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| WMGI > SEC Filings for WMGI > Form 10-Q on 30-Oct-2009 | All Recent SEC Filings |
30-Oct-2009
Quarterly Report
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
products and our manufacturing processes, manufacture our products
cost-effectively, respond to competitive pressures specific to each of our
geographic markets, including our ability to enforce non-compete agreements, and
successfully market and distribute our products in a profitable manner. We, and
the entire industry, are subject to extensive governmental regulation, primarily
by the United States Food and Drug Administration (FDA). Failure to comply with
regulatory requirements could have a material adverse effect on our business.
Additionally, our industry is highly competitive and has recently experienced
increased pricing pressures, specifically in the areas of reconstructive joint
devices. We devote significant resources to assessing and analyzing competitive,
regulatory and economic risks and opportunities.
In December 2007, we received a subpoena from the U.S. Department of Justice
(DOJ) through the U.S. Attorney for the District of New Jersey requesting
documents for the period January 1998 through the present related to any
consulting and professional service agreements with orthopaedic surgeons in
connection with hip or knee joint replacement procedures or products. 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 are cooperating fully with the DOJ's investigation by
the DOJ, and we anticipate that we will continue to incur significant expenses
related to this investigation. The conclusion of the investigation could result
in sanctions requiring the payment of criminal fines, civil fines, and/or
settlement amounts. We cannot estimate what, if any, impact any results from
this investigation could have on our consolidated results of operations or
financial position.
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. We
cannot estimate what, if any, impact any results from this investigation could
have on our consolidated results of operations or financial position.
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Results of Operations
Comparison of three months ended September 30, 2009 to three months ended
September 30, 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 September 30,
(unaudited)
2009 2008
Amount % of Sales Amount % of Sales
Net sales $ 117,742 100.0 % $ 111,096 100.0 %
Cost of sales1 35,880 30.5 % 32,038 28.8 %
Gross profit 81,862 69.5 % 79,058 71.2 %
Operating expenses:
Selling, general and administrative1 63,703 54.1 % 61,897 55.7 %
Research and development1 8,537 7.3 % 8,338 7.5 %
Amortization of intangible assets 1,274 1.1 % 1,287 1.2 %
Restructuring charges 131 0.1 % 685 0.6 %
Total operating expenses 73,645 62.5 % 72,207 65.0 %
Operating income 8,217 7.0 % 6,851 6.2 %
Interest expense, net 1,435 1.2 % 717 0.6 %
Other expense (income), net 108 0.1 % (284 ) (0.3 %)
Income before income taxes 6,674 5.7 % 6,418 5.8 %
Provision for income taxes 2,522 2.1 % 2,231 2.0 %
Net income $ 4,152 3.5 % $ 4,187 3.8 %
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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,
2009 2008
Amount % of Sales Amount % of Sales
Cost of sales $ 335 0.3 % $ 300 0.3 %
Selling, general and administrative 2,517 2.1 % 2,623 2.4 %
Research and development 480 0.4 % 430 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,
2009 2008 % change
Hip products $ 40,055 $ 37,562 6.6 %
Knee products 30,114 28,692 5.0 %
Extremity products 25,546 21,706 17.7 %
Biologics products 19,437 20,197 (3.8 %)
Other 2,590 2,939 (11.9 %)
Total net sales $ 117,742 $ 111,096 6.0 %
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following graphs illustrate our product line net sales as a percentage of
total net sales for the three months ended September 30, 2009 and 2008:
Product Line Sales as a Percentage of Total Net Sales
2009 2008
[[Image Removed: (PIE CHART)]] [[Image Removed: (PIE CHART)]]
Net Sales. Overall, our net sales increased 6% in the third quarter of 2009
compared to the third quarter of 2008. We experienced continued growth in our
extremity product line, which increased 18% over prior year, as well as growth
in our hip and knee businesses of 7% and 5%, respectively, over prior year. We
experienced a decline in the performance in our biologics product line,
primarily due to continued declines in the sales of products containing
demineralized bone matrix and due to reimbursement issues in Belgium.
Geographically, our domestic net sales totaled $73.8 million in the third
quarter of 2009 and $70.9 million in the third quarter of 2008, representing
62.7% and 63.8% of total net sales, respectively, and growth of 4% in 2009
compared to 2008. Our international net sales totaled $44.0 million in the third
quarter of 2009, compared to $40.2 million in the third quarter of 2008,
representing growth of 9%. This increase is primarily a result of increased
sales in Japan, Asia, and certain European markets.
Our hip product net sales totaled $40.1 million during the third quarter of
2009, representing a 7% increase over the prior year. Our domestic hip sales
decreased 4% over prior year attributable to sales declines in our revision stem
and CONSERVE® products, while our international hip sales increased 17% over
prior year. Our international results included increased sales of our PROFEMUR®
hip systems in Japan and increased sales in most of our European markets, offset
by sales declines in certain international stocking distributor markets.
Additionally, international hip sales included a $400,000 favorable currency
impact in Q3 2009.
Our knee product net sales totaled $30.1 million in the third quarter of 2009 as
compared to $28.7 in the same period in 2008. Domestically, knee sales remained
relatively flat year-over-year. International knee sales increased 11% due to
increased sales in Asia offset by declines in certain of our European markets.
Our extremity product net sales increased to $25.5 million in the third quarter
of 2009, representing growth of 18% over the third quarter of 2008. This
year-over-year growth, driven by a 24% increase in our domestic extremities, is
primarily attributable to higher levels of INBONE™ product sales, the continued
success of our CHARLOTTE™ Foot and Ankle System, and sales attributable to our
Rayhack acquisition of 2008. Our international extremity sales decreased 10%
compared to the prior year period due to our distributor transition in Australia
and an unfavorable currency impact of $100,000.
Net sales of our biologics products totaled $19.4 million in the third quarter
of 2009, representing a year-over-year decline of 4%. In the U.S., biologics
sales declined in 2009 as the continued success of our GRAFTJACKET® tissue
repair and containment membranes and increased sales of our PRO-DENSE®
injectable regenerative graft were
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
offset by the continued decline in sales of our ALLOMATRIX® line of injectable
tissue-based bone graft substitutes. Our international biologics sales decline
of 6% is primarily attributable to the suspension of our biologics distribution
in Belgium early in 2009 due to changes in reimbursement.
Cost of Sales. Our cost of sales as a percentage of net sales increased from
28.8% in the third quarter of 2008 to 30.5% in the third quarter of 2009. This
increase is primarily attributable to the impact that slowing production volumes
are having on our absorption rates. Our cost of sales included 0.3 percentage
points of non-cash, stock-based compensation expense in 2009 and 2008. 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, cost of raw materials and currency exchange rates.
Selling, General and Administrative. Our selling, general and administrative
expenses as a percentage of net sales totaled 54.1% in the third quarter of
2009, a 1.6 percentage point decrease from 55.7% in the third quarter of 2008.
Our 2009 and 2008 selling, general and administrative expenses include
$1.6 million (1.3% of net sales) and $1.5 million (1.4% of net sales),
respectively, of costs, primarily legal fees, associated with the ongoing U.S.
government inquiries. The remaining decrease in selling, general and
administrative expenses as a percentage of sales was driven by cost savings
initiatives, primarily in our European subsidiaries, and lower levels of cash
incentive compensation, partially offset by increased expenses associated with
global compliance efforts. We also recognized $2.5 million and $2.6 million of
non-cash, stock-based compensation expense in the third quarter of 2009 and
2008, respectively, representing 2.1% and 2.4% of net sales, 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, 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 7.3% of net sales in the third quarter of 2009, as
compared to 7.5% of net sales in the third quarter of 2008. Our research and
development expenses include approximately $0.5 million (0.4% of net sales) and
$0.4 million (0.4% of net sales) of non-cash, stock-based compensation expense
in the third quarter of 2009 and 2008, respectively.
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 2009 remained flat compared to the
same period in 2008. Based on the intangible assets held as of September 30,
2009, we expect to recognize amortization expense of approximately $5.2 million
for the full year of 2009, $2.3 million in 2010, $2.3 million in 2011,
$2.1 million in 2012, and $1.8 million in 2013.
Restructuring. During the third quarter of 2009, our restructuring expenses as a
percentage of net sales totaled 0.1%, compared to 0.6% during the third quarter
of 2008. 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, legal and professional
fees, and in 2008 employee litigation charges. See Note 9 to our condensed
consolidated financial statements for further discussion of our restructuring
charges.
Interest Expense, Net. Interest expense, net, consists of interest expense of
$1.6 million during 2009 and $1.7 million in 2008, primarily from borrowings
under our Convertible Senior Notes due 2014 issued in November 2007, offset by
interest income of $0.2 million and $1.0 million during the third 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Provision for Income Taxes. We recorded tax provisions of $2.5 million and
$2.2 million in the third quarter of 2009 and 2008, respectively. During the
third quarter of 2009, our effective tax rate was approximately 37.8%, as
compared to 34.8% in the third quarter of 2008. The effective tax rate in the
third quarter of 2008 included a 2.8 percentage point impact due to the discrete
tax effect of restructuring charges.
Comparison of nine months ended September 30, 2009 to nine months ended
September 30, 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:
Nine Months Ended September 30,
(unaudited)
2009 2008
Amount % of Sales Amount % of Sales
Net sales $ 357,580 100.0 % $ 345,438 100.0 %
Cost of sales1 110,646 30.9 % 99,287 28.7 %
Gross profit 246,934 69.1 % 246,151 71.3 %
Operating expenses:
Selling, general and administrative1 196,133 54.9 % 197,361 57.1 %
Research and development1 26,460 7.4 % 24,715 7.2 %
Amortization of intangible assets 3,899 1.1 % 3,604 1.0 %
Restructuring charges 991 0.3 % 5,595 1.6 %
Acquired in-process research and development - - 2,490 0.7 %
Total operating expenses 227,483 63.6 % 233,765 67.7 %
Operating income 19,451 5.4 % 12,386 3.6 %
Interest expense, net 3,974 1.1 % 1,127 0.3 %
Other income, net (358 ) (0.1 %) (907 ) (0.3 %)
Income before income taxes 15,835 4.4 % 12,166 3.5 %
Provision for income taxes 5,939 1.7 % 6,278 1.8 %
Net income $ 9,896 2.8 % $ 5,888 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:
Nine Months Ended September 30,
2009 2008
Amount % of Sales Amount % of Sales
Cost of sales $ 938 0.3 % $ 952 0.3 %
Selling, general and administrative 7,822 2.2 % 8,440 2.4 %
Research and development 1,440 0.4 % 1,096 0.3 %
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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,
2009 2008 % change
Hip products $ 123,030 $ 118,873 3.5 %
Knee products 90,727 90,116 0.7 %
Extremity products 77,116 64,070 20.4 %
Biologics products 58,672 61,548 (4.7 %)
Other 8,035 10,831 (25.8 %)
Total net sales $ 357,580 $ 345,438 3.5 %
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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, 2009 and 2008:
Product Line Sales as a Percentage of Total Net Sales
2009 2008
[[Image Removed: (PIE CHART)]] [[Image Removed: (PIE CHART)]]
Net Sales. Net sales totaled $357.6 million during the first nine months of
2009, representing a 4% increase over the first nine months in the prior year.
The increase in net sales is primarily attributable to 20% growth in our
extremity product line offset by an unfavorable currency impact of $6.4 million.
Specifically, the increase in our extremities product line can be attributed to
sales of our DARCO® plating systems, the continued success of our CHARLOTTE™
Foot and Ankle system, sales of our INBONE™ products acquired in April 2008, and
sales of our RAYHACK® Osteotomy Systems acquired in September 2008.
In the first nine months of 2009, domestic net sales increased by 7% to
$221.3 million, or 61.9% of total net sales. International sales totaled
$136.3 million, including the aforementioned unfavorable currency impact of
$6.4 million, representing a decrease of 1% over the first nine months in the
prior year. This decrease is attributable to the unfavorable currency, partially
offset by growth in our Japanese and certain European markets.
Cost of Sales. Our cost of sales as a percentage of net sales increased from
28.7% in the first nine months of 2008 to 30.9% in the first nine months of
2009. This increase is attributable to higher levels of excess and obsolete
inventory provisions, increased raw material and other manufacturing costs, and,
in the first six months of 2009, unfavorable currency exchange rates compared to
2008.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Operating Expenses. As a percentage of net sales, our operating expenses
decreased by 4.1 percentage points to 63.6% in the first nine months of 2009, as
compared to 67.7% in the first nine months of 2008. This decrease is primarily
due to lower restructuring expenses in 2009 and charges for acquired in-process
research and development and the unfavorable appellate court ruling in 2008,
partially offset by increased expenses associated with our global compliance
efforts.
Provision for Income Taxes. We recorded tax provisions of $5.9 million and
$6.3 million in the first nine months of 2009 and 2008, respectively. During the
first nine months of 2009, our effective tax rate was approximately 37.5%, as
compared to 51.6% in the first nine months of 2008, primarily attributable to
the reinstatement of the U.S. Federal Research and Development tax credit during
the fourth quarter of 2008.
. . .
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