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ev3's net sales were $107.0 million in the third quarter of 2008,representing a 65% increase over the same quarter of the prior year, primarilydue to the acquisition of FoxHollow. Third quarter revenues includedapproximately $100.0 million in net product sales and approximately $7.0million in research collaboration revenues. Net sales, excluding atherectomyand research collaboration revenues, increased 21% in the third quarter of2008 versus the prior year quarter. By product segment, third quarterneurovascular net product sales increased by 26% and peripheral vascular netsales, excluding atherectomy increased by 19%. Third quarter atherectomysales were $21.0 million. On a geographic basis, ev3 U.S. and internationalbusiness grew by 84% and 37%, respectively over the prior year quarter.Reconciliations of non-GAAP financial measures used in this release to themost comparable U.S. GAAP measures for the respective periods can be foundimmediately following the detail of net sales by geography later in thisrelease.
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Robert Palmisano, president and chief executive officer of ev3 Inc.,commented, "We are pleased with our performance during the third quarter, bothin terms of our sales and bottom line. Third quarter product sales of $100million were in line with our previous third quarter guidance despite astronger dollar than was anticipated in our guidance. I am also encouragedthat we were able to maintain the growth of our peripheral vascular businessin the third quarter despite pressure and distraction that resulted from theactivities of new competitors. More specifically, our atherectomy business isstill under some pressure due to the entry of a new competitor and the ongoingphysician trialing of competitive devices. However, we believe that physiciantrialing of competitive products ultimately will confirm the differentiatedclinical performance and value that the SilverHawk Plaque Excision Systemoffers as a front-line therapy in treating peripheral artery disease. Inaddition, interest in the SilverHawk is gathering momentum outside the U.S.,and we believe that physician enthusiasm for our new DEFINITIVE clinical trialstrategy could have a positive impact on sales and procedure adoption."
ev3's net loss for the third quarter of 2008 declined to $(7.3) millionversus $(36.5) million in the third quarter of 2007 and $(27.4) million in thesecond quarter of 2008. ev3's net loss in the third quarter of 2007 reflecteda special charge of $20.2 million and ev3's net loss in the second quarter of2008 reflected a non-cash impairment charge of $10.5 million. ev3's net lossper common share was $(0.07) for the third quarter of 2008 versus a net lossper common share of $(0.60) in the third quarter of 2007 and a net loss percommon share of $(0.26) in the second quarter of 2008. Total weighted averagecommon shares outstanding used in the per common share calculations were 104.5million and 60.4 million for the third quarter of 2008 and 2007, respectively,and 104.2 million for the second quarter of 2008. ev3's cash and cashequivalents balance was $45.9 million as of the end of the third quarter of2008, an increase of $7.2 million compared to the end of the second quarter of2008. This increase was primarily due to cash generated by operations duringthe third quarter of 2008.
ev3's non-GAAP adjusted net income was $3.9 million, or $0.04 per dilutedshare, for the third quarter of 2008. ev3's guidance range for non-GAAPadjusted EPS was $(0.02) to $0.01 per diluted share. ev3's non-GAAP adjustednet income and adjusted net earnings per share exclude amortization expense of$8.1 million and non-cash stock-based compensation of $3.1 million.
Palmisano concluded, "Our top priority is to achieve sustainedprofitability, so I was particularly pleased with our continued earningsprogress and an increase of $7.2 million in our cash and cash equivalentsbalance compared to the end of the second quarter of 2008. For the remainderof 2008, our focus will be on improving execution and optimizing our coststructure to balance the investment we need to build our business and deliverprofitable growth and value to our shareholders. We believe that our effortsto bring innovative, breakthrough endovascular treatments to physicians andpatients around the world will create a foundation for continued long-termgrowth and future profitability."
Third Quarter Business Highlights
During the third quarter of 2008, ev3 reported the following businesshighlights:
-- Submitted 510(k) applications to the U.S. Food & Drug Administrationfor EverCross and NanoCross PTA balloons;
-- Reported positive 12-month follow-up results for the EuropeanDURABILITY I clinical study, a landmark peripheral stent study covering thelongest lesion lengths in a challenging patient population;
-- Announced DEFINITIVE clinical trial series to expand the clinicalevidence supporting the value of the SilverHawk and RockHawk Plaque ExcisionSystems to drive increased procedure adoption, expand clinical indications andsupport the use of atherectomy as a front-line therapy; and
-- Enrolled first patient in DEFINITIVE Ca++ U.S. IDE trial to evaluateRockHawk Plaque Excision System when used in conjunction with the SpiderFXEmbolic Protection Device in the treatment of moderate to heavily calcifiedperipheral artery lesions.
Sales Review
Peripheral vascular segment product sales in the third quarter of 2008increased 73% to $66.9 million versus $38.7 million in the third quarter of2007. On a non-GAAP basis, excluding atherectomy revenue of $21.0 million,peripheral vascular product sales increased 19% to $45.9 million in the thirdquarter of 2008 versus $38.7 million in the third quarter of 2007. Stentproduct sales increased 16% to $26.8 million from $23.1 million. Thrombectomyand embolic protection product sales increased 29% to $6.9 million from $5.4million, while sales of procedural support and other peripheral vascularproducts increased 19% to $12.2 million from $10.2 million.
In the third quarter of 2008, ev3's neurovascular segment net salesincreased 26% to $33.1 million versus $26.4 million in the third quarter of2007. Within the neurovascular business segment, sales of embolic productsincreased 24% to $18.2 million from $14.7 million, and sales of neurovascularaccess and delivery products were up 28% to $14.9 million from $11.7 million.
Research collaboration revenue resulting from ev3's former collaborationand license agreement with Merck & Co., Inc. was $7.0 million for the thirdquarter of 2008, which included approximately $2.0 million for wind-downactivities as negotiated with Merck. ev3 expects to recognize approximately$800,000 of additional revenue from wind-down activities in the fourth quarterof 2008.
On a geographic basis, when compared to the third quarter of 2007, ev3'sthird quarter 2008 U.S. net sales increased 84% to $70.4 million, while thirdquarter 2008 international net sales increased 37% to $36.6 million, over theprior-year quarter. ev3's third quarter 2008 U.S. net sales increase wasprimarily due to the FoxHollow acquisition. International sales growth wasprimarily due to the Axium coil, further market penetration of the EverFlexfamily of stents and the Onyx Liquid Embolic System for the treatment of brainarterio-venous malformations (AVMs), and the introduction of atherectomyproducts into international markets. Changes in foreign currency exchangerates had a positive impact of approximately $1.7 million on third quarter2008 net sales compared to the third quarter of 2007, and a negative impact ofapproximately $900,000 compared to the second quarter of 2008 as a result ofdeclines in foreign currency exchange rates.
An investor presentation summarizing the company's third quarter 2008results is available at http://ir.ev3.net.
Outlook
ev3 expects fiscal year 2008 net sales to be in the range of $418 to $423million consisting of $398 to $403 million of product sales and $20.2 millionof research collaboration revenue and the additional revenue to be recognizedas a result of services to be provided to Merck to wind-down activities.Full-year revenue guidance has been updated to reflect a $3.7 million increasefrom ev3's previous guidance of $16.5 million of research collaborationrevenue and a decrease in product sales from a range of $408 to $413 millionto $398 to $403 million as a result of recent decreases in foreign currencyexchange rates and new competitive entrants in the peripheral vascularmarketplace. ev3 expects fiscal year 2008 non-GAAP adjusted earnings pershare to be in the range of $0.06 to $0.08 per diluted share based onapproximately 105 million of outstanding shares. ev3's adjusted net earningsper share guidance excludes estimated amortization expense of approximately$31.0 million, non-cash stock-based compensation of approximately $14.3million and the $10.5 million non-cash impairment charge related to thetermination of ev3's former collaboration and license agreement with Merck.
The company expects fourth quarter 2008 net sales to be in the range of$102 to $107 million and non-GAAP adjusted net earnings per share to be in therange of $0.04 to $0.06 per diluted share based on approximately 105 millionof outstanding shares. ev3's non-GAAP adjusted net earnings per shareexcludes estimated amortization expense of approximately $6.7 million and non-cash stock-based compensation of approximately $2.6 million.
Earnings Call Information
ev3 will host a conference call today, October 31, 2008, beginning at 7:30a.m. Central Time (8:30 a.m. Eastern Time) to review its results of operationsfor the third quarter of 2008 and future outlook, followed by a question andanswer session.
The conference call will be available to interested parties through a liveaudio webcast at http://ir.ev3.net, where it will be archived and accessiblefor approximately 12 months. The live dial-in number for the call is 888-679-8040 (U.S.) or 617-213-4851 (International). The participant passcode is68443677.
If you do not have access to the Internet and want to listen to an audioreplay of the conference call, dial 888-286-8010 (U.S.) or 617-801-6888(International) and enter passcode 80099924. The audio replay will beavailable beginning at 9:30 a.m. Central Time on Friday, October 31, 2008until Friday, November 7, 2008.
About ev3 Inc.
Since its founding in 2000, ev3 has been dedicated to developinginnovative, breakthrough and clinically proven technologies and solutions forthe treatment of peripheral vascular and neurovascular diseases. ev3'sproducts are used by endovascular specialists to treat a wide range ofperipheral vascular and neurovascular diseases and disorders. The companyoffers a comprehensive portfolio of treatment options, including the primaryinterventional technologies used today -- peripheral angioplasty balloons,stents, plaque excision systems, embolic protection devices, liquid embolics,embolization coils, thrombectomy catheters and occlusion balloons. Moreinformation about the company and its products can be found athttp://www.ev3.net.
ev3, the ev3 logo, Axium, Onyx, EverFlex, EverCross, FoxHollow, SilverHawkand RockHawk are trademarks of ev3 Inc., registered in the U.S. and othercountries. All trademarks and trade names referred to in this press releaseare the property of their respective owners.
Forward-Looking Statements
Statements contained in this press release that relate to future, notpast, events are forward-looking statements under the Private SecuritiesLitigation Reform Act of 1995. Forward-looking statements often can beidentified by words such as "expect," "anticipate," "intend," "will," "may,""believe," "could," "continue," "future," "outlook," "guidance," or thenegative of these words or other words of similar meaning. Forward-lookingstatements by their nature address matters that are, to different degrees,uncertain. Uncertainties and risks may cause ev3's actual results to bematerially different than those expressed in or implied by ev3's forward-looking statements. For ev3, particular uncertainties and risks include,among others, ev3's future operating results and financial performance,fluctuations in foreign currency exchange rates, ev3's ability to implement,fund and achieve sustainable cost savings measures that will better align itsoperating expenses with its anticipated net sales levels and reallocateresources to better support growth initiatives, the effect of the currentglobal economic crisis, the timing of regulatory approvals and introduction ofnew products, market acceptance of new products, success of clinical testing,availability of third party reimbursement, impact of competitive products andpricing and changes in the regulatory environment. More detailed informationon these and additional factors that could affect ev3's actual results aredescribed in ev3's filings with the Securities and Exchange Commission,including its most recent annual report on Form 10-K and subsequent quarterlyreports on Form 10-Q. Except as required by law, ev3 undertakes no obligationto update publicly its forward-looking statements.
Use of Non-GAAP Financial Measures
To supplement ev3's consolidated condensed financial statements preparedin accordance with U.S. generally accepted accounting principles (GAAP), ev3uses certain non-GAAP financial measures in this release. Reconciliations ofthe non-GAAP financial measures used in this release to the most comparableU.S. GAAP measures for the respective periods can be found in tables later inthis release immediately following the detail of net sales by geography.Non-GAAP financial measures have limitation as analytical tools and should notbe considered in isolation or as a substitute for ev3's financial resultsprepared in accordance with GAAP.
To supplement ev3's consolidated condensed financial statements preparedin accordance with GAAP, ev3 uses certain non-GAAP financial measures in thisrelease. These non-GAAP financial measures include "net sales, excludingatherectomy and research collaboration revenues," "peripheral vascular netsales, excluding atherectomy," "non-GAAP adjusted net income (loss)" and"non-GAAP adjusted net earnings (loss) per share."
Reconciliations of the non-GAAP financial measures used in this release tothe most comparable U.S. GAAP measures for the respective periods can be foundin the tables below. In addition, an explanation of the manner in which ev3'smanagement uses these non-GAAP measures to conduct and evaluate its business,the economic substance behind management's decision to use these non-GAAPmeasures, the substantive reasons why management believes that these non-GAAPmeasures provide useful information to investors, the material limitationsassociated with the use of these non-GAAP measures and the manner in whichmanagement compensates for those limitations is included following thereconciliation tables below.
"Use and Economic Substance of Non-GAAP Financial Measures Used by ev3 andUsefulness of Such Non-GAAP Financial Measures to Investors
ev3 uses the non-GAAP financial measures described above as supplementalmeasures of performance and believes these measures facilitate operatingperformance comparisons from period to period and company to company byfactoring out potential differences caused by acquisitions, dispositions, non-recurring, unusual or infrequent charges not related to ev3's regular, ongoingbusiness, variations in capital structure, tax positions, depreciation, non-cash charges and certain large and unpredictable charges. ev3's managementuses the non-GAAP financial measures used in this release to analyze theunderlying trends in ev3's business, assess the performance of ev3's coreoperations, establish operational goals and forecasts that are used inallocating resources and evaluate ev3's performance period over period and inrelation to its competitors' operating results. Additionally, ev3'smanagement is evaluated on the basis of some of these non-GAAP financialmeasures when determining achievement of their incentive compensationperformance targets.
ev3 believes that presenting the non-GAAP financial measures used in thisrelease provides investors greater transparency to the information used byev3's management for its financial and operational decision-making and allowsinvestors to see ev3's results "through the eyes" of management. ev3 alsobelieves that providing this information better enables ev3's investors tounderstand ev3's operating performance and evaluate the methodology used byev3's management to evaluate and measure such performance. ev3's managementbelieves that non-GAAP financial measures are useful to investors to evaluateev3's performance period over period and in relation to its competitors'operating results. Because ev3 historically has reported some of these non-GAAP results to the investment community, management also believes that thedisclosure of these non-GAAP measures provides consistency in ev3's financialreporting and facilitates investors' understanding of ev3's historic operatingtrends by providing an additional basis for comparisons to prior periods.
The following is an explanation of each of the items that managementexcluded from one or more of the non-GAAP financial measures used in thisrelease and the reasons for excluding each of these individual items:
-- Atherectomy net sales. In the fourth quarter of 2007, ev3 acquiredFoxHollow Technologies, Inc. (FoxHollow). Prior to this acquisition, ev3 didnot recognize any atherectomy net sales. In addition to disclosing net salesand growth rates that are determined in accordance with GAAP, ev3's managementbelieves that in order to properly understand underlying business trends inand performance of ev3's peripheral vascular segment business, management hasfound and investors may find it useful to consider the impact of excludingatherectomy net sales from ev3's total net sales and from ev3's peripheralvascular segment net sales.
-- Research collaboration revenue. As a result of ev3's FoxHollowacquisition, ev3 was engaged in a research collaboration with Merck & Co.,Inc. (Merck). Prior to ev3's acquisition of FoxHollow, ev3 did not recognizeany research collaboration revenue. This research collaboration was terminatedby Merck effective in July 2008. ev3's management believes that in order toproperly understand underlying business trends in and performance of ev3'songoing operations, management has found and investors may find it useful toconsider the impact of excluding research collaboration revenue from ev3'stotal net sales.
-- Research collaboration asset impairment. As a result of thetermination of ev3's research collaboration with Merck, ev3 recorded an assetimpairment charge of $10.5 million during the second quarter 2008 to write-offthe remaining carrying value of the related Merck intangible asset that wasestablished at the time of ev3's acquisition of FoxHollow. In addition todisclosing net income that is determined in accordance with GAAP, ev3'smanagement believes that in order to properly understand the underlyingbusiness trends and performance of ev3's ongoing operations, management hasfound and investors may find it useful to consider the impact of excluding the$10.5 million research collaboration asset impairment charge recorded by ev3in second quarter 2008.
-- Non-cash stock-based compensation. ev3 excludes stock-basedcompensation expense from its non-GAAP financial measures primarily becausesuch expense, while constituting an ongoing and recurring expense, is not anexpense that requires cash settlement and is not used by ev3's management toassess the core profitability of ev3's business operations. ev3's managementalso believes that excluding this item from ev3's non-GAAP results is usefulto investors to understand the application of SFAS 123R and its impact onev3's operational performance, liquidity and its ability to invest in researchand development and fund acquisitions and capital expenditures and it allowsfor greater transparency to certain line items in ev3's financial statements.
-- Amortization expense. ev3 excludes amortization expense from its non-GAAP financial measures primarily because such expense, while constituting anongoing and recurring expense, is not an expense that requires cash settlementand is not used by ev3's management to assess the core profitability of ev3'sbusiness operations. ev3's management also believes that excluding this itemfrom ev3's non-GAAP results is useful to investors to understand ev3'soperational performance, liquidity and its ability to invest in research anddevelopment and fund acquisitions and capital expenditures.
Material Limitations Associated with the Use of Non-GAAP FinancialMeasures and Manner in which ev3 Compensates for these Limitations
Non-GAAP financial measures have limitations as analytical tools andshould not be considered in isolation or as a substitute for ev3's financialresults prepared in accordance with GAAP. Some of the limitations associatedwith ev3's use of these non-GAAP financial measures are:
-- Items such as stock-based compensation do not directly affect ev3'scash flow position; however, such items reflect economic costs to ev3 and arenot reflected in ev3's "non-GAAP adjusted net income (loss)" or "non-GAAPadjusted net earnings (loss) per share," and therefore these non-GAAP measuresdo not reflect the full economic effect of these items.
-- Items such as the research collaboration asset impairment do notdirectly affect ev3's cash flow position; however, such items represent areduction in value of ev3's assets. The expense associated with thisreduction in value is not included in ev3's "non-GAAP adjusted net income(loss)" or "non-GAAP adjusted net earnings (loss) per share," and thereforethese non-GAAP measures do not reflect the full economic effect of thereduction in value of this asset.
-- Non-GAAP financial measures are not based on any comprehensive set ofaccounting rules or principles and therefore other companies may calculatesimilarly titled non-GAAP financial measures differently than ev3, limitingthe usefulness of those measures for comparative purposes.
-- ev3's management exercises judgment in determining which types ofcharges or other items should be excluded from the non-GAAP financial measuresev3 uses.
ev3 compensates for these limitations by relying primarily upon its GAAPresults and using non-GAAP financial measures only supplementally. ev3provides full disclosure of each non-GAAP financial measure ev3 uses anddetailed reconciliations of each non-GAAP measure to its most directlycomparable GAAP measure. ev3 encourages investors to review thesereconciliations. ev3 qualifies its use of non-GAAP financial measures withcautionary statements as to their limitations.ev3 Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share amounts) (unaudited) For the Three For the Nine Months Ended Months Ended September September September September 28, 30, 28, 30, 2008 2007 2008 2007 Sales Product sales $100,018 $65,060 $296,577 $191,955 Research collaboration 7,011 - 19,426 - Net sales 107,029 65,060 316,003 191,955 Operating expenses Product cost of goods sold (a) 36,182 23,097 102,442 65,916 Research collaboration 2,100 - 5,647 - Sales, general and administrative (a) 53,005 45,353 178,769 125,372 Research and development (a) 12,133 10,708 37,913 29,464 Amortization of intangible assets 8,101 3,952 24,285 11,916 Intangible asset impairment - - 10,459 - Loss (gain) on sale or disposal of assets, net 116 - 116 (988) Special charges - 20,183 - 20,183 Total operating expenses 111,637 103,293 359,631 251,863 Loss from operations (4,608) (38,233) (43,628) (59,908) Other (income) expense: Realized and unrealized gains on investments, net (142) - (542) - Interest (income) expense, net 49 (417) (307) (823) Other (income) expense, net 2,279 (1,554) 192 (2,066) Loss before income taxes (6,794) (36,262) (42,971) (57,019) Income tax expense 516 250 1,531 858 Net loss $(7,310) $(36,512) $(44,502) $(57,877) Earnings per share: Net loss per common share (basic and diluted) $(0.07) $(0.60) $(0.43) $(0.98) Weighted average common shares outstanding 104,474,600 60,365,027 104,276,029 59,141,035 (a) Includes stock-based compensation charges of: Product cost of goods sold $121 $101 $596 $446 Sales, general and administrative 2,572 2,100 9,608 6,166 Research and development 366 269 1,478 717 $3,059 $2,470 $11,682 $7,329 ev3 Inc. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share amounts) September 28, December 31, 2008 2007 (unaudited) Assets Current assets Cash and cash equivalents $45,947 $81,060 Short-term investments - 9,744 Accounts receivable, less allowance of $7,536 and $6,783, respectively 73,593 66,170 Inventories 56,269 64,044 Prepaid expenses and other assets 6,773 6,371 Other receivables 695 981 Total current assets 183,277 228,370 Restricted cash 1,442 2,204 Property and equipment, net 33,643 37,985 Goodwill 598,448 586,648 Other intangible assets, net 198,506 231,000 Other assets 467 899 Total assets $1,015,783 $1,087,106 Liabilities and stockholders' equity Current liabilities Accounts payable $18,366 $21,511 Accrued compensation and benefits 28,388 35,301 Accrued liabilities 25,455 49,429 Deferred revenue - 9,347 Current portion of long-term debt 2,500 3,571 Total current liabilities 74,709 119,159 Long-term debt 7,083 6,429 Other long-term liabilities 5,381 3,037 Total liabilities 87,173 128,625 Stockholders' equity Common stock, $0.01 par value; 300,000,000 shares authorized; shares issued and outstanding: 105,896,421 shares at September 28, 2008 and 105,078,769 shares at December 31, 2007 1,059 1,051 Additional paid in capital 1,753,572 1,739,064 Accumulated deficit (825,541) (781,039) Accumulated other comprehensive loss (480) (595) Total stockholders' equity 928,610 958,481 Total liabilities and stockholders' equity $1,015,783 $1,087,106 ev3 Inc. SELECTED NET SALES INFORMATION (Dollars in thousands, except per share amounts) (unaudited) For the Three For the Nine NET SALES BY SEGMENT Months Ended Months Ended September September September September 28, 30, % 28, 30, % 2008 2007 change 2008 2007 change Peripheral vascular Atherectomy $20,992 $- NA $68,624 $- NA Stents 26,772 23,105 16% 77,932 65,064 20% Thrombectomy and embolic protection 6,938 5,368 29% 19,990 20,029 0% Procedural support and other 12,184 10,240 19% 35,243 30,742 15% Total peripheral vascular 66,886 38,713 73% 201,789 115,835 74% Neurovascular Embolic products 18,174 14,698 24% 53,469 40,451 32% Neuro access and delivery products 14,958 11,649 28% 41,319 35,669 16% Total neurovas- cular 33,132 26,347 26% 94,788 76,120 25% Research collaboration 7,011 - NA 19,426 - NA Total company $107,029 $65,060 65% $316,003 $191,955 65% For the Three For the Nine NET SALES BY GEOGRAPHY Months Ended Months Ended September September September September 28, 30, % 28, 30, % 2008 2007 change 2008 2007 change United States $70,452 $38,312 84% $208,773 $113,028 85% International 36,577 26,748 37% 107,230 78,927 36% Total net sales $107,029 $65,060 65% $316,003 $191,955 65% ev3 Inc. NON-GAAP FINANCIAL MEASURES
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