EMPI Files for IPO
BY JOHN MCCORMICK, APRIL 5, 2004
The IPO market for orthopedic and related companies is clearly heating up this year. Witness the recent offerings from NuVasive and dj Orthopedics. Now St. Paul, MN based orthopedic rehabilitation company EMPI, Inc. has just filed its Registration Statement with the Securities and Exchange Commission. EMPI sells electrotherapy, rehabilitation and orthotics devices such as TENS devices (for pain management), NMES devices (used to restore and maintain muscle function) and non-invasive drug delivery systems to physical therapy clinics and HMO's.
This offering is the outcome of a classic leveraged buyout (LBO) and recapitalization by the Carlyle Group which took the company private in 1999. The company had been trading on NASDAQ for nearly 20 years prior to the LBO. The Carlyle Group, through affiliates, owns more than 90% of the outstanding shares, but EMPI will use the proceeds of the offering to pay down its debts and for general corporate purposes, according to the filing. If one reads between the lines, the debts being paid off result from the company borrowing heavily last November to create a $58 million payout to shareholders and a $5 million special bonus for management.
We should take heart because during the course of the LBO, revenues nearly doubled from $76 million when Carlyle bought the company to over $150 million in calendar year 2003. That's an impressive number for this slower growth, price-competitive area of the orthopedics world, despite acquisitions aiding EMPI along. While the company has been experiencing rock solid and stable revenue increases during Carlyle's ownership tenure, it is clear to any reader of the S-1 statement that gross margins decline like clockwork every year. In 1999 gross margins were over 75% and today they are around 67%.
Luckily for the shareholders, management has been able to hold operating margins in the mid-20's range. Of course, cuts in research and development in both absolute dollar and percentage terms have contributed to the fairly robust operating margins and operating income growth. For the record, R&D stands at approximately 1.3% of revenues - well below the orthopedic industry average of approximately 5.5%. After all, bank interest should always take precedent to a company's long term competitiveness especially when gross margins are declining every year and revenue growth in the core pain management product lines are sluggish. To be fair, the gross margin decline, according to management, is attributable to an increase in sales of catalog and lower margin products and no one should be surprised that profitability and revenue growth have also been challenged by declines in reimbursement rates.
Perhaps it is a good thing that the company is delivering its balance sheet and fewer precious operating income dollars can be dedicated to interest so management crank up the R&D engine for the sake of the company's long-term competitiveness. Then again, the banks are about to replaced by those demanding public shareholders who are looking for quarterly increases in EPS versus increases in R&D.
