KYPH Kyphon (MM)

SUNNYVALE, Calif., Nov. 1 /PRNewswire-FirstCall/ -- Kyphon Inc. (NASDAQ:KYPH) today announced that net sales for the quarter ended September 30, 2006 totaled $102.7 million, an increase of 30% over the $79.0 million in net sales reported for the third quarter of 2005. Net income for the third quarter of 2006 decreased 19% to $9.5 million, or $0.21 per diluted share, compared to net income of $11.8 million or $0.26 per diluted share for the same period in 2005, which lacked any FAS 123( R ) charges. Excluding the FAS 123( R ) stock-based compensation charge, non-GAAP net income for the third quarter of 2006 compared to the same period a year ago increased 22% to $14.3 million, or $0.31 per diluted share. A reconciliation of GAAP and non-GAAP operating results is provided below. Kyphon's revenues for the third quarter included $82.5 million in net sales in the United States and $20.2 million in net sales from its international operations, representing growth in those markets of 23% and 66%, respectively, over the third quarter of 2005. For the nine-month period ended September 30, 2006, Kyphon reported net sales of $295.2 million, an increase of 34% over the $220.3 million reported for the same period in 2005. Net income for the first nine months of 2006 increased 5% to $27.5 million or $0.60 per diluted share, compared to net income of $26.1 million, or $0.58 per diluted share for the same period in 2005. Excluding the FAS 123( R ) stock-based compensation charge, non-GAAP net income for the nine-month period ended September 30, 2006 compared to the same period a year ago increased 58% to $41.3 million, or $0.89 per diluted share. A reconciliation of GAAP and non-GAAP operating results is provided below. "I am very pleased with our third quarter financial performance and the continuing strong adoption of the balloon kyphoplasty procedure by spine specialists to treat their patients who suffer from vertebral compression fractures," said Richard Mott, president and chief executive officer of Kyphon. "The body of clinical evidence supporting the effectiveness and safety of the balloon kyphoplasty procedure continues to grow and demand for training by clinicians remains robust. We believe this reflects, in part, the growing interest shown by the interventional radiology community in performing the balloon kyphoplasty procedure to treat their patients. Over 250,000 patients have been treated by nearly 10,000 clinicians worldwide since we first began commercialization, and we remain focused on making balloon kyphoplasty the standard of care for spinal fractures," concluded Mott. Financial Outlook for Full-Year 2006 and Quarter Ending December 31, 2006 For the full-year 2006, net sales are targeted to increase approximately 31% versus 2005 to at least $400 million. For the fourth quarter of 2006, the company anticipates worldwide net sales of at least $105 million, which represents an increase of 22% versus the fourth quarter of 2005. The full-year 2006 target range for GAAP earnings per diluted share, which includes the impact of the implementation of stock-based compensation under FAS 123( R ), is expected to be between $0.84 and $0.87. The target range for non-GAAP earnings per diluted share excluding the impact of FAS 123( R ) is $1.23 to $1.26. For the fourth quarter, the target range for GAAP earnings per diluted share including the impact of FAS 123( R ) is $0.24 to $0.26. Excluding the impact of FAS 123( R ), non-GAAP earnings per diluted share is targeted to be between $0.34 and $0.36. Selected Metrics Kyphon ended the third quarter of 2006 with about 300 device sales representatives in the U.S. Internationally, the company ended the third quarter with approximately 115 sales professionals. Kyphon is planning to end 2006 with approximately 300 to 310 device sales representatives in the U.S., along with approximately 120 to 130 sales representatives outside of the U.S. These sales representatives work with spine specialists worldwide who perform, or who are candidates to perform, the balloon kyphoplasty procedure and the primary care physician community, to educate them about the option of balloon kyphoplasty. To date, approximately 5,800 spine specialists in the U.S. and 4,100 outside the U.S. have been trained to perform balloon kyphoplasty. For the year 2006, Kyphon expects to train a total of approximately 2,300 physicians to perform balloon kyphoplasty procedures, 1,000 in the U.S. and 1,300 outside of the U.S. Use of Non-GAAP Financial Measures Kyphon management believes that to properly understand Kyphon's short- and long-term financial trends, investors may wish to consider the impact of certain charges to better understand the Company's operations and financial performance. These charges result from facts and circumstances that vary in frequency and/or impact on continuing operations. In addition, Kyphon management uses results of operations before certain charges to evaluate the operational performance of the company and as a basis for strategic planning. Investors should consider these non-GAAP measures in addition to, and not as a substitute for, financial performance measures in accordance with GAAP. Reconciliation of GAAP and Non-GAAP Operating Results Non-GAAP third quarter 2006 and nine months ended September 30, 2006 results exclude stock-based compensation charge under FAS 123( R ). A reconciliation of Kyphon's non-GAAP operating results to its GAAP operating results for these periods follows (unaudited, in thousands, except per share amounts): Kyphon Inc. Reconciliation of GAAP and Non-GAAP Operating Results (unaudited; in thousands, except per share amounts) Three Months Ended Three Months Ended September 30, September 30, 2006 2005 GAAP Adjustments (1) Pro Forma GAAP U. S. net sales $82,508 $-- $82,508 $66,863 International net sales 20,170 -- 20,170 12,151 Net sales 102,678 -- 102,678 79,014 Cost of goods sold 13,321 (390) 12,931 9,456 Gross profit 89,357 390 89,747 69,558 Operating expenses: Research and development 10,384 (892) 9,492 6,415 Sales and marketing 48,609 (2,826) 45,783 36,151 General and administrative 15,307 (2,582) 12,725 8,280 Total operating expenses 74,300 (6,300) 68,000 50,846 Income from operations 15,057 6,690 21,747 18,712 Interest income and other, net 2,254 -- 2,254 1,212 Income before income taxes 17,311 6,690 24,001 19,924 Provision for income taxes 7,780 1,892 9,672 8,170 Net income $9,531 $4,798 $14,329 $11,754 Net income per share: Basic $0.21 $0.11 $0.32 $0.27 Diluted $0.21 $0.10 $0.31 $0.26 Weighted-average shares outstanding: Basic 44,572 -- 44,572 43,195 Diluted 46,305 83 46,388 45,898 Nine Months Ended Nine Months Ended September 30, September 30, 2006 2005 GAAP Adjustments (1) Pro Forma GAAP U. S. net sales $239,661 $-- $239,661 $188,426 International net sales 55,507 -- 55,507 31,848 Net sales 295,168 -- 295,168 220,274 Cost of goods sold 37,474 (947) 36,527 25,875 Gross profit 257,694 947 258,641 194,399 Operating expenses: Research and development 28,912 (2,793) 26,119 19,513 Sales and marketing 142,644 (8,355) 134,289 107,310 General and administrative 43,371 (7,938) 35,433 26,321 Total operating expenses 214,927 (19,086) 195,841 153,144 Income from operations 42,767 20,033 62,800 41,255 Interest income and other, net 6,457 -- 6,457 2,556 Income before income taxes 49,224 20,033 69,257 43,811 Provision for income taxes 21,720 6,190 27,910 17,700 Net income $27,504 $13,843 $41,347 $26,111 Net income per share: Basic $0.62 $0.31 $0.93 $0.61 Diluted $0.60 $0.29 $0.89 $0.58 Weighted-average shares outstanding: Basic 44,313 -- 44,313 42,522 Diluted 46,158 159 46,317 45,035 (1) Adjustments consist of stock-based compensation and the related tax effect. FAS 123( R ) requires the company to estimate the cost of all forms of employee stock-based compensation, including employee stock options and awards under our employee stock purchase plan (ESPP), and to record a commensurate expense (which is subjective in nature) in the income statement. This non-GAAP presentation is given in part to enhance the understanding of the company's historical financial performance and comparability between periods in light of a change in accounting standards particularly since the company did not include stock-based compensation under FAS 123( R ) as an expense in its financial statements prior to January 1, 2006. In addition, the company strongly believes that the non-GAAP presentation to exclude stock-based compensation is relevant and useful information that will be widely used by analysts, investors, and other interested parties in the medical device industry. Accordingly, the company is disclosing this information to permit additional analysis of the company's performance. Earnings Call Information Kyphon will host a conference call today at 2:00 p.m. Pacific Time to discuss its third quarter 2006 results and expectations for the remainder of 2006. A live webcast of the call will be available from the Investor Relations section of the company's corporate Web site at http://www.kyphon.com/. The call will be archived on this site for a minimum of two months. An audio replay of the call will also be available beginning from 6:00 p.m. Pacific Time on Wednesday, November 1, 2006, until 12:00 a.m. Pacific Time on Wednesday, November 22, 2006. To access the replay, dial (888) 203-1112 (U.S.) or (719) 457-0820 (International) and enter the access code 2104660. About Kyphon Inc. Kyphon develops and markets medical devices designed to diagnose low back pain and restore spinal function using minimally invasive technologies. The company's products are used in balloon kyphoplasty for the treatment of spinal fractures caused by osteoporosis or cancer, and in Functional Anaesthetic Discography(TM) for the diagnosis of low back pain due to disc degeneration. More information about the company and its products can be found at http://www.kyphon.com/ and its patient education Web site, http://www.spinalfracture.com/. Functional Anaesthetic Discography is a trademark, and Kyphon is a registered trademark, of Kyphon Inc. This press release contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward looking statements include, but are not limited to, those that use words such as "believes," "expects," "anticipates," "targets," "intends," "plans," "projects," and words of similar effect, and specifically include the company's future financial projections and anticipated business direction and performance. Forward-looking statements are based on management's current preliminary expectations and are subject to risks, uncertainties and assumptions, which may cause the company's actual results to differ materially from the statements contained herein. Information on potential risk factors that could affect Kyphon, its business and its financial results are detailed in the company's periodic filings with the Securities and Exchange Commission (SEC), including, but not limited to, those risks and uncertainties listed in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors Affecting Future Operating Results," which can be found in Kyphon's annual report on Form 10-K for the year ended December 31, 2005 filed with the SEC on March 3, 2006 and in Kyphon's quarterly report on Form 10-Q for the quarter ended June 30, 2006 filed with the SEC on August 8, 2006. Kyphon undertakes no obligation to release publicly any revisions to any forward-looking statements contained herein to reflect events or circumstances after the date hereof. KYPHE Kyphon Inc. Condensed Consolidated Balance Sheets (unaudited, in thousands) September 30, December 31, 2006 2005 Assets Current assets: Cash and cash equivalents $120,151 $76,149 Investments 129,574 118,324 Accounts receivable, net 64,253 55,480 Inventories 11,677 9,265 Prepaid expenses and other current assets 23,816 16,387 Total current assets 349,471 275,605 Property and equipment, net 24,437 15,977 Goodwill and other intangible assets, net 14,839 15,377 Other assets 12,018 9,673 Total assets $400,765 $316,632 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $9,522 $9,308 Accrued liabilities 61,913 49,793 Total current liabilities 71,435 59,101 Deferred rent and other 5,224 4,051 Contingent purchase price 3,459 3,424 Total liabilities 80,118 66,576 Commitments and contingencies Stockholders' equity: Common stock, par value: $0.001 per share 45 44 Additional paid-in capital 272,314 231,312 Treasury stock, at cost (201) (201) Deferred stock-based compensation, net -- (116) Accumulated other comprehensive income 2,140 172 Retained earnings 46,349 18,845 Total stockholders' equity 320,647 250,056 Total liabilities and stockholders' equity $400,765 $316,632 -- -- Kyphon Inc. Condensed Consolidated Income Statements (unaudited; in thousands, except per share amounts) Three Months Ended Nine Months Ended September 30, September 30, 2006 2005 2006 2005 U. S. net sales $82,508 $66,863 $239,661 $188,426 International net sales 20,170 12,151 55,507 31,848 Net sales 102,678 79,014 295,168 220,274 Cost of goods sold 13,321 9,456 37,474 25,875 Gross profit 89,357 69,558 257,694 194,399 Operating expenses: Research and development 10,384 6,415 28,912 19,513 Sales and marketing 48,609 36,151 142,644 107,310 General and administrative 15,307 8,280 43,371 26,321 Total operating expenses 74,300 50,846 214,927 153,144 Income from operations 15,057 18,712 42,767 41,255 Interest income and other, net 2,254 1,212 6,457 2,556 Income before income taxes 17,311 19,924 49,224 43,811 Provision for income taxes 7,780 8,170 21,720 17,700 Net income $9,531 $11,754 $27,504 $26,111 Net income per share: Basic $0.21 $0.27 $0.62 $0.61 Diluted $0.21 $0.26 $0.60 $0.58 Weighted-average shares outstanding: Basic 44,572 43,195 44,313 42,522 Diluted 46,305 45,898 46,158 45,035 DATASOURCE: Kyphon Inc. CONTACT: Investors and Media, Julie D. Tracy, Vice President, Investor Relations and Corporate Marketing, +1-408-548-6687, or Web site: http://www.kyphon.com/

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