Mentor Reports Third Quarter Fiscal Year 2008 Financial Results

Mentor Corporation (NYSE:MNT), a leading supplier of medical products for the global aesthetic market, today announced financial results for the quarter ending December 31, 2007, the third quarter of fiscal year 2008. "We are pleased with our third quarter results and our continued progress in fulfilling our aesthetic medicine strategy. During the quarter, we drove continued conversion to our MemoryGel product line in the U.S.,” commented Joshua H. Levine, President and Chief Executive Officer. "From a strategic perspective, we continued to invest heavily in research and development to diversify the product portfolio and support greater critical mass in terms of our overall business.” Total Net Sales Total net sales were $92.9 million in the third quarter of fiscal year 2008, an increase of 23% over net sales of $75.3 million in the third quarter of fiscal year 2007. The increase in net sales was primarily the result of the conversion from saline breast implants to MemoryGel™ silicone breast implants and strong sales of reconstructive products. Internationally, Mentor experienced strong sales growth in the quarter, including sales from the recently acquired Perouse subsidiary of approximately $4.7 million. Total net sales for the third quarter of fiscal year 2008 included approximately $1.6 million of positive foreign currency exchange effects. Gross Profit and Margin Gross profit for the third quarter of fiscal year 2008 was $66.7 million, or 71.9% of net sales, compared to $56.4 million, or 74.9% of net sales, in the third quarter of fiscal year 2007. Excluding a $1.0 million charge for the "step-up” valuation of inventory associated with the Perouse acquisition, gross margin on a non-GAAP basis was 72.9% for the quarter. The gross margin percentage was primarily adversely affected by sales of Perouse products. Selling, General and Administrative Selling, general and administrative (SG&A) expenses in the third quarter of fiscal year 2008 were $38.9 million, or 41.9% of sales, compared to $32.4 million, or 43.0% of sales, in the third quarter of fiscal year 2007. Included in SG&A expenses in the third quarter of fiscal year 2008 was $1.8 million of severance expense. Research and Development Research and development (R&D) expenses in the third quarter of fiscal year 2008 were $9.7 million, an increase of $1.9 million, or 25%, from the third quarter of fiscal year 2007. For the first nine months of fiscal year 2008, the Company recorded expense of $32.2 million, reflecting an increase of 31% when compared to $24.7 million in the same period last year. The Company has invested and expects to continue to invest heavily in clinical trials and related program expenses in support of its breast and facial aesthetics initiatives. Dermal Fillers Mentor anticipates approval for Prevelle™ Plus and Puragen™ Plus in the U.S. in late fiscal year 2008 and mid-fiscal year 2009, respectively. The Company’s next generation dermal filler, DGE, is in study follow-up with anticipated FDA submission in the third quarter of fiscal year 2009 and approval in the first or second quarter of fiscal year 2010. Botulinum Toxin Type A Program The Company expects 6-month follow-up to be completed in its Phase IIIa clinical trial by mid-March 2008 in its study for the correction of rhytides. During the quarter, enrollment of 700 patients into the Phase IIIb study began and was completed on January 17, 2008. The Phase IIIc patient enrollment is expected to begin by the end of February 2008. In addition, Mentor anticipates completion of patient enrollment in its Phase I study for the treatment of pain from torticollis/cervical dystonia by the end of fiscal year 2008. MemoryGel silicone gel-filled breast implants Post-Approval Study (PAS) As of January 30, 2008, Mentor has enrolled approximately 27,100 patients towards the total target of 42,900 patients required by the PAS conditions. The Company expects to fully complete patient enrollment in the PAS within the FDA directed timeline of 2 years from the initiation date of the study, February 15, 2007. Operating Income Operating income from continuing operations was $18.1 million in the third quarter of fiscal year 2008, representing an increase of 12% over the $16.2 million reported in the third quarter of fiscal year 2007. For the first nine months of fiscal year 2008, operating income from continuing operations was $60.4 million, representing an increase of 29% over the same period last year. Net Interest Interest expense, net of interest income in the third quarter of fiscal year 2008, was $0.2 million. In the third quarter of fiscal year 2007, interest income, net of interest expense, was $4.9 million. The decrease in interest income was due to lower cash balances primarily as a result of repurchases of shares of the Company’s common stock. Effective Tax Rate Mentor’s effective tax rate for continuing operations in the third quarter of fiscal year 2008 was 30.9% compared to 29.4% in the third quarter of fiscal year 2007. Earnings Per Share Mentor recorded diluted GAAP earnings per share (EPS) of $0.32 in the third quarter of fiscal year 2008, compared to $0.29 per share in the third quarter of fiscal year 2007. Mentor reported diluted GAAP EPS from continuing operations of $0.32 in the third quarter of fiscal year 2008, which is equivalent to the $0.32 reported in the third quarter of fiscal year 2007. Diluted GAAP EPS from continuing operations for the third quarter of fiscal year 2008 includes a combined $0.05 after tax effect related to severance costs and costs recorded in cost of sales related to the "step-up” valuation of inventory associated with our Perouse acquisition. Excluding these charges, diluted non-GAAP EPS from continuing operations was $0.37 in the third quarter of fiscal year 2008, an increase of 16% over the $0.32 in the third quarter of fiscal year 2007 when there were no similar charges. Balance Sheet Mentor ended the third quarter of fiscal year 2008 with $107 million in cash and marketable securities, compared to $488 million at the end of fiscal year 2007. In the first nine months of the fiscal year, Mentor repurchased approximately 9 million shares of its common stock for $368 million, invested cash of approximately $53 million in the acquisition of Perouse and paid dividends of $23 million. Conference Call Mentor Corporation has scheduled a conference call today regarding this announcement. Those interested in listening to a recording of the call may dial (800) 695-2122 at 6:00 p.m. ET today until Midnight ET, February 7, 2008. You may also listen to the live web cast at 5:00 p.m. ET today or the archived call at www.mentorcorp.com, under Investor Relations and "Audio Archives”. Note Regarding Use of Non-GAAP Financial Measures The financial measures of non-GAAP gross margin, non-GAAP SG&A expense, and diluted non-GAAP earnings per share from continuing operations included in this press release are different from those otherwise presented under GAAP as these non-GAAP measures exclude certain charges. In the third quarter of fiscal year 2008, these charges include severance expense included in SG&A and amounts recorded as cost of sales as a result of the "step-up” valuation of inventory related to the Perouse acquisition. Neither of these items was recorded in the third quarter of fiscal 2007. Mentor has provided these measures in addition to GAAP financial results because management believes these non-GAAP measures provide a consistent basis for comparison between quarters and of profitability rates that are not influenced by these charges and therefore are helpful in understanding Mentor’s underlying operating results. These non-GAAP measures are some of the primary measures Mentor’s management uses for planning and forecasting. These measures are not in accordance with, or an alternative to, GAAP and these non-GAAP measures may not be comparable to information provided by other companies. Reconciliations of GAAP to non-GAAP results are presented at the end of this press release. Safe Harbor Statement This release contains forward-looking statements including, but not limited to, statements relating to Mentor’s current and anticipated product development activity and expenses, and market acceptance of those products; the approval with conditions by the FDA of the Company’s MemoryGel silicone gel breast implants PMA; the initiation, patient enrollment, and continuation of clinical studies with respect to the Company’s botulinum toxin Type A program; the development program for a portfolio of hyaluronic acid-based dermal fillers; and the acquisition of Perouse Plastie by Mentor. A number of factors could cause actual results to differ from the forward-looking statements including, but not limited to, U.S. market acceptance and adoption of MemoryGel breast implants; patient enrollment in the FDA-mandated post-approval study for MemoryGel breast implants; the amount and timing of expenses to be incurred with respect to the MemoryGel breast implants post-approval study; the timing and conditions of FDA approval, if any, of the Company’s Contour Profile Gel breast implant PMA; the ability of the Company to move forward in a timely manner with the PMAs for its hyaluronic acid-based dermal fillers; the timing and outcome of other PMAs submitted to the FDA; results of clinical development programs; the timing and outcome of various clinical trials undertaken by the Company; the impact on revenue and expenses of delays in FDA approval and other governmental agencies for the approval and sale of any of the Company’s products; seasonal and economic factors, in the U.S. and internationally, which affect demand for aesthetic products and procedures; the ability of the Company to identify and implement other product opportunities in the global aesthetics marketplace; competitive pressures and other factors such as the introduction or regulatory approval of new products by competitors and pricing of competing products and the resulting effects on sales and pricing of the Company’s products; disruptions or other problems with sources of supply; significant product liability or other claims; difficulties with new product development, introduction and market acceptance; changes in the mix of the Company’s products sold; patent and intellectual property conflicts; product recalls; FDA or other governmental agency rejection of new or existing products; changes in Medicare, Medicaid or third-party reimbursement policies; changes in government regulation; use of hazardous or environmentally sensitive materials; and other events. Risks and uncertainties relating to the Perouse acquisition include that the businesses of Mentor and Perouse will not be integrated successfully; anticipated synergies may not be fully realized or may take longer to be realized than expected; and possible disruption of the Perouse business, including with customers, employees, suppliers or third parties. Important factors that may cause such a difference for Mentor include, but are not limited to, those factors described in the Company’s Annual Report on Form 10-K, Quarterly Report on Form 10-Q, recent Current Reports on Form 8-K and other Securities and Exchange Commission filings. These filings discuss the foregoing risks as well as other important risk factors that could contribute to such differences or otherwise affect the Company’s business, results of operations and financial condition. The Company undertakes no obligation to revise or update publicly any forward-looking statement for any reason. MENTOR CORPORATION       CONSOLIDATED STATEMENTS OF INCOME (unaudited, in thousands, except per share data)     Three Months Ended Nine Months Ended December 31, 2007 December 31, 2006 2007     2006   PercentChange 2007     2006   PercentChange   Net sales $ 92,860 $ 75,309 23 % $ 273,814 $ 221,654 24 %   Cost of sales 26,138   18,925   38 % 72,842   59,491   22 % Gross profit 66,722 56,384 18 % 200,972 162,163 24 %   Selling, general and administrative expense 38,884 32,356 20 % 108,326 90,792 19 % Research and development expense 9,690   7,780   25 % 32,207   24,654   31 % 48,574 40,136 21 % 140,533 115,446 22 %         Operating income 18,148   16,248   12 % 60,439   46,717   29 %   Interest (expense) (1,249 ) (1,426 ) (12 )% (4,160 ) (4,707 ) (12 )% Interest income 1,071 6,346 (83 )% 7,218 16,233 (56 )% Other (expense) income, net (452 ) (281 ) 61 % (1,421 ) 494 (388 )%         Income before income taxes 17,518   20,887   (16 )% 62,076   58,737   6 %   Income taxes 5,406   6,137   (12 )% 18,191   17,490   4 % Net income from continuing operations 12,112   14,750   (18 )% 43,885   41,247   6 %   Net (loss) income from discontinued operations (net of income tax (benefit) expense of ($94) and ($609) for Q3; ($157) and $141,101 for YTD) (170 ) (1,122 ) (85 )% (287 ) 223,504   (100 )% Net income $ 11,942   $ 13,628   (12 )% $ 43,598   $ 264,751   (84 )%   Basic earnings per share Earnings per share from continuing operations $ 0.36 $ 0.35 3 % $ 1.22 $ 0.98 24 % Earnings (loss) per share from discontinued operations (0.01 ) (0.03 ) (67 )% (0.01 ) 5.33 (100 )% Basic earnings per share $ 0.36 $ 0.33 9 % $ 1.21 $ 6.32 (81 )%   Diluted earnings per share Earnings per share from continuing operations $ 0.32 $ 0.32 0 % $ 1.09 $ 0.89 23 % Earnings (loss) per share from discontinued operations (0.01 ) (0.03 ) (67 )% (0.01 ) 4.57 (100 )% Diluted earnings per share $ 0.32 $ 0.29 10 % $ 1.08 $ 5.46 (80 )%   Dividends per share $ 0.20 $ 0.18 11 % $ 0.60 $ 0.54 11 %   Weighted average shares outstanding Basic 33,602 41,916 (20 )% 36,033 41,898 (14 )% Diluted 39,848 49,144 (19 )% 42,499 48,948 (13 )% MENTOR CORPORATION CONSOLIDATED STATEMENTS OF INCOME (unaudited, in thousands, except per share data)     Three Months Ended Three Months Ended December 31, 2007 December 31, 2006 GAAP   Non-GAAP Adjustments     Non-GAAP GAAP Non-GAAP Adjustments Non-GAAP Net sales $ 92,860 - $ 92,860 $ 75,309 - $ 75,309 Cost of sales 26,138   (964 ) 25,174   18,925     18,925   Gross profit 66,722 964 67,686 56,384 - 56,384 Selling, general and administrative 38,884 (1,837 ) 37,047 32,356 - 32,356 Research and development 9,690 9,690 7,780 7,780                 48,574 (1,837 ) 46,737 40,136 - 40,136                 Operating income 18,148   2,801   20,949   16,248   - 16,248   Interest (expense) (1,249 ) - (1,249 ) (1,426 ) - (1,426 ) Interest income 1,071 - 1,071 6,346 - 6,346 Other (expense) income, net (452 ) - (452 ) (281 ) - (281 )                 Income before income taxes 17,518   2,801   20,319   20,887   - 20,887   Income taxes 5,406   821   6,227   6,137   - 6,137   Net income from continuing operations 12,112   1,980   14,092   14,750   - 14,750   Net (loss) from discontinued operations (170 ) -   (170 ) (1,122 ) - (1,122 ) Net income $ 11,942   $ 1,980   $ 13,922   $ 13,628   $ - $ 13,628   Basic earnings per share Earnings per share from continuing operations $ 0.36 $ 0.06 $ 0.42 $ 0.35 $ - $ 0.35 Earnings (loss) per share from discontinuedoperations (0.01 ) - (0.01 ) (0.03 ) - (0.03 ) Basic earnings per share $ 0.36 $ 0.06 $ 0.41 $ 0.33 $ - $ 0.33 Diluted earnings per share Earnings per share from continuing operations $ 0.32 $ 0.05 $ 0.37 $ 0.32 $ - $ 0.32 Earnings (loss) per share from discontinuedoperations (0.01 ) - (0.01 ) (0.03 ) - (0.03 ) Diluted earnings per share $ 0.32 $ 0.05 $ 0.37 $ 0.29 $ - $ 0.29 Dividends per share $ 0.20 - $ 0.20 $ 0.18 - $ 0.18 Weighted average shares outstanding Basic 33,602 33,602 33,602 41,916 41,916 41,916 Diluted 39,848 39,848 39,848 49,144 49,144 49,144 MENTOR CORPORATION SALES BY PRINCIPAL PRODUCT LINE (unaudited, in thousands)   Three Months Ended       Nine Months Ended     December 31, December 31, 2007   2006 PercentChange 2007   2006 PercentChange   Breast aesthetics $ 81,021 $ 65,550 24 % $ 240,564 $ 193,217 25 % Body aesthetics 3,883 3,907 (1 )% 11,572 12,844 (10 )% Other aesthetics, including facial 7,956 5,852 36 % 21,678 15,593 39 % Total sales from continuing operations $ 92,860 $ 75,309 23 % $ 273,814 $ 221,654 24 % MENTOR CORPORATION   CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited, in thousands)   Assets December 31, 2007 March 31, 2007 Current assets: Cash and marketable securities $ 106,647 $ 487,740 Accounts receivable, net 72,385 65,419 Inventories 46,697 38,073 Deferred income taxes 26,353 25,892 Prepaid expenses and other 17,783 20,256 Total current assets 269,865 637,380   Property, plant and equipment, net 48,610 34,683 Intangible assets, net 32,067 15,963 Goodwill, net 46,197 12,644 Other assets 6,681 9,098     Total assets $ 403,420 $ 709,768   Liabilities and shareholders’ equity Current liabilities $ 117,907 $ 112,731 Long-term liabilities 18,341 12,169 Convertible subordinated notes 150,000 150,000 Shareholders’ equity 117,172 434,868 Total liabilities and shareholders’ equity $ 403,420 $ 709,768 MENTOR CORPORATION                 CALCULATION OF DILUTED EARNINGS PER SHARE - RESTATED FOR CONTINUING OPERATIONS(a) (Unaudited, in thousands, except per share data)                                   Fiscal Year 2007 ending March 31, 2007 Fiscal Year 2008 Q1 Q2 Q3 Q4 FY Q1 Q2 Q3 FY Net income as reported from continuing operations $ 15,674 $ 10,823 $ 14,750 $ 16,377 $ 57,624 $ 21,744 $ 10,029 $ 12,112 $ 43,885 Add back after tax interest expense on convertible notes 802 802   802   802 3,208 802   802   802   2,406   Numerator for diluted EPS calculation for continuing operations $ 16,476 $ 11,625   $ 15,552   $ 17,179 $ 60,832 $ 22,546   $ 10,831   $ 12,914   $ 46,291   Numerator for diluted EPS calculation for discontinued operations $ 225,728 $ (1,102 ) $ (1,122 ) $ 9,486 $ 232,990 $ (6 ) $ (111 ) $ (170 ) $ (287 )   Weighted average shares outstanding 42,443 41,360 41,916 42,091 41,960 40,465 34,044 33,602 36,033 Shares issuable through exercise of stock options 1,100 1,115 869 803 1,000 678 659 502 613 Shares issuable through conversion of convertible notes 5,147 5,150 5,153 5,158 5,152 5,165 5,170 5,177 5,171 Additional dilution for unvested restricted shares outstanding 299 152 185 272 151 285 292 308 295 Shares issuable through exercise of warrants (treasury stock method) 327 769   1,021   1,072 829 357   518   259   387   Denominator for diluted EPS from continuing operations 49,316 48,546   49,144   49,396 49,092 46,950   40,683   39,848   42,499   Denominator for diluted EPS from discontinued operations 49,316 41,360   41,916   49,396 49,092 40,465   34,044   33,602   36,033     Diluted earnings per share from continuing operations $ 0.33 $ 0.24 $ 0.32 $ 0.35 $ 1.24 $ 0.48 $ 0.27 $ 0.32 $ 1.09 Diluted earnings (loss) per share from discontinued operations $ 4.58 $ (0.03 ) $ (0.03 ) $ 0.19 $ 4.75 $ - $ - $ (0.01 ) $ (0.01 )   (a) Note: We classified our surgical urology and clinical and consumer healthcare segments as discontinued operations at March 31, 2006. Accordingly we have restated our EPS calculation to reflect the results of these segments as discontinued operations.