PLMD Polymedica Corp (MM)

PolyMedica Corporation (NASDAQ: PLMD): Highlights: Revenues for the second quarter of fiscal 2007 were $164.1 million, a 41% increase over the prior year quarter and an increase of 5% over the first quarter; Earnings per share, including stock-based compensation expense of $0.08 per share, were $0.34, representing a 36% sequential increase over $0.25 reported in the first quarter; Thus far during the fiscal year, the Company has acquired certain assets of nine diabetes companies serving approximately 57,000 patients, including six acquisitions completed in the second quarter; Pharmacy revenue was $47.4 million, an increase of 125% over the prior year quarter and an increase of 13% over the first quarter; To date, the Company�s investment in the Medicare Prescription Drug Program (Part D) initiative has resulted in offering prescription drug services to approximately 85,000 patients, and The Company enters into a pharmacy fulfillment agreement with Medco Health Solutions, Inc. PolyMedica Corporation (NASDAQ: PLMD) today reported revenue growth of 41% to $164.1 million in the second fiscal quarter of 2007, compared with $116.4 million for the same period last year. Income from continuing operations, net of taxes, for the quarter was $8.0 million, or $0.34 per diluted share, compared sequentially with $0.25 per diluted share for the previous quarter. The Company recognized $2.9 million of pre-tax stock-based compensation expense ($1.9 million after taxes, or $0.08 per diluted share) during the second quarter of fiscal 2007. Excluding the impact of stock-based compensation expense, earnings per share were $0.42 compared with $0.33 in the first quarter of fiscal 2007. Earnings per share in the second quarter of fiscal 2006 were $0.40. Commenting on the Company�s quarterly results, President and Chief Executive Officer Patrick Ryan said, �This quarter was an important first step for the Company as we started to translate our revenue growth over the past several quarters into meaningful earnings growth. The Company�s decision to focus on our core diabetes business and to invest in the Liberty Part D drug benefit program has resulted in 36% earnings per share growth from the previous quarter, and we have established a good foundation to continue revenue and earnings growth into the future. Our diabetes advertising programs achieved a $296 cost per patient this quarter, and, so far this year, we have acquired nine diabetes businesses that will contribute to consistent growth. In our pharmacy segment, new patient enrollment continues to exceed overall market growth. We are operating in a highly competitive market with sophisticated competitors, and our decision to enter into a fulfillment agreement with Medco will allow us to scale our operations to meet patient demand.� Mr. Ryan continued, �Our financial position remains strong. We successfully completed a $180 million convertible note offering this quarter that met our goals of reducing ongoing interest costs and enhancing shareholder value. In addition, as expected in connection with the Deficit Reduction Act, Medicare delayed $11.8 million in payments to us at the end of the quarter that we subsequently received in the first week of October. Despite the Medicare payment hold, we still had a strong A/R management quarter with A/R days at 58 at quarter end and cash flow of $21 million so far this year.� Results of Operations for the Second Quarter Net revenues: Three Months Ended ---------------------------- Sept. 30, Sept. 30, $ % (in thousands) 2006 2005 Change Change ------------- ------------- ------------- -------- Diabetes $ 116,697 $ 95,346 $ 21,351 22% Pharmacy 47,413 21,081 26,332 125% ------------- ------------- ------------- -------- Net revenues $ 164,110 $ 116,427 $ 47,683 41% ============= ============= ============= ======== Net revenues in the second quarter of fiscal 2007 increased 41% to $164.1 million compared with $116.4 million for the same period last year. Diabetes revenue increased $21.4 million, or 22%, from last year primarily due to the 7% increase in diabetes patients and the revenue generated from the fiscal 2006 acquisitions of National Diabetic Pharmacies (NDP) and IntelliCare. Pharmacy revenue increased $26.3 million, or 125%, from last year primarily due to the enrollment of approximately 76,000 patients through September 30, 2006, into the Liberty Part D drug benefit program, offset by a reduction in the Company�s historical cash pharmacy business. The provision for sales returns and allowances in the second quarter of 2007 was $3.5 million, or 2.1% of gross revenues, compared with $4.2 million, or 3.5% of gross revenues, in last year�s second quarter. The decrease in the amount and the percentage of sales returns and allowances to gross revenues this quarter was primarily attributable to the fiscal 2006 acquisitions of NDP and IntelliCare and the revenue growth of the Pharmacy segment, all of which generate a lower rate of sales returns and allowances. Gross Margin: Three Months Ended ------------------------ Sept. 30, Sept. 30, $ % (in thousands) 2006 2005 Change Change ----------- ----------- ----------- ----------- Diabetes $ 66,869 $ 55,644 $ 11,225 20% Pharmacy 9,089 7,330 1,759 24% ----------- ----------- ----------- ----------- Gross margin $ 75,958 $ 62,974 $ 12,984 21% =========== =========== =========== =========== Gross margin in the second quarter increased 21% to $76 million from $63 million for the same period last year. Diabetes gross margin increased $11.2 million and Pharmacy gross margin increased $1.8 million from last year. Gross margin was 46.3% of net revenues this quarter compared with 54.1% last year and 46.4% in the first quarter of fiscal 2007. Diabetes gross margin was 57.3% in the second quarter compared with 58.4% last year and 55.9% last quarter. The decrease in Diabetes gross margin from last year was primarily attributable to the increased revenues generated from the fiscal 2006 acquisitions of NDP and IntelliCare. These businesses report lower gross margin percentages than the Company�s historical Diabetes business. The second quarter increase in Diabetes gross margin from the first quarter was primarily due to the continued roll-out of the newest Liberty private-label blood glucose monitoring system. Pharmacy gross margin was 19.2% this quarter compared with 34.8% last year and 20.7% last quarter. The decrease in gross margin in the Pharmacy segment was due to the growth in net revenues attributable to the Liberty Part D drug benefit program that generates a lower product gross margin than the historical Pharmacy business. Selling, general and administrative expenses: Three Months Ended ------------------------ Sept. 30, Sept. 30, (in thousands) 2006 2005 ----------- ----------- Employee compensation $ 22,550 $ 19,886 Direct-response advertising amortization 12,053 10,487 Depreciation expense 2,562 1,912 Amortization of intangible assets 3,712 1,515 Provision for doubtful accounts 5,801 4,953 Stock-based compensation 2,939 408 Other 10,598 7,124 ----------- ----------- Selling, general and administrative expenses $ 60,215 $ 46,285 =========== =========== As a percentage of net revenues 36.7% 39.8% =========== =========== The $13.9 million increase in selling, general and administrative expense from last year related primarily to headcount and other costs associated with the fiscal 2006 acquisitions of NDP and IntelliCare, increased amortization expense from the thirteen diabetes companies acquired since September 30, 2005, an increase in the amortization of direct-response advertising, and the inclusion of stock-based compensation in the financial statements in fiscal 2007. SG&A expense, in dollars, was similar to the amount reported in the fiscal first quarter of 2007. As a percentage of revenue, SG&A expense in the second quarter was 36.7% compared to 39.8% last year and 38.7% last quarter. Other income and expense: Other income and expense increased $2.3 million from last year due to the higher level of debt outstanding during the period and a higher average interest rate. Compared to the first quarter, other income and expense increased $457,000, or 17%, primarily due to increased borrowings under the Credit Facility to fund several patient list acquisitions during the second quarter. The average borrowing rate under the credit facility was 6.9% in the second quarter compared to 6.5% in the first quarter. Results of Operations for the Six Months Ended September 30, 2006 Net revenues: Six Months Ended ------------------------ Sept. 30, Sept. 30, $ % (in thousands) 2006 2005 Change Change ----------- ----------- ----------- ----------- Diabetes $ 230,480 $ 178,516 $ 51,964 29% Pharmacy 89,519 40,439 49,080 121% ----------- ----------- ----------- ----------- Net revenues $ 319,999 $ 218,955 $ 101,044 46% =========== =========== =========== =========== Net revenues for the six months ended September 30, 2006, increased 46% to $320 million compared with $219 million for the same period last year. Diabetes revenue increased $52 million, or 29%, from last year due to the increase in patients and the fiscal 2006 acquisitions of National Diabetic Pharmacies and IntelliCare. Pharmacy revenue increased $49.1 million, or 121%, from last year due to the enrollment of approximately 76,000 patients through September 30, 2006, into the Liberty Part D drug benefit program. This was offset by a decrease in the cash pharmacy business. Gross Margin: Six Months Ended ------------------------ Sept. 30, Sept. 30, $ % (in thousands) 2006 2005 Change Change ----------- ----------- ----------- ----------- Diabetes $ 130,474 $ 106,617 $ 23,857 22% Pharmacy 17,817 13,811 4,006 29% ----------- ----------- ----------- ----------- Gross margin $ 148,291 $ 120,428 $ 27,863 23% =========== =========== =========== =========== Gross margin for the six months ended September 30, 2006, increased 23% to $148.3 million from $120.4 million for the same period last year and was due to the revenue growth in both the Diabetes and Pharmacy segments this year. Diabetes gross margin increased $23.9 million and Pharmacy gross margin increased $4 million from last year. Gross margin was 46.3% of net revenues compared with 55% last year with the decrease attributable to a higher percentage of revenues derived from the Pharmacy segment and revenues derived from the NDP and IntelliCare acquisitions, which generate lower gross margins. Diabetes gross margin was 56.6% compared with 59.7% last year and was primarily attributable to the revenue generated from the acquisitions in fiscal 2006 of NDP and IntelliCare. Pharmacy gross margin was 19.9% compared with 34.2% last year, and the decrease was due to the growth in net revenues attributable to the Liberty Part D drug benefit program that generates a lower gross margin than the historical pharmacy business. Selling, general and administrative expenses: Six Months Ended ------------------------ Sept. 30, Sept. 30, (in thousands) 2006 2005 ----------- ----------- Employee compensation $ 46,909 $ 37,551 Direct-response advertising amortization 23,695 20,418 Depreciation expense 5,076 3,792 Amortization of intangible assets 6,137 2,865 Provision for doubtful accounts 11,329 9,525 Stock-based compensation 5,953 579 Other 21,380 13,592 ----------- ----------- Selling, general and administrative expenses $ 120,479 $ 88,322 =========== =========== As a percentage of net revenues 37.7% 40.3% =========== =========== The $32.2 million increase in selling, general and administrative expense from last year related primarily to increased headcount to support the growth of the diabetes and pharmacy businesses, amortization expense and other general costs associated with the fiscal 2006 acquisitions of NDP and IntelliCare, the acquisitions of certain assets of 13 diabetes companies acquired since September 30, 2005, the inclusion of stock-based compensation in the financial statements in fiscal 2007 and an increase in direct-response advertising amortization. Balance Sheet and Cash Flow Highlights The Company�s cash flows for the six months ended September 30, 2006 and 2005, included the following: Six Months Ended ------------------------ Sept. 30, Sept. 30, $ 2006 2005 Change ----------- ----------- ----------- Summary Cash Flow Data: Cash flows from operating activities $ 20,977 $ 29,614 $ (8,637) Cash flows used for investing activities (31,602) (20,110) (11,492) Cash flows from (used for) financing activities 8,960 (21,428) 30,388 ----------- ----------- ----------- Net change in cash and cash equivalents (1,665) (11,924) 10,259 Beginning cash and cash equivalents 9,101 72,246 (63,145) ----------- ----------- ----------- Ending cash and cash equivalents $ 7,436 $ 60,322 $ (52,886) =========== =========== =========== Additional Cash Flow/Balance Sheet Data: Purchase of property, plant and equipment $ (5,004) $ (4,082) $ (922) Purchase of patient lists and other contracts (26,598) (5,210) (21,388) Direct response advertising expenditures (29,312) (29,612) 300 Proceeds from convertible note offering 180,000 - 180,000 Net purchase of derivative instruments (26,268) - (26,268) Repurchase of common stock (29,624) (151,233) 121,609 Net cash flow from credit facility (106,400) 135,000 (241,400) A/R days sales outstanding 58 56 Inventory days on hand 42 63 Accounts receivable days sales outstanding for the quarter were 58 days and consistent with the quarter ended June 30, 2006. As discussed last quarter, the Centers for Medicare and Medicaid Services (CMS) suspended all payments between September�22�30, 2006, and this resulted in an increase in accounts receivable of approximately $11.8 million, or six additional DSO days as of September 30, 2006. Inventory days as of September 30, 2006, increased six days to 42 days, compared with 36 days on June 30, 2006, with the increase due to an increase in Pharmacy purchases. Diabetes Patients Three Twelve Months Months Ended Ended Sept. 30, Sept. 30, 2006 2006 ----------- ----------- Diabetes patients, beginning balance 888,000 852,000 New diabetes patients from marketing programs 47,000 189,000 New diabetes patients from acquisitions 20,000 42,000 Patient attrition (42,000) (170,000) ----------- ----------- Diabetes patients as of September 30, 2006 913,000 913,000 =========== =========== Three Months Ended ------------------------------------- Sept. 30, June 30, Sept. 30, 2006 2006 2005 ----------- ----------- ----------- Acquisition cost per patient - Marketing $ 296 $ 336 $ 283 Conference Call and Replay PolyMedica management will host a conference call and live webcast today, Tuesday, November�7, 2006, at 11:00 a.m. Eastern time to discuss the Company�s financial results. The number to call for this interactive conference call is 1-888-313-7044. A 90-day online replay will be available beginning approximately one hour following the conclusion of the live broadcast. A link to these events can be found on the Company�s website at www.polymedica.com or at www.earnings.com. About PolyMedica For more than a decade, PolyMedica Corporation has been the nation's largest provider of blood glucose testing supplies and related services to people with diabetes and today serves more than 913,000 active patients. The Company is expanding its portfolio of products and services, from patient education to prescription drugs, to help people better manage their conditions and maintain their health. Through proactive patient outreach, convenient home delivery and administrative support, PolyMedica makes it simple for patients to obtain the supplies and medications they need, while encouraging compliance with physicians� orders. More information about PolyMedica can be found on the Company�s website at www.polymedica.com. This press release contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those anticipated. Such risks and uncertainties include, but are not limited to, rules and regulations promulgated under the Act, unanticipated changes in Medicare reimbursement, successful participation in new reimbursement programs, outcomes of government reviews, inquiries, investigations and related litigation, continued compliance with government regulations, fluctuations in customer demand, management of rapid growth, competition from other healthcare product vendors, timing and acceptance of new product introductions, general economic conditions, geopolitical events and regulatory changes, as well as other especially relevant risks detailed in the Company�s filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the period ended March 31, 2006, and Quarterly Report on Form 10-Q for the period ended June 30, 2006. The information set forth herein should be read in light of such risks. The Company assumes no obligation to update the information contained in this press release. POLYMEDICA CORPORATION Consolidated Statements of Operations (In thousands, except per share amounts) Three Months Ended Six Months Ended ------------------------ ------------------------ Sept. 30, Sept. 30, Sept. 30, Sept. 30, 2006 2005 2006 2005 ----------- ----------- ----------- ----------- Net revenues $ 164,110 $ 116,427 $ 319,999 $ 218,955 Cost of sales 88,152 53,453 171,708 98,527 ----------- ----------- ----------- ----------- Gross margin 75,958 62,974 148,291 120,428 Selling, general and administrative expenses 60,215 46,285 120,479 88,322 ----------- ----------- ----------- ----------- Income from continuing operations 15,743 16,689 27,812 32,106 Other income and expense (3,214) (888) (5,971) (575) ----------- ----------- ----------- ----------- Income from continuing operations before income taxes 12,529 15,801 21,841 31,531 Income tax provision 4,573 5,735 7,972 11,516 ----------- ----------- ----------- ----------- Income from continuing operations, net of income taxes 7,956 10,066 13,869 20,015 ----------- ----------- ----------- ----------- Income from discontinued operations, net of income taxes - 21,429 - 23,640 ----------- ----------- ----------- ----------- Net income $ 7,956 $ 31,495 $ 13,869 $ 43,655 =========== =========== =========== =========== Income from continuing operations, net of income taxes, per weighted average share, diluted $ 0.34 $ 0.40 $ 0.59 $ 0.75 Income from discontinued operations, net of income taxes, per weighted average share, diluted - 0.86 - 0.88 ----------- ----------- ----------- ----------- Net income per weighted average share, diluted $ 0.34 $ 1.26 $ 0.59 $ 1.63 =========== =========== =========== =========== Weighted average shares, diluted 23,568 25,053 23,553 26,748 PolyMedica Corporation Consolidated Balance Sheets (In thousands) Sept. 30, March 31, 2006 2006 ----------- ----------- ASSETS Current assets Cash and cash equivalents $ 7,436 $ 9,101 Accounts receivable, net 106,609 104,013 Inventories 41,387 34,467 Deferred income taxes 4,334 4,334 Income tax receivable - 6,662 Prepaid expenses and other current assets 13,125 9,896 ----------- ----------- Total current assets 172,891 168,473 Property, plant and equipment, net 64,577 64,678 Goodwill 64,598 64,488 Intangible assets, net 47,689 27,228 Direct response advertising, net 97,270 91,653 Notes receivable 9,610 9,548 Other assets 9,052 3,249 ----------- ----------- Total assets $ 465,687 $ 429,317 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 49,780 $ 47,015 Current portion, capital lease obligations 561 596 ----------- ----------- Total current liabilities 50,341 47,611 Capital lease and other obligations 1,170 1,144 Convertible notes 180,000 - Credit facility 83,600 190,000 Deferred income taxes 12,130 31,411 ----------- ----------- Total liabilities 327,241 270,166 Total shareholders' equity 138,446 159,151 ----------- ----------- Total liabilities and shareholders' equity $ 465,687 $ 429,317 =========== =========== PolyMedica Corporation Statement of Operations - Reconciliation of Non-GAAP Financial Measures (In thousands, except per share amounts) Three Months Ended September 30, 2006 ---------------------------------------- Reported Stock- Adjusted GAAP Based Non-GAAP Totals Compensation Totals ------------ ------------ ------------ Income before income taxes $ 12,529 $ 2,939 $ 15,468 Income tax provision 4,573 1,073 5,646 ------------ ------------ ------------ Net income $ 7,956 $ 1,866 $ 9,822 ============ ============ ============ Diluted earnings per share $ 0.34 $ 0.08 $ 0.42 ============ ============ ============ Weighted average shares, diluted 23,568 23,568 23,568 Six Months Ended September 30, 2006 ---------------------------------------- Reported Stock- Adjusted GAAP Based Non-GAAP Totals Compensation Totals ------------ ------------ ------------ Income before income taxes $ 21,841 $ 5,953 $ 27,794 Income tax provision 7,972 2,173 10,145 ------------ ------------ ------------ Net income $ 13,869 $ 3,780 $ 17,649 ============ ============ ============ Diluted earnings per share $ 0.59 $ 0.16 $ 0.75 ============ ============ ============ Weighted average shares, diluted 23,553 23,553 23,553 We believe that referring to these non-GAAP totals facilitates a better understanding of our annual operating results. PolyMedica Corporation (NASDAQ: PLMD): Highlights: -- Revenues for the second quarter of fiscal 2007 were $164.1 million, a 41% increase over the prior year quarter and an increase of 5% over the first quarter; -- Earnings per share, including stock-based compensation expense of $0.08 per share, were $0.34, representing a 36% sequential increase over $0.25 reported in the first quarter; -- Thus far during the fiscal year, the Company has acquired certain assets of nine diabetes companies serving approximately 57,000 patients, including six acquisitions completed in the second quarter; -- Pharmacy revenue was $47.4 million, an increase of 125% over the prior year quarter and an increase of 13% over the first quarter; -- To date, the Company's investment in the Medicare Prescription Drug Program (Part D) initiative has resulted in offering prescription drug services to approximately 85,000 patients, and -- The Company enters into a pharmacy fulfillment agreement with Medco Health Solutions, Inc. PolyMedica Corporation (NASDAQ: PLMD) today reported revenue growth of 41% to $164.1 million in the second fiscal quarter of 2007, compared with $116.4 million for the same period last year. Income from continuing operations, net of taxes, for the quarter was $8.0 million, or $0.34 per diluted share, compared sequentially with $0.25 per diluted share for the previous quarter. The Company recognized $2.9 million of pre-tax stock-based compensation expense ($1.9 million after taxes, or $0.08 per diluted share) during the second quarter of fiscal 2007. Excluding the impact of stock-based compensation expense, earnings per share were $0.42 compared with $0.33 in the first quarter of fiscal 2007. Earnings per share in the second quarter of fiscal 2006 were $0.40. Commenting on the Company's quarterly results, President and Chief Executive Officer Patrick Ryan said, "This quarter was an important first step for the Company as we started to translate our revenue growth over the past several quarters into meaningful earnings growth. The Company's decision to focus on our core diabetes business and to invest in the Liberty Part D drug benefit program has resulted in 36% earnings per share growth from the previous quarter, and we have established a good foundation to continue revenue and earnings growth into the future. Our diabetes advertising programs achieved a $296 cost per patient this quarter, and, so far this year, we have acquired nine diabetes businesses that will contribute to consistent growth. In our pharmacy segment, new patient enrollment continues to exceed overall market growth. We are operating in a highly competitive market with sophisticated competitors, and our decision to enter into a fulfillment agreement with Medco will allow us to scale our operations to meet patient demand." Mr. Ryan continued, "Our financial position remains strong. We successfully completed a $180 million convertible note offering this quarter that met our goals of reducing ongoing interest costs and enhancing shareholder value. In addition, as expected in connection with the Deficit Reduction Act, Medicare delayed $11.8 million in payments to us at the end of the quarter that we subsequently received in the first week of October. Despite the Medicare payment hold, we still had a strong A/R management quarter with A/R days at 58 at quarter end and cash flow of $21 million so far this year." -0- *T Results of Operations for the Second Quarter Net revenues: Three Months Ended ---------------------------- Sept. 30, Sept. 30, $ % (in thousands) 2006 2005 Change Change ------------- ------------- ------------- -------- Diabetes $ 116,697 $ 95,346 $ 21,351 22% Pharmacy 47,413 21,081 26,332 125% ------------- ------------- ------------- -------- Net revenues $ 164,110 $ 116,427 $ 47,683 41% ============= ============= ============= ======== *T Net revenues in the second quarter of fiscal 2007 increased 41% to $164.1 million compared with $116.4 million for the same period last year. Diabetes revenue increased $21.4 million, or 22%, from last year primarily due to the 7% increase in diabetes patients and the revenue generated from the fiscal 2006 acquisitions of National Diabetic Pharmacies (NDP) and IntelliCare. Pharmacy revenue increased $26.3 million, or 125%, from last year primarily due to the enrollment of approximately 76,000 patients through September 30, 2006, into the Liberty Part D drug benefit program, offset by a reduction in the Company's historical cash pharmacy business. The provision for sales returns and allowances in the second quarter of 2007 was $3.5 million, or 2.1% of gross revenues, compared with $4.2 million, or 3.5% of gross revenues, in last year's second quarter. The decrease in the amount and the percentage of sales returns and allowances to gross revenues this quarter was primarily attributable to the fiscal 2006 acquisitions of NDP and IntelliCare and the revenue growth of the Pharmacy segment, all of which generate a lower rate of sales returns and allowances. -0- *T Gross Margin: Three Months Ended ------------------------ Sept. 30, Sept. 30, $ % (in thousands) 2006 2005 Change Change ----------- ----------- ----------- ----------- Diabetes $ 66,869 $ 55,644 $ 11,225 20% Pharmacy 9,089 7,330 1,759 24% ----------- ----------- ----------- ----------- Gross margin $ 75,958 $ 62,974 $ 12,984 21% =========== =========== =========== =========== *T Gross margin in the second quarter increased 21% to $76 million from $63 million for the same period last year. Diabetes gross margin increased $11.2 million and Pharmacy gross margin increased $1.8 million from last year. Gross margin was 46.3% of net revenues this quarter compared with 54.1% last year and 46.4% in the first quarter of fiscal 2007. Diabetes gross margin was 57.3% in the second quarter compared with 58.4% last year and 55.9% last quarter. The decrease in Diabetes gross margin from last year was primarily attributable to the increased revenues generated from the fiscal 2006 acquisitions of NDP and IntelliCare. These businesses report lower gross margin percentages than the Company's historical Diabetes business. The second quarter increase in Diabetes gross margin from the first quarter was primarily due to the continued roll-out of the newest Liberty private-label blood glucose monitoring system. Pharmacy gross margin was 19.2% this quarter compared with 34.8% last year and 20.7% last quarter. The decrease in gross margin in the Pharmacy segment was due to the growth in net revenues attributable to the Liberty Part D drug benefit program that generates a lower product gross margin than the historical Pharmacy business. -0- *T Selling, general and administrative expenses: Three Months Ended ------------------------ Sept. 30, Sept. 30, (in thousands) 2006 2005 ----------- ----------- Employee compensation $ 22,550 $ 19,886 Direct-response advertising amortization 12,053 10,487 Depreciation expense 2,562 1,912 Amortization of intangible assets 3,712 1,515 Provision for doubtful accounts 5,801 4,953 Stock-based compensation 2,939 408 Other 10,598 7,124 ----------- ----------- Selling, general and administrative expenses $ 60,215 $ 46,285 =========== =========== As a percentage of net revenues 36.7% 39.8% =========== =========== *T The $13.9 million increase in selling, general and administrative expense from last year related primarily to headcount and other costs associated with the fiscal 2006 acquisitions of NDP and IntelliCare, increased amortization expense from the thirteen diabetes companies acquired since September 30, 2005, an increase in the amortization of direct-response advertising, and the inclusion of stock-based compensation in the financial statements in fiscal 2007. SG&A expense, in dollars, was similar to the amount reported in the fiscal first quarter of 2007. As a percentage of revenue, SG&A expense in the second quarter was 36.7% compared to 39.8% last year and 38.7% last quarter. Other income and expense: Other income and expense increased $2.3 million from last year due to the higher level of debt outstanding during the period and a higher average interest rate. Compared to the first quarter, other income and expense increased $457,000, or 17%, primarily due to increased borrowings under the Credit Facility to fund several patient list acquisitions during the second quarter. The average borrowing rate under the credit facility was 6.9% in the second quarter compared to 6.5% in the first quarter. -0- *T Results of Operations for the Six Months Ended September 30, 2006 Net revenues: Six Months Ended ------------------------ Sept. 30, Sept. 30, $ % (in thousands) 2006 2005 Change Change ----------- ----------- ----------- ----------- Diabetes $ 230,480 $ 178,516 $ 51,964 29% Pharmacy 89,519 40,439 49,080 121% ----------- ----------- ----------- ----------- Net revenues $ 319,999 $ 218,955 $ 101,044 46% =========== =========== =========== =========== *T Net revenues for the six months ended September 30, 2006, increased 46% to $320 million compared with $219 million for the same period last year. Diabetes revenue increased $52 million, or 29%, from last year due to the increase in patients and the fiscal 2006 acquisitions of National Diabetic Pharmacies and IntelliCare. Pharmacy revenue increased $49.1 million, or 121%, from last year due to the enrollment of approximately 76,000 patients through September 30, 2006, into the Liberty Part D drug benefit program. This was offset by a decrease in the cash pharmacy business. -0- *T Gross Margin: Six Months Ended ------------------------ Sept. 30, Sept. 30, $ % (in thousands) 2006 2005 Change Change ----------- ----------- ----------- ----------- Diabetes $ 130,474 $ 106,617 $ 23,857 22% Pharmacy 17,817 13,811 4,006 29% ----------- ----------- ----------- ----------- Gross margin $ 148,291 $ 120,428 $ 27,863 23% =========== =========== =========== =========== *T Gross margin for the six months ended September 30, 2006, increased 23% to $148.3 million from $120.4 million for the same period last year and was due to the revenue growth in both the Diabetes and Pharmacy segments this year. Diabetes gross margin increased $23.9 million and Pharmacy gross margin increased $4 million from last year. Gross margin was 46.3% of net revenues compared with 55% last year with the decrease attributable to a higher percentage of revenues derived from the Pharmacy segment and revenues derived from the NDP and IntelliCare acquisitions, which generate lower gross margins. Diabetes gross margin was 56.6% compared with 59.7% last year and was primarily attributable to the revenue generated from the acquisitions in fiscal 2006 of NDP and IntelliCare. Pharmacy gross margin was 19.9% compared with 34.2% last year, and the decrease was due to the growth in net revenues attributable to the Liberty Part D drug benefit program that generates a lower gross margin than the historical pharmacy business. -0- *T Selling, general and administrative expenses: Six Months Ended ------------------------ Sept. 30, Sept. 30, (in thousands) 2006 2005 ----------- ----------- Employee compensation $ 46,909 $ 37,551 Direct-response advertising amortization 23,695 20,418 Depreciation expense 5,076 3,792 Amortization of intangible assets 6,137 2,865 Provision for doubtful accounts 11,329 9,525 Stock-based compensation 5,953 579 Other 21,380 13,592 ----------- ----------- Selling, general and administrative expenses $ 120,479 $ 88,322 =========== =========== As a percentage of net revenues 37.7% 40.3% =========== =========== *T The $32.2 million increase in selling, general and administrative expense from last year related primarily to increased headcount to support the growth of the diabetes and pharmacy businesses, amortization expense and other general costs associated with the fiscal 2006 acquisitions of NDP and IntelliCare, the acquisitions of certain assets of 13 diabetes companies acquired since September 30, 2005, the inclusion of stock-based compensation in the financial statements in fiscal 2007 and an increase in direct-response advertising amortization. Balance Sheet and Cash Flow Highlights The Company's cash flows for the six months ended September 30, 2006 and 2005, included the following: -0- *T Six Months Ended ------------------------ Sept. 30, Sept. 30, $ 2006 2005 Change ----------- ----------- ----------- Summary Cash Flow Data: Cash flows from operating activities $ 20,977 $ 29,614 $ (8,637) Cash flows used for investing activities (31,602) (20,110) (11,492) Cash flows from (used for) financing activities 8,960 (21,428) 30,388 ----------- ----------- ----------- Net change in cash and cash equivalents (1,665) (11,924) 10,259 Beginning cash and cash equivalents 9,101 72,246 (63,145) ----------- ----------- ----------- Ending cash and cash equivalents $ 7,436 $ 60,322 $ (52,886) =========== =========== =========== Additional Cash Flow/Balance Sheet Data: Purchase of property, plant and equipment $ (5,004) $ (4,082) $ (922) Purchase of patient lists and other contracts (26,598) (5,210) (21,388) Direct response advertising expenditures (29,312) (29,612) 300 Proceeds from convertible note offering 180,000 - 180,000 Net purchase of derivative instruments (26,268) - (26,268) Repurchase of common stock (29,624) (151,233) 121,609 Net cash flow from credit facility (106,400) 135,000 (241,400) A/R days sales outstanding 58 56 Inventory days on hand 42 63 *T Accounts receivable days sales outstanding for the quarter were 58 days and consistent with the quarter ended June 30, 2006. As discussed last quarter, the Centers for Medicare and Medicaid Services (CMS) suspended all payments between September 22-30, 2006, and this resulted in an increase in accounts receivable of approximately $11.8 million, or six additional DSO days as of September 30, 2006. Inventory days as of September 30, 2006, increased six days to 42 days, compared with 36 days on June 30, 2006, with the increase due to an increase in Pharmacy purchases. -0- *T Diabetes Patients Three Twelve Months Months Ended Ended Sept. 30, Sept. 30, 2006 2006 ----------- ----------- Diabetes patients, beginning balance 888,000 852,000 New diabetes patients from marketing programs 47,000 189,000 New diabetes patients from acquisitions 20,000 42,000 Patient attrition (42,000) (170,000) ----------- ----------- Diabetes patients as of September 30, 2006 913,000 913,000 =========== =========== Three Months Ended ------------------------------------- Sept. 30, June 30, Sept. 30, 2006 2006 2005 ----------- ----------- ----------- Acquisition cost per patient - Marketing $ 296 $ 336 $ 283 *T Conference Call and Replay PolyMedica management will host a conference call and live webcast today, Tuesday, November 7, 2006, at 11:00 a.m. Eastern time to discuss the Company's financial results. The number to call for this interactive conference call is 1-888-313-7044. A 90-day online replay will be available beginning approximately one hour following the conclusion of the live broadcast. A link to these events can be found on the Company's website at www.polymedica.com or at www.earnings.com. About PolyMedica For more than a decade, PolyMedica Corporation has been the nation's largest provider of blood glucose testing supplies and related services to people with diabetes and today serves more than 913,000 active patients. The Company is expanding its portfolio of products and services, from patient education to prescription drugs, to help people better manage their conditions and maintain their health. Through proactive patient outreach, convenient home delivery and administrative support, PolyMedica makes it simple for patients to obtain the supplies and medications they need, while encouraging compliance with physicians' orders. More information about PolyMedica can be found on the Company's website at www.polymedica.com. This press release contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those anticipated. Such risks and uncertainties include, but are not limited to, rules and regulations promulgated under the Act, unanticipated changes in Medicare reimbursement, successful participation in new reimbursement programs, outcomes of government reviews, inquiries, investigations and related litigation, continued compliance with government regulations, fluctuations in customer demand, management of rapid growth, competition from other healthcare product vendors, timing and acceptance of new product introductions, general economic conditions, geopolitical events and regulatory changes, as well as other especially relevant risks detailed in the Company's filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the period ended March 31, 2006, and Quarterly Report on Form 10-Q for the period ended June 30, 2006. The information set forth herein should be read in light of such risks. The Company assumes no obligation to update the information contained in this press release. -0- *T POLYMEDICA CORPORATION Consolidated Statements of Operations (In thousands, except per share amounts) Three Months Ended Six Months Ended ------------------------ ------------------------ Sept. 30, Sept. 30, Sept. 30, Sept. 30, 2006 2005 2006 2005 ----------- ----------- ----------- ----------- Net revenues $ 164,110 $ 116,427 $ 319,999 $ 218,955 Cost of sales 88,152 53,453 171,708 98,527 ----------- ----------- ----------- ----------- Gross margin 75,958 62,974 148,291 120,428 Selling, general and administrative expenses 60,215 46,285 120,479 88,322 ----------- ----------- ----------- ----------- Income from continuing operations 15,743 16,689 27,812 32,106 Other income and expense (3,214) (888) (5,971) (575) ----------- ----------- ----------- ----------- Income from continuing operations before income taxes 12,529 15,801 21,841 31,531 Income tax provision 4,573 5,735 7,972 11,516 ----------- ----------- ----------- ----------- Income from continuing operations, net of income taxes 7,956 10,066 13,869 20,015 ----------- ----------- ----------- ----------- Income from discontinued operations, net of income taxes - 21,429 - 23,640 ----------- ----------- ----------- ----------- Net income $ 7,956 $ 31,495 $ 13,869 $ 43,655 =========== =========== =========== =========== Income from continuing operations, net of income taxes, per weighted average share, diluted $ 0.34 $ 0.40 $ 0.59 $ 0.75 Income from discontinued operations, net of income taxes, per weighted average share, diluted - 0.86 - 0.88 ----------- ----------- ----------- ----------- Net income per weighted average share, diluted $ 0.34 $ 1.26 $ 0.59 $ 1.63 =========== =========== =========== =========== Weighted average shares, diluted 23,568 25,053 23,553 26,748 *T -0- *T PolyMedica Corporation Consolidated Balance Sheets (In thousands) Sept. 30, March 31, 2006 2006 ----------- ----------- ASSETS Current assets Cash and cash equivalents $ 7,436 $ 9,101 Accounts receivable, net 106,609 104,013 Inventories 41,387 34,467 Deferred income taxes 4,334 4,334 Income tax receivable - 6,662 Prepaid expenses and other current assets 13,125 9,896 ----------- ----------- Total current assets 172,891 168,473 Property, plant and equipment, net 64,577 64,678 Goodwill 64,598 64,488 Intangible assets, net 47,689 27,228 Direct response advertising, net 97,270 91,653 Notes receivable 9,610 9,548 Other assets 9,052 3,249 ----------- ----------- Total assets $ 465,687 $ 429,317 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 49,780 $ 47,015 Current portion, capital lease obligations 561 596 ----------- ----------- Total current liabilities 50,341 47,611 Capital lease and other obligations 1,170 1,144 Convertible notes 180,000 - Credit facility 83,600 190,000 Deferred income taxes 12,130 31,411 ----------- ----------- Total liabilities 327,241 270,166 Total shareholders' equity 138,446 159,151 ----------- ----------- Total liabilities and shareholders' equity $ 465,687 $ 429,317 =========== =========== *T -0- *T PolyMedica Corporation Statement of Operations - Reconciliation of Non-GAAP Financial Measures (In thousands, except per share amounts) Three Months Ended September 30, 2006 ---------------------------------------- Reported Stock- Adjusted GAAP Based Non-GAAP Totals Compensation Totals ------------ ------------ ------------ Income before income taxes $ 12,529 $ 2,939 $ 15,468 Income tax provision 4,573 1,073 5,646 ------------ ------------ ------------ Net income $ 7,956 $ 1,866 $ 9,822 ============ ============ ============ Diluted earnings per share $ 0.34 $ 0.08 $ 0.42 ============ ============ ============ Weighted average shares, diluted 23,568 23,568 23,568 Six Months Ended September 30, 2006 ---------------------------------------- Reported Stock- Adjusted GAAP Based Non-GAAP Totals Compensation Totals ------------ ------------ ------------ Income before income taxes $ 21,841 $ 5,953 $ 27,794 Income tax provision 7,972 2,173 10,145 ------------ ------------ ------------ Net income $ 13,869 $ 3,780 $ 17,649 ============ ============ ============ Diluted earnings per share $ 0.59 $ 0.16 $ 0.75 ============ ============ ============ Weighted average shares, diluted 23,553 23,553 23,553 We believe that referring to these non-GAAP totals facilitates a better understanding of our annual operating results. *T