VIASYS Healthcare Inc. Reports Third Quarter 2006 Results

VIASYS Healthcare Inc. (NYSE:VAS), a leading healthcare technology company, today reported results for the quarter ended September 30, 2006. All information is from continuing operations and inclusive of the results of all acquisitions unless otherwise indicated. Third Quarter Results Three MonthsEndedSeptember 30,2006 Three MonthsEndedOctober 1,2005 %Change  Diluted EPS from Continuing Operations $0.14  $0.13  Add Back: Special Items per share(1) 0.12  0.07  Subtotal $0.26  $0.20  Add Back: Stock Compensation Expense per share(1) 0.04  -  Adjusted Diluted EPS from Continuing Operations $0.30  $0.20  49.2% Revenues for the third quarter of 2006 increased to $144.7 million as compared to $126.9 million in the comparable quarter last year. Excluding the impact of stock compensation expense and special items(1), operating income increased to $16.1 million as compared to $10.6 million in the same period last year, and income from continuing operations after taxes increased to $9.9 million, or $.30 per diluted share, compared to $6.4 million, or $.20 per diluted share, for the same period last year. Foreign currency translation had a positive impact of 1.1% on revenues for the quarter. Including the impact of stock compensation and special items(1), operating income was $9.6 million compared to $7.3 million in the same period last year, and income from continuing operations after taxes was $4.6 million, or $.14 per diluted share, as compared to $4.3 million, or $.13 per diluted share, for the same period last year. September Year-to-Date Results Nine MonthsEndedSeptember 30,2006 Nine MonthsEndedOctober 1,2005 %Change  Diluted EPS from Continuing Operations $0.52  $(0.70) Add Back: Special Items per share(1) 0.13  1.28  Subtotal $0.65  $0.58  Add Back: Stock Compensation Expense per share(1) 0.14  -  Adjusted Diluted EPS from Continuing Operations $0.79  $0.58  37.2% Revenues for year-to-date 2006 increased to $426.3 million as compared to $354.8 million in the comparable quarter last year. Excluding the impact of stock compensation expense and special items(1), operating income increased to $43.1 million as compared to $28.5 million in the same period last year, and income from continuing operations after taxes increased to $26.1 million, or $.79 per diluted share, compared to $18.0 million, or $.58 per diluted share, for the same period last year. Foreign currency translation did not have a material impact on revenues for the year-to-date period. Including the impact of stock compensation and special items(1), operating income was $31.0 million compared to a loss of $14.3 million in the same period last year, and income from continuing operations after taxes was $17.2 million, or $.52 per diluted share, as compared to a loss of $22.0 million, or a loss of $.70 per diluted share, for the same period last year. Chairman, President and CEO Comments Randy Thurman, Chairman, President and CEO, commented on VIASYS’ performance: "Our third quarter results reflect the continued strong global demand for most VIASYS products and services. The excellent performance of our core businesses continues to be complemented by the strategic acquisitions completed in 2005 and 2006. In the third quarter, total revenue growth was 14.0%, of which 11.5% resulted from our core business and 2.5% resulted from the impact of our acquisitions. Adjusted operating income from continuing operations grew 52.6%. This quarterly performance contributed to the year-to-date results which reflect 20.2% revenue growth, including 9.5% from our core business. Adjusted operating income from continuing operations increased 51.1% year-to-date as compared to the prior year. "Contributing to our growth in core revenue and adjusted operating income are the success of VIASYS Clinical Services, global demand for our ventilators, consistently strong performance of our respiratory diagnostics portfolio, strong international demand and the improved profitability of NeuroCare. Acquisitions over the past few years have been fully integrated and we believe that these new products and new channels will drive continued solid global performance. "During the year we have faced and successfully met certain challenges. We made the strategic decision to expand into select international markets with excellent long-term growth potential, knowing that average selling prices are somewhat lower than our overall average. In addition, we experienced increases in raw material costs across all of our businesses, but which had a disproportionate impact on MedSystems and Orthopedics. Higher raw material costs are a global dynamic affecting most companies. Additionally, we have been affected by price and volume pressures in Orthopedics, which we believe are occurring industry-wide. Overall top line demand and operational controls have allowed us to offset these issues and to deliver expected earnings.” Further commenting on VIASYS’ results, Mr. Thurman said: "Yesterday we announced the acquisition of the products of BioBeat Medical Ltd. ("BioBeat”) during the quarter. We believe BioBeat brings to VIASYS best-in-class digital TCD (transcranial doppler) technology. We will quickly integrate this technology into our current vascular product portfolio, and we believe that it provides VIASYS with significant opportunities in the fast-growing vascular diagnostic market as well as certain potential neuro therapeutic applications such as stroke treatment. "I would also like to comment on the progress of our sleep initiative. A dedicated management team has been appointed and, as previously announced, the acquisition of Tiara Medical Systems ("Tiara”) was completed earlier in the quarter. The integration of Tiara is proceeding as planned. We believe that the combination of Tiara’s portfolio, our existing products, our presence in sleep centers and our relationships with pulmonologists and neurologists provide a unique competitive advantage that will allow us to compete effectively in the rapidly growing sleep therapy market. This market continues to be a focus of our growth and acquisition strategy. "We believe that VIASYS has become a market leader in each segment in which we compete. This is a result of our product development initiatives, the global reach of our international sales and distribution, the success of our direct sales and service organizations and our focused acquisition strategy that has brought products which complement and strengthen our core businesses. Combined with our strong balance sheet, we believe these initiatives and strategic focus position us to continue to create excellent shareholder value. "Based on the year-to-date results and the fourth quarter outlook, we are maintaining our previously announced 2006 earnings guidance of $1.25 to $1.30 per diluted share, excluding stock-based compensation expense. The stronger than expected performance of Tiara, which we previously expected to be dilutive, is partially offsetting the reduced fourth quarter outlook for orthopedics. 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. In keeping with prior practice, this guidance excludes the impact of any future acquisitions and special items.” Segment Highlights – Third Quarter Respiratory Care Revenues increased 21.1% to $94.3 million in the third quarter of 2006 compared to the third quarter of 2005. The quarter benefited from sleep therapy product revenues as a result of the July acquisition of Tiara and strong sales of our LTV1200 portable mechanical ventilators. Also contributing to this increase were strong sales of our AVEA ventilators and domestic pulmonary function testing equipment, as well as increased revenue from VIASYS Clinical Services. Operating income increased to $10.9 million from $8.4 million in the comparable period last year. This increase was due to higher overall sales as well as an increase in domestic sales of higher margin products such as LTV1200. These increases were partially offset by the negative impact on gross margin due to sales in international markets with lower average selling prices. In addition, we recognized increased expenses due to investments in the sales organization and recorded an in-process research and development charge related to the acquisition of Tiara. NeuroCare Revenues increased 4.8% to $30.9 million in the third quarter of 2006 compared to the third quarter of 2005. The increased revenues resulted from the ongoing strength in the sales of our vascular products as well as increases in our neurophysiology products such as the new LTM (long term monitoring) and ambulatory EEG systems. These increases were partially offset by lower consumables revenue due to a change from direct to distributor sales in select countries subsequent to the Oxford acquisition in 2005. Distributors receive discounted pricing to fund local marketing and sales efforts. An operating loss of $0.2 million was incurred in the third quarter of 2006 compared to a loss of $1.2 million in the same period last year. Included in the current period loss were $1.8 million of in-process research and development charges related to the BioBeat acquisition and $1.1 million of restructuring charges. Included in the third quarter 2005 loss was $0.2 million of restructuring charges. Excluding these items, operating income in the third quarter of 2006 was $2.7 million as compared to a loss of $1.0 million in the same period last year. This increase was mainly due to sales of higher margin products and expense savings realized in the current period from cost improvement initiatives and restructuring of our global operations. MedSystems Revenues increased 9.6% to $8.8 million in the third quarter of 2006 compared to the third quarter of 2005. The increase was mainly due to higher sales of enteral delivery products and in particular, contributions from our CORTRAK® and NAVIGATOR® access systems. Also contributing to the increase were higher sales of our airway management products. Operating income was $1.6 million in the third quarter of 2006 and 2005. The margin impact from the higher sales was offset by a less favorable product mix and increases in costs related to petroleum-based raw materials. Orthopedics Revenues declined 7.4% to $10.6 million in the third quarter of 2006 compared to the third quarter of 2005. This decrease was primarily due to weaker demand for orthopedic implants as well as pricing pressures from our OEM customers. Operating income was $1.8 million in the third quarter of 2006 compared to $3.0 million in the comparable period last year. The impact of the lower sales volume was compounded by the impact on gross margin of the pricing pressures. Corporate Corporate expenses increased by $1.7 million in the third quarter of 2006 over the comparable quarter of 2005 primarily due to stock-based compensation expense recorded in the current period. Conference Call VIASYS Healthcare Inc. will host an earnings release conference call on Thursday November 2, 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 7917790. 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®, BEAR®, BIRD®, CORFLO®, CORPAK®, CORTRAK®, EME®, GRASON-STADLER®, JAEGER™, LYRA®, MEDELEC®, MICROGAS®, NAVIGATOR®, NICOLET®, NicoletOne™, PULMONETIC™, SENSORMEDICS®, TECA®, TECOMET™, VELA® and VMAX®. 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, their affect on earnings 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 create stockholder value, 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 confidence in the Company’s future, our ability to continue to gain market share in our strategic products, our ability to continue to make strategic and accretive acquisitions and our ability to compete in the sleep therapy market. 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, 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, the effectiveness of the co-location of the former Critical Care and Respiratory Technologies business segments, market factors, the continued growth in the sleep therapy market, 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. (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 Ended September 30, 2006 Three Months Ended October 1, 2005 Change Operating Income from Continuing Operations $ 9,574  $ 7,275  Acquisition Related Costs (a) 187  1,215  Restructuring Charges 1,456  2,064  Acquired in-process research and development (b) 2,949  -  Stock Compensation Expense (c) 1,940  -  Adjusted Operating Income from Continuing Operations $ 16,106  $ 10,554  52.6%   Income from Continuing Operations $ 4,566  $ 4,316  Acquisition Related Costs (net of income taxes of $(67) and $(431) (a)) 120  784  Restructuring Charges (net of income taxes of $(524) and $(733)) 932  1,331  Acquired in-process research and development (b) 2,949  -  Stock Compensation Expense (net of income taxes of $(656) (c)) 1,284  -  Adjusted Income from Continuing Operations $ 9,851  $ 6,431  53.2%   Diluted Earnings per Share from Continuing Operations $ .14  $ .13  Acquisition Related Costs per Share (a) -  .03  Restructuring Charges per Share .03  .04  Acquired in-process research and development per share (b) .09  -  Stock Compensation Expenses per Share (c) .04  -  Adjusted Earnings per Share from Continuing Operations $ .30  $ .20    (a) The third quarter of 2006 was negatively impacted by $0.1 million from stepping-up acquired inventory, as required by generally accepted accounting principles. In addition, the Company incurred $0.1 million of expenses to integrate companies acquired in 2005 and 2006. The third quarter of 2005 was negatively impacted by $0.7 million from stepping-up acquired inventory, as required by generally accepted accounting principles. In addition, the Company incurred $0.5 million of expenses to integrate the acquired companies.   (b) In the third quarter of 2006, the Company recorded a charge of $2.9 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 third quarter of 2006 we recorded $1.9 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)   Nine Months Ended September 30, 2006 Nine Months Ended October 1, 2005 Change Operating Income from Continuing Operations $ 31,035  $ (14,310) Acquisition Related Costs (a) 461  4,149  Restructuring Charges 1,424  3,765  Acquired in-process research and development (b) 2,949  34,909  Fees related to terminated transaction 440  -  Stock Compensation Expense (c) 6,779  -  Adjusted Operating Income from Continuing Operations $ 43,088  $ 28,513  51.1%   Income from Continuing Operations $ 17,223  $ (22,014) Acquisition Related Costs (net of income taxes of $(166) and $(1,473) (a)) 295  2,676  Restructuring Charges (net of income taxes of $(513) and $(1,337)) 911  2,428  Acquired in-process research and development (b) 2,949  34,909  Fees related to terminated transaction (net of income taxes of $(158)) 282  -  Stock Compensation Expense (net of income taxes of ($2,291) (c)) 4,488  -  Adjusted Income from Continuing Operations $ 26,147  $ 17,999  45.3%   Diluted Earnings per Share from Continuing Operations $ .52  $ (.70) Acquisition Related Costs per Share (a) -  .08  Restructuring Charges per Share .03  .08  Acquired in-process research and development per share (b) .09  1.12  Fees related to terminated transaction per share .01  -  Stock Compensation Expenses per Share (c) .14  -  Adjusted Earnings per Share from Continuing Operations $ .79  $ .58    (a) The year-to-date period was negatively impacted by $0.1 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. The prior year period was negatively impacted by $3.2 million from stepping-up acquired inventory, as required by generally accepted accounting principles. In addition, the Company incurred $0.9 million of expenses to integrate the acquired companies.   (b) The Company recorded a charge of $2.9 million and $34.9 million for the nine month periods ending September 30, 2006 and October 1, 2005, respectively, 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 the year-to-date period, we recorded $6.8 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) September 30, 2006 October 1, 2005   Revenues $ 144,653  $ 126,899    Operating Costs and Expenses: Cost of revenues 76,034  66,049  Selling, general and administrative expense 45,870  42,079  Purchased in-process research and development expense 2,949  -  Research and development expense 8,770  9,432  Restructuring charges 1,456  2,064  135,079  119,624      Operating Income 9,574  7,275  Interest Expense, net (623) (844) Other (Expense) Income, net (161) 261    Income from Continuing Operations Before Income Taxes 8,790  6,692  Provision for Income Taxes (4,224) (2,376) Income from Continuing Operations 4,566  4,316  Income from Discontinued Operations (net of tax) -  90  Net Income $ 4,566  $ 4,406    Earnings per Share: Basic: Continuing Operations $ .14  $ .14  Discontinued Operations -  -  $ .14  $ .14  Diluted: Continuing Operations $ .14  $ .13  Discontinued Operations -  -  $ .14  $ .13  Weighted Average Shares Outstanding: Basic 32,512  31,526    Diluted 33,359  32,497      Nine Months Ended Consolidated Statements of Operations (unaudited) (In Thousands, Except Per Share Amounts) September 30, 2006 October 1, 2005   Revenues $ 426,347  $ 354,775    Operating Costs and Expenses: Cost of revenues 223,865  189,232  Selling, general and administrative expense 139,738  117,468  Purchased in-process research and development expense 2,949  34,909  Research and development expense 27,337  23,711  Restructuring charges 1,424  3,765  395,313  369,085      Operating Income 31,034  (14,310) Interest Expense, net (2,251) (587) Other Expense, net (217) (18)   Income from Continuing Operations Before Income Taxes 28,566  (14,915) Provision for Income Taxes (11,343) (7,099) Income (Loss) from Continuing Operations 17,223  (22,014) Income from Discontinued Operations (net of tax) -  537  Net Income (Loss) $ 17,223  $ (21,477)   Earnings (Loss) per Share: Basic: Continuing Operations $ .53  $ (.70) Discontinued Operations -  .01  $ .53  $ (.69) Diluted: Continuing Operations $ .52  $ (.70) Discontinued Operations -  .01  $ .52  $ (.69) Weighted Average Shares Outstanding: Basic 32,307  31,317    Diluted 33,172  31,317      VIASYS Healthcare Inc. Revenues by Business Segment and Geography (In thousands of dollars)   Three Months Ended Nine Months Ended September 30, 2006 October 1, 2005 September 30, 2006 October 1, 2005   Respiratory Care Domestic 50,480  42,263  145,311  109,982  International 43,775  35,560  129,304  102,463  Total 94,255  77,823  274,615  212,445      NeuroCare Domestic 18,791  17,159  54,839  49,429  International 12,149  12,376  37,387  38,781  Total 30,940  29,535  92,226  88,210      MedSystems Domestic 6,648  6,255  19,682  18,888  International 2,164  1,785  6,155  4,848  Total 8,812  8,040  25,837  23,736      Orthopedics Domestic 8,998  9,720  28,080  24,693  International 1,648  1,781  5,589  5,691  Total 10,646  11,501  33,669  30,384      Total VIASYS Domestic 84,917  75,397  247,912  202,992  International 59,736  51,502  178,435  151,783  Total 144,653  126,899  426,347  354,775