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Orthopedic and Dental Industry News Complete Archive »

dj Orthopedics Announces Revenue Shortfall and Stock Repurchase BY JOHN MCCORMICK, OCTOBER 4, 2004

Last week, dj Orthopedics (NYSE: DJO) stock fell 10% on the announcement that it was cutting its third quarter outlook. The shortfall largely comes from previously announced integration efforts associated with the Company's Regentek unit, which manufactures bone growth stimulation products.

The company said it expects to post 3Q:04 earnings of $0.18 to $0.19 per share on revenue of about $62.5 million, including costs to integrate Regentek that are anticipated to reduce earnings by 5 cents per share. The company previously expected revenue of $63.5 million to $65.5 million. Excluding the integration charges, Dj Orthopedics put its 3Q:04 at $0.23 to $0.24 per share. Analyst consensus was $0.27 per share on revenue of $64.5 million for 3Q:04. DJO said it anticipates 4Q:04 revenue of $65 to $68 million, compared with the analyst consensus of $68.6 million.

Despite strong revenue growth in segments such as International, DJO said its lowered outlook is partly based on lower than expected sales of Regentek SpinaLogic (6% less than pro forma revenues of Q3:03), which showed unusually slow activity in spinal surgeries in the quarter. The company also said recent changes in the California workers' compensation system will hurt its revenues in almost every area including pain management, long bone, spine stimulation, and even bracing. Revenues in California are expected to be reduced by about $600,000, and DJO predicts third-quarter rehabilitation revenue will be about $500,000 less than original expectations. Management noted that the California issue appears to be a unit volume issue where prescriptions more subject to medical necessity requirements.

Looking forward on the Regentek integration front, relocating the Regentek operations from Tempe, AZ, to the company's Vista, CA headquarters, which is going as planned, is expected to save the company about $3 million annually in pretax operating expenses beginning in 2005. The company previously said it expected to incur one-time integration-related charges of $4 million to $5 million in the second half of 2004. Management noted that training of DonJoy sales force is going well, new prescribers are being enlisted where no prior Regentek sales force, that the Company is adding new Regentek specialists and there has been only modest turnover in Regentek sales force.

In other areas, the Company announced that its new 200,000 sq. ft. facility in Mexico was completed in late August and 80% of manufacturing has moved over. The Vista, CA machine shop and cold therapy production are expected to move over to this new plant which is expected to achieve $1,000,000 COGS savings in 2005. On this front, DJO has done exceptionally well. The last Mexican plant move was a bona fide success story and delivered unexpected COGS savings.

Finally, the Company announced that its Board has approved a $20 million stock buyback with an open timetable. Management stated that they might be opportunistic at current prices depending on cash flow and other opportunities that the Company comes across. By our calculations, at current prices, DJO could theoretically retire about 5% of its stock.

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