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| WMGI > SEC Filings for WMGI > Form 10-Q on 28-Apr-2009 | All Recent SEC Filings |
28-Apr-2009
Quarterly Report
shortly after several of our knee and hip competitors agreed to resolutions with
the U.S. Department of Justice (DOJ) after being subjects of investigation
involving the same subject matter. We continue to cooperate fully with the
investigation by the DOJ, and we anticipate that we will 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 inquiry.
A detailed discussion of these risks and other factors is provided in Item 1A of
our Annual Report on Form 10-K for the year ended December 31, 2008, and
elsewhere in this report.
Results of Operations
Comparison of three months ended March 31, 2009 to three months ended March 31,
2008
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 March 31,
(unaudited)
2009 2008
Amount % of Sales Amount % of Sales
Net sales $ 120,912 100.0 % $ 115,865 100.0 %
Cost of sales 1 38,021 31.4 % 32,438 28.0 %
Gross profit 82,891 68.6 % 83,427 72.0 %
Operating expenses:
Selling, general and administrative 1 66,609 55.1 % 66,589 57.5 %
Research and development 1 8,906 7.4 % 7,999 6.9 %
Amortization of intangible assets 1,317 1.1 % 1,041 0.9 %
Restructuring charges 66 0.1 % 1,815 1.5 %
Total operating expenses 76,898 63.6 % 77,444 66.8 %
Operating income 5,993 5.0 % 5,983 5.2 %
Interest expense (income), net 1,253 1.0 % (363 ) (0.3 %)
Other income, net (363 ) (0.3 %) (1,026 ) (0.9 %)
Income before income taxes 5,103 4.2 % 7,372 6.4 %
Provision for income taxes 1,786 1.5 % 3,314 2.9 %
Net income $ 3,317 2.7 % $ 4,058 3.5 %
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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 March 31,
2009 2008
Amount % of Sales Amount % of Sales
Cost of sales $ 292 0.2 % $ 344 0.3 %
Selling, general and administrative 2,101 1.7 % 2,971 2.6 %
Research and development 395 0.3 % 249 0.2 %
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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
March 31,
2009 2008 % change
Hip products $ 41,914 $ 39,900 5.0 %
Knee products 30,388 30,176 0.7 %
Extremity products 25,941 20,461 26.8 %
Biologics products 19,771 20,678 (4.4 %)
Other 2,898 4,650 (37.7 %)
Total net sales $ 120,912 $ 115,865 4.4 %
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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 March 31, 2009 and 2008:
2009 2008
[[Image Removed: (PIE CHART)]] [[Image Removed: (PIE CHART)]]
Net Sales. Our overall net sales growth of 4% in the first quarter of 2009 was
attributable to our continued success in our extremity product line, which
increased 27% over prior year, and expansion in our hip product line.
Geographically, our domestic net sales totaled $74.4 million in the first
quarter of 2009 and $67.2 million in the first quarter of 2008, representing 61%
and 58% of total net sales, respectively, and growth of 11% in 2009 compared to
2008. Our international net sales totaled $46.6 million in the first quarter of
2009, compared to $48.6 million in the first quarter of 2008. International
sales in 2009 include an unfavorable currency impact of $3.3 million,
principally resulting from the performance of the euro against the U.S. dollar
in the first quarter of 2009 compared to the same period of 2008. Additionally,
increased sales in most of our international markets were offset by declines in
the United Kingdom, France, and Turkey.
Our hip product net sales totaled $41.9 million during the first quarter of
2009, representing an increase of 5% over the prior year. Our domestic hip sales
increased 8% over prior year, while our international hip sales increased 3%
over prior year. Our domestic growth was primarily due to sales of revision hip
stems under a distribution agreement signed during the second quarter of 2008,
and increased sales of our DYNASTY® acetabular cup system. Growth in our
international markets was primarily driven by sales of our PROFEMUR® hip systems
in Japan. Our international hip sales include a $1.0 million unfavorable
currency impact in 2009.
Our knee product net sales totaled $30.4 million in the first quarter of 2009 as
compared to $30.2 in the same period in 2008. Year-over-year knee sales
increased 2% domestically as increased unit sales and increased pricing had a
relatively even impact on our sales growth. International knee sales decreased
slightly due to an $0.8 million unfavorable currency impact.
Our extremity product net sales increased to $25.9 million in the first quarter
of 2009, representing growth of 27% over the first quarter of 2008. This
year-over-year growth was driven by sales of our INBONE™ products acquired
in the second quarter of 2008, the continued success of our CHARLOTTE™ Foot and
Ankle system, and increased sales of our DARCO® plating systems and our
SIDEKICK™ external fixation systems. Our domestic extremity product sales
increased 34% in 2009, while our international extremity sales increased 3% as
compared to prior year. Our international extremity sales growth included a
$0.7 million unfavorable currency impact.
Net sales of our biologics products totaled $19.8 million in the first quarter
of 2009, representing a year-over-year decline in sales of 4%. In the U.S.,
biologics sales increased 2% in 2009 due to increased sales of our
PRO-DENSE®injectable regenerative graft and our CANCELLO-PURE™ wedge products,
partially offset by the continued decline in sales of our ALLOMATRIX® line of
injectable tissue-based bone graft substitutes. Our international biologics
sales decline was primarily due to decreased sales to our stocking distributor
in Turkey and the discontinuation of our biologics distribution in Belgium, as
well as an unfavorable currency impact of $0.4 million.
Cost of Sales. Our cost of sales as a percentage of net sales increased from
28.0% in the first quarter of 2008 to 31.4% in the first quarter of 2009. This
increase is primarily attributable to higher levels of excess and obsolete
inventory provisions, increased raw material and other manufacturing costs, and
unfavorable currency exchange rates compared to the first quarter of 2008. Our
cost of sales included 0.2 percentage points and 0.3 percentage points of
non-cash, stock-based compensation expense in 2009 and 2008, respectively. 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, period
expenses, levels of production volume, and currency exchange rates.
Selling, General and Administrative. Our selling, general and administrative
expenses as a percentage of net sales totaled 55.1% in the first quarter of
2009, a 2.4 percentage point decrease from 57.5% in the first quarter of 2008.
Our 2009 and 2008 selling, general and administrative expenses include
$4.1 million (3.4% of net sales) and $1.7 million (1.5% of net sales),
respectively, of costs, primarily legal fees, associated with the ongoing U.S.
government inquiries. In addition, $2.1 million and $3.0 million of non-cash,
stock-based compensation expense was recognized in the first quarter of 2009 and
2008, respectively, representing 1.7% and 2.6% of net sales in each of the
years, respectively. The remaining decrease in selling, general and
administrative expenses as a percentage of sales was driven by expense savings,
primarily in our European subsidiaries, and lower levels of cash incentive
compensation.
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, as we
continue to incur expenses associated with the U.S. government inquiries, which
we believe will continue to be significant, and as our spending related to the
global compliance requirements of our industry increases.
Research and Development. Our investment in research and development activities
represented approximately 7.4% of net sales in the first quarter of 2009, as
compared to 6.9% of net sales in the first quarter of 2008. Our research and
development expenses include approximately $0.4 million (0.3% of net sales) and
$0.2 million (0.2% of net sales) of non-cash, stock-based compensation expense
in the first quarter of 2009 and 2008, respectively. The increase in research
and development is primarily attributable to increased investments in product
development initiatives and clinical studies to support regulatory approvals and
provide expanded proof of the efficacy of our products.
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 first quarter of 2009 increased to $1.3 million from
$1.0 million in the first quarter of 2008. Based on the intangible assets held
at March 31, 2009, we expect to recognize amortization expense of approximately
$5.1 million for the full year of 2009, $2.3 million in 2010, $2.2 million in
2011, $2.1 million in 2012, and $1.8 million in 2013.
Interest Expense (Income), Net. Interest expense (income), net, consists of
interest expense of $1.7 million during both 2009 and 2008, primarily from
borrowings under our convertible debt issued in November 2007, our capital lease
agreements, and certain of our factoring agreements, offset by interest income
of $400,000 and $2.1 million during the first quarter of 2009 and 2008,
respectively, generated by our invested cash balances and investments in
marketable securities.
The amounts of interest income we realize in 2009 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 $1.8 million and
$3.3 million in the first quarter of 2009 and 2008, respectively. During the
first quarter of 2009, our effective tax rate was approximately 35.0%, as
compared to 45.0% in the first quarter of 2008, primarily attributable to the
reinstatement of the U.S. Federal Research and Development tax credit during the
fourth quarter of 2008 and lower levels of nondeductible stock-based
compensation expense during 2009.
Seasonal Nature of Business
We traditionally experience lower sales volumes in the third quarter than
throughout the rest of the year as many of our products are used in elective
procedures, which generally decline during the summer months, typically
resulting in selling, general and administrative expenses and research and
development expenses as a percentage of sales that are higher than throughout
the rest of the year. In addition, our first quarter selling, general and
administrative expenses include additional expenses that we incur in connection
with the annual meeting held by the American Academy of Orthopaedic Surgeons.
This meeting, which is the largest orthopaedic meeting in the world, features
the presentation of scientific papers and instructional courses for orthopaedic
surgeons. During this 3-day event, we display our most recent and innovative
products to these surgeons.
Restructuring
In June 2007, we announced our plans to close our facilities in Toulon, France.
This announcement came after a thorough evaluation in which it was determined
that we had excess manufacturing capacity and redundant distribution and
administrative resources that would be best eliminated through the closure of
this facility. The majority of our restructuring activities were complete by the
end of 2007, with Toulon's production being transferred to our existing
manufacturing facility in Arlington, Tennessee and its distribution activities
being transferred to our European headquarters in Amsterdam, the Netherlands. We
have estimated that total pre-tax restructuring charges will be approximately
$28 to $32 million, of which we have recognized $25.6 million through March 31,
2009. We have seen the benefits from this restructuring within selling, general
and administrative expenses since 2008, and we anticipate seeing additional
benefits within cost of sales in 2009. See Note 9 to our condensed consolidated
financial statements for further discussion of our restructuring charges.
Liquidity and Capital Resources
The following table sets forth, for the periods indicated, certain liquidity
measures (in thousands):
As of As of
March 31, December 31,
2009 2008
Cash and cash equivalents $ 96,831 87,865
Marketable securities 51,694 57,614
Working capital 403,045 401,406
Line of credit availability 100,000 100,000
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Operating Activities. Cash provided by operating activities was $15.3 million
for the first quarter of 2009, as compared to $12.8 million for the first
quarter of 2008. The increase in operating cash flow is primarily attributable
to changes in working capital, as favorable variances in accounts receivable and
inventory were mostly offset by unfavorable variances in accrued expenses and
marketable securities.
Investing Activities. Our capital expenditures totaled approximately
$9.8 million and $9.9 million in the first quarter of 2009 and 2008,
respectively. Our industry is capital intensive, particularly as it relates to
surgical instrumentation. Historically, our capital expenditures have consisted
of purchased manufacturing equipment, research and testing equipment, computer
systems, office furniture and equipment, and surgical instruments. We expect to
incur capital expenditures of approximately $40 million in 2009 for routine
capital expenditures, as well as approximately $3 million for the expansion of
facilities in Arlington, Tennessee.
Financing Activities. During the first three months of 2009, cash used in
financing activities totaled $94,000 compared to the first three months of 2008,
where cash provided by financing activities totaled $2.7 million. This decrease
is primarily attributable to a $3.4 million decrease in proceeds from stock
option exercises. During the first
quarter of 2009, we terminated our factoring agreements. While our factoring
agreements were active, the cash proceeds received from these factoring
agreements, net of the amount of factored receivables collected, were reflected
as cash flows from financing activities in our consolidated statements of cash
flows.
On March 31, 2009, our revolving credit facility had availability of
$100 million, which can be increased by up to an additional $50 million at our
request and subject to the agreement of the lenders. We currently have no
borrowings outstanding under the credit facility. Borrowings under the credit
facility will bear interest at the sum of a base annual rate plus an applicable
annual rate that ranges from 0% to 1.75% depending on the type of loan and our
consolidated leverage ratio, with a current annual base rate of 3.25%.
During 2007, we issued $200 million of Convertible Senior Notes due 2014, which
generated net proceeds of $193.5 million. The notes pay interest semiannually at
an annual rate of 2.625%. The notes are convertible into shares of our common
stock at an initial conversion rate of 30.6279 shares per $1,000 principal
amount of the notes, which represents a conversion price of $32.65 per share. We
will make scheduled interest payments in 2009 related to the notes totaling
$5.3 million.
Other Liquidity Information
We have funded our cash needs since 2000 through various equity and debt
issuances and through cash flow from operations. In 2007, we issued $200 million
of Convertible Senior Notes due 2014, which generated net proceeds totaling
$193.5 million.
Although it is difficult for us to predict our future liquidity requirements, we
believe that our current cash and cash equivalents balance of $96.8 million, our
marketable securities balance of $51.7 million, our existing available credit
line of $100 million, and our expected cash flow from our 2009 operations will
be sufficient for the foreseeable future to fund our working capital
requirements and operations, permit anticipated capital expenditures in 2009 of
approximately $43 million, and meet our contractual cash obligations in 2009.
Critical Accounting Policies and Estimates
Information on judgments related to our most critical accounting policies and
estimates is discussed in Item 7 of our Annual Report on Form 10-K for the year
ended December 31, 2008. Certain of our more critical accounting estimates
require the application of significant judgment by management in selecting the
appropriate assumptions in determining the estimate. By their nature, these
judgments are subject to an inherent degree of uncertainty. We develop these
judgments based on our historical experience, terms of existing contracts, our
observance of trends in the industry, information provided by our customers, and
information available from other outside sources, as appropriate. Actual results
may differ from these judgments under different assumptions or conditions.
Different, reasonable estimates could have been used for the current period.
Additionally, changes in accounting estimates are reasonably likely to occur
from period to period. Both of these factors could have a material impact on the
presentation of our financial condition, changes in financial condition or
results of operations. All of our significant accounting policies are more fully
described in Note 2 to our consolidated financial statements set forth in our
Annual Report on Form 10-K for the year ended December 31, 2008. There have been
no significant modifications to the policies related to our critical accounting
estimates since December 31, 2008.
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