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SurModics Inc. (SRDX)

F2Q2012 Results Earnings Call

May 08, 2012 5:00 PM ET

Executives

Tim Arens – Vice President and Interim CFO

Gary Maharaj – Chief Executive Officer

Analysts

Ernie Andberg – Feltl

Ross Taylor – CL King

Jeffrey Warshauer – Sidoti & Company

Charley Jones – Barrington Research

Presentation

Operator

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Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the SurModics Second Quarter 2012 Earnings Conference Call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions)

This conference is being recorded today, Tuesday, May 8, 2012. I would now like to turn the conference over to Mr. Tim Arens, Vice President and Interim Chief Financial Officer. Please go ahead, sir.

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Tim Arens

Thank you, Lily. Good afternoon. And welcome to SurModics' fiscal 2012 second quarter earnings call. Also with me on the call is Gary Maharaj, our Chief Executive Officer.

Our press release reporting our full second quarter results was issued earlier this afternoon and is available on our website at surmodics.com.

Before we begin, it is my duty to inform you that this conference call is being webcast and is accessible through the Investor Relations section of the SurModics' website, where the audio recording of the webcast will also be archived for future reference.

I will remind you that some of the statements made during this call may be considered forward-looking. The 10-K for fiscal year 2011 identifies certain factors that could cause the company's actual results to differ materially from those projected in any forward-looking statements made during this call. The company does not undertake any duty to update any forward-looking statements as a result of new information or future events or developments.

On today's call, I will provide an overview of our financial results and highlights for the quarter. Gary will then discuss our key achievements for the quarter and provide an update on the growth drivers and strategy, including additional detail on our newly announced share repurchase program. Following this discussion, we will open the call to take your questions.

Unless otherwise noted, second quarter financial results discuss today exclude the $200,000 second quarter loss associated with discontinued operations. Thus, the financial information that I discuss relates to our continuing operations and is in many cases on a non-GAAP basis.

As in past quarter’s, I’ll provide insights and performance comparisons, excluding financial impact related to the discontinuation of Cordis’ Cypher and Cypher Select Plus drug eluting stents.

You will recall that in prior periods, we have generated both product and royalty revenue based on tails of these Cordis products, which have incorporated our proprietary drug delivery and hydrophilic coatings technologies.

Our earnings announcement issued earlier this afternoon provide supplemental non-GAAP financial information that adjust for Cypher and certain events specific charges. We believe that these adjustments provide meaningful insight into our core operating performance and then alternate perspective of our operating results.

Our financial performance after adjusting for Cypher resulted in modest revenue growth while our core businesses generated record operating income during the quarter. Revenue for the second quarter totaled $12.2 million, an 8% decline from the $13.3 million reported in the second quarter of last year.

On a comparative basis, our second quarter revenue growth on adjusting for the $1.6 million in revenue associated with Cypher increased 4% from the year ago period.

We delivered solid bottom line results during the quarter with operating income of $3.7 million. On a non-GAAP basis operating income was $3.8 million, up 41% from the prior year.

Non-GAAP operating margin was 31%, up 800 basis points compared with the prior year period, driven by strong contributions from last year’s productivity and cost actions, and continued pull-through on our organic growth initiatives.

On a GAAP basis, our diluted earnings per share was $0.11 for the second quarter, compared to diluted earnings per share of $0.16 from the year ago period. Excluding the impact of Cypher and the $800,000 charge related to our equity investment in OctoPlus, non-GAAP diluted earnings per share in the second grew 27% and was $0.14, compared to non-GAAP diluted earnings per share of $0.11 from a year ago period driven by higher core revenue and contributions from last year’s cost actions.

I will now turn our discussion to performance by business unit. For the second quarter, Medical Device sales which include revenue from both our hydrophilic coatings and device drug delivery technologies totaled $8.7 million, down 12% from the $10 million reported in the year ago period. Adjusting for Cypher Medical Device revenue grew 5%.

Device drug delivery revenue declined $1.3 million from last year’s second quarter. This decline was largely attributable to Cypher. Second quarter results include hydrophilic coatings revenue of $8.7 million, which was flat compared with a year ago period.

During the quarter our hydrophilic royalty revenue excluding Cypher increased 4% from last year’s second quarter. During the quarter we experienced the 9% decline in our non-Cypher royalty revenue associated with the Medical Device Coronary and Cardiac Rhythm Management market segment. As a point of reference, the first quarter generated 8% growth in this market segment after adjusting for Cypher.

Based upon multiple customer interactions, we believe that this quarter’s Coronary and CRM segment performance may have been impacted by factors such as delayed customer product introductions and ongoing international pricing pressures.

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