VAS Viasys Healthcare

VIASYS Healthcare Inc. (NYSE:VAS), a leading healthcare technology company, today reported results for the quarter ended July 1, 2006. All information is from continuing operations and inclusive of all acquisitions unless otherwise indicated. -0- *T Second Quarter Results Three Months Three Months Ended July 1, Ended July 2, % 2006 2005 Change --------------- --------------- -------- Diluted EPS from Continuing Operations $0.22 $(0.99) Special Items per share(1) 0.01 1.20 Stock Compensation Expense per share(1) 0.03 - --------------- --------------- Adjusted EPS from Continuing Operations $0.26 $0.21 23.8% =============== =============== *T Revenues for the second quarter of 2006 increased to $146.2 million as compared to $125.4 million in the comparable quarter last year. Excluding the impact of stock compensation expense and special items(1), operating income increased to $14.5 million as compared to $10.5 million in the same period last year, and income from continuing operations after taxes increased to $8.7 million, or $.26 per diluted share, compared to $6.6 million, or $.21 per diluted share, for the same period last year. Foreign currency translation did not have a material impact on revenues for the quarter. Including the impact of stock compensation and special items(1), operating income was $12.1 million compared to a loss of $28.3 million in the same period last year, and income from continuing operations after taxes was $7.2 million, or $.22 per diluted share, as compared to a loss of $30.9 million, or a loss of $.99 per diluted share, for the same period last year. -0- *T June Year-to-Date Results Six Months Six Months Ended July 1, Ended July 2, % 2006 2005 Change --------------- --------------- -------- Diluted EPS from Continuing Operations $0.38 $(0.84) Special Items per share(1) 0.01 1.21 Stock Compensation Expense per share(1) 0.10 - --------------- --------------- Adjusted EPS from Continuing Operations $0.49 $0.37 32.4% =============== =============== *T Revenues for year-to-date 2006 increased to $281.7 million as compared to $227.9 million in the comparable quarter last year. Excluding the impact of stock compensation expense and special items(1), operating income increased to $27.0 million as compared to $18.0 million in the same period last year, and income from continuing operations after taxes increased to $16.3 million, or $.49 per diluted share, compared to $11.6 million, or $.37 per diluted share, for the same period last year. Foreign currency translation had a year-to-date negative impact of 1.3% on revenue growth. Including the impact of stock compensation and special items(1), operating income was $21.5 million compared to a loss of $21.6 million in the same period last year, and income from continuing operations after taxes was $12.7 million, or $.38 per diluted share, as compared to a loss of $26.3 million, or a loss of $.84 per diluted share, for the same period last year. Chairman, President and CEO Comments Randy Thurman, Chairman, President and CEO, commented on VIASYS' performance: "We are pleased to report revenue and earnings growth that are once again in line with our stated expectations and outlook for the full year. These results reflect continued strong contributions across each of our core businesses and reinforce our continued confidence in the company's future. VIASYS is focused in four compelling medical segments, and we are a market leader in each. We are gaining share in our strategic products, our continued growth prospects are excellent and we have an outstanding balance sheet. We believe we can grow the top line by at least 10% and earnings by at least 15% for the next three years and put the balance sheet to use by continuing to do acquisitions that are both strategic and accretive. "Our second quarter 2006 performance once again reflects those dynamics. This was another quarter driven by strong global demand for VIASYS products and services. The performance of our core businesses, specifically in Respiratory Care and Orthopedics, was complemented by the strategic acquisitions completed in 2005. We believe this performance is indicative of the customer recognition of VIASYS' superior products and service, success in product development and acquisitions as well as our global sales, service and distribution capability. This was also a quarter in which we completed a strategic acquisition that we believe will be accretive next year. "Leading our growth was the Respiratory Care segment, and in particular VIASYS Clinical Services (VCS), which nearly doubled its first half performance versus the first half of 2005. VCS is an example of the entrepreneurial drive within VIASYS. Started internally three years ago, VCS leverages our partnership with global pharmaceutical companies who buy our diagnostic systems for respiratory drug trials by providing an array of value added data management services to the drug companies. We believe we have become the leader in this market and expect that this business will grow significantly in the next three to four years. "Also contributing to Respiratory Care's success is our ventilation business which grew over 40% versus the prior year. We are now a provider of best-in-class products in every segment of ventilation. Our success in this business is demonstrated by the market share gains we are realizing and our success in winning a number of large accounts such as Kindred Healthcare and several large state tenders." Further commenting on VIASYS' results, Mr. Thurman said: "Consistent with our focus for 2006 to deliver higher levels of profitability in the NeuroCare business, this segment generated $1.5 million of operating income in the current quarter versus a loss in the prior year. While the business earned a 5% return on sales, we believe higher profitability needs to be achieved. As a result, in July we announced headcount reductions and anticipate further actions to improve the profitability of this business in the future. "VIASYS Orthopedics delivered strong revenue growth for the quarter and while year-to-date profit is up over 10%, the second quarter was about even with last year. This slowdown in profitability is driven by price pressure from orthopedic customers and price increases on raw materials. We believe this trend will continue for the remainder of 2006. "In our Corporate segment we recorded a pre-tax charge of $0.4 million for professional fees related to a strategic transaction which VIASYS deemed to not be in the best interest of shareholders and elected not to pursue. "We believe VIASYS has the ability to continue to deliver growth above industry averages. This ability stems from our focused strategy, the quality of our products and service and the commitment of our 2,200 employees to the company's mission. Our focus has consistently been driven by several strategic imperatives - achieving "best in class" status for all products and services, making continual operational improvements, investing in new product development, selectively increasing resources in certain global markets, leveraging our strong balance sheet to complete strategic acquisitions and developing our organization and people. By doing so we believe we can deliver excellent long-term stockholder value and higher return on invested capital. These areas of focus will not change and we expect our year-to-date positive performance to continue in the second half of the year. "I would also like to mention the newest acquisition by VIASYS, Tiara Medical Systems, Inc. Tiara Medical designs, manufactures and sells a variety of consumable products for patients suffering from sleep apnea and other chronic respiratory diseases. We expect this acquisition will allow us to compete effectively in the rapidly growing sleep therapy market by building on our existing product offerings and leveraging our substantial presence with both the pulmonologists and sleep centers. "We expect the acquisition of Tiara Medical to have a dilutive impact on earnings in 2006. Despite this dilution, we are maintaining our previously announced 2006 guidance of $1.25 to $1.30 per diluted share before the impact of stock-based compensation expense. Including the impact of stock-based compensation, we expect earnings in the range of $1.08 to $1.13 per diluted share for the full year. Of this $.17 per diluted share reduction in earnings, we recorded $.10 per diluted share of stock compensation in the first six months of 2006. The remaining $.07 per diluted share will occur ratably over the next two quarters. In keeping with prior practice, this guidance excludes the impact of any future acquisitions and special items. "On behalf of the VIASYS board of directors, I would like to comment on the senior leadership of VIASYS. We firmly believe that VIASYS has one of the best leadership teams in the industry. Our consistent results and above market performance support that belief. While I founded VIASYS as Chairman and CEO, in the last two years I have assumed additional roles as company President and also Group President, International. Given the past success and the expected future growth of VIASYS, the Board and I believe an appropriate succession strategy requires us to appoint a company president by the end of 2007. We have formed a board search committee that will identify candidates, both internally and externally, and select a president during this timeframe. The board has extended my current agreement through 2010 ensuring an adequate transition process. I look forward to working with the board of directors and the new president on the continued long-term success of the company." Segment Highlights - Second Quarter Respiratory Care Revenues increased 28.3% to $94.0 million in the second quarter of 2006 compared to the second quarter of 2005. This increase was partially due to strong international sales of our AVEA and VELA ventilators, domestic pulmonary function testing equipment and increased revenue from our Customer Service and VIASYS Clinical Services businesses. Also contributing to the increase were strong sales of portable mechanical ventilators resulting from the Pulmonetics acquisition in the second quarter of 2005. Partially offsetting these increases were price pressure in selected international markets, higher international sales into countries with lower average sales prices and the continued negative impact of a strike by medical practitioners in Germany and the National Health Services budget constraints in the United Kingdom. Operating income increased to $13.1 million from a loss of $26.2 million in the comparable period last year. This increase was partially due to the acquisition of Pulmonetics and higher gross margins resulting from increased sales. In addition, in 2005 we recorded a $34.9 million expense for purchased in-process research and development charges related to the acquisitions of Pulmonetics and Micro Medical. Partially offsetting these benefits were the gross margin impact of the pricing pressure and lower average sales prices in international markets. In addition, we recognized increased incentive compensation costs, as well as expenses from our investment in the research and development of new products. NeuroCare Revenues decreased 7.3% to $31.4 million in the second quarter of 2006 compared to the second quarter of 2005. The decreased revenues resulted from lower sales of consumable and neurophysiology products, partially due to unusually high revenues in the second quarter of 2005 following the acquisition of Oxford. Also contributing to the decreased revenues was a change in our selling channel from direct to distributor in selected countries, in which case the distributor is given a discounted price to fund local marketing and sales efforts. Partially offsetting this decrease were higher sales of vascular and audio products. Operating income was $1.5 million in the second quarter of 2006 compared to a loss of $1.6 million in the comparable period last year. This increase is mainly due to synergies realized in the current period from the integration of Oxford into our existing business and acquisition related charges taken in the second quarter of 2005. MedSystems Revenues increased 8.4% to $8.9 million in the second quarter of 2006 compared to the second quarter of 2005. The increase was mainly due to higher sales of enteral delivery products and in particular, contributions from our CORTRAK(TM) and NAVIGATOR(R) access systems. Operating income was $1.7 million in the second quarter of 2006 and 2005. The impact of higher sales and favorable product mix driven by a shift to the higher margin access systems was offset by higher raw material costs and higher selling expense resulting from the increased sales. Orthopedics Revenues increased 17.4% to $11.8 million in the second quarter of 2006 compared to the second quarter of 2005. This increase was primarily due to higher sales of orthopedic instruments resulting from the acquisition of Intermed and industrial products. Operating income was $2.0 million in the second quarter of 2006 and 2005. The impact of the higher sales volume was offset by increased expenses related to the acquired business, pricing pressure in the industry and rising material costs. Corporate Corporate expenses increased by $2.2 million in the second quarter of 2006 over the comparable quarter of 2005 primarily due to stock compensation expense recorded in the current period, as well as professional fees related to a strategic transaction we decided not to pursue. Conference Call VIASYS Healthcare Inc. will host an earnings release conference call on Tuesday August 8, 2006, at 5:00 PM Eastern Time. The call will be simultaneously webcast on the investor information page of our website, www.viasyshealthcare.com. The call will be archived on our website and will also be available for two weeks via phone at 877-519-4471, access code 7587794. VIASYS Healthcare Inc. is a global, research-based medical technology company focused on respiratory, neurology, medical disposable and orthopedic products. VIASYS products are marketed under well-recognized trademarks including among others AVEA(R), BEAR(R), BIRD(R), CORFLO(R), CORPAK(R), CORTRAK(TM), EME(R), GRASON-STADLER(R), JAEGER(TM), LYRA(R), MEDELEC(R), MICROGAS(R), NAVIGATOR(R), NICOLET(R), NicoletOne(TM), PULMONETIC(TM), SENSORMEDICS(R), TECA(R), TECOMET(TM), VELA(R) and VMAX(R). VIASYS is headquartered in Conshohocken, PA, and its businesses are conducted through its Respiratory Care, NeuroCare, MedSystems and Orthopedics business units. More information can be found at http://www.viasyshealthcare.com. This press release includes certain forward-looking statements within the meaning of the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of 1995 regarding, among other things, the performance of our recent acquisitions and whether they will contribute to higher rates of revenue and earnings growth in the future, our ability to achieve our stated goals, the outlook for our businesses, our expectations for new product introductions, our ability to deliver long-term stockholder value and return on invested capital, our belief relating to our investment in research and development, our belief regarding the performance of our core businesses, our 2006 earnings guidance, our prospects for continued growth, our ability to successfully execute on our business strategies, our expectations for the growth of our VCS businesses, our expectations regarding headcount reductions, our confidence in the Company's future, our ability to continue to gain market share in our strategic products, our ability to grow revenues and earnings over the next three years, and our ability to continue to make strategic and accretive acquisitions. These statements may be identified by words such as "expect," "anticipate," "estimate," "project," "intend," "plan," "believe," and other words and terms of similar meaning. Such forward-looking statements are based on current expectations and involve inherent risks and uncertainties, including important factors that could delay, divert, or change any of them, and could cause actual outcomes and results to differ materially from current expectations. These factors include, among other things, the integration of our recent acquisitions, the continued implementation of the company's restructuring plans, the restructuring of our international organization, of the headcount reductions in our NeuroCare business, the timing of pharmaceutical trials by third parties, sales and marketing initiatives, our ability to attract and retain talented sales personnel, the commercialization of new products, effectiveness of the co-location of the former Critical Care and Respiratory Technologies business segments, market factors, internal research and development initiatives, partnered research and development initiatives, competitive product development, changes in governmental regulations and legislation, the continued consolidation of certain of the industries in which we operate, acceptance of our new products and services, patent protection and litigation, a successful mergers and acquisitions strategy, the ability to locate and acquire companies, businesses and products that are strategic to the Company and accretive to earnings, and the market for mergers and acquisitions. For further details and a discussion of these and other risks and uncertainties, please see our Annual Report on Form 10-K for the year ended December 31, 2005, which is on file with the Securities and Exchange Commission. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events, or otherwise. -0- *T (1) Stock Compensation and Special items - In accordance with Regulation G of the Securities and Exchange Commission, the table set forth below reconciles certain financial measures used in this press release that were not calculated in accordance with generally accepted accounting principles, or GAAP, with the most directly comparable financial measure calculated in accordance with GAAP. Reconciliation of Non-GAAP Financial Measures (In Thousands, Except Per Share Amounts) Three Months Three Months Ended Ended July 1, 2006 July 2, 2005 Change -------------- -------------- -------- Operating Income from Continuing Operations $ 12,090 $ (28,329) Acquisition Related Costs (a) 164 2,934 Restructuring Charges 58 1,030 Acquired in-process research and development (b) - 34,909 Fees related to terminated transaction 440 - Stock Compensation Expense (c) 1,745 - -------------- -------------- Adjusted Operating Income from Continuing Operations $ 14,497 $ 10,544 37.5% ============== ============== Income from Continuing Operations $ 7,156 $ (30,876) Acquisition Related Costs (net of income taxes of $(59) and $(1,042) (a)) 105 1,892 Restructuring Charges (net of income taxes of $(21) and $(366)) 37 664 Acquired in-process research and development (b) - 34,909 Fees related to terminated transaction (net of income taxes of $(158)) 282 - Stock Compensation Expense (net of income taxes of ($590)) (c) 1,155 - -------------- -------------- Adjusted Income from Continuing Operations $ 8,735 $ 6,589 32.6% ============== ============== Diluted Earnings per Share from Continuing Operations $ .22 $ (.99) Acquisition Related Costs (a) - .06 Restructuring Charges - .02 Acquired in-process research and development (b) - 1.12 Legal fees related to terminated transaction .01 - Stock Compensation Expenses (c) .03 - -------------- -------------- Adjusted Earnings per Share from Continuing Operations $ .26 $ .21 ============== ============== (a) In the second quarter of 2006, the Company incurred $.2 million of expenses to integrate companies acquired in 2005. The second quarter of 2005 was negatively impacted by $2.5 million from stepping-up acquired inventory, as required by generally accepted accounting principles. In addition, the Company incurred $0.4 million of expenses to integrate the acquired companies. (b) In the second quarter of 2005, the Company recorded a charge of $34.9 million to write-off in-process research and development expenses in conjunction with our acquisitions, as required under generally accepted accounting principles. (c) Effective January 1, 2006, we adopted the new accounting pronouncement FAS123R, "Share Based Payments." In the second quarter of 2006 we recorded $1.7 million of expense for stock compensation made to employees, including charges resulting from the adoption of FAS123R. This charge was not required to be recorded in the comparable period of the prior year. Reconciliation of Non-GAAP Financial Measures (In Thousands, Except Per Share Amounts) Six Months Six Months Ended Ended July 1, 2006 July 2, 2005 Change -------------- -------------- -------- Operating Income from Continuing Operations $ 21,460 $ (21,585) Acquisition Related Costs (a) 274 2,934 Restructuring Charges (33) 1,701 Acquired in-process research and development (b) - 34,909 Fees related to terminated transaction 440 - Stock Compensation Expense (c) 4,839 - -------------- -------------- Adjusted Operating Income from Continuing Operations $ 26,980 $ 17,959 50.2% ============== ============== Income from Continuing Operations $ 12,656 $ (26,330) Acquisition Related Costs (net of income taxes of $(99) and $(1,042) (a)) 175 1,892 Restructuring Charges (net of income taxes of ($12 and $(604)) (21) 1,098 Acquired in-process research and development (b) - 34,909 Fees related to terminated transaction (net of income taxes of $(158)) 282 - Stock Compensation Expense (net of income taxes of ($1,636)) (c) 3,203 - -------------- -------------- Adjusted Income from Continuing Operations $ 16,295 $ 11,569 40.9% ============== ============== Diluted Earnings per Share from Continuing Operations $ .38 $ (.84) Acquisition Related Costs per Share (a) - .06 Restructuring Charges per Share - .03 Acquired in-process research and development per share (b) - 1.12 Fees related to terminated transaction per share .01 - Stock Compensation Expenses per Share (c) .10 - -------------- -------------- Adjusted Earnings per Share from Continuing Operations $ .49 $ .37 ============== ============== (a) June year-to-date 2006, the Company incurred $.3 million of expenses to integrate companies acquired in 2005. June year-to-date 2005 was negatively impacted by $2.5 million from stepping-up acquired inventory, as required by generally accepted accounting principles. In addition, the Company incurred $0.4 million of expenses to integrate the acquired companies. (b) June year-to date 2005, the Company recorded a charge of $34.9 million to write-off acquired in-process research and development expenses in conjunction with our acquisitions, as required under generally accepted accounting principles. (c) Effective January 1, 2006, we adopted the new accounting pronouncement FAS123R, "Share Based Payments." For June year-to-date we recorded $4.8 million of expense for stock compensation made to employees, including charges resulting from the adoption of FAS123R. This charge was not required to be recorded in the comparable period of the prior year. Three Months Ended ------------------ Consolidated Statements of Operations (unaudited) (In Thousands, Except Per Share Amounts) July 1, 2006 July 2, 2005 Revenues $ 146,175 $ 125,431 Operating Costs and Expenses: Cost of revenues 78,238 68,611 Selling, general and administrative expense 46,626 41,553 Purchased in-process research and development expense - 34,909 Research and development expense 9,163 7,657 Restructuring charges 58 1,030 ------------ ------------ 134,085 153,760 ------------ ------------ Operating Income 12,090 (28,329) ------------ ------------ Interest Expense, net (753) (207) Other Expense, net (156) (121) ------------ ------------ Income from Continuing Operations Before Income Taxes 11,181 (28,657) Provision for Income Taxes (4,025) (2,219) ------------ ------------ Income (Loss) from Continuing Operations 7,156 (30,876) Income (Loss) from Discontinued Operations (net of tax) - 134 ------------ ------------ Net Income (Loss) $ 7,156 $ (30,742) ============ ============ Earnings (Loss) per Share: Basic: Continuing Operations $ .22 $ (.99) Discontinued Operations - .01 ------------ ------------ $ .22 $ (.98) ============ ============ Diluted: Continuing Operations $ .22 $ (.99) Discontinued Operations - .01 ------------ ------------ $ .22 $ (.98) ============ ============ Weighted Average Shares Outstanding: Basic 32,313 31,304 Diluted 33,177 31,304 Six Months Ended ---------------- Consolidated Statements of Operations (unaudited) (In Thousands, Except Per Share Amounts) July 1, 2006 July 2, 2005 Revenues $ 281,694 $ 227,876 Operating Costs and Expenses: Cost of revenues 147,832 123,183 Selling, general and administrative expense 93,867 75,389 Purchased in-process research and development expense - 34,909 Research and development expense 18,568 14,279 Restructuring charges (33) 1,701 ------------ ------------ 260,234 249,461 ------------ ------------ Operating Income 21,460 (21,585) ------------ ------------ Interest Income (Expense), net (1,629) 257 Other Expense, net (56) (279) ------------ ------------ Income from Continuing Operations Before Income Taxes 19,775 (21,607) Provision for Income Taxes (7,119) (4,723) ------------ ------------ Income (Loss) from Continuing Operations 12,656 (26,330) Income from Discontinued Operations (net of tax) - 446 ------------ ------------ Net Income (Loss) $ 12,656 $ (25,884) ============ ============ Earnings (Loss) per Share: Basic: Continuing Operations $ .39 $ (.84) Discontinued Operations - .01 ------------ ------------ $ .39 $ (.83) ============ ============ Diluted: Continuing Operations $ .38 $ (.84) Discontinued Operations - .01 ------------ ------------ $ .38 $ (.83) ============ ============ Weighted Average Shares Outstanding: Basic 32,205 31,212 Diluted 33,124 31,212 VIASYS Healthcare Inc. Revenues by Business Segment and Geography (In thousands of dollars) Three Months Ended Six Months Ended ------------------- ------------------- July 1, July 2, July 1, July 2, 2006 2005 2006 2005 --------- --------- --------- --------- Respiratory Care Domestic 48,289 38,714 94,552 68,858 International 45,754 34,560 85,808 65,764 --------- --------- --------- --------- Total 94,043 73,274 180,360 134,622 --------- --------- --------- --------- NeuroCare Domestic 17,682 18,370 36,049 33,568 International 13,759 15,535 25,237 25,107 --------- --------- --------- --------- Total 31,441 33,905 61,286 58,675 --------- --------- --------- --------- MedSystems Domestic 6,712 6,581 13,033 12,633 International 2,166 1,611 3,991 3,063 --------- --------- --------- --------- Total 8,878 8,192 17,024 15,696 --------- --------- --------- --------- Orthopedics Domestic 9,919 7,908 19,083 14,973 International 1,894 2,152 3,941 3,910 --------- --------- --------- --------- Total 11,813 10,060 23,024 18,883 --------- --------- --------- --------- Total VIASYS Domestic 82,602 71,573 162,717 130,032 International 63,573 53,858 118,977 97,844 --------- --------- --------- --------- Total 146,175 125,431 281,694 227,876 ========= ========= ========= ========= *T