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| OFIX > SEC Filings for OFIX > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-2009
Quarterly Report
• An increase of the gross profit margin, and
• A reduction in operating expenses as a percentage of net sales
We expect the acceleration of revenue growth will be driven by the introduction
of a number of key new products in 2009, including the Trinity® Evolution™
allograft, the Firebird™ pedicle screw system, the PILLAR SA interbody device,
and the Ascent LE posterior cervical spine system. As of September 30, 2009,
each of these new products had been introduced to the market and was
contributing to the year-over-year net sales growth reported by the Company.
Our gross profit margin is expected to increase as a result of the introduction
of the key new products indicated above, primarily Trinity® Evolution™. We
recognize a 100% gross profit margin from the marketing fees earned from the
sales of this allograft, compared to approximately 50% gross profit margin on
our previous Trinity® product. This is due to the fact that we are not required
to purchase inventory of Trinity® Evolution™, whereas, previously, we were
required to purchase inventory of the old Trinity® product and record the
associated cost of sales.
Our operating expenses are expected to decrease as a percentage of net sales as
we leverage our operating infrastructure against the expected increase in net
sales noted above. Additionally, we initiated a reorganization and consolidation
plan, during the fourth quarter of 2008, to reduce operating expenses by
eliminating redundancies and increasing operating efficiency. This plan includes
the consolidation of operations in our Springfield, MA and Wayne, NJ locations
into the Company's operations in the Dallas, TX area. For a further discussion
about this reorganization and consolidation plan, please refer to the
explanation provided in our General and Administrative Expense section of this
Management Discussion and Analysis.
We have administrative and training facilities in the United States and Italy
and manufacturing facilities in the United States, the United Kingdom, Italy and
Mexico. We directly distribute our products in the United States, the United
Kingdom, Italy, Germany, Switzerland, Austria, France, Belgium, Mexico, Brazil,
and Puerto Rico. In several of these and other markets, we also distribute our
products through independent distributors.
Our condensed consolidated financial statements include the financial results of
the Company and its wholly-owned and majority-owned subsidiaries and entities
over which we have control. All intercompany accounts and transactions are
eliminated in consolidation.
Our reporting currency is the United States Dollar. All balance sheet accounts,
except shareholders' equity, are translated at period-end exchange rates, and
revenue and expense items are translated at weighted average rates of exchange
prevailing during the period. Gains and losses resulting from foreign currency
transactions are included in other income (expense), net on the statements of
operations. Gains and losses resulting from the translation of foreign currency
net assets are recorded in the accumulated other comprehensive income component
of shareholders' equity.
Our financial condition, results of operations and cash flows are not
significantly impacted by seasonality trends. However, sales associated with
products for elective procedures appear to be influenced by the somewhat lower
level of such procedures performed in the late summer. Certain of the Breg
bracing products experience greater demand in the fall and winter corresponding
with high school and college football schedules and winter sports. In addition,
we do not believe our operations will be significantly affected by inflation.
However, in the ordinary course of business, we are exposed to the impact of
changes in interest rates and foreign currency fluctuations. Our objective is to
limit the impact of such movements on earnings and cash flows. In order to
achieve this objective, we seek to balance non-dollar income and expenditures.
During the nine months ended September 30, 2009 and all of 2008, we have used a
derivative instrument to hedge certain foreign currency fluctuation exposures.
During the nine months ended September 30, 2009 and the second half of 2008, we
have used a derivative instrument to hedge certain interest rate exposure on
LIBOR-based borrowings. See Item 3 - "Quantitative and Qualitative Disclosures
About Market Risk."
We manage our operations as four business segments: Domestic, Spinal Implants &
Biologics, Breg, and International. Domestic consists of operations of our
subsidiary Orthofix Inc. Spinal Implants and Biologics consist of our Blackstone
subsidiary and its domestic and international operations. Breg consists of Breg
Inc.'s operations and domestic and international distributors. International
consists of operations which are located in the rest of the world as well as
independent export distribution operations. Group Activities are comprised of
the operating expenses and identifiable assets of Orthofix International N.V.
and its US holding company subsidiary, Orthofix Holdings, Inc.
Segment and Market Sector Revenues
The following tables display net sales by business segment and net sales by
market sector. We maintain our records and account for net sales, costs of sales
and expenses by business segment. We provide net sales by market sector for
information purposes only.
Business Segment:
Three Months Ended September 30,
2009 2008
Percent of Percent of
Total Net Total Net
(US$ in thousands) Net Sales Sales Net Sales Sales Growth
Domestic $ 52,222 39 % $ 47,065 36 % 11 %
Spinal Implants & Biologics 28,017 21 % 25,338 20 % 11 %
Breg 23,724 17 % 22,377 17 % 6 %
International 31,135 23 % 34,521 27 % -10 %
Total $ 135,098 100 % $ 129,301 100 % 4 %
Nine Months Ended September 30,
2009 2008
Percent of Percent of
Total Net Total Net
(US$ in thousands) Net Sales Sales Net Sales Sales Growth
Domestic $ 155,654 39 % $ 138,397 36 % 12 %
Spinal Implants & Biologics 86,562 22 % 81,093 21 % 7 %
Breg 70,175 17 % 66,341 17 % 6 %
International 89,227 22 % 101,541 26 % -12 %
Total $ 401,618 100 % $ 387,372 100 % 4 %
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Market Sector:
Three Months Ended September 30,
2009 2008
Percent Percent
of Total of Total Constant
Net Net Net Net Reported Currency
(US$ in thousands) Sales Sales Sales Sales Growth Growth
Spine $ 68,136 50 % $ 61,318 48 % 11 % 11 %
Orthopedics 33,250 25 % 33,824 26 % -2 % 6 %
Sports Medicine 24,664 18 % 23,700 18 % 4 % 5 %
Vascular 3,904 3 % 4,274 3 % -9 % -5 %
Other 5,144 4 % 6,185 5 % -17 % -5 %
Total $ 135,098 100 % $ 129,301 100 % 4 % 7 %
Nine Months Ended September 30,
2009 2008
Percent Percent
of Total of Total Constant
Net Net Net Net Reported Currency
(US$ in thousands) Sales Sales Sales Sales Growth Growth
Spine $ 204,995 51 % $ 186,488 48 % 10 % 10 %
Orthopedics 95,468 24 % 96,919 25 % -1 % 8 %
Sports Medicine 73,369 18 % 70,212 18 % 4 % 5 %
Vascular 12,574 3 % 13,391 4 % -6 % -1 %
Other 15,212 4 % 20,362 5 % -25 % -9 %
Total $ 401,618 100 % $ 387,372 100 % 4 % 7 %
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The following table presents certain items from our Condensed Consolidated Statements of Operations as a percent of total net sales for the periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
(%) (%) (%) (%)
Net sales 100 100 100 100
Cost of sales 24 37 25 30
Gross profit (1) 76 63 75 70
Operating expenses:
Sales and marketing 41 39 41 40
General and administrative 15 15 16 15
Research and development 6 5 7 5
Amortization of intangible assets 1 4 1 4
Gain on sale of Pain Care®
operations - - - -
Impairment of goodwill and
intangible assets - 224 - 75
Total operating income (loss) 13 (224 ) 10 (69 )
Net income (loss) 5 (184 ) 4 (59 )
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(1) Includes effect of obsolescence provision representing approximately 9% and 3% points, respectively, for the three and nine months ended September 30, 2008.
Three Months Ended September 30, 2009 Compared to Three Months Ended
September 30, 2008
Net sales increased 4% to $135.1 million in the third quarter of 2009 compared
to $129.3 million for the same period last year. The impact of foreign currency
decreased sales by $3.6 million during the third quarter of 2009 when compared
to the third quarter of 2008.
Sales by Business Segment:
Net sales in Domestic increased to $52.2 million in the third quarter of 2009
compared to $47.1 million for the same period last year, an increase of 11%.
Domestic's net sales represented 39% and 36% of total net sales during the third
quarter of 2009 and 2008, respectively. The increase in Domestic's net sales was
partially the result of a 12% increase in sales in our Spine market sector,
which was mainly driven by increased sales of our Spinal-Stim® and
Cervical-Stim®products. The increase in Domestic's net sales was also
attributable to an 8% increase in our Orthopedics market sector which included a
14% increase in sales of Physio-Stim® products and a 16% increase in sales of
our external fixation products as compared to the same period in the prior year.
Partially offsetting these sales increases was a decrease of 29% in the sales of
our biologics products as a result of our replacement of the Trinity® product
line with Trinity®Evolution™. Although biologics sales decreased, the quantity
of product sold increased in the third quarter of 2009 compared to the third
quarter of 2008 because, under the terms of the agreement, we recognized
marketing fees of 70% of the end-user sales price of Trinity® Evolution™
compared to 100% of the end-user sales price of Trinity®. During the three
months ended September 30, 2009, Domestic generated $0.6 million in revenues of
Trinity® Evolution™.
Domestic Sales by Market Sector:
Net Sales for the
Three Months Ended September 30,
(US$ in thousands) 2009 2008 Growth
Spine $ 39,609 $ 35,340 12 %
Orthopedics 12,613 11,725 8 %
Total $ 52,222 $ 47,065 11 %
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Net sales in Spinal Implants & Biologics increased $2.7 million to $28.0 million
in the third quarter of 2009 compared to $25.3 million for the same period last
year, an increase of 11%. Spinal Implants & Biologics' net sales represented 21%
and 20% of total net sales during the third quarter of 2009 and 2008,
respectively. The increase in sales was primarily related to a 21% increase in
our thoracolumbar product sales due to the introduction of the new Firebird™
pedicle screw system during the second quarter of 2009. Sales of our interbody
and cervical products increased by 22% and 10%, respectively, when compared to
the same period in the prior year. These sales increases were partially offset
by a 19% sales decrease in our biologics products when compared to the same
period last year as a result of our replacement of the Trinity® product line
with Trinity® Evolution™. Although biologics sales decreased, the quantity of
product sold increased in the third quarter of 2009 compared to the third
quarter of 2008 because, under the terms of the agreement, we recognized
marketing fees of 70% of the end-user sales price of Trinity®Evolution™ compared
to 100% of the end-user sales price of Trinity®. Full market release of our new
Trinity® Evolution™ stem cell-based allograft occurred on July 1, 2009 with
sales reaching $3.5 million during the third quarter of 2009. All of Spinal
Implants & Biologics' sales are recorded in our Spine market sector.
Net sales in Breg increased $1.3 million to $23.7 million in the third quarter
of 2009 compared to $22.4 million for the same period last year, an increase of
6%. Breg's net sales represented 17% of total net sales during both third
quarters of 2009 and 2008. The increase in Breg's net sales was primarily due to
a 9% increase in sales of our Breg bracing products when compared to the same
period in the prior year, primarily as a result of the sales of our new products
which include spine bracing. Further, sales of our cold therapy products
increased 6% over the same period in the prior year which is due to the recent
introduction of our Kodiak® cold therapy products. All of Breg's sales are
recorded in our Sports Medicine market sector.
Net sales in International decreased 10% to $31.1 million in the third quarter
of 2009 compared to $34.5 million for the same period last year. International's
net sales represented 23% and 27% of our total net sales in the third quarter of
2009 and 2008, respectively. The impact of foreign currency decreased
International net sales by 10% or $3.5 million, during the third quarter of 2009
as compared to the third quarter of 2008. On a constant currency basis, sales
for the Orthopedics sector increased 5% in the third quarter of 2009 when
compared to the prior year. Within the Orthopedics sector, external fixation,
stimulation, and deformity correction increased 4%, 18%, and 72% respectively,
on a constant currency basis, when compared with the same period last year.
Sales of our Vascular and Other distributed products both decreased 5% on a
constant currency basis when compared to the same period in the prior year.
International Sales by Market Sector:
Net Sales for the
Three Months Ended Constant
September 30, Reported Currency
(US$ in thousands) 2009 2008 Growth Growth
Spine $ 510 $ 640 -20 % -20 %
Orthopedics 20,637 22,099 -7 % 5 %
Sports Medicine 940 1,323 -29 % -21 %
Vascular 3,904 4,274 -9 % -5 %
Other 5,144 6,185 -17 % -5 %
Total $ 31,135 $ 34,521 -10 % 0 %
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Sales by Market Sector:
Sales of our Spine products increased to $68.1 million in the third quarter of
2009 compared to $61.3 million in the third quarter of 2008. Sales of our
Cervical-Stim® and Spinal-Stim®products increased 7% and 17%, respectively, in
the third quarter of 2009 compared to 2008. In addition, sales of our Spinal
Implants & Biologics products increased 10% over the same period in the prior
year due to the introduction of new thoracolumbar products previously discussed
as well as increased sales of our interbody and cervical products. Also, the
full market release of our new Trinity® Evolution™ stem cell-based allograft
occurred on July 1, 2009 replacing the former Trinity® product line. Sales of
Trinity® Evolution™ reached $3.5 million during the third quarter of 2009. Under
the terms of the agreement, we recognized marketing fees of 70% of the end-user
sales price of Trinity® Evolution™ compared to 100% of the end-user sales price
of Trinity®. Spine product sales were 50% and 48% of our total net sales in the
third quarters of both 2009 and 2008, respectively.
Sales of our Orthopedics products decreased $0.6 million to $33.3 million in the
third quarter of 2009 compared to $33.8 million for the same period last year.
On a constant currency basis, sales increased 6% compared to the same period
last year due to increased sales of our Physio Stim®, external fixation, and
deformity correction products. Orthopedic product sales were 25% of our total
net sales in the third quarter of 2009 compared to 26% for the same period last
year.
Sales of our Sports Medicine products increased 4% to $24.7 million in the third
quarter of 2009 compared to $23.7 million for the same period last year. As
discussed above, the increase of $1.0 million is primarily due to sales of our
Breg bracing and cold therapy products. Sports Medicine product sales were 18%
of our total net sales in both the third quarters of 2009 and 2008.
Sales of our Vascular products, which consist of our A-V Impulse System®,
decreased 9% to $3.9 million in the third quarter of 2009 compared to
$4.3 million for the same period last year. On a constant currency basis, sales
decreased 5% compared to the prior period. Vascular product sales were 3% of our
total net sales in both the third quarters of 2009 and 2008.
Sales of our Other products, which include the sales of our Laryngeal Mask as
well as our Woman's Care line, decreased 17% to $5.1 million in the third
quarter of 2009 when compared to $6.2 million for the same period last year. On
a constant currency basis, sales decreased 5% when compared to the third quarter
of 2008. We distribute the Laryngeal Mask product in the United Kingdom and in
Italy. We will transition out of the agreements to distribute the Laryngeal Mask
product in Italy and in the United Kingdom, in October 2009 and June 2010,
respectively. Other product sales were 4% and 5% of our total net sales in both
the third quarters of 2009 and 2008, respectively.
Gross Profit - Our gross profit increased 27% to $103.1 million in the third
quarter of 2009, compared to $81.3 million for the same period last year. Gross
profit as a percent of net sales in the third quarter of 2009 was 76.3% compared
to 62.9% for the same period last year. In the quarter ended September 30, 2008,
due to reduced projections in revenue, distributor terminations, new products,
and the replacement of one of our products with a successor product, the Company
changed its estimates regarding the inventory allowance at Blackstone, primarily
based on estimated net realizable value using assumptions about future demand
and market conditions. The change in estimate resulted in an increase in the
reserve for obsolescence of approximately $10.9 million. In addition, the
Company recorded approximately $0.6 million of expense related to Blackstone
instrumentation equipment, also as a result of the replacement of one of our
products with a successor product. Gross profit as a percent of net sales in the
third quarter of 2008 was 62.9%. Gross profit, excluding the additional reserve
recorded at Blackstone was 71.8% in the quarter ended September 30, 2008.
Excluding the negative impacts in the prior year, the increase in the gross
profit is primarily due to the increased sales of higher margin stimulation
products and Spinal Implants & Biologics products.
Sales and Marketing Expense - Sales and marketing expense, which includes
commissions, certain royalties and the bad debt provision, generally increase
and decrease in relation to sales. Sales and marketing expense increased
$4.8 million, or 10%, to $55.0 million in the third quarter of 2009 compared to
$50.2 million in the third quarter of 2008. As a percent of net sales, sales and
marketing expense was 40.7% and 38.8% in the third quarter of 2009 and 2008,
respectively. This increase is primarily the result of an increase in commission
expenses reflecting the implementation of sales programs with new distributor
programs. This increased investment in sales and marketing has facilitated the
development of new customer relationships and increased sales in both the spine
stimulation and orthopedic businesses.
General and Administrative Expense - General and administrative expense
increased $1.5 million, or 8%, in the third quarter of 2009 to $20.8 million
compared to $19.3 million in the third quarter of 2008. The increase is
primarily due to a restructuring charge to consolidate substantially all of
Blackstone's current operations in Wayne, NJ and Springfield, MA into the same
facility housing its spine stimulation and US orthopedics business in the
Dallas, TX area. In addition, general and administrative expenses were also
higher compared with the prior year due to infrastructure increases in some
faster growing international markets. General and administrative expense as a
percent of net sales was 15.4% in the third quarter of 2009 compared to 14.9%
for the same period last year.
Research and Development Expense - Research and development expense increased
$1.4 million in the third quarter of 2009 to $7.9 million compared to
$6.4 million for the same period last year. This increase is primarily the
result of our collaborative arrangement with Intelligent Implant Systems ("IIS")
for which we made an $0.8 million milestone payment during the third quarter of
2009. As a percent of sales, research and development expense was 5.8% in the
third quarter of 2009 compared to 5.0% for the same period last year. We do not
expect to incur any further expense in 2009 related to the IIS agreement; see
Liquidity and Capital Resources for further detail.
Amortization of Intangible Assets - Amortization of intangible assets decreased
$3.7 million in the third quarter of 2009 to $1.7 million compared to
$5.3 million for the same period last year. This decrease is primarily
attributed to the impairment of $105.7 million of definite-lived intangible
assets at Blackstone during the third quarter of 2008.
Impairment of Goodwill and Certain Intangible Assets - In the third quarter of
2008, we incurred $289.5 million of expense related to the impairment of
goodwill and certain intangible assets. As part of our debt refinancing
completed in September 2008, five year projections were prepared for Blackstone.
. . .
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