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| WMGI > SEC Filings for WMGI > Form 10-Q on 4-Nov-2008 | All Recent SEC Filings |
4-Nov-2008
Quarterly Report
In December 2007, we received a subpoena from the DOJ requesting certain
documents related to consulting agreements with orthopaedic surgeons. This
subpoena was served shortly after several of our knee and hip competitors agreed
to resolutions with the DOJ after being subjects of investigation involving the
same subject matter. We continue to cooperate fully with the investigation of
the DOJ, and we anticipate that we may continue to incur significant expenses
related to this inquiry.
In June 2008, we received a letter from the U.S. Securities and Exchange
Commission (SEC) informing us that it is conducting an informal investigation
regarding potential violations of the Foreign Corrupt Practices Act in the sale
of medical devices in a number of foreign countries by companies in the medical
device industry. We understand that several other medical device companies have
received similar letters. We are cooperating fully with the SEC request.
Results of Operations
Comparison of three months ended September 30, 2008 to three months ended
September 30, 2007
The following table sets forth, for the periods indicated, our results of
operations expressed as dollar amounts (in thousands) and as percentages of net
sales:
Three Months Ended September 30,
(unaudited)
2008 2007
Amount % of Sales Amount % of Sales
Net sales $ 111,096 100.0 % $ 91,399 100.0 %
Cost of sales1 32,038 28.8 % 24,268 26.6 %
Gross profit 79,058 71.2 % 67,131 73.4 %
Operating expenses:
Selling, general and administrative1 61,897 55.7 % 54,573 59.7 %
Research and development1 8,338 7.5 % 7,151 7.8 %
Amortization of intangible assets 1,287 1.2 % 968 1.1 %
Restructuring charges 685 0.6 % 6,966 7.6 %
Total operating expenses 72,207 65.0 % 69,658 76.2 %
Operating income (loss) 6,851 6.2 % (2,527 ) (2.8 %)
Interest expense (income), net 717 0.6 % (361 ) (0.4 %)
Other income, net (284 ) (0.3 %) (10 ) (0.0 %)
Income (loss) before income taxes 6,418 5.8 % (2,156 ) (2.4 %)
Provision (benefit) for income taxes 2,231 2.0 % (634 ) (0.7 %)
Net income (loss) $ 4,187 3.8 % $ (1,522 ) (1.7 %)
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1 These line items include the following amounts of non-cash, stock-based compensation expense, expressed in dollar amounts (in thousands) and as percentages of net sales, for the periods indicated:
Three Months Ended September 30,
2008 2007
Amount % of Sales Amount % of Sales
Cost of sales $ 300 0.3 % $ 530 0.6 %
Selling, general and administrative 2,623 2.4 % 2,936 3.2 %
Research and development 430 0.4 % 399 0.4 %
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The following table sets forth our net sales by product line for the periods indicated (in thousands) and the percentage of year-over-year change:
Three Months Ended
September 30,
2008 2007 % change
Hip products $ 37,562 $ 30,914 21.5 %
Knee products 28,692 23,727 20.9 %
Extremity products 21,706 15,676 38.5 %
Biologics products 20,197 18,024 12.1 %
Other 2,939 3,058 (3.9 %)
Total net sales $ 111,096 $ 91,399 21.6 %
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The following graphs illustrate our product line net sales as a percentage of
total net sales for the three months ended September 30, 2008 and 2007:
Product Line Sales as a Percentage of Total Net Sales
[[Image Removed: (GRAPH)]]
Net Sales. Our overall net sales growth of 22% in the third quarter of 2008 was
attributable to our continued success in our extremity product line, which
increased 38% over prior year, as well as expansion in our hip, knee, and
biologics product lines, which increased 22%, 21%, and 12%, respectively, over
prior year. Geographically, our domestic net sales totaled $70.9 million in the
third quarter of 2008 and $58.0 million in the third quarter of 2007,
representing 63.8% and 63.5% of total net sales, respectively, and an increase
of 22%. Our international net sales totaled $40.2 million in the third quarter
of 2008, increasing by 21%, compared to $33.4 million in the third quarter of
2007. International sales in 2008 include a favorable currency impact of
$1.6 million, principally resulting from the performance of the euro and the
Japanese yen against the U.S. dollar in the third quarter of 2008 as compared to
the same period of 2007. Our international net sales in the third quarter of
2008 were favorably impacted by sales growth in substantially all of our major
international markets.
Our hip product net sales totaled $37.6 million during the third quarter of
2008, representing an increase of 22% over prior year, resulting from increased
sales of our DYNASTYTMAcetabular Cup System, our PROFEMUR® lines, and sales of
revision hip stems introduced during the second quarter of 2008. Our domestic
hip sales increased 15% over prior year due to increased unit sales, offset
partially by declines in average selling price. Our international hip business
increased by 29% over prior year due to growth in almost all of our
international markets, with exceptional success in Japan, where hip sales
increased 32%. Additionally, our international hip sales include a $1.0 million
favorable currency impact in 2008.
Our knee product net sales totaled $28.7 million in the third quarter of 2008,
representing growth of 21% over prior year. Knee sales increased 17% in the
U.S., primarily as a result of increased unit sales of our ADVANCE® knee
systems. Our international knee sales increased 27% over prior year, driven
primarily by our European markets, as well as a $390,000 favorable currency
impact in 2008.
Our extremity product net sales increased to $21.7 million in the third quarter
of 2008, representing growth of 38% over the third quarter of 2007. This
year-over-year growth was driven by the continued success of our CHARLOTTETM
Foot and Ankle system and sales of our DARCO® plating systems, as well as sales
of our INBONETM products acquired during the second quarter 2008. Our domestic
extremity product sales increased 45%, primarily resulting from the performance
of our foot and ankle product portfolio, including products recently acquired
from Inbone. Our international extremity product sales growth was primarily
attributable to increased sales of our DARCO® plating systems.
Net sales of our biologics products totaled $20.2 million in the third quarter
of 2008, representing year-over-year growth of 12%. In the U.S., biologics sales
increased by 18% due to increased sales of our PRO-DENSE® injectable
regenerative graft, sales of our GRAFTJACKET® tissue repair and containment
membranes, and the success of our CANCELLO-PURETM wedge products. In our
international markets, we noted a decline in biologics sales primarily due to
the August 2007 disposition of our Adcon®-Gel related assets.
Cost of Sales. Our cost of sales as a percentage of net sales increased from
26.6% in the third quarter of 2007 to 28.8% in the third quarter of 2008 as
lower levels of non-cash, stock-based compensation expense were offset by shifts
in our geographic sales mix and higher levels of excess and obsolete inventory
provisions. Our cost of sales and corresponding gross profit percentages can be
expected to fluctuate in future periods depending upon changes in our product
sales mix and prices, distribution channels and geographies, manufacturing
yields, excess and obsolete inventory provisions, and other expenses and levels
of production volume.
Selling, General and Administrative. Our selling, general, and administrative
expenses as a percentage of net sales totaled 55.7% in the third quarter 2008, a
4.0 percentage point decrease from 59.7% in the third quarter of 2007. Our 2008
selling, general, and administrative expenses include approximately $1.5 million
(1.4% of net sales) of costs, primarily legal fees, associated with the DOJ
inquiry. This amount was offset by lower levels of expenses due to our
restructuring efforts in Toulon, France, lower levels of professional fees, and
leveraging of fixed administrative expenses. In addition, approximately
$2.6 million and $2.9 million of non-cash, stock-based compensation expense was
recognized in the third quarter of 2008 and 2007, respectively, representing
2.4% and 3.2% of net sales in each of the years, respectively.
We anticipate that our selling, general, and administrative expenses will
increase in absolute dollars to the extent that additional growth in net sales
results in increases in sales commissions and royalty expense associated with
those sales and requires us to expand our infrastructure. Further, in the near
term, we anticipate that these expenses may increase as a percentage of net
sales as we make strategic investments in order to grow our business and as we
continue to incur expenses associated with the DOJ inquiry, which we believe may
continue to be significant.
Research and Development. Our investment in research and development activities
represented approximately 7.5% of net sales in the third quarter of 2008, as
compared to 7.8% of net sales in the third quarter of 2007. Our research and
development expenses include approximately $430,000 (0.4% of net sales) and
$399,000 (0.4% of net sales) of non-cash, stock-based compensation expense in
the third quarter of 2008 and 2007, respectively. Our investment in research and
development increased in absolute dollars due to increased spending on product
development initiatives.
We anticipate that our research and development expenditures may increase as a
percentage of net sales and will increase in absolute dollars as we continue to
increase our investment in product development initiatives and clinical studies
to support regulatory approvals and provide expanded proof of the efficacy of
our products.
Amortization of Intangible Assets. Charges associated with the amortization of
intangible assets in the third quarter of 2008 increased to $1.3 million from
$1.0 million in the third quarter of 2007 as a result of our recent
acquisitions. Based on the intangible assets held at September 30, 2008, we
expect to recognize amortization expense of approximately $5.0 million for the
full year of 2008, $4.7 million in 2009, $2.2 million in 2010, $2.1 million in
2011, and $2.0 million in 2012.
Restructuring. During the third quarter of 2008, our restructuring expenses as a
percentage of net sales totaled 0.6%, compared to 7.6% during the third quarter
of 2007. These charges are a result of the closure of our Toulon, France
facilities, which was announced in the second quarter of 2007. These charges
primarily included severance and termination benefits and legal and professional
fees. See Note 12 to our condensed consolidated financial statements for further
discussion of our restructuring charges.
Interest Expense (Income), Net. Interest expense (income), net, consists of
interest expense of $1.7 million and $146,000 during the third quarter of 2008
and 2007, respectively, primarily from borrowings under our capital lease
agreements, certain of our factoring agreements, and, in 2008, our convertible
debt, offset by interest income of $1.0 million and $507,000 during the third
quarter of 2008 and 2007, respectively, generated by our invested cash balances
and investments in marketable securities.
We continue to anticipate higher levels of interest expense in 2008 compared to
2007 due to our November 2007 issuance of $200 million of convertible senior
notes, which may be partially offset by additional interest income from the
portion of net proceeds which are currently invested in interest-bearing
accounts. The amounts of interest income we realize in 2008 and beyond are
subject to variability, dependent upon both the rate of invested returns we
realize and the amount of excess cash balances on hand.
Provision for Income Taxes. We recorded tax provisions of $2.2 million in the
third quarter of 2008 as compared to a tax benefit of $634,000 in the third
quarter of 2007. During the third quarter of 2008, our effective tax rate was
approximately 34.8%, as compared to 29.4% in the third quarter of 2007. The
effective tax rate in the third quarter of 2008 and 2007 included a
2.8 percentage point and 6.5 percentage point impact, respectively, related to
the discrete tax effect of restructuring charges. Additionally, our third
quarter 2008 provision does not include a benefit for the U.S. Federal Research
and Development tax credit, as it was not reinstated until October 2008. We will
include the full year impact of this benefit in our effective tax rate in the
fourth quarter of 2008.
Comparison of nine months ended September 30, 2008 to nine months ended
September 30, 2007
The following table sets forth, for the periods indicated, our results of
operations expressed as dollar amounts (in thousands) and as percentages of net
sales:
Nine Months Ended September 30,
(unaudited)
2008 2007
Amount % of Sales Amount % of Sales
Net sales $ 345,438 100.0 % $ 283,694 100.0 %
Cost of sales1 99,287 28.7 % 80,003 28.2 %
Gross profit 246,151 71.3 % 203,691 71.8 %
Operating expenses:
Selling, general and administrative1 197,361 57.1 % 164,806 58.1 %
Research and development1 24,715 7.2 % 22,106 7.8 %
Amortization of intangible assets 3,604 1.0 % 2,793 1.0 %
Restructuring charges 5,595 1.6 % 14,505 5.1 %
Acquired in-process research and development 2,490 0.7 % - -
Total operating expenses 233,765 67.7 % 204,210 72.0 %
Operating income (loss) 12,386 3.6 % (519 ) (0.2 %)
Interest expense (income), net 1,127 0.3 % (1,364 ) (0.5 %)
Other (income) expense, net (907 ) (0.3 %) 45 0.0 %
Income before income taxes 12,166 3.5 % 800 0.3 %
Provision for income taxes 6,278 1.8 % 1,223 0.4 %
Net income (loss) $ 5,888 1.7 % $ (423 ) (0.1 %)
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1 These line items include the following amounts of non-cash, stock-based compensation expense, expressed in dollar amounts (in thousands) and as percentages of net sales, for the periods indicated:
Nine Months Ended September 30,
2008 2007
Amount % of Sales Amount % of Sales
Cost of sales $ 952 0.3 % $ 1,563 0.6 %
Selling, general and administrative 8,440 2.4 % 8,830 3.1 %
Research and development 1,096 0.3 % 2,016 0.7 %
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The following table sets forth our net sales by product line for the periods indicated (in thousands) and the percentage of year-over-year change:
Nine Months Ended
September 30,
2008 2007 % change
Hip products $ 118,873 $ 99,888 19.0 %
Knee products 90,116 75,011 20.1 %
Extremity products 64,070 43,349 47.8 %
Biologics products 61,548 56,136 9.6 %
Other 10,831 9,310 16.3 %
Total net sales $ 345,438 $ 283,694 21.8 %
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The following graphs illustrate our product line net sales as a percentage of
total net sales for the nine months ended September 30, 2008 and 2007:
Product Line Sales as a Percentage of Total Net Sales
[[Image Removed: (GRAPH)]]
Net Sales. Net sales totaled $345.4 million during the first nine months of
2008, representing a 22% increase over prior year, and including a favorable
currency impact of $9.9 million. The increase in net sales is attributable to
growth in each of our principal product lines. Specifically in our extremities
product line, the 48% increase from prior year can be attributed to sales of our
DARCO® plating systems, which we acquired in the second quarter of 2007, the
continued success of our CHARLOTTETM Foot and Ankle system, and sales of our
INBONETM products following the acquisition in the second quarter of 2008 as
well as the impact of our other acquisitions in the past year.
In the first nine months of 2008, domestic net sales increased by 20% to
$207.2 million, or 60.0% of total net sales. International sales totaled
$138.2 million, including the aforementioned favorable currency impact of
$9.9 million, representing an increase of 25%.
Cost of Sales. Our cost of sales as a percentage of net sales increased from
28.2% in the first nine months of 2007 to 28.7% in the first nine months of
2008. This increase is primarily attributable to unfavorable shifts in our
geographic sales mix, which was partially offset by manufacturing efficiencies
and lower levels of non-cash stock-based compensation expense.
Acquired In-Process Research and Development. Upon consummation of our Inbone
acquisition, we immediately recognized as expense $2.5 million in costs
representing the estimated fair value of acquired in-process research and
development (IPRD) that had not yet reached technological feasibility and had no
alternative future use.
The value of the IPRD was determined by estimating the costs to develop the acquired IPRD into commercially viable products, estimating the resulting net cash flows from this project, and discounting the net cash flows back to their present values. The resulting net cash flows from the project were based on our management's best estimates of revenue, cost of sales, research and development costs, selling, general and administrative costs, and income taxes from the project. A summary of the estimates used to calculate the net cash flows for the project is as follows:
Year net cash Discount rate including
in-flows expected factor to account for Acquired
Project to begin uncertainty of success IPRD
INBONETM Calcaneal Stem Implant 2009 18 % $ 2,490,000
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The INBONE™ Calcaneal Stem implant (Calcaneal Stem) is an implant device designed to attach on the INBONETM Talar Dome and achieve bone implant stability by engaging the inside of the talar bone spanning into the calcaneal bone after the two bones have been stabilized together. We expect this device to bring increased sales to the existing Total Ankle Replacement device. The product is complete, but it has not yet received all the necessary FDA clearances to bring the product into a commercially viable product. Prior to the acquisition, Inbone filed a 510(k) premarket notification for the Calcaneal Stem and had received questions from the FDA. Subsequent to the acquisition, we received additional questions. We are currently working on a new submission that will address these . . .
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