Integra Lifesciences Holdings Corp (IART) 2007 Q1 法說會逐字稿

Good day, everyone, and welcome to the Integra LifeSciences 2007 first quarter earnings conference call. As a reminder today's call is being recorded. At this time I would like to turn the call over to Mr. Stuart Essig, President and Chief Executive Officer. Please go ahead,

Thank you. Good morning, everyone, and thank you for joining us for the Integra LifeSciences first quarter 2007 earnings release conference call. I am Stuart Essig, President and Chief Executive Officer. Joining me today are Maureen Bellantoni, Chief Financial Officer and Gerry Carlozzi, Chief Operating Officer. Jack Henneman, our Chief Administrative Officer, is visiting LXU Healthcare today and could not be on the call. During this call we will review our financial results for the first quarter of 2007 which we released this morning. And we will update our forward-looking guidance for 2007 and 2008. At the conclusion of our prepared remarks we will take questions from members of the telephonic audience. Before we Began, Maureen Bellantoni will make some remarks regarding the contents of this conference call.

This presentation is open to the general public and can be heard through telephone access or via a live webcast. A replay of the conference call will be accessible starting one hour after the conclusion of the live event. Access to the replay is available through May 23, 2007 by dialing 719-457-0820, access code 7954405, or through the webcast accessible on the Investor Relations page of our website.

Today's call is a proprietary presentation of Integra LifeSciences Holdings Corporation and is being recorded by Integra. No recording, reproduction, transcript, transmission or distribution of today's presentation is permitted without Integra's consent. Because the content of this call is time-sensitive the information provided is accurate only as of the date of this live broadcast, May 9, 2007. Unless otherwise posted or announced by Integra, the information in this call shall not be relied upon beyond May 23, 2007, the last day that an archived replay of the call authorized by Integra will be available.

Certain statements made during this call are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Among others, statements concerning management's expectations of future financial results, new product launches and regulatory approval and market acceptance of these new products, future product development programs and potential business acquisitions are forward-looking. Forward-looking statements involve risk and uncertainties that could cause actual results to differ materially from predicted results. For a discussion of such risks and uncertainties please refer to the risk factors included in the business section of Integra's annual report on form 10-K for the year ended December 31, 2006 and to information contained in our subsequent filings with the Securities and Exchange Commission.

These forward-looking statements are made based upon our current expectation, and we undertake no duty to update information provided during this call. Certain non-GAAP financial measures are disclosed in this presentation. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures is provided in the press release we issued this morning, which is available on our website in the press release section under Investor Relations. Additionally in this press release and in the current report on form 8-K that we filed today, we provide explanations for why management believes the presentation of these non-GAAP financial measures provides useful information to investors regarding Integra's financial condition and results of operations, and the reasons for which Integra's management uses the non-GAAP financial measures.

I will now turn the call over to Stuart to review the highlights of the quarter.

Thank you, Maureen. The first quarter of 2007 demonstrates continued positive momentum in our revenue growth with revenues exceeding the high end of our guidance range. Total revenues in the first quarter of 2007 increased by $45.9 million to $123 million, a 60% increase over the first quarter of 2006. Revenues from productlines acquired during 2006 totaled $34.7 million. Our neural Ortho implant revenues in the first quarter increased over the prior year period by 28%. Sales of our DuraGen family of products, extremity reconstructive implants and bone growth products led revenue growth in this category. In particular, sales of DuraGen and the Newdeal family of products showed strong growth of approximately 25%. Products acquired since the beginning of 2006 contributed $2.4 million.

Revenues from our medical/surgical equipment productlines increased over the prior year period by 88%. Acquired products contributed $32.3 million to revenue this quarter as compared to $3.4 million a year ago. Sales of monitoring and neurosurgical systems products were particularly strong. International sales were 26% of total sales this quarter compared to 25% in the year ago quarter, and 24% for the full-year 2006. Given the strength of our U.S. business this change reflects the positive impact of our recent expansion of our international sales infrastructure. Foreign exchange impacted revenues by a positive $1.6 million.

During the first quarter when announced the acquisition of the Dentalite productline from Welch Allyn and our intent to acquire LXU Healthcare, which we closed earlier this week. I will discuss its financial impact later in the call. I will now turn the presentation back over to Maureen Bellantoni who will provide more information regarding our cash flows, operating expenses, interest expense and income tax rate.

Thank you, Stewart. We continue to generate substantial cash flow from our operations. In the first quarter of 2007 our operating cash flows were $15.3 million. We have used these strong cash flows to fund both acquisitions and share repurchases. Our share repurchases of over $130 million over the last two years have allowed us to continue to grow earnings per share faster than net income. Gross margin on total revenues in the first quarter of 2007 were 60.5%. This was a sequential improvement of one percentage point. We continue to anticipate gross margins of 61.5% for the full-year 2007.

Research and development expense increased by $2.9 million to $6.1 million in the first quarter of 2007. Selling, general and administration expense increased by $18 million to $49.1 million in the first quarter of 2007, or 40% of revenue consistent with the first quarter of 2006. SG&A increased over the fourth quarter primarily as a result of increased selling expenses. Let me expand on this point. Given the strength of the fourth quarter 2006 revenues, we accelerated the ramp up in our extremities reconstructive, intensive care unit specialists and spine sales forces. Indeed we are now ahead of our plan in hiring with approximately 75 reconstructive and 24 ICU specialists in the field and 20 spine sales people on board and driving sales of DuraGen Set Plus, and our recently launched Integra Mozaik bone graft substitute.

As we discussed on the last earnings call we expected to invest significantly in our sales organization in the first half of 2007. We added over 30 people to our sales force in the fourth quarter of 2006 and an additional 15 in the first quarter of 2007. We are pleased that we have gotten past the steep part of that ramp. From current levels we expect sales force headcount to remain steady throughout the year. This should give us strong margin leverage as our sales force matures and drive (inaudible) revenues for the remainder of the year. SG&A as a percent of revenue should decrease throughout the remainder of the year.

We are targeting SG&A expense at 36 to 38% and R&D at approximately 5 to 5.5% of total revenues for 2007. Operating income was $16.5 million for the first quarter, up $2.9 million from the first quarter of 2006. Our expense for the amortization of intangible assets was $3.5 million in the quarter of which $800,000 is included in the cost of product revenue. We expect total amortization expense to be approximately $3.8 million per quarter through the end of 2007 of which $900,000 will be reported in cost of product revenue.

In the first quarter of 2007 we recorded $2.5 million of net interest expense. Our effective income tax rate was 34% for the quarter. We continue to expect an effective income tax rate of approximately 34% for 2007. Before I discuss earnings I would like to remind you that we are no longer adjusting our earnings for the effects of FAS 123(R). To facilitate comparisons we have presented in our press release the first quarter 2006 adjusted earnings per share with only (technical difficulty) the FAS 123(R) adjustment.

We reported net income of $9.1 million or $0.30 per diluted share for the first quarter of 2007. When adjusted for certain restructuring related expenses and other charges, net income for the first quarter of 2007 was $9.8 million or $0.33 per diluted share. For comparison our first quarter 2006 adjusted earnings per share was $0.31. The weighted average common shares outstanding using the calculation of diluted earnings per share on the first quarter of 2007 were approximately 30 million shares.

At the end of March our cash totaled $29.3 million, and we had outstanding borrowings of $100 million under our $300 million credit facility. Cash uses in the second quarter will include approximately $30 million for the purchase of the LXU Healthcare business. These funds will come from our line of credit and cash on hand.

And now let me turn the presentation back over to Stuart.

Thank you, Maureen. Before commenting on guidance I would like to talk about the acquisition that we recently closed. LXU Healthcare, which we acquired this week for approximately $30 million in cash, is the leading manufacturer of fiber-optic headlamps for the operating room. LXU employs approximately 140 employees and will be operated as part of our Jarit instruments business. This acquisition provides Integra with yet another market leading product for the operating room.

Additionally, the combination of Luxtec light sources and Jarit surgical retraction systems provides our customers with outstanding operative site illumination and visibility. In addition to the Luxtec surgical headlamp manufacturing operation, LXU has two other businesses, the larger of the two LXU Medical, is a leading specialty surgical products distributor and has a direct sales force calling on surgeons and key clinical decision-makers. This sales force will allow us to further position Jarit's growing line of specialty surgical instrumentation directly to the end-user. This acquisition represents an excellent strategic fit for Integra. It provides significant growth opportunities for the Jarit and LXU Medical sales teams by leveraging our combined strength and leading brand names within the surgical community.

LXU also comes with a strong management team that we are pleased to welcome into the Integra family. We expect LXU to add an additional $19 million to 2007 revenues primarily in the third and fourth quarters. In the second quarter we expect a contribution of approximately $4 million. Total revenues in 2007 are now expected to be between $533 million and $542 million. For 2008 we are now anticipating revenues of $600 million to $620 million. As always, our guidance does not reflect the acquisitions that have not yet closed.

Our adjusted earnings per share guidance excludes certain acquisition and restructuring charges that we expect to incur in conjunction with the closing of the LXU acquisition. Further details are outlined in our press release issued this morning. Consistent with our reporting of adjusted earnings per share for the first quarter of 2007, our forward-looking guidance does not include any adjustments related to FAS 123(R). GAAP earnings per share guidance for 2007 is $1.63 to $1.73 per share. Our adjusted earnings per share guidance for 2007 has adjusted for the anticipated restructuring charges detailed in the financial tables in our press release, is at $1.70 to $1.80 per share. 2008 GAAP and adjusted earnings per share expected to be $2.05 to $2.25.

In 2007 we expect to incur approximately $2 million of acquisition integration-related costs including $1.25 million of inventory purchase accounting charges in connection with the LXU acquisition. These charges are reflected in our GAAP guidance. We do not expect the LXU acquisition to impact adjusted earnings per share in 2007 or 2008 as we expect to invest in the incremental profit contribution into the growing combined instrument business.

The significant investment Integra is making in sales, marketing and product development has been paying off in increased internal growth. Our acquisition strategy serves to buttress this investment and accelerate the pace of change. We are excited about the continued benefit that this will bring to our customers, employees and shareholders. This concludes our prepared remarks. I will be happy to answer all of your questions. Operator, you may turn the call over to our participants.