DJ Orthopedics reports 28% revenue increase for third quarter
BY JOHN MCCORMICK, NOVEMBER 3, 2004
Last week, dj Orthopedics (NYSE:DJO) announced that net revenues for 3Q:04 rose 27.9 percent to $62.5 million, compared with net revenues of $48.9 million reported in 3Q:03. Revenues were therefore below the consensus estimate of $63.1 million. Of course, the critical measure is pro forma revenue growth (that is to say 'as if' the bone growth stim business was owned by DJO in 3Q:03). Pro forma revenue growth for the quarter was, in fact, only 1.9 percent compared to the prior year. Luckily, a few weeks ago, management pre-announced that it was going to be a light quarter and these results were already priced into the stock.
In terms of earnings, if we exclude the impact of $2.1 million in restructuring charges related primarily to integration activities of the bone growth stim (RegentekTM) business, net income for 3Q:04 was $5.9 million, or $0.26 per share, which represents an increase of 62.5 percent compared with net income of $3.6 million, or $0.19 per share, reported in 3Q:03. Once again, if we consider a pro forma approach, net income increased 18.5 percent in 3Q:04 compared to pro forma net income of $5.0 million, or $0.26 per share, for 3Q:03. EPS growth is flat on a pro forma basis, but it did beat the Street estimate of $0.24, however. Reported net income for the 3Q:04, including the impact of the restructuring charges, was $4.7 million, or $0.20 per share.
Although management executed a substantial turnaround of the business in 2003, this is a new day with a new set of challenges. The integration of a new business (bone growth stim) outside of the core product line (bracing) is different from the prior turnaround. The prior turnaround was a headcount reduction and a successful shift of manufacturing facilities from California to Mexico. This new effort relies more on management's ability to integrate and grow the RegentekTM sales force into a bracing sales force in the face of what may be a systemic challenge to the bone growth product line. This going on while management is simultaneously redoing its manufacturing facilities, yet again. Although prior manufacturing improvements have done wonders for DJO's gross margin, the soul searching question for DJO is really about the bone growth stimulation issue. Will the recent excitement over the Charit' artificial disc and other alternatives such as BMPs lead doctors and patients away from fusion and electrical bone stimulation? We note that RegentekTM revenue declined 7% on a year-over-year basis driven largely by lackluster Spine sales. That is the core issue the Company has to face in the near term and quite possibly the long run as well.
