Months Ended
Revenues per Day
March 31,
April 1,
March 31,
April 1,
2007
2006
2007
2006
Net revenues:
Domestic Rehabilitation
$ 71,770
$ 53,711
$ 1,121
$ 839
Regeneration
17,579
15,974
275
250
International
25,549
12,878
399
201
Consolidated net revenues
114,898
82,563
$ 1,795
$1,290
Gross profit:
Domestic Rehabilitation
35,289
29,132
Regeneration
16,302
14,831
International
15,881
6,891
Consolidated gross profit (1)
67,472
50,854
Income from operations:
Domestic Rehabilitation
6,918
10,501
Regeneration
4,611
3,704
International
5,531
1,222
Income from operations of reportable segments (2)
17,060
15,427
Expenses not allocated to segments (3)
(4,578)
(3,615)
Consolidated income from operations
$ 12,482
$ 11,812
Number of operating days
64
64
(1) GAAP consolidated gross profit for the three months
ended March 31, 2007 and April 1, 2006, includes:
Three Months Ended
Three Months Ended
March 31, 2007
April 1, 2006
Domestic Rehab
Regeneration
International
Domestic Rehab
Regeneration
International
GAAP gross profit
$ 35,289
$ 16,302
$ 15,881
$ 29,132
$ 14,831
$ 6,891
Certain charges and expenses related to acquisitions
2,004
-
63
-
-
613
Non-GAAP gross profit (excluding the impact of certain charges
related to acquisitions)
$ 37,293
$ 16,302
$ 15,944
$ 29,132
$ 14,831
$ 7,504
(2) GAAP income from operations of reportable segments for
the three months ended March 31, 2007 and April 1, 2006, includes:
Three Months Ended
Three Months Ended
March 31, 2007
April 1, 2006
Domestic Rehab
Regeneration
International
Domestic Rehab
Regeneration
International
GAAP income from operations of reportable segments
$ 6,918
$ 4,611
$ 5,531
$ 10,501
$ 3,704
$ 1,222
Certain other charges and expenses related to acquisitions and costs
related to a litigation settlement
2,004
-
63
-
-
851
Non-GAAP income from operations of reportable segments (excluding
the impact of certain charges related to acquisitions and costs
related to a litigation settlement)
$ 8,922
$ 4,611
$ 5,594
$ 10,501
$ 3,704
$ 2,073
(3) Expenses not allocated to segments for the three months
ended March 31, 2007 includes $0.6 million of costs related to a
litigation settlement.
DJO Incorporated
Unaudited Reconciliation of Non-GAAP Financial Measures
(In thousands, except per share data)
In managing its business, the Company makes use of certain non-GAAP
financial measures in evaluating the Company's results of operations.
The events giving rise to the purchase accounting adjustments to
write up acquired inventories to fair value and certain other
charges and expenses related to the Axmed and Aircast acquisitions,
costs related to a litigation settlement and the write-off of
previously deferred expenses related to a discontinued acquisition
are not associated with the Company's normal operating business.
The Company also records significant non-cash stock-based
compensation expense and non-cash amortization expense related to
intangible assets acquired.
The Company believes disclosure of non-GAAP gross profit, non-GAAP
income from operations, non-GAAP earnings and adjusted EBITDA has
economic substance because the expenses excluded from these measures
represent non-cash expenditures, or relate to transactions that are
variable in nature between reporting periods and are not associated
with the Company's normal operating business.
The Company believes that presenting non-GAAP diluted earnings per
share, excluding the impact of purchase accounting adjustments to
write up acquired inventories to fair value, certain other charges
and expenses related to acquisitions, costs related to a litigation
settlement and the write-off of previously deferred expenses related
to discontinued acquisitions, and adjusted EBITDA are additional
measures of performance that investors can use to compare operating
results between reporting periods. The Company defines Adjusted
EBITDA as earnings before interest, taxes, depreciation,
amortization, stock-based compensation expense, purchase accounting
adjustments to write up acquired inventory to fair value, certain
other charges and expenses related to acquisitions, costs related to
a litigation settlement and the write-off of previously deferred
expenses related to a discontinued acquisition. Management of the
Company uses non-GAAP information internally in planning,
forecasting and evaluating the Company's results of operations in
the current period and in comparing it to prior periods. The Company
also uses these non-GAAP measures in evaluating management
performance for compensation purposes. The Company believes that
this information also provides investors better insight in
evaluating the Company's earnings performance from core operations
and provides consistency in financial reporting.
DJO Incorporated
Unaudited Reconciliation of Non-GAAP Financial Measures continued
(In thousands, except per share data)
The measure, "Non-GAAP gross profit" is reconciled with GAAP gross
profit in the table below:
Three Months Ended
March 31,
2007
April 1,
2006
GAAP gross profit
$ 67,472
$ 50,854
Purchase accounting adjustments to write up acquired inventories to
fair value and certain other charges and expenses related to
acquisitions
2,067
613
Non-GAAP gross profit (excluding the impact of purchase accounting
adjustments to write up acquired inventories to fair value and
certain other charges and expenses related to acquisitions)
$ 69,539
$ 51,467
The measure, “Non-GAAP operating income”
is reconciled with GAAP operating income in the table below:
Three Months Ended
March 31,
2007
April 1,
2006
GAAP operating income
$ 12,482
$ 11,812
Purchase accounting adjustments to write up acquired inventories to
fair value, certain other charges and expenses related to
acquisitions and costs related to a litigation settlement
2,617
851
Non-GAAP operating income (excluding the impact of purchase
accounting adjustments to write up acquired inventories to fair
value, certain other charges and expenses related to acquisitions
and costs related to a litigation settlement)
$ 15,099
$ 12,663
The measure, “Non-GAAP net income”
is reconciled with GAAP net income in the table below:
Three Months Ended
March 31, 2007
April 1,
2006
GAAP net income
$ 3,995
$ 5,981
Purchase accounting adjustments to write up acquired inventories to
fair value, certain other charges and expenses related to
acquisitions and costs related to a litigation settlement, net of tax
1,570
509
Write-off of previously deferred expenses related to a discontinued
acquisition, net of tax
-
55
Non-GAAP net income (excluding the impact of purchase accounting
adjustments to write up acquired inventories to fair value, certain
other charges and expenses related to acquisitions, costs related to
a litigation settlement and write-off of previously deferred
expenses related to a discontinued acquisition)
$ 5,565
$ 6,545
DJO Incorporated
Unaudited Reconciliation of Non-GAAP Financial Measures continued
(In thousands, except per share data)
The measure, "Non-GAAP diluted net income per share" is reconciled
with GAAP net income in the table below:
Three Months Ended
March 31,
2007
April 1,
2006
GAAP diluted net income per share
$ 0.17
$ 0.26
Purchase accounting adjustments to write up acquired inventories to
fair value, certain other charges and expenses related to
acquisitions, costs related to a litigation settlement and write-off
of previously deferred expenses related to a discontinued
acquisition, net per share
0.06
0.02
Non-GAAP diluted net income per share (excluding the impact of
purchase accounting adjustments to write up acquired inventories to
fair value, certain other charges and expenses related to
acquisitions, costs related to a litigation settlement and write-off
of previously deferred expenses related to a discontinued
acquisition)
$ 0.23
$ 0.28
The measure, “Adjusted EBITDA”
is reconciled with GAAP net income in the table below:
Three Months Ended
March 31,
2007
April 1,
2006
GAAP net income
$ 3,995
$ 5,981
Plus:
Interest expense, net of interest income
5,877
981
Provision for income taxes
2,811
4,711
Depreciation and amortization
7,737
3,860
Stock-based compensation expense, net of tax
2,400
1,756
Purchase accounting adjustments to write up acquired inventories to
fair value, certain other charges and expenses related to
acquisitions and costs related to a litigation settlement
2,617
851
Write-off of previously deferred expenses related to a discontinued
acquisition
-
91
Adjusted EBITDA (excluding the impact of purchase accounting
adjustments to write up acquired inventories to fair value,
certain other charges and expenses related to acquisitions, costs
related to a litigation settlement and write-off of previously
deferred expenses related to a discontinued acquisition)
$ 25,437
$ 18,231