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RTIX > SEC Filings for RTIX > Form 10-Q on 1-Nov-2012All Recent SEC Filings

Show all filings for RTI BIOLOGICS, INC.

Form 10-Q for RTI BIOLOGICS, INC.


1-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement Relating to Forward Looking Statements

Information contained in this filing contains "forward-looking statements" which can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "anticipates" or comparable terminology, or by discussions of strategy. There can be no assurance that the future results covered by these forward-looking statements will be achieved. Some of the matters described in the "Risk Factors" section of our Form 10-K constitute cautionary statements which identify factors regarding these forward-looking statements, including certain risks and uncertainties, that could cause actual results to vary materially from the future results indicated in these forward-looking statements. Other factors could also cause actual results to vary materially from the future results indicated in such forward-looking statements.

Management Overview

RTI Biologics, Inc., together with its subsidiaries, produces orthopedic and other surgical implants that repair and promote the natural healing of human bone and other human tissues. We process donated human musculoskeletal and other tissues, including bone, cartilage, tendon, ligament, fascia lata, pericardium, sclera, and dermal tissues, as well as bovine animal tissues to produce allograft and xenograft implants by utilizing our proprietary BIOCLEANSE ® and TUTOPLAST® sterilization processes. We process and distribute human and bovine animal tissues for use in the fields of sports medicine, spine, surgical specialties, bone graft substitutes, and general orthopedic and dental. We market our implants through a direct distribution organization, as well as through a network of independent distributors to hospitals and surgeons in the United States and internationally. We were founded in 1997 and are headquartered in Alachua, Florida

Domestic distributions and services accounted for 87% of total revenues in the first nine months of 2012. Most of our implants are distributed directly to doctors, hospitals and other healthcare facilities through a direct distribution force and through various strategic relationships.

International distributions and services accounted for 13% of total revenues in the first nine months of 2012. Our implants are distributed in over 30 countries through a direct distribution force in Germany and through stocking distributors in the rest of the world outside of Germany and the U.S.

Our business is generally not seasonal in nature; however, the number of orthopedic implant surgeries and elective procedures generally declines during the summer months.

Our principal goals are to honor the gift of donated tissue, donor families, and patients while building our competitive strength in the marketplace to increase revenues, profitability and cash flow as we focus on improved operational efficiency, productivity and asset management. We are making investments in new implant and product development and our U.S. direct distribution network to promote growth in 2012 and beyond. In addition, we actively look externally for new implants and technologies to augment our existing implant offerings.

We continue to maintain our commitment to research and development and the introduction of new strategically targeted allograft and xenograft implants as well as focused clinical efforts to support their acceptance in the marketplace.


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Three and Nine Months Ended September 30, 2012 Compared With Three and Nine
Months Ended September 30, 2011



                                          Three Months Ended           Nine Months Ended
                                             September 30,               September 30,
                                           2012          2011         2012          2011
                                                          (In Thousands)
   Revenues from tissue distribution:
   Sports medicine                      $   11,811     $ 11,072     $  38,573     $  34,881
   Spine                                    10,187       10,322        28,532        31,060
   Surgical specialties                      7,880        7,519        24,136        22,583
   BGS and general orthopedic                7,916        7,026        21,947        19,374
   Dental                                    5,240        4,551        15,678        13,615
   Other revenues                            1,532        1,767         4,640         4,872

   Total revenues                       $   44,566     $ 42,257     $ 133,506     $ 126,385

   Domestic revenues                        39,643       37,282       116,707       110,507
   International revenues                    4,923        4,975        16,799        15,878

   Total revenues                       $   44,566     $ 42,257     $ 133,506     $ 126,385

Three Months Ended September 30, 2012 Compared With Three Months Ended September 30, 2011

Revenues. Our total revenues increased $2.3 million, or 5.5%, to $44.6 million for the three months ended September 30, 2012 compared to $42.3 million for the three months ended September 30, 2011.

Sports Medicine - Revenues from sports medicine allografts increased $739,000, or 6.7%, to $11.8 million for the three months ended September 30, 2012 compared to $11.1 million for the three months ended September 30, 2011. Sports medicine revenues increased primarily as a result of higher unit volumes of 6.7%.

Spine - Revenues from spinal allografts decreased $135,000, or 1.3%, to $10.2 million for the three months ended September 30, 2012 compared to $10.3 million for the three months ended September 30, 2011. Spine revenues decreased primarily as a result of lower average revenues per unit of 5.7%, primarily due to changes in distribution mix, partially offset by higher unit volumes of 4.6%.

Surgical Specialties - Revenues from surgical specialty allografts increased $361,000, or 4.8%, to $7.9 million for the three months ended September 30, 2012 compared to $7.5 million for the three months ended September 30, 2011. Surgical specialties revenues increased as a result of higher unit volumes of 3.2% and higher average revenue per unit of 1.6%.

Bone Graft Substitutes (BGS) and General Orthopedic - Revenues from BGS and general orthopedic allografts increased $890,000, or 12.7%, to $7.9 million for the three months ended September 30, 2012 compared to $7.0 million for the three months ended September 30, 2011. BGS and general orthopedic revenue increases were primarily the result of higher unit volumes of 12.5%.

Dental - Revenues from dental allografts increased $689,000, or 15.1%, to $5.2 million for the three months ended September 30, 2012 compared to $4.6 million for the three months ended September 30, 2011. Dental revenues increased primarily as a result of higher unit volumes of 10.6% and higher revenues per unit of 4.3%.

Other Revenues - Revenues from other sources consisting of tissue recovery fees, biomedical laboratory fees, recognition of previously deferred revenues, shipping fees, distribution of reproductions of our allografts to distributors for demonstration purposes and restocking fees decreased by $235,000 to $1.5 million for the three months ended September 30, 2012 compared to $1.8 million for the three months ended September 30, 2011. The decrease was primarily due to lower tissue recovery fees related to tissue recovered for other tissue processors in the current period.


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International revenues - International revenues include distributions from our foreign affiliates as well as domestic export revenues. International revenues decreased $52,000, or 1.0%, to $4.9 million for the three months ended September 30, 2012 compared to $5.0 million for the three months ended September 30, 2011. On a constant currency basis, international revenues increased $456,000, or 9.2%, primarily as a result of higher BGS and general orthopedic revenues.

Costs of Processing and Distribution. Costs of processing and distribution decreased $60,000, or 0.3%, to $22.9 million for the three months ended September 30, 2012 compared to $22.9 million for the three months ended September 30, 2011.

Costs of processing and distribution decreased as a percentage of revenues from 54.3% for the three months ended September 30, 2011 to 51.3% for the three months ended September 30, 2012. The decrease was primarily the result of higher production levels and operating efficiencies for the three months ended September 30, 2012 as compared to the prior year period.

Marketing, General and Administrative Expenses.Marketing, general and administrative expenses increased $835,000, or 6.1%, to $14.5 million for the three months ended September 30, 2012 from $13.7 million for the three months ended September 30, 2011. Marketing, general and administrative expenses increased as a percentage of revenues from 32.3% for the three months ended September 30, 2011 to 32.5% for the three months ended September 30, 2012. The increase in expenses was primarily due to increases in compensation, distributor commissions and marketing related expenses of $1.0 million, partially offset by favorable foreign currency exchange fluctuations of $292,000 due to an 11.6% increase in the value of the U.S. dollar versus the Euro, as compared to the prior year period.

Research and Development Expenses. Research and development expenses increased by $599,000, or 23.9%, to $3.1 million for the three months ended September 30, 2012 from $2.5 million for the three months ended September 30, 2011. As a percentage of revenues, research and development expenses increased from 5.9% for the three months ended September 30, 2011 to 7.0% for the three months ended September 30, 2012. The increase was primarily due to higher research study related expenses of $591,000.

Asset Abandonments. There were no asset abandonments for the three months ended September 30, 2012 compared to $1,000 for the three months ended September 30, 2011.

Net Other Income (Expense). Net other income was $32,000 for the three months ended September 30, 2012 compared to net other expense of $29,000 for the three months ended September 30, 2011. The increase in net other income is primarily attributable to lower interest expense incurred on long term debt and favorable foreign currency exchange changes due to fluctuations in the value of the U.S. dollar versus the Euro and the timing of payments on foreign currency liabilities.

Income Tax Provision. Income tax provision for the three months ended September 30, 2012 was $1.3 million compared to $377,000 for the three months ended September 30, 2011. Our effective tax rate for the three months ended September 30, 2012 and 2011 was 31.8% and 12.1% respectively. Our effective tax rate for the three months ended September 30, 2012 compared to the three months ended September 30, 2011 increased primarily resulting from new safe harbor guidance issued by the Internal Revenue Service in the third quarter of 2011 regarding the deductibility of transaction fees incurred as part of our 2008 merger with TMI with no comparable credit in the current period.

Nine Months Ended September 30, 2012 Compared With Nine Months Ended September 30, 2011

Revenues. Our total revenues increased $7.1 million, or 5.6%, to $133.5 million for the nine months ended September 30, 2012 compared to $126.4 million for the nine months ended September 30, 2011.


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Sports Medicine - Revenues from sports medicine allografts increased $3.7 million, or 10.6%, to $38.6 million for the nine months ended September 30, 2012 compared to $34.9 million for the nine months ended September 30, 2011. Sports medicine revenues increased primarily as a result of higher unit volumes of 11.6%, partially offset by lower average revenues per unit of 0.9%, primarily due to changes in distribution mix.

Spine - Revenues from spinal allografts decreased $2.5 million, or 8.1%, to $28.5 million for the nine months ended September 30, 2012 compared to $31.1 million for the nine months ended September 30, 2011. Spine revenues decreased primarily as a result of lower unit volumes of 5.2% and lower average revenue per unit of 3.1%, primarily due to changes in distribution mix.

Surgical Specialties - Revenues from surgical specialty allografts increased $1.6 million, or 6.9%, to $24.1 million for the nine months ended September 30, 2012 compared to $22.6 million for the nine months ended September 30, 2011. Surgical specialties revenues increased primarily as a result of higher unit volumes of 9.2%, partially offset by lower revenues per unit of 1.9%, primarily due to changes in distribution mix.

Bone Graft Substitutes (BGS) and General Orthopedic - Revenues from BGS and general orthopedic allografts increased $2.6 million, or 13.3%, to $22.0 million for the nine months ended September 30, 2012 compared to $19.4 million for the nine months ended September 30, 2011. BGS and general orthopedic revenue increases were primarily the result of higher unit volumes of 17.2%, partially offset by lower revenues per unit of 3.2%, primarily due to changes in distribution mix.

Dental - Revenues from dental allografts increased $2.1 million, or 15.2%, to $15.7 million for the nine months ended September 30, 2012 compared to $13.6 million for the nine months ended September 30, 2011. Dental revenues increased primarily as a result of higher unit volumes of 16.4%, partially offset by lower revenues per unit of 0.7%, primarily due to changes in distribution mix.

Other Revenues - Revenues from other sources consisting of tissue recovery fees, biomedical laboratory fees, recognition of previously deferred revenues, shipping fees, distribution of reproductions of our allografts to distributors for demonstration purposes and restocking decreased $232,000, or 4.8%, to $4.6 million for the nine months ended September 30, 2012 compared to $4.9 million for the nine months ended September 30, 2011. The decrease was primarily due to lower tissue recovery fees related to tissue recovered for other tissue processors in the current period.

International revenues - International revenues include distributions from our foreign affiliates as well as domestic export revenues. International revenues increased $921,000, or 5.8%, to $16.8 million for the nine months ended September 30, 2012 compared to $15.9 million for the nine months ended September 30, 2011. On a constant currency basis, international revenues increased $2.2 million, or 13.6%, primarily as a result of higher BGS and general orthopedic revenues.

Costs of Processing and Distribution. Costs of processing and distribution increased $1.0 million, or 1.5%, to $70.0 million for the nine months ended September 30, 2012 compared to $69.0 million for the nine months ended September 30, 2011.

Costs of processing and distribution decreased as a percentage of revenues from 54.6% for the nine months ended September 30, 2011 to 52.5% for the nine months ended September 30, 2012. The decrease was primarily the result of higher production levels and operating efficiencies for the nine months ended September 30, 2012 as compared to the prior year period.

Marketing, General and Administrative Expenses.Marketing, general and administrative expenses increased $1.4 million, or 3.4%, to $43.2 million for the nine months ended September 30, 2012 from $41.8 million for the nine months ended September 30, 2011. Marketing, general and administrative expenses decreased as a percentage of revenues from 33.0% for the nine months ended September 30, 2011 to 32.3% for the nine months ended September 30, 2012. The increase in expense was primarily due to an increase in variable compensation expense


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and distributor commissions expense of $1.0 million and $685,000, respectively, partially offset by $619,000 of favorable foreign currency exchange fluctuations due to an 8.9% increase in the value of the U.S. dollar versus the Euro, as compared to the prior year period.

Research and Development Expenses.Research and development expenses increased by $1.9 million, or 25.3%, to $9.3 million for the nine months ended September 30, 2012 from $7.4 million for the nine months ended September 30, 2011. As a percentage of revenues, research and development expenses increased from 5.9% for the nine months ended September 30, 2011 to 7.0% for the nine months ended September 30, 2012. The increase was primarily due to higher research study related expenses of $1.4 million.

Asset Abandonments. Asset abandonments decreased by $40,000 to $18,000 for the nine months ended September 30, 2012 from $58,000 for the nine months ended September 30, 2011.

Litigation settlement. In connection with certain lawsuits pending against us related to the misconduct of Biomedical Tissue Services, Ltd. ("BTS") and BTS's owner, Michael Mastromarino, as well as several funeral homes and their owners with which BTS conducted its affairs, an agreement was reached to settle 29 of the lawsuits, and the parties prepared documentation to effect such agreement in the third quarter of 2012. Pursuant to the settlement of these lawsuits, we recorded a litigation settlement charge of $2.4 million in the second quarter of 2012 which was paid in the third quarter of 2012.

Net Other Income (Expense). Net other income was $138,000 for the nine months ended September 30, 2012 compared to net other expense of $168,000 for the nine months ended September 30, 2011. The increase in net other income is primarily attributable to lower interest expense incurred on long term debt and favorable foreign currency exchange changes due to fluctuations in the value of the U.S. dollar versus the Euro and the timing of payments on foreign currency liabilities.

Income Tax Provision. Income tax provision for the nine months ended September 30, 2012 was $2.7 million compared to $2.0 million for the nine months ended September 30, 2011. Our effective tax rate for the nine months ended September 30, 2012 and 2011 was 30.3% and 24.8% respectively. Our effective tax rate for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 increased primarily resulting from new safe harbor guidance issued by the Internal Revenue Service in the third quarter of 2011 regarding the deductibility of transaction fees incurred as part of our 2008 merger with TMI with no comparable credit in the current period.

Liquidity and Capital Resources

Our working capital at September 30, 2012 increased $6.7 million to $130.7 million from $124.1 million at December 31, 2011. The increase in working capital was primarily due to the increase in cash and cash equivalents on hand and a decrease in accounts payable during the current period. At September 30, 2012, we had 43 days of revenues outstanding in trade accounts receivable, a decrease of 2 days compared to December 31, 2011. The decrease was due to higher cash receipts from customers than shipments and corresponding billings to customers during the first nine months of 2012. At September 30, 2012 we had 283 days of inventory on hand, a decrease of 17 days compared to December 31, 2011. The planned decrease was primarily due to a continued inventory management focus. We believe that our inventory levels will be adequate to support our on-going operations for the next twelve months. We had $55.2 million of cash and cash equivalents at September 30, 2012.

Our long term obligations at September 30, 2012 decreased $390,000 to $201,000 from $591,000 at December 31, 2011. The decrease in long term obligations was primarily due to our paying off our term loans and paying down our capital leases. At September 30, 2012, we have $16.4 million of borrowing capacity available under our revolving credit facilities. On July 21, 2012, we entered into an amended credit agreement with Toronto-Dominion Bank. Under the amended agreement there were no substantial changes to the credit facility agreement terms, other than the revolving credit facility's maturity date being extended from July 21, 2012 to July 21, 2014.


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As of September 30, 2012, we believe that our working capital, together with our borrowing ability under our revolving credit facilities, will be adequate to fund our on-going operations for the next twelve months.

Certain Commitments.

The Company's short-term and long-term debt obligations and availability of
credit as of September 30, 2012 are as follows:



                                          Outstanding       Available
                                            Balance          Credit
                                                (In thousands)
               Short-term obligations:
               Credit facilities         $          -      $    16,361
               Long-term obligations:
               Capital leases                      201              -

               Total debt obligations    $         201     $    16,361

The following table provides a summary of our debt obligations, operating lease obligations, and other significant obligations as of September 30, 2012.

                                                             Contractual Obligations Due by Period
                                               Total       2012        2013       2014      2015       After 2015
                                                                         (In thousands)
Debt obligations                              $   201     $    31     $   162     $   8     $  -      $         -
Operating leases                                2,636         482       1,129       482       274              269
Other significant obligations (1)               6,174       5,931         243        -         -                -
Unrecognized tax benefits                         531         158         336        -         -                37

Total                                         $ 9,542     $ 6,602     $ 1,870     $ 490     $ 274     $        306

(1) These amounts consist of contractual obligations for tissue recovery development grants and licensing fees.

The Company was in compliance with all covenants related to its revolving credit facilities as of September 30, 2012.


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