Theragenics Corporation Q3 2009 Earnings Call Transcript

Theragenics Corporation (TGX)

Q3 2009 Earnings Call Transcript

November 5, 2009 11:00 am ET

Executives

Christine Jacobs – Chairman, President and CEO

Frank Tarallo – CFO and Treasurer

Presentation

Operator

Good morning. My name is Carisa and I will be your conference operator today. At this time, I would like to welcome everyone to the Theragenics third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions) Thank you.

I would now like to turn the conference over to Ms. Christine Jacobs, Chairman and CEO. Please go ahead ma’am.

Christine Jacobs

Thank you, Carisa, and good morning. Thank you for joining us today as well. Welcome to Theragenics third quarter 2009 conference call. I will be providing my comments on the quarter and our outlook for the last quarter of the year and beyond in a couple of minutes. But first, Frank Tarallo, our Chief Financial Officer is going to provide a review of the financial results. Frank?

Frank Tarallo

Thank you, Chris. This morning, we released our consolidated financial results for the third quarter of 2009. If you did not receive this news release or if you would like to be added to either our fax or e-mail distribution list, please contact our Investor Relations at 800-998-8479 or 770-271-0233.

Before I begin my review, please be aware that some comments made during this conference call may contain forward-looking statements involving risks and uncertainties regarding our operations and future results.

Please see our press release issued today and our filings with the Securities and Exchange Commission, including without limitation the company’s Form 10-K and Forms 10-Q which identify specific factors that may cause actual results or events to differ materially from those described in the forward-looking statements.

Now our results; first, let me remind you that we acquired NeedleTech Products in July 2008. So NeedleTech results are included in our consolidated results for all of 2009, but not for two months in the 2008 periods.

Our consolidated revenue was $19.3 million in the third quarter and $59.6 million for the nine-month period. Our revenue is best analyzed on a segment basis, which I will talk address in a minute.

Consolidated net income in the third quarter was $799,000 or $0.02 per share compared to $641,000 or $0.02 per share last year. For the first nine months of this year, our net income was $2.7 million or $0.08 per share compared to $3.9 million or $0.12 per share last year.

We had a number of items that affected comparability between the 2009 and 2008 periods. If you are trying to follow along, all of these items are listed in our press release. The most significant affects on our consolidated net income were as follows.

First, in 2008, we had $590,000 of non-cash charges related to the NeedleTech acquisition. These charges did not recur in 2009. Second, our R&D expenses increased in 2009, a result of the R&D program we implemented late last year. R&D expenses were $148,000 higher in the third quarter and $1 million higher in the first nine months of this year compared to 2008.

Third, our interest income declined this year. Interest income decreased $167,000 in the third quarter and decreased $906,000 in the first nine months of this year compared to ’08. This was due to the lower returns available on our investments this year.

Now I would like to review our segment results. First, let me remind you of a change we made this to the manner in which we allocate the cost of corporate activities to our business segments.

Operating expenses associated with corporate activities are now allocated based on the relative revenue of each business segment. We believe this method more accurately reflects the utilization our resources. We also utilized this method internally to review results and allocate resources.

Previously, nearly, all of the expenses associated with corporate activities were charged to the brachytherapy segment. Our 2008 segment results have been restated to reflect this change. This is simply a change in the way we allocate corporate costs among our businesses. This has no affect on the consolidated results we previously reported for the 2008 periods.

I mentioned earlier that NeedleTech is included in the entire period of our 2009 results, but only for two months in our results from last year. So revenue in our surgical products business is a higher relative portion of our consolidated revenue this year. This means that a greater portion of our corporate costs are being allocated to our surgical products business in 2009 versus 2008.

Now to the numbers; revenue in our surgical products segment was $13.4 million in the quarter and $40.2 million in the nine-month period of this year. On a pro forma basis as if NeedleTech results were included in the entire 2008 period, this represents organic growth of 6% for the quarter and 8% year-to-date.

Operating income in our surgical business was $623,000 in the third quarter compared to $202,000 last year. For the first nine months of 2009, operating income was $1.5 million compared to $1.7 million last year.

I would like to point out three items that had a significant affect on the comparability of year-over-year results in our surgical products business. First, the 2008 periods included the $590,000 of non-cash acquisition-related charges that I mentioned earlier and these charges did not recur this year.

Second, the increased R&D expenses in ’09 that I mentioned earlier. And third, corporate costs allocated to our surgical business increased $125,000 in the third quarter and $1 million in the first nine months of this year compared to 2008. I referred to the change in how we allocate corporate costs a few minutes ago.

In our brachytherapy business, revenue was $6.1 million for the quarter, a decline of 10% from 2008. For the nine-month period, our brachy revenue was $19.6 million, a decline of 12% from 2008. Sales to our main distributor continue to decline down 17% in the quarter and 21% for the year.

Operating income in our brachy business was $972,000 in the quarter, up slightly from $933,000 last year. For the first nine months of this year, our brachy operating income was $3.4 million compared to $4.2 million last year. The decline in our brachy revenue had a significant affect on operating income because of the relatively fixed nature of our manufacturing costs.

Operating income in the 2009 period did benefit from a decrease in the allocation of corporate costs compared to last year. Corporate costs allocated to our brachy business decreased $92,000 in the third quarter and $468,000 for the first nine months of this year compared to 2008. The third of this year also had lower advertising expenses compared to ’08, due to the timing of our advertising.

A non-GAAP metric we use to monitor our business is earnings before interest, taxes, depreciation, amortization and share-based compensation which we refer to as EBITDA. Non-GAAP measures are not intended to be used in place of GAAP reported amounts. But we think and investors have told us that certain non-GAAP information is helpful in assessing and understanding our results.

EBITDA was a healthy $3.4 million in the third quarter and $10.5 million in the first nine months of this year. Cash flow from operations was strong at $4 million in the third quarter and $11.6 million for the nine months of this year. We did receive a $1.5 million tax refund in the second quarter that affected our cash flow in that year-to-date period.

Our capital expenditures for the first nine months of this year were $4 million. This past quarter, we purchased an existing facility to increase the capacity of our specialty needle manufacturing operation. We are currently remodeling that facility to suit our needs. We also continue to invest in the implementation of our corporate-wide IT initiative and new ERP systems. We expect our capital expenditures including these two major projects the total is much as $10 million to $12 million over the next 12 to 18 months.

We also used cash in 2009 to repay a portion of our outstanding borrowings. During the first nine months of this year, we have repaid $1.1 million under the term loan portion of our credit facility in accordance with the three payment terms. These terms require a principal payments of $3.3 million on an annual basis through July of 2012.

Our balance sheet remains healthy. We ended the quarter with $46.9 million in cash and cash equivalents. We have $30.9 million outstanding under our credit agreement resulting in a net positive cash position of $16 million.

That wraps up my comments. And I would now like to turn the call back over to Chris.

Christine Jacobs

Thank you, Frank. In our two previous conference call this year, you have heard me talk about us making modest investments for the future, focusing on execution, and building momentum towards 2010 and beyond. Indeed that’s exactly what we accomplished in the third quarter. We continued to invest in our strategic initiatives. We delivered good profits and operating cash flow and we continued for building momentum towards 2010.

Our surgical products business delivered 6% pro forma organic growth in the third quarter and 8% pro forma organic growth year-to-date. Our wound closure and our specialty needle products have performed particularly well this year. We delivered good value and customized service for these customers and our surgical products business overall.

Our open orders were $13.1 million at the end of the third quarter, that’s up 14% over year end. Open orders are not guaranteed shipments and they are subject to cancellation or delay. But they do represent actual orders from customers that are in our manufacturing pipeline. They are an indicator of our prospects and demand for our products.

We expect our surgical products business to continue to experience period-to-period fluctuations because of the ordering patterns of our large OEM and distributor customers. But we think that 8% pro forma organic growth during the first nine months of this year is impressive, especially given the macroeconomic environment within which we had to operate during 2009. We continue to expect double-digit growth overtime in this business.

Last quarter I mentioned that we would likely purchase and remodel an existing facility to increase the capacity of our specialty needle manufacturing. As Frank mentioned, we acquired just such a facility in the third quarter and are currently in the early stages of remodeling and constructing to suit our need.

We paid cash for the building and do not expect to borrow to complete any of the remodeling or construction. Our specialty needle manufacturing operation is seriously cramped and it requires additional capacity to provide for future growth. We expect to complete the remodeling and move that plant within the next 12 months.

Any move of this type is usually difficult and we are planning for the move now in an effort to minimize any disruptions. You can expect that we will build inventory in anticipation of the move. We will of course also incur moving expenses next year that may be significant.

In our brachytherapy business, we continued to see a downward trend in procedures. I still don’t know where the bottom is in this industry and I don’t think anybody does. Pass-through reimbursement for seed is set to expire at the end of the year.

We continue to spend significant time in Washington in support of extending the pass-through status of seed reimbursement. Now I don’t have anything to report right now, and of course anything can happen. But seed reimbursement is a budget neutral issue to the CBO or the Congressional Budget Office.

Meaning, if there is no net cost or better said there is no increase at the federal budget level to maintain pass-through status for seed. So you could see that we have a good case to make both on the clinical side and the financial side. We will keep you posted and report back as things develop.

Despite the continued decline in brachy revenue, this business remains quite profitable and it generates good cash flows. You’ve heard me talk over the last several conference calls about disruptions and potential changes in this industry. As an example of this, one of our seed competitors declared bankruptcy this year.

We predicted just this type of shakeup. We expect opportunities to shake out at what we believe are inevitable changes to come in the industry. To reiterate what we have been saying, Theragenics is well positioned to take advantage of any opportunities that’s going to present themselves.

To sum up my remarks and points that I have made this morning sound a lot like remarks from previous conference calls and consistency in 2009 is not a bad message. We entered this year wanting to achieve a number of things.

We wanted to make modest investments in our capacity and infrastructure for future growth. We wanted to deliver organic growth in the surgical products business. We wanted to maintain our leadership in the brachy industry and be ready to take any advantages of opportunities that present themselves in the market.

We wanted to sustain profitability in both of our businesses and we wanted to generate strong cash flows from operations. We wanted to keep our balance sheet strong and flexible including renewing the credit facility. And lastly, we wanted to build momentum towards 2010 and beyond.

Our results for the nine months of this year show that we are well on our way to achieving each one of those mentioned objectives. We have recorded the highest nine-month revenue in our company’s history. And in many way, 2009 is shaping up to be the best year ever for us.

So that wraps up my remarks. Carisa, Frank and I are now opened to take questions from many of the callers.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) There are no questions at this time.

Christine Jacobs

All right, Carisa. I guess folks are awfully busy today, so we will take that as a great queue. And thank you very much for listening and coming into hear about our progress in 2009. Thank you all for being there.

Operator

This concludes today’s Theragenics third quarter 2009 earnings conference call. You may now disconnect.

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