DJO Announces Financial Results for First Quarter 2007.

SAN DIEGO -- DJO Incorporated (NYSE:DJO), a global provider of products and services that promote musculoskeletal and vascular health, today announced financial results for the first quarter of 2007, ended March 31, 2007.

Net revenues for the first quarter of 2007 were $114.9 million, reflecting an increase of approximately 39 percent, compared with net revenues of $82.6 million in the first quarter of 2006. The first quarters of 2007 and 2006 each included 64 shipping days. Revenues for the first quarter of 2007 included a contribution from the Company's Aircast acquisition, which closed in April 2006. On a pro forma basis, as if Aircast had been acquired as of January 1, 2006, net revenues for the first quarter of 2007 reflected growth of approximately 9 percent compared to pro forma net revenues for the first quarter of 2006.

Non-GAAP net income for the first quarter of 2007 was $5.6 million, or $0.23 per share, compared with non-GAAP net income of $6.5 million, or $0.28 per share, for the first quarter of 2006. Non-GAAP results for the first quarters of 2007 and 2006 exclude certain amounts aggregating $1.6 million, or $0.06 per share, and $0.6 million, or $0.02 per share, respectively, which are not deemed to be reflective of the ongoing operations of the Company. For the first quarter of 2007, the excluded amounts reflect certain costs and expenses related to the integration of the acquired Aircast business and costs related to the settlement of outstanding litigation. For the first quarter of 2006, the excluded amounts reflect purchase accounting adjustments to write up acquired Axmed inventories to fair value and the write-off of previously deferred expenses related to a discontinued acquisition. Beginning with the first quarter of 2007, the Company has no longer excluded the impact of stock-based compensation expense from its non-GAAP results as such expense is now included in both the current and comparable prior year periods. GAAP net income for the first quarter of 2007 was $4.0 million, or $0.17 per share, compared with GAAP net income of $6.0 million, or $0.26 per share, for the first quarter of 2006.

The Company defines adjusted EBITDA as earnings before interest, taxes, depreciation and amortization, stock-based compensation expense and certain charges and expenses not deemed to be reflective of the ongoing operations of the Company, as discussed above. Adjusted EBITDA for the first quarter of 2007 was $25.4 million, or 22.1 percent of net revenues, reflecting growth of approximately 40 percent over adjusted EBITDA of $18.2 million for the first quarter of 2006.

"The first quarter of 2007 generated mixed results for DJO, with strong revenue results offset by gross profit margins and earnings that did not meet our expectations," said Les Cross, president and CEO of DJO Incorporated. "On the positive side, the first quarter was marked by continued strong revenue growth across the Company's three business segments. We also achieved the improved operating expense levels we had expected. We are disappointed, however, that gross profit was lower than expected in the first quarter. Maintaining excellent customer service post-integration was our top priority in the first quarter. Our revenue results show that we accomplished that goal, but it came at a higher cost than originally forecast. With our production and distribution activities fully integrated for the first time this quarter, we have realized that we require additional time to stabilize our significantly larger operations to the point where we begin to generate the cost reductions and expanded gross margins we anticipated would result post-integration. Our current operations structure is requiring greater overhead cost than we anticipated and higher material costs, due partly to material efficiency issues. We also incurred freight and other distribution-related costs, included in costs of goods sold, in excess of our original forecasts. We are now moving more inventory from Mexico throughout our newly expanded distribution network that includes our Indianapolis distribution center, over 1,100 OfficeCare locations and multiple distribution points in Europe. This expanded distribution strategy is requiring a higher level of cost than anticipated, but has been very effective. With product inventory closer to our customers, we have improved our service levels and delivery times. This has helped us continue to grow our top line at rates significantly in excess of the underlying market rates of growth.

"It is very important to note that the cost structure issues we are dealing with are not related solely to the Aircast integration. Rather they are based on the fact that we have rapidly increased the size and scale of our Company very significantly through our recent acquisitions and our successful internal growth strategies. On an annualized basis, we grew the size of the Company by over 50% in 2006. We believe a majority of our cost issues are short-term and that they can and will be addressed through our continuous improvement processes, which have been very successful in generating cost reductions in the past. We have several active performance improvement initiatives in process designed to quickly reduce our costs of goods sold and also further improve our operating expense levels. We are already seeing meaningful cost reductions in the areas that contributed the largest cost overruns in the first quarter. However, based on our actual first quarter results, we are now expecting a delay of approximately two quarters in the margin expansion we originally expected would begin to take place in the first quarter. Much of the delay beyond the first quarter is due to the fact that certain of the unfavorable first quarter spending variances were required to be capitalized into the cost of the inventory we built in the first quarter, which will be sold and charged to costs of goods sold in the second quarter. Although we expect to see modest margin improvement in the second quarter, the inventory effect will constrain our ability to see significant gross margin expansion until the third quarter.

"As a result of the issues discussed above, our non-GAAP consolidated gross profit margin was 60.5% of net revenues in the first quarter of 2007 as compared to our non-GAAP consolidated gross profit margin of 62.1% of net revenues in the first quarter of 2006. Our GAAP gross profit margin of 58.7% in the first quarter of 2007 was also reduced by certain expenses related to the Aircast integration of $2.1 million, which we do not believe are reflective of our ongoing operations.

"Our non-GAAP operating income margin in the first quarter of 2007 was 13.1% of net revenues compared to our non-GAAP operating income margin of 15.3% of net revenues in the first quarter of 2006. Our GAAP operating income margin was 10.9% in the first quarter of 2007 and was also reduced by certain charges aggregating $2.6 million, which we do not believe are reflective of our ongoing operations, including the Aircast integration costs noted above and the settlement of a lawsuit for $0.6 million.

"Despite the fact that we fell short of some of our goals in the first quarter, we have made tremendous progress in many areas. Our recent acquisitions have added significant value to DJO and will continue to add increasing value as time progresses. Our adjusted EBITDA level, reflecting growth of approximately 40% over the first quarter of 2006, is one measure of the significant value contributed from our acquisitions and the strength of our cash earnings potential. As we continue to improve the costs of goods sold of our newly integrated business, and continue to derive earnings accretion from the pay down of acquisition-related debt balances, we remain confident that we will see the accretive nature of the acquisitions translate into growth in earnings per share in the near future.

"Revenue growth in the first quarter of 2007 was again a highlight. With strong first quarter revenues of $114.9 million, slightly ahead of our expectation, we began 2007 on a positive note at the top line. Net revenues for the Company's Domestic Rehabilitation, Regeneration and International business segments grew by 33.6%, 10.0% and 98.4%, respectively. In our Domestic Rehabilitation segment, first quarter revenue was driven by the contribution from Aircast and by continued strength within our OfficeCare channel, which posted year-over-year growth of over 20%. In our Regeneration segment, SpinaLogic sales continued to benefit from our expanded selling strategy, with over 17% growth over the prior year in the first quarter. Finally, we continue to see very strong growth in our International segment, driven by the successful integration of the DJO, Axmed and Aircast sales forces in France and the DJO and Aircast sales forces in each of our other major international markets. On a pro forma basis, as if Aircast had been acquired as of January 1, 2006, net revenues for the first quarter of 2007 in our International segment reflected growth of over 17% compared to pro forma net revenues for the first quarter of 2006, or over 13% when measured in constant currency.

"The total after-tax impact on our first quarter 2007 earnings of stock-based compensation expense was approximately $1.6 million, or approximately $0.07 per share. The total after-tax impact on our first quarter 2007 earnings from other costs and expenses not deemed to be reflective of the Company's ongoing operations was approximately $1.6 million, or approximately $0.06 per share.

"With strong first quarter sales results behind us, we are pleased to increase the low end of our revenue expectations for 2007 and confirm that we now expect total 2007 revenue to be between $470 million and $480 million, representing year-over-year growth of approximately 14% to 16%. Assuming the momentum we saw in the first quarter continues, we would expect our full year revenue to be closer to the high end of this range. With respect to earnings, the expected delay in realization of gross margin expansion requires us to reduce our full year earnings forecast. Our current earnings outlook for 2007 calls for improvement as we sequentially move through the second, third and fourth quarters. As mentioned, the costs of our inventories on hand will constrain the possible margin improvement in the second quarter and we expect a stronger level of sequential improvement beginning in the third quarter. Based upon our continuous improvement objectives for the year, we now expect our gross margins to trend up to reach approximately 64% by the fourth quarter. Our expectations around gross margin improvement drive our expectations around earnings per share for 2007. We are now targeting full year non-GAAP earnings per share of $1.35 to $1.40, excluding those items incurred in the first quarter that are not deemed to be reflective of our ongoing operations, but including the impact of stock-based compensation expense. Our new earnings target reflects growth over our comparable 2006 non-GAAP earnings of 36% to 41%. We are very focused on driving performance improvement and margin expansion as quickly as possible with the objective of exceeding this new range of expectation. We intend to update our full year outlook as the year progresses and we believe that there could be upside to our current range of expectation to the extent our performance improvement initiatives deliver results faster or greater than the amounts built into our current forecast. We also expect sequential margin improvement to continue into 2008, contributing, along with continued revenue growth and reduced interest expense due to debt repayment, to our expectation for strong double-digit earnings growth in 2008.

"Because the second calendar quarter is seasonally slower than the first quarter, we target only modest sequential growth in our average daily revenues for the second quarter. We expect the second quarter of 2007, which contains 64 shipping days, the same number of days as in the first quarter, to generate revenues of approximately $116 million."

Conference Call Information

DJO has scheduled a conference call to discuss this announcement beginning at 1:00 PM, Eastern Time today, May 8, 2007. Individuals interested in listening to the conference call may do so by dialing 706-634-0177, using the reservation code 5523897. A telephone replay will be available for 48 hours following the conclusion of the call by dialing 706-645-9291 and using the above reservation code. The live conference call also will be available via the Internet at www.djortho.com, and a recording of the call will be available on the Company's website.

About DJO Incorporated

DJO Incorporated is a global provider of solutions for musculoskeletal and vascular health, specializing in rehabilitation and regeneration products for the non-operative orthopedic, spine and vascular markets. Marketed under the Aircast[R], DonJoy[R] and ProCare[R] brands, the Company's broad range of over 700 rehabilitation products, including rigid knee braces, soft goods and pain management products, are used in the prevention of injury, in the treatment of chronic conditions and for recovery after surgery or injury. The Company's regeneration products consist of bone growth stimulation devices that are used to treat nonunion fractures and as an adjunct therapy after spinal fusion surgery. The Company's vascular systems products help prevent deep vein thrombosis and pulmonary embolism that can occur after orthopedic and other surgeries. Together, these products provide solutions throughout the patient's continuum of care. The Company sells its products in the United States and in more than 70 other countries through networks of agents, distributors and its own direct sales force. Customers include orthopedic, podiatric and spine surgeons, orthotic and prosthetic centers, third-party distributors, hospitals, surgery centers, physical therapists, athletic trainers, other healthcare professionals and individual and team athletes. For additional information on the Company, please visit www.djortho.com.

Safe Harbor Statement

This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements relate to, among other things, the Company's revenue and earnings guidance for 2007. The words "believe," "should," "expect," "intend," "estimate" and "anticipate," variations of such words and similar expressions identify forward-looking statements, but their absence does not mean that a statement is not a forward-looking statement. These forward-looking statements are based on the Company's current expectations and are subject to a number of risks, uncertainties and assumptions. The Company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. Among the important factors that could cause actual results to differ significantly from those expressed or implied by such forward-looking statements are risks related to the successful execution of the Company's business strategies relative to its Domestic Rehabilitation, Regeneration and International businesses; the realization of substantial operational synergies from the integration of Aircast's administrative, manufacturing and distribution operations into the Company's existing operations in Vista, Mexico and Indianapolis respectively; the successful combination of the Company's and Aircast's respective operations in several countries in Europe; the realization of expected revenue synergies from the Aircast product lines; the success of the Company's performance improvement initiatives designed to improve gross profit margins and reduce operating expenses; the continued growth of the markets the Company addresses; the impact of potential reductions in reimbursement levels by Medicare and other governmental and commercial payors; the Company's ability to successfully develop, license or acquire, and timely introduce and market new products or product enhancements; the Company's dependence on orthopedic professionals, agents and distributors for marketing its products; the Company's dependence on third-party agents to manage insurance billing and collections; risks relating to the Company's international operations; resources needed and risks involved in complying with government regulations and in developing and protecting intellectual property; and the effects of healthcare reform, Medicare competitive bidding, managed care and buying groups on the prices of the Company's products. Other risk factors are detailed in the Company's Annual Report on Form 10-K for the year ended December 31, 2006, filed on March 1, 2007, with the Securities and Exchange Commission.

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