UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to
--------------
-------------------.
Commission File Number: 0-19961
ORTHOFIX INTERNATIONAL N.V.
(Exact name of registrant as specified in its charter)
Netherlands Antilles N/A
- ------------------------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7 Abraham de Veerstraat
Curacao
Netherlands Antilles N/A
- ------------------------------------------- ---------------------------------
(Address of principal executive offices) (Zip Code)
599-9-4658525
------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.10 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ X ] No [ ]
As of May 9, 2003, 14,117,672 shares of common stock were issued and
outstanding.
Table of Contents
Page
PART I FINANCIAL INFORMATION................................................3
ITEM 1. CONDENSED FINANCIAL STATEMENTS...................................3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.......15
ITEM 4. CONTROLS AND PROCEDURES.........................................15
PART II OTHER INFORMATION.................................................. 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................16
SIGNATURES ............................................................17
CERTIFICATIONS ............................................................18
Forward-Looking Statements
This Form 10-Q contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, relating to our business and
financial outlook, which are based on our current expectations, estimates,
forecasts and projections. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential" or "continue" or
other comparable terminology. These forward-looking statements are not
guarantees of future performance and involve risks, uncertainties, estimates and
assumptions that are difficult to predict. Therefore, actual outcomes and
results may differ materially from those expressed in these forward-looking
statements. You should not place undue reliance on any of these forward-looking
statements. Further, any forward-looking statement speaks only as of the date on
which it is made, and we undertake no obligation to update any such statement to
reflect new information, the occurrence of future events or circumstances or
otherwise.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies without fear of litigation. We
would like to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act in connection with the forward-looking
statements included in this document.
A number of important factors could cause actual results to differ
materially from those indicated by the forward-looking statements, including,
but not limited to, the risks described under Item 1 - "Business - Risk Factors"
in our Annual Report on Form 10-K for the fiscal year ended December 31, 2002.
2
PART I FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Consolidated Balance Sheets at MARCH 31, 2003 and DECEMBER 31, 2002
(U.S. Dollars, in thousands except per share data) March 31, December 31,
2003 2002
----------------- ----------------
Assets (Unaudited) (Note 2)
Current assets:
Cash and cash equivalents.................................... $41,552 $48,813
Trade accounts receivable, net............................... 53,936 54,654
Inventories.................................................. 22,250 23,471
Deferred income taxes........................................ 3,271 3,271
Prepaid expenses and other................................... 4,374 6,789
----------------- ----------------
Total current assets........................................... 125,383 136,998
Securities and other investments............................... 5,787 4,753
Property, plant and equipment, net............................. 13,330 13,841
Patents and other intangible assets, net....................... 4,645 4,214
Goodwill, net.................................................. 70,656 58,781
Other long-term assets ........................................ 2,434 2,187
----------------- ----------------
Total assets................................................... $222,235 $220,774
================= ================
Liabilities and shareholders' equity
Current liabilities:
Bank borrowings.............................................. $5,583 $6,977
Current portion of long-term debt............................ 159 399
Trade accounts payable....................................... 8,039 9,637
Other current liabilities.................................... 20,290 20,113
----------------- ----------------
Total current liabilities.................................... 34,071 37,126
Long-term debt................................................. 46 44
Deferred income taxes.......................................... 1,915 2,202
Other long-term liabilities.................................... 3,496 3,451
----------------- ----------------
Total liabilities............................................ 39,528 42,823
Minority interests............................................. -- 9,867
Contingencies (Note 11)
Shareholders' equity:
Common shares................................................ 1,421 1,384
Additional paid-in capital................................... 54,091 50,884
Less: 70,000 treasury shares, at cost (2002: 195,000)...... (1,878) (5,281)
----------------- ----------------
53,634 46,987
Retained earnings............................................ 129,147 123,194
Accumulated other comprehensive loss......................... (74) (2,097)
----------------- ----------------
Total shareholders' equity..................................... 182,707 168,084
----------------- ----------------
Total liabilities, minority interests and shareholders' equity. $222,235 $220,774
================= ================
The accompanying notes form an integral part of these condensed consolidated
financial statements.
3
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(Unaudited, U.S. Dollars, in thousands except per share data) 2003 2002
---------------- -----------------
Net sales...................................................... $48,181 $41,595
Cost of sales.................................................. 12,585 9,911
---------------- -----------------
Gross profit................................................. 35,596 31,684
Operating expenses
Sales and marketing.......................................... 17,600 15,084
General and administrative................................... 4,982 4,145
Research and development..................................... 2,131 2,132
Amortization of intangible assets............................ 278 165
KCI litigation costs......................................... 862 --
---------------- -----------------
25,853 21,526
---------------- -----------------
Total operating income .................................... 9,743 10,158
Other income (expense), net................................... (326) (275)
---------------- -----------------
Net income before income tax and minority interests......... 9,417 9,883
Income tax expense............................................. (3,464) (2,905)
---------------- -----------------
Income before minority interests ........................... 5,953 6,978
Minority interests............................................. -- (388)
================ =================
Net income ............................................... $5,953 $6,590
================ =================
Net income per common share - basic............................ $0.43 $0.52
================ =================
Net income per common share - diluted.......................... $0.41 $0.44
================ =================
Weighted average number of common shares - basic.............. 13,704,052 12,770,208
================ =================
Weighted average number of common shares - diluted............. 14,499,614 15,000,213
================ =================
The accompanying notes form an integral part of these condensed consolidated
financial statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(Unaudited, U.S. Dollars, in thousands) 2003 2002
---------------- -----------------
Cash flows from operating activities:
Net income................................................ $5,953 $6,590
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.............................. 1,628 1,257
Provision for doubtful accounts............................ 1,240 995
Loss on sale of fixed assets............................... -- 168
Loss on equity investments................................. 372 292
Minority interest in net income of consolidated subsidiaries -- 388
Tax benefit on non-qualified stock options................. 142 --
Other ..................................................... 70 (222)
Change in operating assets and liabilities:
Increase in accounts receivable......................... (176) (2,319)
Decrease/(increase) in inventories...................... 1,353 (922)
Decrease/(increase) in prepaid expenses and other....... 2,241 (182)
Decrease in accounts payable............................ (1,716) (507)
(Decrease)/increase in other current liabilities........ 202 (602)
---------------- -----------------
Net cash provided by operating activities...................... 11,309 4,936
---------------- -----------------
Cash flows from investing activities:
Investments in affiliates and subsidiaries................ (22,071) (2,041)
Capital expenditures...................................... (974) (1,799)
Other..................................................... (300) --
---------------- -----------------
Net cash used in investing activities.......................... (23,345) (3,840)
---------------- -----------------
Cash flows from financing activities:
Net proceeds from issuance of common stock................ 8,385 864
Repurchase of treasury shares............................. (1,880) (3,069)
Proceeds from loans and borrowings........................ 39 595
Repayment of loans and borrowings......................... (1,920) (1,834)
---------------- -----------------
Net cash provided by (used in) financing activities............ 4,624 (3,444)
---------------- -----------------
Effect of exchange rate changes on cash........................ 151 (336)
---------------- -----------------
Decrease in cash and cash equivalents.......................... (7,261) (2,684)
Cash and cash equivalents at the beginning of the year......... 48,813 34,273
---------------- -----------------
Cash and cash equivalents at the end of the period............. $41,552 $31,589
================ =================
The accompanying notes form an integral part of these condensed consolidated
financial statements.
5
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BUSINESS
Orthofix International N.V. and its subsidiaries (the "Company") is a
multinational corporation principally involved in the design, development,
manufacture, marketing and distribution of medical equipment, principally for
the orthopedic market.
NOTE 2: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Pursuant to these rules and
regulations, certain information and note disclosures, normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States, have been condensed or omitted. In the opinion of
management, all adjustments (consisting of normal recurring items) considered
necessary for a fair presentation have been included. Operating results for the
three months ended March 31, 2003 are not necessarily indicative of the results
that may be expected for the year ended December 31, 2003. The balance sheet at
December 31, 2002 has been derived from the audited financial statements at that
date but does not include all of the information and footnotes required by
accounting principles generally accepted in the United States for complete
financial statements. For further information, refer to the Consolidated
Financial Statements and Notes thereto of our Annual Report on Form 10-K for the
year ended December 31, 2002.
NOTE 3: INVENTORY
Inventories are as follows:
March 31, December 31,
(In thousands) 2003 2002
------------------ -----------------
Raw materials $2,611 $2,177
Work-in-process 1,510 1,210
Finished goods 9,016 11,668
Field inventory 6,053 5,260
Consignment inventory 5,899 5,910
Less reserve for obsolescence (2,839) (2,754)
------------------ -----------------
$22,250 $23,471
================== =================
NOTE 4: ACQUISITIONS AND INVESTMENTS
On March 20, 2003, the Company completed the acquisition of the remaining
48% minority interest in Intavent Orthofix Limited (IOL) for $20.6 million
(including acquisition costs) with an effective date of January 14, 2003. The
Company utilized an independent firm to perform an appraisal and valuation of
IOL. The Company used cash on hand to complete this purchase from Intavent
Limited (Intavent). Mr. Gaines-Cooper, Chairman of Orthofix, is a settlor of a
trust which owns a 30% interest in Intavent. IOL has been a fully consolidated
subsidiary and is now a wholly-owned subsidiary of the Company. The Company
recorded this additional equity purchase using the purchase method of accounting
and the impact has been included in the results of operations from the date of
acquisition. A preliminary allocation of the purchase price reflects the
settlement of a minority interest obligation of approximately $9.9 million and
$10.7 million of additional goodwill. The Company expects to finalize the
purchase price allocation during 2003.
6
The pro forma effect on operations or earnings per share would not be
substantially different than those reported, assuming consummation of the
purchase as of January 1, 2003. The pro forma unaudited results of operations
and earnings per share for the three months ended March 31, 2002, assuming
consummation of the purchase as of January 1, 2002, are as follows:
As Reported Pro Forma
----------- ---------
Net sales $41,595 $41,595
Net income 6,590 6,978
Per share data:
Basic $0.52 $0.55
Diluted $0.44 $0.47
On February 5, 2003, the Company purchased an equity interest in Innovative
Spinal Technologies (IST), a start-up company focused on commercializing spinal
products, for $1.5 million. The investment is accounted for at cost.
NOTE 5: COMMON SHARES
For the three months ended March 31, 2003, the Company issued 571,300
shares of common stock upon the exercise of outstanding stock options for
proceeds of $8.4 million and paid $1.9 million to purchase 70,000 shares of its
common stock in the open market for treasury. During the period, the Company
also retired 195,000 treasury shares recorded at a cost of $5.3 million.
NOTE 6: COMPREHENSIVE INCOME
Other comprehensive income includes foreign currency translation
adjustments and unrealized gains/losses on available-for-sale securities, net of
tax. Other comprehensive income/(loss) for the three months ended March 31, 2003
and 2002 was $2.0 million of income and a loss of $0.4 million, respectively.
During the period ended March 31, 2003, the Company reclassified $1.4 million of
foreign currency translation impact on goodwill that is denominated in a non
U.S. dollar currency, from other comprehensive income to goodwill. This
reclassification had no impact on the results of operations or cash flows of the
Company. Total comprehensive income combines reported net income and other
comprehensive income. Total comprehensive income for the three months ended
March 31, 2003 and 2002 was $8.0 million and $6.2 million, respectively.
NOTE 7: BUSINESS SEGMENT INFORMATION
The Company's operations are managed as two geographic business units (the
Americas and International) plus Group activities. The Americas consists of the
United States, Mexico and Brazil. International consists of the rest of the
world plus export distribution operations.
For the three month periods ended March 31:
Net Sales To Intersegment Operating
External Customers Net Sales Income/(Expense)
------------------ ------------------- --------------------
(In thousands) 2003 2002 2003 2002 2003 2002
---- ---- ---- ---- ---- ----
International $21,485 $17,247 $12,543 $9,597 $5,052 $6,265
Americas 26,696 24,348 157 55 6,104 5,245
Group activities -- -- -- -- (1,021) (814)
Eliminations -- -- -- -- (392) (538)
-------- ------- ------- ------- ------- -------
Total $48,181 $41,595 $12,700 $9,652 $9,743 $10,158
-------- ------- ------- ------- ------- -------
7
Identifiable Assets
-------------------
March 31, December 31,
(In thousands) 2003 2002
------- ---------
International $150,406 $169,071
Americas 84,017 80,848
Group 80,831 56,652
Eliminations (93,019) (85,797)
--------- ---------
Total $222,235 $220,774
========= ========
A reconciliation of combined operating profit for each business unit to
consolidated income before income taxes and minority interests for the three
month periods ended March 31 is as follows:
2003 2002
(In thousands) ---- ----
Operating income - Business Units $9,743 $10,158
Other income / (expense) (326) (275)
--------- --------
Consolidated income before tax and minority interests $9,417 $9,883
========= ========
NOTE 8: INCOME TAX EXPENSE
The difference between the reported provision for income taxes and a
provision computed by applying the statutory rates applicable to each subsidiary
of the Company is primarily attributable to the Company's tax holiday benefit in
the Seychelles.
NOTE 9: EARNINGS PER SHARE
For each of the three month periods ended March 31, 2003 and 2002, there
were no adjustments to net income (the numerators) for purpose of calculating
basic and diluted net income per common share. The following table sets forth a
reconciliation of the denominators in computing earnings per share in accordance
with Statement of Financial Accounting Standards No. 128, 'Earnings Per Share':
March 31, March 31,
2003 2002
-------------- --------------
Weighted average common shares - basic 13,704,052 12,770,208
Effect of diluted securities:
Stock options 795,562 2,230,005
-------------- --------------
Weighted average common shares - diluted 14,499,614 15,000,213
============== ==============
The Company did not include in the diluted shares outstanding calculation
130,333 options for the three month period ended March 31, 2003, because their
inclusion would be antidilutive or their exercise price exceeded the average
market price of our common stock during the period. All options were included in
the diluted shares
8
outstanding calculation for the three month period ended March 31, 2002 as the
average market value of our common stock for the period was higher than the
exercise prices of all options outstanding for the period.
NOTE 10: STOCK BASED COMPENSATION
The Company accounts for stock based awards to employees under the
intrinsic value method in accordance with APB 25 and related interpretations
and, accordingly, no compensation cost has been recognized for stock options
issued under the Company's plans.
In December 2002, Statement of Financial Accounting Standards (SFAS) No.
148, "Accounting for Stock Based Compensation Transition and Disclosure and
Amendment of FASB Statement No. 123" was issued. This statement provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock based employee compensation and requires
prominent disclosure in both annual and interim financial statements about the
method of accounting for stock based employee compensation and the effects of
the method used on reporting results. The interim financial statement disclosure
aspect of this standard is effective beginning with these financial statements
and the provision has been adopted herein.
Pro forma information regarding the Company's net income and net income per
common share for the three month periods ended March 31, 2003 and 2002 has been
determined as if the Company had accounted for its employee stock option plans
under the fair value method. The Company used the same pricing model and
assumptions that were used in the Annual Report on Form 10-K for the year ended
December 31, 2002. For purposes of pro forma disclosures, the estimated fair
value of the options is amortized to expense over the options' vesting period.
March 31, March 31,
(In thousands, except per share data) 2003 2002
-------------- --------------
Net income
As reported $5,953 $6,590
Less: Total stock - based
employee compensation
expense determined under
fair value method for all
awards net of tax (586) (624)
------ ------
Pro forma $5,367 $5,966
Net income per common share - basic
As reported $0.43 $0.52
Pro forma $0.39 $0.47
Net income per common share - diluted
As reported $0.41 $0.44
Pro forma $0.37 $0.40
9
NOTE 11: CONTINGENCIES
The Company, in the normal course of its business, is involved in various
lawsuits from time to time. In addition, the Company is subject to certain other
contingencies discussed below:
On January 29, 1999, two couples who owned shares of the common stock of
American Medical Electronics Inc. ("AME") commenced a civil action against the
Company and one of its subsidiaries and the Review Committee (defined below)
seeking, among other relief, the maximum earnout and bonus under the merger
agreement. The Company is vigorously defending against the action. On August 21,
1995, the Company acquired substantially all the outstanding stock of AME and
merged AME into Orthofix Inc. Prior to the merger, Orthofix Inc. had no
operating activity. The principal terms of the acquisition included cash
payments of approximately $47.5 million and the issuance of approximately 1.95
million shares of the Company's common stock with a fair market value of
approximately $33.5 million. Additionally, the Merger Agreement provided for
payments contingent upon the attainment of certain gross revenue thresholds by
the Company in 1995, 1996 and/or 1997 and were not compensatory in nature. The
earnout and bonus, if paid, were to be paid in cash, common stock of the Parent
or a combination thereof on a Payout Date defined in the Merger Agreement. The
Company announced that the Review Committee, established to determine contingent
amounts payable under the Agreement and Plan of Merger relating to the
acquisition of AME, determined that Orthofix will pay the AME Record Holders
$500,000 (which was satisfied in cash and issuance of treasury shares with a
fair market value of $259,000), and 12% of the net recovery, if any, received
from its judgment against Biomet, EBI and EBI MS up to a maximum of $5,500,000.
Novamedix filed an action on February 21, 1992 against Kinetic Concepts Inc
("KCI") alleging infringement of the patents relating to Novamedix's A-V Impulse
System product, breach of contract, and unfair competition. In this action,
Novamedix is seeking a permanent injunction enjoining further infringement by
KCI. Novamedix also seeks damages relating to past infringement, breach of
contract, and unfair competition. KCI has filed counterclaims alleging that
Novamedix engaged in inequitable conduct before the United States Patent and
Trademark Office and fraud as to KCI and that Novamedix engaged in common law
and statutory unfair competition against KCI. KCI seeks a declaratory judgment
that the patents are invalid, unenforceable, and not infringed. KCI also seeks
monetary damages, injunctive relief, costs, attorney's fees, and other
unspecified relief. During 2002, the United States Patent and Trademark Office
issued re-examination certificates validating four U.S. vascular patents owned
by us. The U.S. District Court in San Antonio, Texas has restored the litigation
to active status, and has provided a Scheduling Order that will govern this
matter. KCI has sought to add a charge of infringement against Novamedix under a
recently issued KCI patent but that request was denied on a procedural basis.
KCI retains the right to seek enforcement of its patent in a separate
proceeding. A portion of any amounts received will be payable to former owners
of Novamedix under the original purchase agreement.
On April 17, 2001 the Company received an administrative request for
records from the Office of the Inspector General of the United States Department
of Health and Human Services. On June 20, 2001, the Company received a similar
administrative request for records from the Office of the Inspector General of
the United States Department of Defense.
The Company has cooperated with government representatives throughout the
inquiry. The Company continues to believe the primary focus of the government's
inquiry concerns the appropriateness of claims the Company submitted to federal
health programs for the off-label use of the Company's FDA-approved pulsed
electronic magnetic field device, and billing and coding for its off-label use.
The Company's outside counsel have presented to governmental
representatives several letters describing the Company's coding and billing
practices for the off-label use of its pulsed electronic magnetic field device,
and discussed the Company's understanding of Medicare, Medicaid and
CHAMPUS/TriCare rules with respect to the off-label use of FDA-approved devices.
The Company does not believe that resolution of this matter will have a material
adverse effect on its financial condition or cash flows. The resolution, which
the Company expects to occur in 2003, could have a material adverse effect on
its results of operations in the period in which it occurs.
In management's opinion, the Company is not currently involved in any other
legal proceeding, individually or in the aggregate, that will have a material
effect on the financial position, liquidity or operating results of the Company.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis addresses the results of our
operations for the three months ended March 31, 2003, as compared to our results
of operations for the three months ended March 31, 2002. The discussion and
analysis also addresses our liquidity and financial condition and other matters.
General
We design, develop, manufacture, market and distribute medical equipment,
used principally by musculoskeletal medical specialists for orthopedic
applications. Our main products are external and internal fixation devices used
in fracture treatment, limb lengthening and bone reconstruction, and
non-invasive stimulation products used to enhance the success rate of spinal
fusions and to treat non-union fractures. Our products also include devices for
removal of the bone cement used to fix artificial implants, the ultrasonic
treatment of musculoskeletal pain, bracing products and a bone substitute
compound, from which we receive a royalty. We also produce a device for
enhancing venous circulation.
We have administrative and training facilities in the United States, the
United Kingdom and Italy and manufacturing facilities in the United States, the
United Kingdom, Italy and Seychelles. We directly distribute our products in the
United States, the United Kingdom, Ireland, Italy, Germany, Switzerland,
Austria, France, Belgium, Mexico and Brazil. In these and other markets, we also
distribute our products through independent distributors.
Our revenues are generally derived from two primary sources: sales of
orthopedic and non-orthopedic products. Sales of orthopedic products, including
orthopedic devices (32%), stimulation products (44%) and vascular products
(12%), accounted for 88% of our total net sales in the three months ended March
31, 2003, as compared to 88% of our total net sales for the same period in the
prior year. Sales of non-orthopedic products, including some vascular products
and the Laryngeal Mask product, accounted for 12% of our total net sales in the
three months ended March 31, 2003, as compared to 12% of our total net sales for
the same period in the prior year.
The following tables display the net sales by geographic destination and by
geographic origination, net of inter-company eliminations, for each of our
geographic markets and by each of our product groups for the three months ended
March 31, 2003 and 2002. We provide net sales by geographic destination and by
product group for information purposes only. We keep our books and records and
account for net sales, costs and expenses in accordance with the geographic
origination of our products.
Geographic Destination:
Three Months Ended March 31,
(In thousands) 2003 2002
Percent of Percent of Total
Net Sales Total Net Sales Net Sales Net Sales
--------- --------------- --------- ---------
Americas $ 31,202 65 % $ 28,806 69 %
International 16,979 35 % 12,789 31 %
------- ---- ------ -----
Total $ 48,181 100 % $ 41,595 100 %
======= ==== ====== =====
Geographic Origination:
Three Months Ended March 31,
(In thousands) 2003 2002
Percent of Percent of Total
Net Sales Total Net Sales Net Sales Net Sales
--------- --------------- --------- ---------
Americas $ 26,696 55 % $ 24,348 59 %
International 21,485 45 % 17,247 41 %
------ --- -------- -----
Total $ 48,181 100 % $ 41,595 100 %
====== === ======== =====
11
Product Groups:
Three Months Ended March 31,
(In thousands) 2003 2002
Percent of Percent of
Net Sales Total Net Sales Net Sales Total Net Sales
--------- --------------- --------- ---------------
Orthopedic
Devices $ 15,149 32 % $ 13,084 31 %
Stimulation 21,124 44 % 18,742 45 %
Vascular(1) 5,978 12 % 4,854 12 %
-------- ------- -------- -------
Total Orthopedic 42,251 88 % 36,680 88 %
Non-Orthopedic
Vascular(1) 1,056 2 % 857 2 %
Other 4,874 10 % 4,058 10 %
-------- ------- -------- -------
Total Non-Orthopedic 5,930 12 % 4,915 12 %
-------- ------- -------- -------
Total $ 48,181 100 % $ 41,595 100 %
======== ======= ======== =======
- ---------------------
(1) Approximately 85% of the revenue from vascular products is classified as
from Orthopedic applications while 15% is classified as from Non-Orthopedic
applications.
Our consolidated financial statements include the financial statements of
the Company and its wholly owned and majority-owned subsidiaries and entities
over which the Company has control. All intercompany accounts and transactions
are eliminated in consolidation. The equity method of accounting is used when
the Company has significant influence over significant operating decisions but
does not hold control. Under the equity method, original investments are
recorded at cost and adjusted by the Company's share of undistributed earnings
or losses of these companies. All material intercompany transactions and profits
associated with the equity investees are eliminated in consolidation.
Our reporting currency is the United States dollar. All balance sheet
accounts, except shareholders' equity, are translated at the 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). Gains and losses
resulting from the translation of foreign currency financial statements are
recorded in the accumulated other comprehensive income component of the
shareholders' equity.
Our financial condition, results of operations and cash flows are not
significantly impacted by seasonality trends. 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. We do not ordinarily use
derivative instruments to hedge foreign exchange exposure.
12
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
The following table presents certain items in our statements of operations
as a percentage of net sales for the periods indicated:
Three Months Ended March 31,
-------------------------------------
2003 2002
(%) (%)
Net sales........................... 100 100
Cost of sales....................... 26 24
Gross profit........................ 74 76
Operating expenses
Sales and marketing .............. 37 36
General and administrative........ 10 10
Research and development.......... 4 5
Amortization of intangible assets. 1 1
Litigation costs................ 2 --
Total operating income.............. 20 24
Net income.......................... 12 16
We manage our operations in two geographic business units: the Americas and
International. The Americas unit covers the United States, Mexico and Brazil.
The International unit covers the rest of the world plus export operations.
Sales - Net sales increased 16% to $48.2 million for the first three months
of 2003 compared to $41.6 million for the first three months of 2002. The impact
of foreign currency increased sales by $1.9 million during the first quarter of
2003 as compared to the first quarter of 2002.
Net Sales in the Americas (primarily the United States) increased to $26.7
million in the first quarter of 2003 compared to $24.3 million in the first
quarter of 2002, an increase of 10%. The Americas represented 55% of total net
sales during the first quarter of 2003 and 59% of total net sales for the same
period of 2002. The increase in sales was primarily the result of increased
volume of stimulators sold, along with moderate growth in orthopedic devices.
Net International sales increased 25% to $21.5 million in the first quarter
of 2003 compared to $17.2 million in 2002. The primary contributors were
increased sales of orthopedic devices, vascular products and the Laryngeal Mask
product. The impact of foreign currency increased International sales for the
quarter by $2.1 million.
All product groups experienced growth in the first quarter of 2003 compared
to the first quarter of 2002. Sales of orthopedic devices grew 16% to $15.1
million in 2003 from $13.1 million in 2002. The increase was primarily due to
increased sales of our external and internal fixation products. Sales of
stimulation products grew 13% to $21.1 million in 2003 from $18.7 million in
2002. The increase was principally the result of higher shipment volume.
Stimulation products are sold almost exclusively in the United States, although
we are attempting to expand distribution for stimulation products to Europe and
Mexico. Sales of vascular products grew 22% to $6.0 million in 2003 from $4.9
million in 2002. The growth was principally the result of increased sales in
Japan and through our Company-owned distributors in Europe. Approximately 85% of
the sales from vascular products is classified as from orthopedic applications,
while 15% is classified as from non-orthopedic applications.
Sales of our non-orthopedic products grew 20% to $5.9 million from $4.9
million in 2002. The increase was primarily due to the growth in sales of the
Laryngeal Mask product, including a new single use version, which we distribute
in the United Kingdom, Ireland and Italy, and increased sales of vascular
products for non-orthopedic applications.
13
Gross Profit - Our gross profit increased 12% to $35.6 million in the first
quarter of 2003, from $31.7 million in the first quarter of 2002. The increase
was primarily due to the increase of 16% in net sales offset by a decline in
gross profit margin. Gross profit as a percent of net sales in the first quarter
2003 was 73.9% compared to 76.2% in 2002, reflecting the impact of product mix
of approximately $0.2 million and foreign currency of approximately $0.9
million. Although currency contributed $1.9 million to sales growth, the year
over year appreciation of the Euro and the Great Britain Pound against the U.S.
Dollar was detrimental to our gross profit and gross profit margin in those
situations where we produce products in Euros or Pounds and sell them in U.S.
Dollars.
Sales and Marketing Expenses - Sales and marketing expenses, which include
commissions, royalties and bad debt provision, generally increase and decrease
in relation to sales. Sales and marketing expense increased $2.5 million to
$17.6 million in the first quarter of 2003 from $15.1 million in the first
quarter of 2002, an increase of 17% on a net sales increase of 16% over the same
periods. Sales and marketing expense as a percent of net sales increased to
36.5% in the first quarter of 2003 from 36.3% in the first quarter of 2002. The
incremental increase is the result of our investment in several areas of sales
and marketing during the first quarter of 2003. Twenty-two new sales people were
hired, trained and equipped to have a meaningful impact on sales in 2003. We
launched the PC.C.P product in the International market with a large training
seminar for surgeons in Verona, Italy, and in preparation for the launch
conducted a training meeting for the sales force.
General and Administrative Expense - General and administrative expense
increased $0.8 million in the first quarter of 2003 to $5.0 million from $4.2
million in the first quarter of 2002. The expense remained constant at 10%, as a
percentage of net sales during both quarters. We incurred additional expenses
associated with becoming a U.S. SEC registrant and with building administrative
support in our direct distributorship organizations in Mexico and Europe.
Research and Development Expense - Research and development expense remained
constant at $2.1 million in the first quarter and decreased as a percent of net
sales from 5.1% in 2002 to 4.4% in 2003. During the first quarter of 2003, we
reduced outside study grants while continuing new product development and
enhancements and additions to current product lines.
Amortization of Intangible Assets - Amortization of intangible assets was $0.3
million in the first quarter of 2003 compared to $0.2 million for the same
period of 2002. The amortization consists principally of the amortization of
patents and trademarks and was in-line with our product development efforts.
KCI Litigation Expense - Based on an assessment of the merits of the KCI case
(further described in the footnotes of our financial statements filed in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2002), we
incurred $0.9 million in litigation costs in the first quarter of 2003.
Other Income (Expense), Net - Other income (expense), net was an expense of
$326,000 in the first quarter of 2003 compared to an expense of $275,000 in the
first quarter of 2002. The increase in expense was principally the result of
higher interest expense on bank borrowings in Italy, partially offset by an
increase in interest income during the first quarter of 2003. Our share of
losses in the OrthoRx joint venture totaled $0.4 million in the first quarter of
2003, an improvement from the $0.6 million loss in the fourth quarter of 2002.
Income Tax Expense - In the first quarters of 2003 and 2002, the effective tax
rate was 36.8% and 29.4%, respectively. The effective tax rate in the first
quarter of 2003 was 3.5% higher because of the impact of the KCI litigation
expenses incurred. The effective tax rate in the first quarter of 2002 was
unusually low as a higher proportion of our taxable income was earned in lower
tax rate jurisdictions. We believe our normalized tax rate, excluding the impact
of litigation expenses, to be 32-33%.
Net Income - Net income for the first quarter of 2003 was $6.0 million
(including the KCI litigation expenses of $0.9 million), or $0.43 per basic
share and $0.41 per diluted share, compared to $6.6 million, or $0.52 per basic
share and $0.44 per diluted share, for the first quarter of 2002, a decrease in
net income of 9%. The weighted number of basic common shares outstanding was
13,704,052 and 12,770,208 during the first quarter of 2003 and 2002,
respectively. The weighted number of diluted common shares outstanding was
14,499,614 and 15,000,213 during the first quarter of 2003 and 2002,
respectively.
14
Liquidity and Capital Resources
Cash and cash equivalents were $41.6 million at March 31, 2003 compared to
$48.8 million at December 31, 2002, a decrease of $7.2 million.
Net cash provided by operating activities was $11.3 million for the three
month period ended March 31, 2003 as compared to $4.9 million for the same
period of 2002, an increase of $6.4 million. Net cash provided by operating
activities is comprised of net income, non-cash items and changes in working
capital. Net income decreased $0.6 million to $6.0 million for the three month
period ended March 31, 2003, including the $0.9 million impact of legal expenses
incurred for pending patent infringement claims against Kinetic Concepts Inc.
(KCI), from $6.6 million for the same period of the prior year. We expect to
incur additional legal expenses for KCI litigation of approximately $1.1 to $2.1
million over the remaining period of 2003. The decrease in net income was offset
by a $0.6 million increase in non-cash items. Working capital accounts generated
$1.9 million of cash during the three month period ended March 31, 2003 compared
to a use of $4.5 million during the same period of the prior year, an overall
improvement of $6.4 million.
We invested $23.3 million during the three month period ended March 31,
2003 compared to $3.8 million for the same period of the prior year for
investments in subsidiaries and affiliates and capital expenditures. During the
first quarter of 2003, we purchased the remaining 48% minority interest of our
U.K. distribution company, Intavent Orthofix Ltd. for $20.6 million and an
equity interest in Innovative Spinal Technologies (IST) for $1.5 million. In
addition, during the first quarter of 2003, we invested $1.0 million in capital
expenditures and we invested an additional $0.3 million in the form of a
short-term loan in the OrthoRx joint venture. The loan will be converted to an
equity investment during the second quarter of 2003.
Net cash provided by financing activities was $4.6 million for the three
month period ended March 31, 2003 as compared to the use of $3.4 million for the
same period in 2002. Proceeds of $8.4 million were generated from the issuance
of 571,300 shares of our common stock upon the exercise of options. For the
period ended March 31, 2003, we purchased 70,000 shares of our common stock in
the open market for $1.9 million. Our Board of Directors has authorized the
purchase of shares of our common stock up to a total of 50% of the number of
shares of our common stock issued from the exercise of options. We have
purchased an additional 63,000 shares in the second quarter of 2003 and may
continue to purchase shares of our common stock up to the level authorized by
our Board of Directors. We also repaid $1.9 million on a line of credit upon the
sale of accounts receivable without recourse in Italy to a third party.
We believe that current cash balances together with projected cash flows
from operating activities, the exercise of stock options and available debt
capacity are sufficient to cover anticipated operating capital needs and
research and development costs over the near term.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
There have been no material changes from the information provided in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002.
Item 4. Controls and Procedures
Within the 90 day period prior to the date of filing this quarterly report
on Form 10-Q, we performed an evaluation under the supervision and with the
participation of Company's management, including the Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on the evaluation, the
Company's management, including the Chief Executive Officer and Chief Financial
Officer, concluded that the Company's disclosure controls and procedures were
effective as of the date of the evaluation. There have been no significant
changes in the Company's internal controls or in other factors that could
significantly affect internal controls since the date of the evaluation.
15
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
2.1* Share Purchase Agreement dated March 20, 2003 between
Orthofix International B.V. and Intavent Limited
99.1* Statement Pursuant to 18 U.S.C. Section 1350 of Chief
Executive Officer dated May 13, 2003.
99.2* Statement Pursuant to 18 U.S.C. Section 1350 of Chief
Financial Officer dated May 13, 2003.
--------------------
* Filed herewith.
(b) Reports on Form 8-K
On March 6, 2003, the Company filed a current report on Form 8-K (Date
of Report: March 5, 2003) reporting under Item 2 that it would complete a
Share Purchase Agreement to acquire from Intavent Limited the remaining 48%
minority interest in its United Kingdom distribution company, Intavent
Orthofix Limited, and attaching a press release regarding the same.
On March 31, 2003, the Company filed a current report on Form 8-K
(Date of Report: March 28, 2003) reporting under Item 9 the sworn
statements of its Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ORTHOFIX INTERNATIONAL N.V.
Date: May 13, 2003 By: /s/ CHARLES W. FEDERICO
-----------------------------
Name: Charles W. Federico
Title: Chief Executive Officer
and President
Date: May 13, 2003 By: /s/ THOMAS HEIN
-----------------------------
Name: Thomas Hein
Title: Chief Financial Officer
17
CERTIFICATIONS
I, Charles W. Federico, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Orthofix International
N.V.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 13, 2003
/s/ CHARLES W. FEDERICO
----------------------------
Name: Charles W. Federico
Title: Chief Executive Officer,
President and Director
18
I, Thomas Hein, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Orthofix International
N.V.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 13, 2003
/s/ THOMAS HEIN
-------------------------------
Name: Thomas Hein
Title: Chief Financial Officer
19