Orthofix International N.V.
ORTHOFIX INTERNATIONAL N V (Form: 10-Q, Received: 08/04/2015 16:21:56)

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark one)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2015

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)

 

 

Curaçao

 

Not applicable

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

7 Abraham de Veerstraat

Curaçao

 

Not applicable

(Address of principal executive offices)

 

(Zip Code)

599-9-4658525

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

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 the past 90 days.     x   Yes     ¨   No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     x   Yes     ¨   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” “non-accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated filer

¨

Accelerated filer

x

 

 

 

 

Non-Accelerated filer

¨   (Do not check if a smaller reporting company)

Smaller Reporting Company

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     ¨   Yes     x   No

As of July 31, 2015, 18,850,550 shares of common stock were issued and outstanding.

 

 

 

 

 


 

Table of Contents

 

 

 

 

 

 

Page

PART I

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

4

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2015, and December 31, 2014

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2015, and 2014

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014

 

6

 

 

 

 

 

 

 

Notes to the Unaudited Condensed Consolidated Financial Statements

 

7

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

16

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

24

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

24

 

 

 

 

 

PART II

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

28

 

 

 

 

 

Item 1A.

 

Risk Factors

 

28

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

28

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

28

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

28

 

 

 

 

 

Item 5.

 

Other Information

 

28

 

 

 

 

 

Item 6.

 

Exhibits

 

28

 

 

 

 

 

SIGNATURES

 

29

2


 

Forward-Looking Statements

This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, relating to our business and financial outlook, which are based on our current beliefs, assumptions, 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,” “projects,” “intends,” “predicts,” “potential” or “continue” or other comparable terminology. These forward-looking statements are not guarantees of our future performance and involve risks, uncertainties, estimates and assumptions that are difficult to predict. Therefore, our 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 hereof, unless it is specifically otherwise stated to be made as of a different date. We undertake no obligation to further update any such statement, or the risk factors described in Item 1A under the heading Risk Factors, to reflect new information, or the occurrence of future events or circumstances.

 

The forward-looking statements in this filing do not constitute guarantees or promises of future performance. Factors that could cause or contribute to such differences may include, but are not limited to, risks relating to: an investigation by the Division of Enforcement of the Securities and Exchange Commission (the “SEC”) and related securities class action litigation arising out of our prior accounting review and restatements of financial statements; our review of allegations of improper payments involving our Brazil-based subsidiary; the geographic concentration of certain of our sales and accounts receivable in countries or territories that are facing severe fiscal challenges; the expected sales of our products, including recently launched products; unanticipated expenditures; changing relationships with customers, suppliers, strategic partners and lenders; changes to and the interpretation of governmental regulations; the resolution of pending litigation matters (including our indemnification obligations with respect to certain product liability claims against our former sports medicine global business unit); our ongoing compliance obligations under a corporate integrity agreement with the Office of Inspector General of the Department of Health and Human Services (and related terms of probation) and a deferred prosecution agreement with the U.S. Department of Justice; risks relating to the protection of intellectual property; changes to the reimbursement policies of third parties; the impact of competitive products; changes to the competitive environment; the acceptance of new products in the market; conditions of the orthopedic and spine industries; credit markets and the global economy (including the expiration of our current secured revolving credit facility in August 2015); corporate development and market development activities, including acquisitions or divestitures; unexpected costs or operating unit performance related to recent acquisitions; and other risks described in Part I, Item 1A under the heading  Risk Factors  in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, as well as in other current and periodic reports that we file with the SEC in the future.

 

3


 

PART I. F INANCIAL INFORMATION

Item 1. Financial Statements

ORTHOFIX INTERNATIONAL N.V.

Condensed Consolidated Balance Sheets

 

 

 

June 30,

 

 

December 31,

 

(U.S. Dollars, in thousands, except share data)

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

55,946

 

 

$

36,815

 

Restricted cash

 

 

 

 

 

34,424

 

Trade accounts receivable, less allowance for doubtful accounts of $7,153 and

   $7,285 at June 30, 2015 and December 31, 2014, respectively

 

 

58,356

 

 

 

61,358

 

Inventories

 

 

59,219

 

 

 

59,846

 

Deferred income taxes

 

 

36,970

 

 

 

37,413

 

Prepaid expenses and other current assets

 

 

24,723

 

 

 

26,552

 

Total current assets

 

 

235,214

 

 

 

256,408

 

Property, plant and equipment, net

 

 

49,963

 

 

 

48,549

 

Patents and other intangible assets, net

 

 

5,626

 

 

 

7,152

 

Goodwill

 

 

53,565

 

 

 

53,565

 

Deferred income taxes

 

 

17,910

 

 

 

18,541

 

Other long-term assets

 

 

26,876

 

 

 

8,970

 

Total assets

 

$

389,154

 

 

$

393,185

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Trade accounts payable

 

$

17,230

 

 

$

13,223

 

Other current liabilities

 

 

47,678

 

 

 

53,220

 

Total current liabilities

 

 

64,908

 

 

 

66,443

 

Deferred income taxes

 

 

 

 

 

229

 

Other long-term liabilities

 

 

26,569

 

 

 

26,886

 

Total liabilities

 

 

91,477

 

 

 

93,558

 

Contingencies (Note 12)

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Common shares $0.10 par value; 50,000,000 shares authorized; 18,839,335 and

   18,611,495 issued and outstanding as of June 30, 2015 and December 31,

   2014, respectively

 

 

1,884

 

 

 

1,861

 

Additional paid-in capital

 

 

237,987

 

 

 

232,788

 

Retained earnings

 

 

60,553

 

 

 

65,360

 

Accumulated other comprehensive loss

 

 

(2,747

)

 

 

(382

)

Total shareholders’ equity

 

 

297,677

 

 

 

299,627

 

Total liabilities and shareholders’ equity

 

$

389,154

 

 

$

393,185

 

The accompanying notes form an integral part of these condensed consolidated financial statements

4


 

ORTHOFIX INTERNATIONAL N.V.

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

(Unaudited, U.S. Dollars,  in thousands, except share and per share data)

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales

 

$

86,868

 

 

$

88,579

 

 

$

163,700

 

 

$

176,879

 

Marketing service fees

 

 

14,086

 

 

 

12,406

 

 

 

27,016

 

 

 

24,120

 

Net sales

 

 

100,954

 

 

 

100,985

 

 

 

190,716

 

 

 

200,999

 

Cost of sales

 

 

21,910

 

 

 

25,414

 

 

 

41,249

 

 

 

52,187

 

Gross profit

 

 

79,044

 

 

 

75,571

 

 

 

149,467

 

 

 

148,812

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

42,946

 

 

 

42,013

 

 

 

87,231

 

 

 

83,184

 

General and administrative

 

 

22,506

 

 

 

18,214

 

 

 

44,075

 

 

 

36,074

 

Research and development

 

 

6,451

 

 

 

6,313

 

 

 

12,296

 

 

 

12,246

 

Restatements and related costs

 

 

2,213

 

 

 

2,327

 

 

 

8,129

 

 

 

10,633

 

 

 

 

74,116

 

 

 

68,867

 

 

 

151,731

 

 

 

142,137

 

Operating income (loss)

 

 

4,928

 

 

 

6,704

 

 

 

(2,264

)

 

 

6,675

 

Other income and expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income (expense), net

 

 

74

 

 

 

(492

)

 

 

(198

)

 

 

(960

)

Other income

 

 

853

 

 

 

363

 

 

 

1,544

 

 

 

91

 

 

 

 

927

 

 

 

(129

)

 

 

1,346

 

 

 

(869

)

Income before income taxes

 

 

5,855

 

 

 

6,575

 

 

 

(918

)

 

 

5,806

 

Income tax expense

 

 

(1,778

)

 

 

(3,309

)

 

 

(2,742

)

 

 

(4,488

)

Net income (loss) from continuing operations

 

 

4,077

 

 

 

3,266

 

 

 

(3,660

)

 

 

1,318

 

Discontinued operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations

 

 

(730

)

 

 

(5,829

)

 

 

(1,511

)

 

 

(6,623

)

Income tax benefit

 

 

225

 

 

 

1,880

 

 

 

364

 

 

 

2,114

 

Net loss from discontinued operations

 

 

(505

)

 

 

(3,949

)

 

 

(1,147

)

 

 

(4,509

)

Net income (loss)

 

$

3,572

 

 

$

(683

)

 

$

(4,807

)

 

$

(3,191

)

Net income (loss) per common share—basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations

 

$

0.22

 

 

$

0.18

 

 

$

(0.20

)

 

$

0.07

 

Net loss from discontinued operations

 

 

(0.03

)

 

 

(0.22

)

 

 

(0.06

)

 

 

(0.24

)

Net income (loss) per common share—basic:

 

$

0.19

 

 

$

(0.04

)

 

$

(0.26

)

 

$

(0.17

)

Net income (loss) per common share—diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations

 

$

0.21

 

 

$

0.18

 

 

$

(0.20

)

 

$

0.07

 

Net loss from discontinued operations

 

 

(0.02

)

 

 

(0.22

)

 

 

(0.06

)

 

 

(0.24

)

Net income (loss) per common share—diluted:

 

$

0.19

 

 

$

(0.04

)

 

$

(0.26

)

 

$

(0.17

)

Weighted average number of common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

18,769,415

 

 

 

18,445,348

 

 

 

18,750,804

 

 

 

18,322,185

 

Diluted

 

 

18,989,579

 

 

 

18,621,192

 

 

 

18,750,804

 

 

 

18,435,128

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on derivative instruments, net of tax

 

 

271

 

 

 

(31

)

 

 

936

 

 

 

72

 

Foreign currency translation adjustment

 

 

1,559

 

 

 

198

 

 

 

(3,301

)

 

 

574

 

Comprehensive income (loss)

 

$

5,402

 

 

$

(516

)

 

$

(7,172

)

 

$

(2,545

)

The accompanying notes form an integral part of these condensed consolidated financial statements

5


 

ORTHOFIX INTERNATIONAL N.V.

Condensed Consolidated Statements of Cash Flows

 

 

 

Six Months Ended

 

 

 

June 30,

 

(Unaudited, U.S. Dollars, in thousands)

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

8,954

 

 

$

17,874

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures for property, plant and equipment

 

 

(13,493

)

 

 

(6,138

)

Capital expenditures for intangible assets

 

 

(83

)

 

 

(119

)

Net proceeds from sale of assets

 

 

4,800

 

 

 

 

Purchase of debt securities

 

 

(15,250

)

 

 

 

Net proceeds from sale of other investments

 

 

 

 

 

32

 

Net cash used in investing activities

 

 

(24,026

)

 

 

(6,225

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net proceeds from issuance of common shares

 

 

1,646

 

 

 

9,520

 

Changes in restricted cash

 

 

34,424

 

 

 

(21,406

)

Excess income tax benefit on employee stock-based awards

 

 

54

 

 

 

40

 

Net cash provided by (used in) financing activities

 

 

36,124

 

 

 

(11,846

)

Effect of exchange rate changes on cash

 

 

(1,921

)

 

 

192

 

Net increase (decrease) in cash and cash equivalents

 

 

19,131

 

 

 

(5

)

Cash and cash equivalents at the beginning of the period

 

 

36,815

 

 

 

28,924

 

Cash and cash equivalents at the end of the period

 

$

55,946

 

 

$

28,919

 

The accompanying notes form an integral part of these condensed consolidated financial statements

 

 

6


 

ORTHFIX INTERNATIONAL N.V.

Notes to the Unaudited Condensed Consolidated Financial Statements

1. Nature of operations, basis of presentation and recently issues accounting pronouncements

Nature of operations

Orthofix International N.V. (together with its subsidiaries, the “Company”) is a diversified, global medical device company focused on developing and delivering innovative repair and regenerative technologies to the spine and orthopedic markets. The Company is comprised of four reportable segments: BioStim, Biologics, Extremity Fixation and Spine Fixation supported by corporate activities.

Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) 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 U.S. GAAP have been condensed or omitted. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair statement have been included. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. Operating results for the three and six months ended June 30, 2015, are not necessarily indicative of the results that may be expected for other interim periods or the year ending December 31, 2015. The balance sheet at December 31, 2014, 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 U.S. for complete financial statements.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, the Company evaluates its estimates including those related to contractual allowances, doubtful accounts, inventories, potential goodwill and intangible asset impairment, litigation and contingent liabilities, income taxes, and shared-based compensation. Actual results could differ from these estimates. As permitted under U.S. GAAP, interim accounting for certain expenses, including income taxes, are based on full year forecasts. For interim financial reporting purposes, income taxes are recorded based upon estimated annual effective income tax rates taking into consideration discrete items occurring during the period.

Recently issued accounting standards

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, Reporting Discontinued Operations and Disclosures of Components of an Entity. The ASU amends the definition of a discontinued operation and also provides new disclosure requirements for disposals meeting the definition, and for those that do not meet the definition, of a discontinued operation. Under the new guidance, a discontinued operation may include a component or a group of components of an entity, or a business or nonprofit activity that has been disposed of or is classified as held for sale, and represents a strategic shift that has or will have a major effect on an entity's operations and financial results. The ASU also expands the scope to include the disposals of equity method investments and acquired businesses held for sale. The guidance did not have a material impact on the consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers . ASU 2014-09 supersedes the revenue recognition requirements in Revenue Recognition (Topic 605), and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The standard was originally to be effective for public entities for annual and interim periods beginning after December 15, 2016. On July 9, 2015, the FASB agreed to defer the effective date by one year to December 15, 2017 for annual reporting periods beginning after that date. The FASB also agreed to permit early adoption of the standard, but not before the original effective date of December 15, 2016. The standard is to be applied either retrospectively or as a cumulative effect adjustment as of the adoption date. The Company is currently evaluating the effect that adopting this new accounting guidance will have on the consolidated results of operations, cash flows, and financial position.

In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs . The ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct reduction from the carrying amount of that debt liability, consistent with debt discounts and premiums. The guidance will be effective retroactively for interim and annual periods beginning after December 15, 2015, with early adoption permitted. The Company is evaluating the new guidance and does not expect it to have a material impact on its consolidated financial statements.

7


 

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory . This ASU requires that an entity should measure in ventory, unless accounted for under the last-in, first-out (“LIFO”) or retail inventory methods, at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predicta ble costs of completion, disposal, and transportation. The guidance will be effective prospectively for interim and annual periods beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the new guidance and do es not expect it to have a material impact on its consolidated financial statements.

 

 

2. Cash Flow Statement Classification Error

During the quarter ended June 30, 2015, the Company identified a classification error in its statement of cash flows for the quarter ended March 31, 2015. This error arose because foreign currency exchange rates and cash balances from an incorrect period were used in calculating the line item “Effect of exchange rate changes on cash,” which caused the negative effect of such line item to be overstated by $2.4 million.  This error resulted in an equal and offsetting error to be reflected in the line item “Net cash provided by operating activities,” whereby such line item was overstated by $2.4 million. The classification error had no effect on the reported net change in cash and cash equivalents, and also had no effect on the consolidated balance sheet, the consolidated statement of operations, or the consolidated statement of stockholders’ equity. Based on our evaluation of relevant quantitative and qualitative factors, we have determined that the classification error is and was immaterial.

This classification error has been corrected in the statement of cash flows for the six months ended June 30, 2015 contained herein. The Company also intends to correct the comparative presentation of the quarter ended March 31, 2015 in its Quarterly Report on Form 10-Q for the quarter ending March 31, 2016.

 

 

3. Inventories

The Company’s inventories are primarily stated at standard cost, which approximates actual cost determined on a first-in, first-out basis. Work-in-process and finished products include material, labor and production overhead costs. Finished products include field inventory which represents immediately saleable finished products that are in the possession of the Company’s direct sales representatives, and consignment inventory which represents immediately saleable finished products located at third party customers, such as distributors and hospitals. Deferred cost of sales result from transactions where the Company has shipped product or performed services for which all revenue recognition criteria have not been met. Once the revenue recognition criteria have been met, both the revenues and associated cost of sales are recognized.

Inventories were as follows:

 

(U.S. Dollars, in thousands)

 

June 30,

2015

 

 

December 31,

2014

 

 

 

 

 

 

 

 

 

 

Raw materials

 

$

4,200

 

 

$

3,879

 

Work-in-process

 

 

5,071

 

 

 

4,830

 

Finished products

 

 

44,309

 

 

 

45,612

 

Deferred cost of sales

 

 

5,639

 

 

 

5,525

 

Total inventory

 

$

59,219

 

 

$

59,846

 

 

 

4. Long-term debt

On August 30, 2010, the Company’s wholly-owned U.S. holding company, Orthofix Holdings, Inc. (“Orthofix Holdings”) entered into a Credit Agreement (the “Credit Agreement”) with certain domestic direct and indirect subsidiaries of the Company (the “Guarantors”), JPMorgan Chase Bank, N.A., as Administrative Agent, RBS Citizens, N.A., as Syndication Agent, and certain lender parties thereto.

The Credit Agreement initially provided for a five year, $200 million secured revolving credit facility (the “Revolving Credit Facility”), and a five year, $100 million secured term loan facility (the “Term Loan Facility,” and together with the Revolving Credit Facility, the “Credit Facilities”). On January 15, 2015, at the Company’s request, the lenders agreed to reduce the available capacity under the Revolving Credit Facility to $100 million.

As of June 30, 2015, and December 31, 2014, there was no outstanding principal under either the Term Loan Facility or the Revolving Credit Facility.  Any outstanding balance on the Revolving Credit Facility arising in the event that we draw funds in the

8


 

future under such facility would be due on August 30, 2015. The Company is currently in negotiations to renew its revolving credit facility and expects to have this completed before the expiration of its current facility.

The amount of net assets of Orthofix Holdings and its subsidiaries that we classify as “restricted” (due to restrictions on the use of such assets pursuant to the terms of the agreement) as of June 30, 2015, and December 31, 2014, is $187.8 million and $181.8 million, respectively. In addition, the Credit Agreement contains restrictions on the Company and subsidiaries that are not parties to the Credit Facilities accessing cash held by Orthofix Holdings, Inc. and its subsidiaries (by way of dividend or otherwise). All of the Company’s subsidiaries that are parties to the Credit Agreement generally have access to this cash for operational and debt repayment purposes. As the Company does not carry a balance on the Revolving Credit Facility as of June 30, 2015, and is in compliance with all required covenants, there are no restrictions on cash as of June 30, 2015. The amount of cash of the Company and its subsidiaries that we classify as “restricted” due to these restrictions as of December 31, 2014 was $34.4 million.

The Company had no borrowings and an unused available line of credit of €5.8 million ($6.5 million and $7.0 million) at June 30, 2015 and December 31, 2014, respectively, on its Italian line of credit. This unsecured line of credit provides the Company the option to borrow amounts in Italy at rates which are determined at the time of borrowing.

 

 

5. Derivative instruments

The tables below disclose the types of derivative instruments the Company owns, the classifications and fair values of these instruments within the balance sheet, and the amount of gain (loss) recognized in other comprehensive income (loss).

 

(U.S. Dollars, in thousands)

As of June 30, 2015

 

Fair   value:  f avorable

(unfavorable)

 

 

Balance sheet location

Cross-currency swap

 

$

5,807

 

 

Other long-term assets

Warrants

 

$

311

 

 

Other long-term assets

 

 

 

 

 

 

 

As of December 31, 2014

 

 

 

 

 

 

Cross-currency swap

 

$

2,504

 

 

Other long-term assets

Warrants

 

$

321

 

 

Other long-term assets

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

(U.S. Dollars, in thousands)

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Cross-currency swap unrealized gain (loss)

   recorded in other comprehensive income

   (loss), net of taxes

 

$

267

 

 

$

(31

)

 

$

936

 

 

$

72

 

Warrants unrealized gain recorded in other

   comprehensive income (loss), net of taxes

 

$

4

 

 

$

 

 

$

 

 

$

 

 

 

6. Fair value measurements

The fair value of the Company’s financial assets and liabilities on a recurring basis were as follows:

 

(U.S. Dollars, in thousands)

 

Balance

June 30,

2015

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Collective trust funds

 

$

1,664

 

 

$

 

 

$

1,664

 

 

$

 

Treasury securities

 

 

532

 

 

 

532

 

 

 

 

 

 

 

Certificates of deposit

 

 

1,129

 

 

 

1,129

 

 

 

 

 

 

 

Derivative securities

 

 

6,118

 

 

 

 

 

 

6,118

 

 

 

 

Equity securities

 

 

1,457

 

 

 

 

 

 

1,457

 

 

 

 

Debt securities

 

 

15,390

 

 

 

 

 

 

 

 

 

15,390

 

Total

 

$

26,290

 

 

$

1,661

 

 

$

9,239

 

 

$

15,390

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred compensation plan

 

$

(1,553

)

 

$

 

 

$

(1,553

)

 

$

 

Total

 

$

(1,553

)

 

$

 

 

$

(1,553

)

 

$

 

 

 

9


 

(U.S. Dollars, in thousands)

 

Balance

December 31,

2014

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Collective trust funds

 

$

1,696

 

 

$

 

 

$

1,696

 

 

$

 

Treasury securities

 

 

586

 

 

 

586

 

 

 

 

 

 

 

Certificates of deposit

 

 

1,510

 

 

 

1,510

 

 

 

 

 

 

 

Derivative securities

 

 

2,825

 

 

 

 

 

 

2,825

 

 

 

 

Equity securities

 

 

1,457

 

 

 

 

 

 

1,457

 

 

 

 

Total

 

$

8,074

 

 

$

2,096

 

 

$

5,978

 

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred compensation plan

 

$

(1,886

)

 

$

 

 

$

(1,886

)

 

$

 

Total

 

$

(1,886

)

 

$

 

 

$

(1,886

)

 

$

 

Debt Securities

 

On March 4, 2015, the Company entered into an Option Agreement (the “Option Agreement”) with eNeura, Inc. (“eNeura”), a privately held medical technology company that is developing devices for the treatment of migraines. The Option Agreement provides the Company with an exclusive option to acquire eNeura (the “Option”) during the 18-month period following the grant of the Option. In consideration for the Option, (i) the Company paid a non-refundable $0.3 million fee to eNeura, and (ii) eNeura issued a Convertible Promissory Note (the “eNeura Note”) to the Company. The principal amount of the eNeura Note is $15.0 million and interest accrues at 8.0%. The eNeura Note will mature on the earlier of (i) March 4, 2019, or (ii) exercise of the Option. The interest is not due until the note matures and will be forgiven if the Company exercises the option. The investment is recorded in other long-term assets as an available for sale debt security and interest is recorded in interest income. The fair value of the instrument is based upon significant unobservable inputs, requiring the Company to develop its own assumptions; therefore, the Company has categorized this asset as a Level 3 financial asset. Given the date of the transaction, as of June 30, 2015, the Company believes the carrying amount of the investment and accrued interest approximate fair value.  

 

The following table provides a reconciliation of the beginning and ending balances for debt securities measured at fair value using significant unobservable inputs (Level 3):

 

(U.S. Dollars, in thousands)

 

2015

 

Balance at January 1

 

$

 

Additions to debt securities

 

 

15,000

 

Accrued interest income

 

 

390

 

Balance at June 30

 

$

15,390

 

 

 

7. Accumulated other comprehensive loss

Accumulated other comprehensive loss is comprised of foreign currency translation adjustments, the effective portion of the gain (loss) on the Company’s cross-currency swap, which is designated and accounted for as a cash flow hedge and the unrealized gain (loss) on warrants. The components of and changes in accumulated other comprehensive loss were as follows:

 

(U.S. Dollars, in thousands)

 

Foreign Currency

Translation Adjustments

 

 

Change

in

Fair Value

 

 

Accumulated Other

Comprehensive Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2014

 

$

(482

)

 

$

100

 

 

$

(382

)

Unrealized gain on derivative instruments,

   net of tax of $529

 

 

 

 

 

936

 

 

 

936

 

Foreign currency translation adjustment (1)

 

 

(3,301

)

 

 

 

 

 

(3,301

)

Balance at June 30, 2015

 

$

(3,783

)

 

$

1,036

 

 

$

(2,747

)

 

(1)

As the unremitted earnings generally remain indefinitely reinvested in the non U.S. dollar denominated foreign subsidiaries, no deferred taxes are recognized on the related foreign currency translation adjustment.

 

10


 

 

8. Earnings per share

For the three and six months ended June 30, 2015 and 2014, there were no adjustments to net income (loss) for purposes of calculating basic and diluted net income (loss) available to common shareholders. The following is a reconciliation of the weighted average shares used in the basic and diluted net loss per common share computations.

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Weighted average common shares-basic

 

 

18,769,415

 

 

 

18,445,348

 

 

 

18,750,804

 

 

 

18,322,185

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unexercised stock options net of treasury share

   repurchase

 

 

220,164

 

 

 

175,844

 

 

 

 

 

 

112,943

 

Weighted average common shares-diluted

 

 

18,989,579

 

 

 

18,621,192

 

 

 

18,750,804

 

 

 

18,435,128

 

Performance-based restricted stock awards and options to purchase shares of common stock with exercise prices in excess of the average market price of common shares are not included in the computation of diluted earnings per share. There were 792,149 and 872,039 outstanding awards and options not included in the diluted earnings per share computation for the three and six months ended June 30, 2015, respectively, because their inclusion was antidilutive. There were 945,725 and 1,193,425 outstanding awards and options not included in the diluted earnings per share computation for the three and six months ended June 30, 2014, respectively, because their inclusion was antidilutive.

Due to the Company being in a net loss from continuing operations position for the six months ended June 30, 2015, no adjustment has been made for potentially dilutive shares totaling 209,269 for any common stock equivalents as their effects would be antidilutive.

 

 

9. Share-based compensation

All share-based compensation costs are measured at the grant date, based on the estimated fair value of the award, and are recognized as expense in the condensed consolidated statements of operations over the requisite service period.

The following table shows the detail of share-based compensation by line item in the condensed consolidated statements of operations:

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

(U.S. Dollars, in thousands)

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Cost of sales

 

$

112

 

 

$

29

 

 

$

223

 

 

$

58

 

Sales and marketing

 

 

296

 

 

 

429

 

 

 

601

 

 

 

873

 

General and administrative

 

 

1,301

 

 

 

657

 

 

 

2,570

 

 

 

1,299

 

Research and development

 

 

91

 

 

 

71

 

 

 

182

 

 

 

143

 

Total

 

$

1,800

 

 

$

1,186

 

 

$

3,576

 

 

$

2,373

 

 

 

On June 30, 2014, the Company granted 99,600 performance-based restricted share awards to officers and certain employees. Vesting is based on achieving earnings targets in two consecutive rolling four quarter periods. As of June 30, 2015, no expense has been recognized for these contingent restricted share awards.

On June 30, 2015, the Company granted 68,750 performance-based restricted share awards to officers.  Vesting is based on achieving earnings and return on invested capital targets as of and for the years ended December 31, 2016, 2017 or 2018.  As of June 30, 2015, no expense has been recognized for these contingent restricted share awards.

During the three and six months ended June 30, 2015, there were 81,974 and 227,840 shares, respectively, of common stock issued related to stock purchase plan issuances, stock option exercises and the vesting of restricted stock awards. During the three and six months ended June 30, 2014, there were 168,715 and 432,290 shares, respectively, of common stock issued related to stock purchase plan issuances, stock option exercises and the vesting of restricted stock awards.

 

11


 

 

10. Income taxes

The Company recognized a $2.7 million and $4.5 million provision for income tax on continuing operations which reflects an effective tax rate of (298.7)% and 77.3% on pre-tax income for the six months ended June 30, 2015 and 2014, respectively. Excluding the impact of various discrete charges, the effective tax rate on continuing operations was (256.6)% and 63.2% for the first six months of 2015 and 2014, respectively. The principal factors affecting the Company’s June 30, 2015 effective tax rate were the Company’s mix of earnings among various tax jurisdictions, state taxes, current period losses in certain jurisdictions for which the Company does not currently provide a tax benefit and variations in the customary relationship between income tax expense and pretax earnings.

As of June 30, 2015 and December 31, 2014, the Company’s unrecognized tax benefit was $15.6 million. The Company had approximately $0.5 million accrued for payment of interest and penalties as of June 30, 2015 and December 31, 2014. It is reasonably possible that the amount of the unrecognized benefit with respect to certain of our unrecognized tax positions will significantly increase or decrease within the next 12 months. These changes may be the result of settlements of ongoing audits, competent authority proceedings or other events. At this time, an estimate of the range of the reasonably possible outcomes cannot be made.

 

 

11. Business segment information

The Company has four strategic business units (“SBUs”), which are comprised of BioStim, Biologics, Extremity Fixation, and Spine Fixation supported by corporate activities. The primary metric used in managing the Company is net margin, which is defined as gross profit less sales and marketing expense. The Company neither discretely allocates assets, other than goodwill, to its operating segments nor evaluates the operating segments using discrete asset information. Accordingly, our segment information has been prepared based on our four SBU reporting segments.

The table below presents net sales for continuing operations by SBU reporting segment. Net sales include product sales and marketing service fees. Marketing service fees, which are recorded on a net basis, are comprised of fees earned for the marketing of Trinity Evolution ® , Trinity ELITE ® and Versashield™ in our Biologics segment.

 

 

 

 

 

 

 

Three Months Ended June 30,

 

(U.S. Dollars, in thousands)

 

2015

 

 

2014

 

 

Reported

Increase (Decrease)

 

 

Constant

Currency

Increase (Decrease)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BioStim

 

$

40,703

 

 

$

39,513

 

 

 

3

%

 

 

3

%

Biologics

 

 

15,274

 

 

 

13,853

 

 

 

10

%

 

 

10

%

Extremity Fixation

 

 

25,594

 

 

 

27,303

 

 

 

(6

)%

 

 

12

%

Spine Fixation

 

 

19,383

 

 

 

20,316

 

 

 

(5

)%

 

 

(4

)%

Total Net Sales

 

$

100,954

 

 

$

100,985

 

 

 

(0

)%

 

 

5

%

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

(U.S. Dollars, in thousands)

 

2015

 

 

2014

 

 

Reported

Increase (Decrease)

 

 

Constant

Currency

Increase (Decrease)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BioStim

 

$

78,403

 

 

$

76,650

 

 

 

2

%

 

 

2

%

Biologics

 

 

29,235

 

 

 

26,863

 

 

 

9

%

 

 

9

%

Extremity Fixation

 

 

47,409

 

 

 

54,369

 

 

 

(13

)%

 

 

2

%

Spine Fixation

 

 

35,669

 

 

 

43,117

 

 

 

(17

)%

 

 

(17

)%

Total Net Sales