American Medical Systems Holdings, Inc. (NASDAQ: AMMD) reported sales of $124.0 million for the third quarter of 2010, a 0.6 percent increase over sales of $123.2 million in the comparable quarter of 2009. The strengthening of the U.S. dollar compared to the third quarter of 2009 negatively affected revenue comparisons for the quarter by $1.4 million. Adjusting for the impact of foreign currency results in third quarter revenue growth of 1.8 percent over the same quarter last year. Further adjusting revenue for the impact of the Her Option® uterine health product line, which was sold during the first quarter of 2010, results in constant currency growth of 2.9 percent.

The Company reported third quarter net income of $18.6 million, or $0.24 per share. This compares to net income and earnings per share in the same quarter last year of $28.6 million, or $0.38, which included a $17.4 million gain on the sale of the Ovion technology and a $5.6 million gain on the exchange of convertible notes. Non-GAAP adjusted earnings per share of $0.29 compares to $0.27 in the same quarter last year, a growth of 7.4%, and finishing at the top of guidance despite softer revenue than planned. Non-GAAP adjusted earnings per share excludes the gains noted above, as well as the impact of the amortization of intangible assets and amortization of financing costs, both significant non-cash items affecting comparability to other companies. A reconciliation of reported net income to non-GAAP adjusted net income is provided in the attached schedules.

Softness in the U.S. market was a significant driver in revenue falling short of earlier expectations, resulting in U.S. revenue growth of 2.1 percent compared to the same quarter last year. This compares to revenue growth of 10.6 percent in the U.S. in the first half of 2010.

Men's Health sales of $55.2 million in the third quarter represented an increase of 0.9 percent on a reported basis compared to the same quarter last year and 2.4 percent on a constant currency basis, with the Male Continence product line growing in mid-single digits and the Erectile Restoration product line experiencing relatively flat growth. The BPH Therapy business declined 2.9 percent on a reported basis and 1.7 percent on a constant currency basis, to $26.9 million during the quarter. Sales were negatively impacted as customers awaited the launch of the MoXy? Liquid Cooled Fiber which did not occur until late in the last week of the third quarter. The Women's Health business, excluding the Her Option® product line that was sold in the first quarter, increased 6.0 percent on a reported basis and 6.8 percent on a constant currency basis to $41.2 million in the third quarter. The Pelvic floor repair product line, which continued its strong performance driven by the success of both the Elevate® anterior and posterior systems was partially offset by flat sales in the Female Continence product line.

?We were impacted more significantly than anticipated in the third quarter by softness in U.S. procedure volume. In addition, we experienced a longer than expected validation process to ensure the successful introduction of our new MoXy? Liquid Cooled Fiber,? noted Tony Bihl, Chief Executive Officer. Mr. Bihl further stated, ?We again demonstrated solid operational performance in both net income and cash management, and we are pleased to have delivered solid earnings at the high end of our guidance, despite challenging revenue results in the third quarter.?

Outlook

The Company estimates fourth quarter revenue in the range of $141 to $146 million, resulting in full year 2010 revenue guidance of $536 to $541 million, a reduction from previous 2010 guidance of $544 to $560 million. This guidance assumes foreign currency exchange rates remain constant with current rates.

Consistent with 2009, the Company has two significant non-cash charges in GAAP earnings that create inconsistencies in comparisons to many other companies; amortization of financing costs and amortization of intangible assets. Accordingly, the Company guides to non-GAAP adjusted earnings per share, which the Company defines as GAAP earnings per share excluding the impact of amortization of intangible assets and amortization of financing costs.

Despite the slower than anticipated revenue growth in the second half of 2010, the Company increased the lower end of its full year 2010 non-GAAP adjusted earnings per share guidance to $1.24 to $1.27 from previous guidance of $1.19 to $1.27. Fourth quarter non-GAAP adjusted earnings per share is expected to be in the range of $0.35 to $0.38. Both the full year and fourth quarter guidance excludes the impact of amortization of intangible assets which is approximately $0.025 and $0.10 for the fourth quarter and full year 2010, respectively, and amortization of financing costs, which is approximately $0.025 and $0.11 for the fourth quarter and full year 2010, respectively. Guidance for both periods excludes the impact of any unusual non-recurring items, such as gain or loss on early debt extinguishments, sale of non-strategic assets or IPRD charges on milestone payments related to prior acquisitions.

Use of Non-GAAP Financial Measures

In addition to financial measures prepared in accordance with generally accepted accounting principles (GAAP), management provides non-GAAP adjusted net income, non-GAAP adjusted earnings per share and constant currency revenue growth rates because management believes that in order to properly understand the Company's short-term and long-term financial trends and for purposes of comparability to other companies, investors may wish to consider the impact of certain adjustments (such as gain on extinguishment of debt, gain on sale of non-strategic assets, IPRD charges, amortization of intangible assets, amortization of financing costs and related income tax adjustments and the impact of foreign currency translation on reported revenue). These adjustments result from facts and circumstances (such as acquisition and business development activities and other non-recurring items) that vary in frequency and impact on the Company's results of operations, represent significant items, which when excluded provide a useful measure to determine the health of the business and earnings by the business before significant non-cash charges or in the case of foreign currency translation, are highly variable and difficult to predict. Management uses non-GAAP adjusted net income, non-GAAP adjusted earnings per share and constant currency revenue growth rates to forecast and evaluate the operational performance of the Company as well as to compare results of current periods to prior periods on a consistent basis.

A reconciliation of net income and revenue growth rate percentages, the GAAP measure most directly comparable to non-GAAP adjusted earnings per share and constant currency revenue growth rates, respectively, are provided on the attached schedules.

Non-GAAP financial measures used by the Company may be calculated differently from, and therefore may not be directly comparable to, similarly titled measures used by other companies. Investors should consider non-GAAP measures in addition to, and not as a substitute for, or superior to, financial performance measures prepared in accordance with GAAP.

Earnings Call Information

American Medical Systems will host a conference call on Wednesday, November 3, 2010 at 5:00 p.m. eastern time to discuss its third quarter results and guidance for the fourth quarter. Those without internet access may join the call from within the U.S. by dialing 888-263-1724; outside the U.S., dial 970-315-0301.

A live web cast of the call will be available through the Company's corporate website at www.AmericanMedicalSystems.com and will be available for replay three hours after the completion of the call.

About American Medical Systems

American Medical Systems, headquartered in Minnetonka, Minnesota, is a diversified supplier of medical devices and procedures to cure incontinence, erectile dysfunction, benign prostate hyperplasia (BPH), pelvic floor prolapse and other pelvic disorders in men and women. These disorders can significantly diminish one's quality of life and profoundly affect social relationships. In recent years, the number of people seeking treatment has increased markedly as a result of longer lives, higher-quality-of-life expectations and greater awareness of new treatment alternatives. American Medical Systems' products reduce or eliminate the incapacitating effects of these diseases, often through minimally invasive therapies. The Company's products were used to treat approximately 335,000 patients in 2009.

Forward-Looking Statements

This press release contains forward-looking statements relating to the market opportunities, future products, sales and financial results of American Medical Systems. These statements and other statements contained in this press release that are not purely historical fact are forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that are based on management's beliefs, certain assumptions and current expectations. These forward-looking statements are subject to risks and uncertainties such as successfully competing against competitors; physician acceptance, endorsement, and use of AMS products; potential product recalls or technological obsolescence; healthcare reform legislation in the U.S.; successfully managing debt leverage and related credit facility financial covenants; current worldwide economic conditions and the impact on operations of the disruption in global financial markets; factors impacting the stock market and share price and its impact on the dilution of convertible securities; ability of the Company's manufacturing facilities to meet customer demand; reliance on single or sole-sourced suppliers; loss or impairment of a principal manufacturing facility; clinical and regulatory matters; timing and success of new product introductions; patient acceptance of the Company's products and therapies; changes in and adoption of reimbursement rates; adequate protection of the Company's intellectual property rights; product liability claims; currency and other economic risks inherent in selling our products internationally and other risks and uncertainties described in the Company's Annual Report on Form 10-K for the year ended January 2, 2010, and its other SEC filings. Actual results may differ materially from anticipated results. The forward-looking statements contained in this press release are made as of the date hereof, and AMS undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the date on which any such statement is made or to reflect the occurrence of unanticipated events.

More information about the Company and its products can be found at its website www.AmericanMedicalSystems.com and in the Company's Annual Report on Form 10-K for 2009 and its other SEC filings.

American Medical Systems Holdings, Inc.

Statements of Operations

(Unaudited)

(In thousands, except per share data)

       
Three Months Ended Nine Months Ended
October 2, 2010 October 3, 2009 October 2, 2010 October 3, 2009
 
Net sales $ 124,029 $ 123,231 $ 395,323 $ 373,257
Cost of sales   21,963     21,284     65,795     66,234  
Gross profit 102,066 101,947 329,528 307,023
 
Operating expenses
Marketing and selling 42,637 42,489 136,948 128,690
Research and development 12,630 12,434 39,976 38,411
General and administrative 10,850 10,459 35,337 32,898
Amortization of intangibles   3,053     3,358     9,130     10,024  
Total operating expenses 69,170 68,740 221,391 210,023
 
Operating income 32,896 33,207 108,137 97,000
 
Other (expense) income
Royalty income 153 961 508 2,768
Interest expense (3,329 ) (4,674 ) (10,867 ) (15,050 )
Amortization of financing costs (3,503 ) (4,395 ) (10,542 ) (12,350 )
Gain on extinguishment of debt - 5,563 - 10,125
Gain on sale of non-strategic assets - 17,446 7,719 17,446
Other income (expense)   1,883     (324 )   1,852     1,098  
Total other (expense) income (4,796 ) 14,577 (11,330 ) 4,037
 
Income before income taxes 28,100 47,784 96,807 101,037
 
Provision for income taxes   9,528     19,163     37,010     38,471  
 
Net income $ 18,572   $ 28,621   $ 59,797   $ 62,566  
 
 
Net income per share
Basic net income $ 0.24 $ 0.39 $ 0.79 $ 0.85
Diluted net income 0.24 0.38 0.77 0.84
 
Weighted average common shares used in calculation
Basic 76,151 74,278 75,627 73,939
Diluted 78,545 74,998 77,643 74,456
 
American Medical Systems Holdings, Inc.
Condensed Balance Sheets
(In thousands)
       
 
October 2, 2010 January 2, 2010
(Unaudited)
Assets
Current assets
Cash and short-term investments $ 61,777 $ 50,538
Accounts receivable, net 91,561 102,590
Inventories, net 35,254 30,276
Other current assets   19,897   20,937
Total current assets 208,489 204,341
 
Property, plant and equipment, net 42,481 44,120
Goodwill and intangibles, net 777,442 792,467
Other long-term assets   5,347   6,223
Total assets $ 1,033,759 $ 1,047,151
 
Liabilities and stockholders' equity
Current liabilities
Accounts payable $ 7,866 $ 9,114
Accrued liabilities and taxes   51,640   62,151
Total current liabilities 59,506 71,265
 
Debt and other long term liabilities   340,967   430,527
Total liabilities 400,473 501,792
 
Stockholders' equity 633,286 545,359
   
Total liabilities and stockholders' equity $ 1,033,759 $ 1,047,151
 
American Medical Systems Holdings, Inc.
Condensed Statements of Cash Flows
(Unaudited)
(In thousands)
         
Nine Months Ended
October 2, 2010 October 3, 2009
 
 
Cash flows from operating activities
Net income $ 59,797 $ 62,566
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization, including deferred financing costs 26,874 29,664
Gain on extinguishment of debt - (10,125 )
Gain on sale of non-strategic assets (7,719 ) (17,446 )
Stock-based compensation 6,284 6,649
Other adjustments, including changes in operating assets
and liabilities   (11,011 )   25,877  
Net cash provided by operating activities 74,225 97,185
 
Cash flows from investing activities
Purchase of property, plant and equipment (5,826 ) (3,688 )
Purchase of other intangibles (2,438 ) (5,392 )
(Purchase) sale of short term investments, net (24,084 ) 11,895
Sale of non-strategic assets, net 19,043 18,982
Other cash flows from investing activities   970     (171 )
Net cash (used in) provided by investing activities (12,335 ) 21,626
 
Cash flows from financing activities
Payments on senior secured credit facility (96,963 ) (78,173 )
Repurchase of convertible senior subordinated notes - (21,125 )
Debt issuance costs - (7,697 )
Other cash flows from financing activities   22,762     6,902  
Net cash used in financing activities (74,201 ) (100,093 )
 
Effect of currency exchange rates on cash and cash equivalents   (523 )   (614 )
 
Net (decrease) increase in cash and cash equivalents (12,834 ) 18,104
 
Cash and cash equivalents at beginning of period   30,670     11,642  
 
Cash and cash equivalents at end of period $ 17,836   $ 29,746  
 
American Medical Systems Holdings, Inc.
Selected Sales Information and Constant Currency Growth Reconciliation
(Unaudited)
(In thousands)
             
Three Months Ended Constant Currency Growth Reconciliation (a)
October 2, 2010 October 3, 2009

Percent
Growth

Currency
Impact

Percent Growth
at Constant
Currency

 
Sales
Men's health $ 55,177 $ 54,666 0.9 % $ (816 ) 2.4 %
BPH therapy 26,890 27,686 -2.9 % (330 ) -1.7 %
Women's health   41,192     38,848   6.0 %   (293 ) 6.8 %
 
Sub-total 123,259 121,200 1.7 % (1,439 ) 2.9 %
 
Uterine health (b)   770     2,031   -62.1 %   -   -62.1 %
 
Total $ 124,029   $ 123,231   0.6 % $ (1,439 ) 1.8 %
 
Geography
United States $ 92,136 $ 90,231 2.1 % $ - 2.1 %
International   31,123     30,969   0.5 %   (1,439 ) 5.1 %
 
Sub-total 123,259 121,200 1.7 % (1,439 ) 2.9 %
 
United States-Uterine health (b)   770     2,031   -62.1 %   -   -62.1 %
 
Total $ 124,029   $ 123,231   0.6 % $ (1,439 ) 1.8 %
 
Percent of total sales
Men's health 44 % 44 %
BPH therapy 22 % 22 %
Women's health   33 %   32 %
 
Sub-total 99 % 98 %
 
Uterine health (b) 1 % 2 %
   
Total   100 %   100 %
 
Geography
United States 75 % 75 %
International   25 %   25 %
 
Total   100 %   100 %
 
(a)  

To calculate the currency impact on revenue growth rates, the Company compares each period's sales, assuming no fluctuation in foreign currency exchange rates between periods. The generally accepted accounting principle (GAAP) measure most comparable to this non-GAAP measure is growth rate percentages based on GAAP revenue.

 
(b)

The uterine health product line, Her Option ® was sold in February, 2010. Revenues in the third quarter of 2010 include revenue earned as part of the product supply agreement, which was part of the divestiture agreement with CooperSurgical, Inc.

 

American Medical Systems Holdings, Inc.
Selected Sales Information and Constant Currency Growth Reconciliation
(Unaudited)
(In thousands)
               
Nine Months Ended Constant Currency Growth Reconciliation (a)

October 2, 2010

October 3, 2009

Percent
Growth

Currency
Impact

Percent Growth
at Constant
Currency

 
Sales
Men's health $ 181,018 $ 171,090 5.8 % $ 651 5.4 %
BPH therapy 81,977 81,159 1.0 % 225 0.7 %
Women's health   128,431     113,617   13.0 %   551 12.6 %
 
Sub-total 391,426 365,866 7.0 % 1,427 6.6 %
 
Uterine health (b)   3,897     7,391   -47.3 %   - -47.3 %
 
Total $ 395,323   $ 373,257   5.9 % $ 1,427 5.5 %
 
Geography
United States $ 284,189 $ 263,946 7.7 % $ - 7.7 %
International   107,237     101,920   5.2 %   1,427 3.8 %
 
Sub-total 391,426 365,866 7.0 % 1,427 6.6 %
 
United States-Uterine health (b)   3,897     7,391   -47.3 %   - -47.3 %
 
Total $ 395,323   $ 373,257   5.9 % $ 1,427 5.5 %
 
Percent of total sales
Men's health 46 % 46 %
BPH therapy 21 % 22 %
Women's health   32 %   30 %
 
Sub-total 99 % 98 %
 
Uterine health (b) 1 % 2 %
   
Total   100 %   100 %
 
Geography
United States 73 % 73 %
International   27 %   27 %
 
Total   100 %   100 %
 
(a)  

To calculate the currency impact on revenue growth rates, the Company compares each period's sales, assuming no fluctuation in foreign currency exchange rates between periods. The generally accepted accounting principle (GAAP) measure most comparable to this non-GAAP measure is growth rate percentages based on GAAP revenue.

 
(b)

The uterine health product line, Her Option ® was sold in February, 2010. Revenues in the first nine months of 2010 consist of end-customer revenue earned prior to the date of sale, in addition to revenue earned as part of the product supply agreement, which was part of the divestiture agreement with CooperSurgical, Inc.

 

American Medical Systems Holdings, Inc.
Reconciliation of Reported Net Income to Non-GAAP Adjusted Net Income
(Adjustments are presented on a pre-tax basis)
(Unaudited)
(In thousands, except per share data)
           
Three Months Ended Nine Months Ended
October 2, 2010 October 3, 2009 October 2, 2010 October 3, 2009
 
Net income, as reported $ 18,572 $ 28,621 $ 59,797 $ 62,566
 
Adjustments to net income:
Amortization of intangibles (a) 3,053 3,358 9,130 10,024
Amortization of financing costs (b) 3,503 4,395 10,542 12,350
Gain on extinguishment of debt (c) - (5,563 ) - (10,125 )
Gain on sale of non-strategic assets (d) - (17,446 ) (7,719 ) (17,446 )
Tax effect of adjustments to net income (e)   (2,472 )   6,615     (2,343 )   2,976  
 
Non-GAAP adjusted net income $ 22,656   $ 19,980   $ 69,407   $ 60,345  
 
Net income per share, as reported
Basic $ 0.24 $ 0.39 $ 0.79 $ 0.85
Diluted $ 0.24 $ 0.38 $ 0.77 $ 0.84
 
Non-GAAP adjusted earnings per share
Basic $ 0.30 $ 0.27 $ 0.92 $ 0.82
Diluted $ 0.29 $ 0.27 $ 0.89 $ 0.81
 
Weighted average common shares used in calculation:
Basic 76,151 74,278 75,627 73,939
Diluted 78,545 74,998 77,643 74,456
 
(a)   Consists of amortization of intangible assets, primarily developed and core technology.
 
(b) Consists of amortization of financing costs on our convertible senior subordinated notes and senior secured credit facility.
 
(c)

Relates to the $5.6 million gain in the third quarter 2009 on exchanging $250.0 million of 2036 convertible senior subordinated notes for a like amount of 2041 convertible senior subordinated notes and year-to-date 2009 also includes the $4.6 million gain in the first quarter of 2009 on retiring approximately $27.3 million of 2036 convertible senior subordinated notes.

 
(d) Relates to the gain on the sale of our Her Option® Global Endometrial Ablation product line in the first quarter of 2010 and the
gain on sale of our Ovion female sterilization and technology assets in the third quarter of 2009.
 
(e) Includes the tax effect of each of the above items in each of the periods.

American Medical Systems Holdings, Inc.
Mark Heggestad, 952-930-6495
Executive Vice President and Chief Financial Officer
Mark.Heggestad@AmericanMedicalSystems.com
or
Anthony Bihl, 952-930-6334
President and Chief Executive Officer
Tony.Bihl@AmericanMedicalSystems.com