Orthofix International N.V.
ORTHOFIX INTERNATIONAL N V (Form: 10-Q, Received: 08/07/2017 16:15:54)

 

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark one)

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

For the quarterly period ended June 30, 2017

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

 

98-1340767

(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.        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).      Yes       No

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

 

Large Accelerated filer

Accelerated filer

 

 

 

 

Non-Accelerated filer

  (Do not check if a smaller reporting company)

Smaller Reporting Company

 

 

 

 

 

 

Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

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

As of August 4, 2017, 18,170,923 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, 2017, and December 31, 2016

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended  June 30, 2017, and 2016

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016

 

6

 

 

 

 

 

 

 

Notes to the Unaudited Condensed Consolidated Financial Statements

 

7

 

 

 

 

 

Item 2.

 

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

 

13

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

20

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

20

 

 

 

 

 

PART II

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

21

 

 

 

 

 

Item 1A.

 

Risk Factors

 

21

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

21

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

21

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

21

 

 

 

 

 

Item 5.

 

Other Information

 

21

 

 

 

 

 

Item 6.

 

Exhibits

 

22

 

 

 

 

 

SIGNATURES

 

23

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 (“the Exchange Act”), 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 Part I, Item 1A under the heading  Risk Factors  in our Form 10-K for the year ended December 31, 2016, to reflect new information, the occurrence of future events or circumstances or otherwise.

 

 

Trademarks

Solely for convenience, our trademarks and trade names in this report are referred to without the ® and ™ symbols, but such references should not be construed as any indicator that we will not assert, to the fullest extent under applicable law, our rights thereto.

 

3


 

PART I. F INANCIAL INFORMATION

Item 1. Financial Statements

ORTHOFIX INTERNATIONAL N.V.

Condensed Consolidated Balance Sheets

 

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

 

June 30,

2017

 

 

December 31,

2016

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

44,330

 

 

$

39,572

 

Restricted cash

 

 

 

 

 

14,369

 

Accounts receivable, net of allowances of $8,480 and $8,396, respectively

 

 

61,213

 

 

 

57,848

 

Inventories

 

 

75,869

 

 

 

63,346

 

Prepaid expenses and other current assets

 

 

17,192

 

 

 

19,238

 

Total current assets

 

 

198,604

 

 

 

194,373

 

Property, plant and equipment, net

 

 

46,651

 

 

 

48,916

 

Patents and other intangible assets, net

 

 

9,508

 

 

 

7,461

 

Goodwill

 

 

53,565

 

 

 

53,565

 

Deferred income taxes

 

 

42,685

 

 

 

47,325

 

Other long-term assets

 

 

16,664

 

 

 

20,463

 

Total assets

 

$

367,677

 

 

$

372,103

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

14,245

 

 

$

14,353

 

Other current liabilities

 

 

50,858

 

 

 

69,088

 

Total current liabilities

 

 

65,103

 

 

 

83,441

 

Other long-term liabilities

 

 

25,627

 

 

 

25,185

 

Total liabilities

 

 

90,730

 

 

 

108,626

 

Contingencies (Note 6)

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

 

Common shares $0.10 par value; 50,000,000 shares authorized;

   18,119,430 and 17,828,155 issued and outstanding as of June 30,

   2017 and December 31, 2016, respectively

 

 

1,812

 

 

 

1,783

 

Additional paid-in capital

 

 

211,990

 

 

 

204,095

 

Retained earnings

 

 

65,378

 

 

 

64,179

 

Accumulated other comprehensive loss

 

 

(2,233

)

 

 

(6,580

)

Total shareholders’ equity

 

 

276,947

 

 

 

263,477

 

Total liabilities and shareholders’ equity

 

$

367,677

 

 

$

372,103

 

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

June 30,

 

 

Six Months Ended

June 30,

 

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

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net sales

 

$

108,942

 

 

$

104,075

 

 

$

211,680

 

 

$

202,754

 

Cost of sales

 

 

23,177

 

 

 

22,516

 

 

 

45,758

 

 

 

44,653

 

Gross profit

 

 

85,765

 

 

 

81,559

 

 

 

165,922

 

 

 

158,101

 

Sales and marketing

 

 

50,471

 

 

 

46,043

 

 

 

99,003

 

 

 

90,865

 

General and administrative

 

 

20,409

 

 

 

18,545

 

 

 

38,691

 

 

 

35,550

 

Research and development

 

 

6,887

 

 

 

6,796

 

 

 

14,311

 

 

 

14,436

 

Charges related to U.S. Government resolutions

 

 

 

 

 

12,870

 

 

 

 

 

 

12,870

 

Operating income (loss)

 

 

7,998

 

 

 

(2,695

)

 

 

13,917

 

 

 

4,380

 

Interest income (expense), net

 

 

76

 

 

 

(113

)

 

 

121

 

 

 

(151

)

Other income (expense), net

 

 

585

 

 

 

147

 

 

 

(3,763

)

 

 

1,980

 

Income (loss) before income taxes

 

 

8,659

 

 

 

(2,661

)

 

 

10,275

 

 

 

6,209

 

Income tax expense

 

 

(3,924

)

 

 

(3,685

)

 

 

(7,848

)

 

 

(7,979

)

Net income (loss) from continuing operations

 

 

4,735

 

 

 

(6,346

)

 

 

2,427

 

 

 

(1,770

)

Discontinued operations (Note 6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations

 

 

(1,300

)

 

 

(1,572

)

 

 

(1,827

)

 

 

(2,562

)

Income tax benefit

 

 

418

 

 

 

474

 

 

 

599

 

 

 

728

 

Net loss from discontinued operations

 

 

(882

)

 

 

(1,098

)

 

 

(1,228

)

 

 

(1,834

)

Net income (loss)

 

$

3,853

 

 

$

(7,444

)

 

$

1,199

 

 

$

(3,604

)

Net income (loss) per common share—basic

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations

 

$

0.26

 

 

$

(0.35

)

 

$

0.13

 

 

$

(0.10

)

Net loss from discontinued operations

 

 

(0.05

)

 

 

(0.06

)

 

 

(0.06

)

 

 

(0.10

)

Net income (loss) per common share—basic

 

$

0.21

 

 

$

(0.41

)

 

$

0.07

 

 

$

(0.20

)

Net income (loss) per common share—diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations

 

$

0.26

 

 

$

(0.35

)

 

$

0.13

 

 

$

(0.10

)

Net loss from discontinued operations

 

 

(0.05

)

 

 

(0.06

)

 

 

(0.06

)

 

 

(0.10

)

Net income (loss) per common share—diluted

 

$

0.21

 

 

$

(0.41

)

 

$

0.07

 

 

$

(0.20

)

Weighted average number of common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

18,050,551

 

 

 

18,147,681

 

 

 

18,015,308

 

 

 

18,312,781

 

Diluted

 

 

18,343,038

 

 

 

18,147,681

 

 

 

18,288,050

 

 

 

18,312,781

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, before tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on derivative instrument

 

 

 

 

 

79

 

 

 

 

 

 

127

 

Unrealized loss on debt securities

 

 

 

 

 

(3,036

)

 

 

(3,220

)

 

 

(3,860

)

Reclassification adjustment for loss on debt securities in net income

 

 

 

 

 

 

 

 

5,585

 

 

 

 

Currency translation adjustment

 

 

2,648

 

 

 

(570

)

 

 

2,882

 

 

 

651

 

Other comprehensive income before tax

 

 

2,648

 

 

 

(3,527

)

 

 

5,247

 

 

 

(3,082

)

Income tax related to items of other comprehensive loss

 

 

 

 

 

1,065

 

 

 

(900

)

 

 

1,340

 

Other comprehensive income, net of tax

 

 

2,648

 

 

 

(2,462

)

 

 

4,347

 

 

 

(1,742

)

Comprehensive income (loss)

 

$

6,501

 

 

$

(9,906

)

 

$

5,546

 

 

$

(5,346

)

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)

 

2017

 

 

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income (loss)

 

$

1,199

 

 

$

(3,604

)

Adjustments to reconcile net income (loss) to net cash from operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

10,447

 

 

 

10,003

 

Amortization of debt costs and other assets

 

 

719

 

 

 

941

 

Provision for doubtful accounts

 

 

820

 

 

 

957

 

Deferred income taxes

 

 

4,284

 

 

 

687

 

Share-based compensation

 

 

5,492

 

 

 

4,012

 

Other-than-temporary impairment on debt securities

 

 

5,585

 

 

 

 

Other

 

 

572

 

 

 

772

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Restricted cash

 

 

14,369

 

 

 

 

Accounts receivable

 

 

(3,787

)

 

 

2,443

 

Inventories

 

 

(11,119

)

 

 

(2,974

)

Prepaid expenses and other current assets

 

 

2,199

 

 

 

340

 

Accounts payable

 

 

(950

)

 

 

(2,879

)

Other current liabilities

 

 

(19,407

)

 

 

10,664

 

Other long-term assets and liabilities

 

 

(696

)

 

 

11

 

Net cash from operating activities

 

 

9,727

 

 

 

21,373

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Capital expenditures for property, plant and equipment

 

 

(7,035

)

 

 

(9,600

)

Capital expenditures for intangible assets

 

 

(1,558

)

 

 

(756

)

Other investing activities

 

 

474

 

 

 

(3,613

)

Net cash from investing activities

 

 

(8,119

)

 

 

(13,969

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from issuance of common shares

 

 

5,282

 

 

 

14,828

 

Payments related to withholdings for share-based compensation

 

 

(2,851

)

 

 

(1,793

)

Repurchase and retirement of common shares

 

 

 

 

 

(43,885

)

Net cash from financing activities

 

 

2,431

 

 

 

(30,850

)

Effect of exchange rate changes on cash

 

 

719

 

 

 

265

 

Net change in cash and cash equivalents

 

 

4,758

 

 

 

(23,181

)

Cash and cash equivalents at the beginning of the period

 

 

39,572

 

 

 

63,663

 

Cash and cash equivalents at the end of the period

 

$

44,330

 

 

$

40,482

 

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

 

 

6


 

ORTHOFIX INTERNATIONAL N.V.

Notes to the Unaudited Condensed Consolidated Financial Statements

Business and basis of presentation

Orthofix International N.V. (the “Company”) is a diversified, global medical device company focused on improving patients’ lives by providing superior reconstructive and regenerative orthopedic and spine solutions to physicians. The Company has four strategic business units (“SBUs”) that are also its reporting segments: BioStim, Biologics, Extremity Fixation, and Spine Fixation.

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 Form 10-K for the year ended December 31, 2016. Operating results for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for other interim periods or the year ending December 31, 2017. The operating results for the three and six months ended June 30, 2016 have been adjusted from previously reported amounts as a result of the adoption of Accounting Standards Update (“ASU”) 2016-09, which was adopted during the quarter ended September 30, 2016 with an effective date of January 1, 2016.

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 share-based compensation. Actual results could differ from these estimates.

 

 

1. Recently issued accounting pronouncements

 

Topic

 

Description of Guidance

 

Effective Date

 

Status of Company's Evaluation

Revenue Recognition

(ASU 2014-09,

as amended)

 

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. Applied either retrospectively or as a cumulative effect adjustment as of the adoption date.

 

January 1, 2018

 

The Company is continuing to evaluate the impact this ASU will have on its consolidated financial statements and disclosures. The Company completed an initial impact assessment and believes adopting this ASU will materially impact the timing of revenue recognition, primarily for Extremity Fixation and Spine Fixation product sales to stocking distributors, which are currently accounted for using the sell-through method. Specifically, the Company believes the revenue associated with these sales will be recorded at the time of the sale instead of deferring recognition until cash is received. The Company expects to adopt this new guidance using the modified retrospective transition method.

Financial Instruments

(ASU 2016-01)

 

Requires entities to measure equity investments, except in limited circumstances, at fair value and recognize any changes in fair value in net income. Applied prospectively.

 

January 1, 2018

 

The Company is currently evaluating the impact this ASU may have on its consolidated financial statements.

7


 

Topic

 

Description of Guidance

 

Effective Date

 

Status of Company's Evaluation

Leases

(ASU 2016-02)

 

Requires a lessee to recognize lease assets and lease liabilities for leases classified as operating leases. Applied using a modified retrospective approach.

 

January 1, 2019

 

The Company is currently evaluating the impact this ASU may have on its consolidated financial statements; however, the Company expects this guidance will result in current operating lease obligations being reflected on the consolidated balance sheet.

Income Taxes

(ASU 2016-16)

 

Reduces complexity by requiring current and deferred income taxes for intra-entity asset transfers, other than inventory, to be recognized when the transfer occurs. Applied using a modified retrospective approach.

 

January 1, 2018

 

The Company is currently evaluating the impact this ASU may have on its consolidated financial statements.

Statement of Cash Flows

(ASU 2016-18)

 

Reduces diversity in classification and presentation of restricted cash, including transfers between cash and restricted cash, on the statement of cash flows. Applied retrospectively.

 

January 1, 2018

 

The Company is currently evaluating the impact this ASU may have on its consolidated statement of cash flows.

 

 

2. Inventories

Inventories were as follows:

 

(U.S. Dollars, in thousands)

 

June 30,

2017

 

 

December 31,

2016

 

Raw materials

 

$

5,049

 

 

$

7,978

 

Work-in-process

 

 

11,339

 

 

 

9,505

 

Finished products

 

 

55,706

 

 

 

42,434

 

Deferred cost of sales

 

 

3,775

 

 

 

3,429

 

 

 

$

75,869

 

 

$

63,346

 

 

 

3. Other current liabilities

In December 2016, the Company approved and initiated a planned restructuring, which primarily affects the Extremity Fixation SBU, to streamline costs, improve operational performance, and wind down a non-core business. The restructuring plan consists primarily of severance charges and the write-down of certain assets. The Company expects to incur total pre-tax expense of approximately $2.9 million in connection with this restructuring activity and has incurred cumulative costs to date of $2.0 million. The Company had an accrual of $1.5 million as of December 31, 2016 in other current liabilities related to the planned restructuring. In the six months ended June 30, 2017, the Company increased its estimate of costs to be incurred by approximately $0.1 million and made additional payments of $0.6 million, resulting in an ending accrual of $1.0 million as of June 30, 2017.

 

 

4. Long-term debt

As of June 30, 2017, the Company has not made any borrowings under its five year $125 million secured revolving credit facility with JPMorgan Chase Bank, N.A., as Administrative Agent, and certain lenders party thereto. The Company has also not made any borrowings on its €5.8 million ($6.6 million) available line of credit in Italy at June 30, 2017.  The Company is in compliance with all required financial covenants as of June 30, 2017.

 

 

8


 

5. Fair value measurements

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

 

 

 

June 30,

2017

 

 

December 31,

2016

 

(U.S. Dollars, in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collective trust funds

 

$

 

 

$

1,574

 

 

$

 

 

$

1,574

 

 

$

1,584

 

Treasury securities

 

 

525

 

 

 

 

 

 

 

 

 

525

 

 

 

467

 

Certificates of deposit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

468

 

Debt security

 

 

 

 

 

 

 

 

9,000

 

 

 

9,000

 

 

 

12,220

 

Total

 

$

525

 

 

$

1,574

 

 

$

9,000

 

 

$

11,099

 

 

$

14,739

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred compensation plan

 

$

 

 

$

(1,271

)

 

$

 

 

$

(1,271

)

 

$

(1,452

)

Total

 

$

 

 

$

(1,271

)

 

$

 

 

$

(1,271

)

 

$

(1,452

)

 

The fair value of the debt security, which is recorded within other long-term assets, is based upon significant unobservable inputs, including the use of a discounted cash flow model, requiring the  Company  to develop its own assumptions; therefore, the Company has categorized this asset as a Level 3 financial asset. As of June 30, 2017, the Company reassessed its estimate of fair value based on current financial information and other assumptions, resulting in a fair value of $9.0 million, which is consistent with the Company’s estimated fair value from the first quarter of 2017. This compares to an amortized cost basis in the debt security of $18.0 million.

The Company evaluated the decline in fair value recorded during the first quarter of 2017 to determine if the impairment was other-than-temporary. Based on this evaluation, the Company recorded an other-than-temporary impairment charge of $5.6 million before income taxes, which is recorded in other expense. In addition to the decrease in fair value, the other-than-temporary impairment included a reclassification of the amount that was previously considered temporary and included in accumulated other comprehensive loss.

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)

 

2017

 

 

2016

 

Balance at January 1

 

$

12,220

 

 

$

12,658

 

Accrued interest income

 

 

 

 

 

640

 

Gains or losses recorded for the period

 

 

 

 

 

 

 

 

Recognized in net income

 

 

(5,585

)

 

 

 

Recognized in other comprehensive income

 

 

2,365

 

 

 

(3,860

)

Balance at June 30

 

$

9,000

 

 

$

9,438

 

 

 

6. Contingencies

In addition to the matters described below, in the normal course of its business, the Company is involved in various lawsuits from time to time and may be subject to certain other contingencies. The Company believes losses with respect to these additional matters are individually and collectively immaterial as to a possible loss and range of loss.

 

Discontinued Operations – Matters Related to Breg and Possible Indemnification Obligations

On May 24, 2012, the Company sold Breg to an affiliate of Water Street Healthcare Partners II, L.P. (“Water Street”). Under the terms of the agreement, the Company indemnified Water Street and Breg with respect to certain specified matters, including the following:

 

Breg was engaged in the manufacturing and sale of local infusion pumps for pain management from 1999 to 2008. Since 2008, numerous product liability cases have been filed in the United States alleging that the local anesthetic, when dispensed by such infusion pumps inside a joint, causes a rare arthritic condition called “chondrolysis.” One case remains outstanding for which the Company currently cannot reasonably estimate the possible loss, or range of loss.

9


 

 

At the time of its divestiture by the Company, Breg was engaged in the manufacturing and sales of motorized cold therapy units used to reduce pain and swelling. Several domestic product liability cases have been filed in recent years, mostly in California state court. In September 2014, the Company entered into a master settlement agreement resolving then pendi ng pre-close cold therapy claims. Currently pending is a post-close cold therapy claim in California state court. As of June 30, 2017, the Company has an accrual of $2.6 million recorded within other current liabilities; however, the actual liability could be higher or lower than the amount accrued.

Charges incurred as a result of this indemnification are reflected as discontinued operations in the condensed consolidated statements of operations.

 

 

7. Accumulated other comprehensive loss

The components of and changes in accumulated other comprehensive loss were as follows:

 

(U.S. Dollars, in thousands)

 

Currency

Translation

Adjustments

 

 

Debt Security

 

 

Accumulated Other

Comprehensive Loss

 

Balance at December 31, 2016

 

$

(5,115

)

 

$

(1,465

)

 

$

(6,580

)

Other comprehensive income (loss)

 

 

2,882

 

 

 

(3,220

)

 

 

(338

)

Income taxes

 

 

 

 

 

1,223

 

 

 

1,223

 

Reclassification adjustments to:

 

 

 

 

 

 

 

 

 

 

 

 

Other expense, net

 

 

 

 

 

5,585

 

 

 

5,585

 

Income taxes

 

 

 

 

 

(2,123

)

 

 

(2,123

)

Balance at June 30, 2017

 

$

(2,233

)

 

$

 

 

$

(2,233

)

 

 

8. Revenue recognition

 

The table below presents net sales, which includes product sales and marketing service fees, for both the three and six months ended June 30, 2017 and 2016.

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

(U.S. Dollars, in thousands)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Product sales

 

$

93,908

 

 

$

90,868

 

 

$

182,309

 

 

$

176,493

 

Marketing service fees

 

 

15,034

 

 

 

13,207

 

 

 

29,371

 

 

 

26,261

 

Net sales

 

$

108,942

 

 

$

104,075

 

 

$

211,680

 

 

$

202,754

 

 

Product sales primarily consist of stimulation devices and fixation products. Marketing service fees are received from the Musculoskeletal Transplant Foundation (“MTF”) based on total sales of biologics tissues.

 

 

9. Business segment information

The table below present net sales, which includes product sales and marketing service fees, by reporting segment:

 

 

 

Three Months Ended June 30,

 

(U.S. Dollars, in thousands)

 

2017

 

 

2016

 

 

Change

 

BioStim

 

$

47,174

 

 

$

44,758

 

 

 

5.4

%

Biologics

 

 

15,661

 

 

 

14,256

 

 

 

9.9

%

Extremity Fixation

 

 

24,747

 

 

 

26,817

 

 

 

-7.7

%

Spine Fixation

 

 

21,360

 

 

 

18,244

 

 

 

17.1

%

Net sales

 

$

108,942

 

 

$

104,075

 

 

 

4.7

%

 

10


 

 

 

Six Months Ended June 30,

 

(U.S. Dollars, in thousands)

 

2017

 

 

2016

 

 

Change

 

BioStim

 

$

91,713

 

 

$

85,802

 

 

 

6.9

%

Biologics

 

 

30,648

 

 

 

28,350

 

 

 

8.1

%

Extremity Fixation

 

 

48,692

 

 

 

51,526

 

 

 

-5.5

%

Spine Fixation

 

 

40,627

 

 

 

37,076

 

 

 

9.6

%

Net sales

 

$

211,680

 

 

$

202,754

 

 

 

4.4

%

The primary metric used in managing the Company is non-GAAP net margin, which is an internal metric that the Company defines as gross profit less sales and marketing expense. The table below presents non-GAAP net margin by reporting segment:

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

(U.S. Dollars, in thousands)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

BioStim

 

$

19,469

 

 

$

18,575

 

 

$

36,602

 

 

$

34,983

 

Biologics

 

 

6,470

 

 

 

6,718

 

 

 

12,641

 

 

 

12,822

 

Extremity Fixation

 

 

6,766

 

 

 

8,161

 

 

 

13,178

 

 

 

15,336

 

Spine Fixation

 

 

2,696

 

 

 

2,201

 

 

 

4,703

 

 

 

4,536

 

Corporate

 

 

(107

)

 

 

(139

)

 

 

(205

)

 

 

(441

)

Non-GAAP net margin

 

$

35,294

 

 

$

35,516

 

 

$

66,919

 

 

$

67,236

 

General and administrative

 

 

20,409

 

 

 

18,545

 

 

 

38,691

 

 

 

35,550

 

Research and development

 

 

6,887

 

 

 

6,796

 

 

 

14,311

 

 

 

14,436

 

Charges related to U.S. Government resolutions

 

 

 

 

 

12,870

 

 

 

 

 

 

12,870

 

Operating income (loss)

 

$

7,998

 

 

$

(2,695

)

 

$

13,917

 

 

$

4,380

 

Interest income (expense), net

 

 

76

 

 

 

(113

)

 

 

121

 

 

 

(151

)

Other income (expense), net

 

 

585

 

 

 

147

 

 

 

(3,763

)

 

 

1,980

 

Income (loss) before income taxes

 

$

8,659

 

 

$

(2,661

)

 

$

10,275

 

 

$

6,209

 

 

 

10. Share-based compensation

The following tables present the detail of share-based compensation by line item in the condensed consolidated statements of operations as well as by award type:

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

(U.S. Dollars, in thousands)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Cost of sales

 

$

137

 

 

$

109

 

 

$

286

 

 

$

226

 

Sales and marketing

 

 

319

 

 

 

280

 

 

 

679

 

 

 

556

 

General and administrative

 

 

2,005

 

 

 

1,376

 

 

 

4,107

 

 

 

2,934

 

Research and development

 

 

215