Orthofix International N.V.
ORTHOFIX INTERNATIONAL N V (Form: 10-Q, Received: 11/03/2015 16:19:19)

 

 

 

 

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 September 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 October 30, 2015, 18,889,815 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 September 30, 2015, and December 31, 2014

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2015, and 2014

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 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

 

29

 

 

 

 

 

Item 1A.

 

Risk Factors

 

29

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

29

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

29

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

29

 

 

 

 

 

Item 5.

 

Other Information

 

29

 

 

 

 

 

Item 6.

 

Exhibits

 

29

 

 

 

 

 

SIGNATURES

 

30

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; 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

 

 

 

September 30,

 

 

December 31,

 

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

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

63,694

 

 

$

36,815

 

Restricted cash

 

 

 

 

 

34,424

 

Trade accounts receivable, less allowance for doubtful accounts of $9,468 and

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

 

 

56,173

 

 

 

61,358

 

Inventories

 

 

57,766

 

 

 

59,846

 

Deferred income taxes

 

 

35,974

 

 

 

37,413

 

Prepaid expenses and other current assets

 

 

31,884

 

 

 

26,552

 

Total current assets

 

 

245,491

 

 

 

256,408

 

Property, plant and equipment, net

 

 

51,467

 

 

 

48,549

 

Patents and other intangible assets, net

 

 

5,368

 

 

 

7,152

 

Goodwill

 

 

53,565

 

 

 

53,565

 

Deferred income taxes

 

 

19,101

 

 

 

18,541

 

Other long-term assets

 

 

27,457

 

 

 

8,970

 

Total assets

 

$

402,449

 

 

$

393,185

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Trade accounts payable

 

$

17,009

 

 

$

13,223

 

Other current liabilities

 

 

61,570

 

 

 

53,220

 

Total current liabilities

 

 

78,579

 

 

 

66,443

 

Deferred income taxes

 

 

 

 

 

229

 

Other long-term liabilities

 

 

26,664

 

 

 

26,886

 

Total liabilities

 

 

105,243

 

 

 

93,558

 

Contingencies (Note 11)

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Common shares $0.10 par value; 50,000,000 shares authorized; 18,882,661 and

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

   2014, respectively

 

 

1,888

 

 

 

1,861

 

Additional paid-in capital

 

 

239,954

 

 

 

232,788

 

Retained earnings

 

 

59,182

 

 

 

65,360

 

Accumulated other comprehensive loss

 

 

(3,818

)

 

 

(382

)

Total shareholders’ equity

 

 

297,206

 

 

 

299,627

 

Total liabilities and shareholders’ equity

 

$

402,449

 

 

$

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 Loss

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

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

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales

 

$

87,761

 

 

$

88,296

 

 

$

251,461

 

 

$

265,175

 

Marketing service fees

 

 

13,390

 

 

 

12,698

 

 

 

40,406

 

 

 

36,818

 

Net sales

 

 

101,151

 

 

 

100,994

 

 

 

291,867

 

 

 

301,993

 

Cost of sales

 

 

23,865

 

 

 

25,268

 

 

 

65,114

 

 

 

77,455

 

Gross profit

 

 

77,286

 

 

 

75,726

 

 

 

226,753

 

 

 

224,538

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

46,129

 

 

 

40,998

 

 

 

133,360

 

 

 

124,182

 

General and administrative

 

 

19,348

 

 

 

19,322

 

 

 

63,423

 

 

 

55,396

 

Research and development

 

 

6,523

 

 

 

6,572

 

 

 

18,819

 

 

 

18,818

 

Restatements and related costs

 

 

1,147

 

 

 

2,326

 

 

 

9,276

 

 

 

12,959

 

 

 

 

73,147

 

 

 

69,218

 

 

 

224,878

 

 

 

211,355

 

Operating income

 

 

4,139

 

 

 

6,508

 

 

 

1,875

 

 

 

13,183

 

Other income and expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(125

)

 

 

(395

)

 

 

(323

)

 

 

(1,355

)

Other expense, net

 

 

(1,736

)

 

 

(1,322

)

 

 

(192

)

 

 

(1,231

)

 

 

 

(1,861

)

 

 

(1,717

)

 

 

(515

)

 

 

(2,586

)

Income before income taxes

 

 

2,278

 

 

 

4,791

 

 

 

1,360

 

 

 

10,597

 

Income tax expense

 

 

(3,066

)

 

 

(4,763

)

 

 

(5,808

)

 

 

(9,251

)

Net (loss) income from continuing operations

 

 

(788

)

 

 

28

 

 

 

(4,448

)

 

 

1,346

 

Discontinued operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from discontinued operations

 

 

(804

)

 

 

260

 

 

 

(2,315

)

 

 

(6,363

)

Income tax benefit

 

 

221

 

 

 

164

 

 

 

585

 

 

 

2,278

 

Net (loss) income from discontinued operations

 

 

(583

)

 

 

424

 

 

 

(1,730

)

 

 

(4,085

)

Net (loss) income

 

$

(1,371

)

 

$

452

 

 

$

(6,178

)

 

$

(2,739

)

Net (loss) income per common share—basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income from continuing operations

 

$

(0.04

)

 

$

 

 

$

(0.24

)

 

$

0.07

 

Net (loss) income from discontinued operations

 

 

(0.03

)

 

 

0.02

 

 

 

(0.09

)

 

 

(0.22

)

Net (loss) income per common share—basic:

 

$

(0.07

)

 

$

0.02

 

 

$

(0.33

)

 

$

(0.15

)

Net (loss) income per common share—diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income from continuing operations

 

$

(0.04

)

 

$

 

 

$

(0.24

)

 

$

0.07

 

Net (loss) income from discontinued operations

 

 

(0.03

)

 

 

0.02

 

 

 

(0.09

)

 

 

(0.22

)

Net (loss) income per common share—diluted:

 

$

(0.07

)

 

$

0.02

 

 

$

(0.33

)

 

$

(0.15

)

Weighted average number of common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

18,855,533

 

 

 

18,577,540

 

 

 

18,785,696

 

 

 

18,408,238

 

Diluted

 

 

18,855,533

 

 

 

18,773,386

 

 

 

18,785,696

 

 

 

18,564,522

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

(706

)

 

 

112

 

 

 

230

 

 

 

184

 

Foreign currency translation adjustment

 

 

(365

)

 

 

(3,302

)

 

 

(3,666

)

 

 

(2,728

)

Comprehensive loss

 

$

(2,442

)

 

$

(2,738

)

 

$

(9,614

)

 

$

(5,283

)

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

5


 

ORTHOFIX INTERNATIONAL N.V.

Condensed Consolidated Statements of Cash Flows

 

 

 

Nine Months Ended

 

 

 

September 30,

 

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

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

26,236

 

 

$

35,966

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures for property, plant and equipment

 

 

(20,980

)

 

 

(11,324

)

Capital expenditures for intangible assets

 

 

(219

)

 

 

(170

)

Net proceeds from sale of assets

 

 

4,800

 

 

 

 

Purchase of other investments

 

 

 

 

(1,457

)

Purchase of debt securities

 

 

(15,250

)

 

 

 

Net proceeds from sale of other investments

 

 

 

 

 

32

 

Net cash used in investing activities

 

 

(31,649

)

 

 

(12,919

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net proceeds from issuance of common shares

 

 

1,669

 

 

 

10,333

 

Repayment of long term debt, net

 

 

 

 

 

(20,000

)

Payment of debt issuance costs

 

 

(1,723

)

 

 

 

Changes in restricted cash

 

 

34,424

 

 

 

(11,023

)

Excess income tax benefit on employee stock-based awards

 

 

303

 

 

 

202

 

Net cash provided by (used in) financing activities

 

 

34,673

 

 

 

(20,488

)

Effect of exchange rate changes on cash

 

 

(2,381

)

 

 

(1,658

)

Net increase in cash and cash equivalents

 

 

26,879

 

 

 

901

 

Cash and cash equivalents at the beginning of the period

 

 

36,815

 

 

 

28,924

 

Cash and cash equivalents at the end of the period

 

$

63,694

 

 

$

29,825

 

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

 

 

6


 

ORTH O FIX 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 (the “2014 Form 10-K”). Operating results for the three and nine months ended September 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 revenue recognition, contractual allowances, doubtful accounts, inventories, potential goodwill and intangible asset impairment, fair value measurements, 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. Adopting this 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, which was later clarified further in ASU 2015-15, Interest – Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements . 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. Debt issuance costs related to line-of-credit arrangements may continue to be presented as an asset. The guidance is effective retroactively for interim and annual periods beginning after

7


 

December 15, 2015, with early adoption permitted. The guidance did not have a material impact on the consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory . This ASU requires that an entity should measure inventory, 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 predictable 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 does not expect it to have a material impact on its consolidated financial statements.

 

 

2. 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)

 

September 30,

2015

 

 

December 31,

2014

 

 

 

 

 

 

 

 

 

 

Raw materials

 

$

3,344

 

 

$

3,879

 

Work-in-process

 

 

5,156

 

 

 

4,830

 

Finished products

 

 

44,691

 

 

 

45,612

 

Deferred cost of sales

 

 

4,575

 

 

 

5,525

 

Total inventory

 

$

57,766

 

 

$

59,846

 

 

 

3. Long-term debt

On August 31, 2015, the Company, through its subsidiaries Orthofix Holdings, Inc. (“Orthofix Holdings”) and Victory Medical Limited (“Victory Medical”, and collectively with Orthofix Holdings, the “Borrowers”), entered into a Credit Agreement (the “New Credit Agreement”) with JPMorgan Chase Bank, N.A. (“JPMorgan”), as Administrative Agent, and certain lenders party thereto. The New Credit Agreement provides for a five year $125 million secured revolving credit facility (the “Facility”) and replaces the Company’s prior 2010 credit facility, which expired and matured pursuant to its terms on August 30, 2015 with no amounts outstanding.  As of September 30, 2015, the Borrowers have not made any borrowings under the New Credit Agreement.

Borrowings under the New Credit Agreement may be used for, among other things, working capital and other general corporate purposes (including share repurchases, permitted acquisitions and permitted payments of dividends and other distributions) of the Company and certain of its subsidiaries.  The Facility is generally available in U.S. Dollars with up to $50 million of the Facility also available to be borrowed in Euros and Pounds Sterling (together with U.S. Dollars, the “Agreed Currencies”).  The New Credit Agreement further permits up to $50 million of the Facility to be utilized for the issuance of letters of credit in the Agreed Currencies.  The Borrowers have the ability to increase the amount of the Facility by an aggregate amount of up to $50 million (which increase may take the form of one or more increases to the revolving credit commitments and/or the issuance of one or more new Term A loans) upon satisfaction of certain conditions precedent and receipt of additional commitments by one or more existing or new lenders.  

Borrowings under the Facility bear interest at a floating rate, which is, at the Borrowers option, either LIBOR plus an applicable margin ranging from 1.75% to 2.5% or a base rate plus an applicable margin ranging from 0.75% to 1.5% (in each case subject to adjustment based on the Company’s total leverage ratio).  An unused commitment fee ranging from 0.25% to 0.4% (subject to adjustment based on the Company’s total leverage ratio) is payable quarterly in arrears based on the daily amount of the undrawn portion of each lender’s revolving credit commitment under the Facility.  Fees are payable on outstanding letters of credit at a rate equal to the applicable margin for LIBOR loans, plus certain customary fees payable solely to the issuer of the letter of credit.  

8


 

The Company and certain of its subsidiaries (collectively, the “Guarantors”) are required to guarantee the repayment of the Borrowers’ obligations under the New Credit Agreement.  The obligations of the Borrowers and each of the Guarantors with res pect to the New Credit Agreement are secured by a pledge of substantially all of the tangible and intangible personal property of the Borrowers and each of the Guarantors, including accounts receivable, deposit accounts, intellectual property, investment p roperty, inventory, equipment and equity interests in their subsidiaries.   The New Credit Agreement contains customary affirmative and negative covenants, including limitations on the Company’s and its subsidiaries’ ability to incur additional debt, grant or permit additional liens, make investments and acquisitions, merge or consolidate with others, dispose of assets, pay dividends and distributions, repay subordinated indebtedness and enter into affiliate transactions.    

In addition, the New Credit Agreement contains financial covenants requiring the Company on a consolidated basis to maintain, as of the last day of any fiscal quarter, a total leverage ratio of not more than 3.0 to 1.0 and an interest coverage ratio of at least 3.0 to 1.0.  The Company was in compliance with all required financial covenants at September 30, 2015. The New Credit Agreement also includes events of default customary for facilities of this type, and upon the occurrence of such events of default, subject to customary cure rights, all outstanding loans under the Facility may be accelerated and/or the lenders’ commitments terminated.

In conjunction with obtaining the Facility, the Company incurred debt issuance costs of $1.7 million which are being amortized over the life of the Facility. The debt issuance costs are included in other long-term assets, net of accumulated amortization. All debt issuance costs relating to the prior 2010 credit facility have been fully amortized.  

The Company had no borrowings and an unused available line of credit of €5.8 million ($6.5 million and $7.0 million) at September 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.

 

 

4. 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 September 30, 2015

 

Fair   value:  f avorable

(unfavorable)

 

 

Balance sheet location

Cross-currency swap

 

$

4,633

 

 

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

September 30,

 

 

Nine Months Ended

September 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

 

$

(706

)

 

$

112

 

 

$

230

 

 

$

184

 

Warrants unrealized gain recorded in other

   comprehensive income (loss), net of taxes

 

$

 

 

$

 

 

$

 

 

$

 

 

 

9


 

5 . 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

September 30,

2015

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Collective trust funds

 

$

1,622

 

 

$

 

 

$

1,622

 

 

$

 

Treasury securities

 

 

518

 

 

 

518

 

 

 

 

 

 

 

Certificates of deposit

 

 

594

 

 

 

594

 

 

 

 

 

 

 

Derivative securities

 

 

4,944

 

 

 

 

 

 

4,944

 

 

 

 

Equity securities

 

 

1,457

 

 

 

 

 

 

1,457

 

 

 

 

Debt securities

 

 

15,694

 

 

 

 

 

 

 

 

 

15,694

 

Total

 

$

24,829

 

 

$

1,112

 

 

$

8,023

 

 

$

15,694

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred compensation plan

 

$

(1,554

)

 

$

 

 

$

(1,554

)

 

$

 

Total

 

$

(1,554

)

 

$

 

 

$

(1,554

)

 

$

 

 

 

(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. As of September 30, 2015, the Company believes the carrying amount of the investment and accrued interest approximates 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

 

 

694

 

Balance at September 30

 

$

15,694

 

 

 

10


 

6. 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 $130

 

 

 

 

 

230

 

 

 

230

 

Foreign currency translation adjustment (1)

 

 

(3,666

)

 

 

 

 

 

(3,666

)

Balance at September 30, 2015

 

$

(4,148

)

 

$

330

 

 

$

(3,818

)

 

(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.

 

 

7. Earnings per share

For the three and nine months ended September 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

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Weighted average common shares-basic

 

 

18,855,533

 

 

 

18,577,540

 

 

 

18,785,696

 

 

 

18,408,238

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unexercised stock options net of treasury share

   repurchase

 

 

 

 

 

195,846

 

 

 

 

 

 

156,284

 

Weighted average common shares-diluted

 

 

18,855,533

 

 

 

18,773,386

 

 

 

18,785,696

 

 

 

18,564,522

 

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 998,992 and 942,366 outstanding awards and options not included in the diluted earnings per share computation for the three and nine months ended September 30, 2015, respectively, because their inclusion was antidilutive. There were 1,023,038 and 1,055,422 outstanding awards and options not included in the diluted earnings per share computation for the three and nine months ended September 30, 2014, respectively, because their inclusion was antidilutive.

Due to the Company being in a net loss from continuing operations position for the three and nine months ended September 30, 2015, no adjustment has been made for potentially dilutive shares totaling 204,432 and 211,397 for any common stock equivalents as their effects would be antidilutive for the quarterly and year-to-date periods, respectively.

 

 

8. 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 Company recognized $1.9 million and $5.5 million of share-based compensation expense for the three and nine months ended September 30, 2015, and $1.7 million and $4.1 million for the three and nine months ended September 30, 2014.

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 September 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 and on August 5, 2015, granted an additional 41,910 performance-based restricted share awards to other members of management.  Vesting is based on

11


 

achieving earnings and return on invested capital targets as of and for the years ended December 31, 2016, 2017 or 2018.  As of September 30, 2015, no expense has been recognized for these contingent restricted share awards.

During the three and nine months ended September 30, 2015, there were 43,326 and 271,166 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 nine months ended September 30, 2014, there were 69,572 and 501,862 shares, respectively, of common stock issued related to stock purchase plan issuances, stock option exercises and the vesting of restricted stock awards.

 

 

9. Income taxes

In the third quarter, our effective tax rate on continuing operations was 134.6%, or $3.1 million, as compared to 99.4%, or $4.8 million, for the same period in the prior year. Excluding the impact of various discrete charges, the effective tax rate on continuing operations for the third quarter of 2015 and 2014 was 63.3% and 74.7%, respectively. In the first nine months of 2015, our effective tax rate on continuing operations was 427.0%, or $5.8 million, as compared to 87.3%, or $9.3 million, for the same period in the prior year. Excluding the impact of various discrete charges, the effective tax rate on continuing operations for the first nine months of 2015 and 2014 was 279.2% and 68.4%, respectively.  The Company’s effective tax rate for the three and nine month periods ended September 30, 2015 was impacted by recording a valuation allowance on the net deferred tax assets in Puerto Rico in response to recent fiscal and economic difficulties experienced by the Puerto Rico Commonwealth, the Company’s mix of earnings among various tax jurisdictions, state taxes, and current period losses in certain jurisdictions for which the Company does not currently receive a tax benefit.

During the third quarter of 2015, the Internal Revenue Service commenced an examination of our federal income tax return for 2012. The State of Massachusetts also commenced an examination of our state income tax returns for 2012 and 2013. The Company cannot reasonably determine if these examinations will have a material impact on our financial statements and cannot predict the timing regarding resolution of those tax examinations.

As of September 30, 2015 and December 31, 2014, the Company’s unrecognized tax benefit was $15.5 million and $15.6 million, respectively. The Company had approximately $0.5 million accrued for payment of interest and penalties as of September 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.

 

 

10. 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.

The tables below present 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 September 30,

 

(U.S. Dollars, in thousands)

 

2015

 

 

2014

 

 

Reported

Increase (Decrease)

 

 

Constant

Currency

Increase (Decrease)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BioStim

 

$

41,559

 

 

$

38,285

 

 

 

8.6

%

 

 

8.6

%

Biologics

 

 

14,639

 

 

 

13,856

 

 

 

5.7

%

 

 

5.7

%

Extremity Fixation

 

 

24,694

 

 

 

27,636

 

 

 

(10.6

)%

 

 

3.4

%

Spine Fixation

 

 

20,259

 

 

 

21,217

 

 

 

(4.5

)%

 

 

(3.9

)%

Total net sales

 

$

101,151

 

 

$

100,994

 

 

 

0.2

%

 

 

4.1

%

12


 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

(U.S. Dollars, in thousands)

 

2015

 

 

2014

 

 

Reported

Increase (Decrease)

 

 

Constant

Currency

Increase (Decrease)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BioStim

 

$

119,962

 

 

$

114,937

 

 

 

4.4

%

 

 

4.4

%

Biologics

 

 

43,874

 

 

 

40,718

 

 

 

7.8

%

 

 

7.8

%

Extremity Fixation

 

 

72,103

 

 

 

82,005

 

 

 

(12.1

)%

 

 

2.1

%

Spine Fixation

 

 

55,928

 

 

 

64,333

 

 

 

(13.1

)%

 

 

(12.6

)%

Total net sales

 

$

291,867

 

 

$

301,993

 

 

 

(3.4

)%

 

 

0.6

%

 

The table below presents net margin by SBU reporting segment:

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

(U.S. Dollars, in thousands)

 

2015

 

 

2014

 

 

2015

 

 

2014