dj Orthopedics (NYSE: DJO) Earns $0.19 for 1Q:04
BY JOHN MCCORMICK, MAY 3, 2004
It would seem that the theme of DJO's first quarter financial results announced on Wednesday was new, new and' new. The Company captured the benefits of a new division, gained new contracts, introduced new products and is building a new manufacturing facility.
New Division
On DJO's conference call with investors last week, revenues were reported up 32% to $62.2 million for 1Q:04 compared to $47.1 million for 1Q:03. This was the first quarter that includes the full effect of the acquisition of the bone growth stimulation business purchased from OrthoLogic, now called Regentek, so management gave analysts a key pro-forma revenue growth statistic: on an 'average sales per day' basis pro-forma revenue growth was 10%. In plain English, the company measured its year-over-year performance 'as if' it had a bone growth stimulation business a year ago with a normalized number of shipping days. The overall 10% statistic suggests an improvement over the Company's prior annual revenue growth of about 8%. We note that under DJO's ownership, Regentek's year-over-year revenue growth was 17.2%, slightly above its 15% growth rate as a stand alone company prior to the acquisition. We also note that all other divisions grew at 6.3% which is slightly higher than market growth, but not a breakaway from prior performance when DJO didn't have bone growth stimulation products. The signals are clear that Regentek is having a positive impact on the business. The Company earned $0.19 per share for the quarter. The EPS number takes into account the 3.2 million primary share issuance in January.
New Contracts
DJO showed some real advancements this quarter in terms of new contracts. The Company signed a new contact with Kaiser for a number of their products in bone growth stimulation and knee, elbow and shoulder braces. Two important things here: First, this includes osteoarthritis knee braces which is the one remaining major bracing category where DJO is, in fact, not the market leader. Getting a contract of this nature should put competitors like Generation-II on notice. Second, management announced on Wednesday that DJO's Regentek division also obtained a contract to sell the Regentek, OL-1000 and Spinalogic products to Kaiser effective May 1. Obtaining the largest non-profit hospital in the United States with over 8 million lives is a significant positive. Although we note that DJO's major competitor, Orthofix, announced that their BREG unit signed up with Kaiser in March. In addition, the OfficeCare division added 39 new accounts which should help this now profitable division make up for some of the reimbursement challenges it has been facing recently.
New Products
Consistent with the Company's stated aims of upgrading product development, several new products were showcased at AAOS this year, including the Defiance III Custom rigid knee brace for athletes, the new DonJoy Custom Montana2 OA custom and OA Everyday off-the-shelf osteoarthritis braces, the MaxTrax walker boots (an alternative to casting), and the Lehrman shoulder brace and the DonJoy Pain Control Devices. Such an aggressive product development approach makes sense since fewer and fewer stand-alone bracing companies can be bought cheaply given last year's spate of acquisitions in the industry. The Company, has held R&D expenses at a steady 2.2% of revenues which is consistent with 2003 expenditures, but significantly up from the prior year. We note that, while not strictly comparable, DJO's R&D spending lags behind competitor Orthofix which spent $3.3 million on R&D for the first quarter of 2004 or 4.7% of its revenues.
New Manufacturing Facility
Despite the DJO's having achieved a considerable gross margin improvement from its successful move to Mexico (59.5% to 62.5% 1Q year over year on a pro-forma basis), the Company is going forward with a new 200,000 square foot manufacturing facility in Mexico which should be occupied in the third quarter of this year, although it is not clear to us when production will start.
In addition, DJO's CEO could not have made it clearer on their Wednesday call, that the Company will be calling its onerous $75 million Senior Sub Notes this June. This debt is a residual from the Company's LBO which occurred several years ago. Including a 6.3% call premium, the redemption amount is $79.7 million and should result in $10 million of interest savings per year. Given the Company's expected $260 million of revenue in 2004, it looks to us like the DJO is fired up on all cylinders.
