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 SeptemberJune 30, 20162017
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 |
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(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
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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, or smaller reporting company, or an emerging growth company. See definitionthe definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer”“smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated filer |
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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 October 28, 2016, 17,826,136August 4, 2017, 18,170,923 shares of common stock were issued and outstanding.
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PART I |
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Item 1. |
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| Condensed Consolidated Balance Sheets as of |
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| Notes to the Unaudited Condensed Consolidated Financial Statements |
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Item 2. |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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PART II |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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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 Annual Report on Form 10-K for the fiscal year ended December 31, 2015,2016, to reflect new information, the occurrence of future events or circumstances or otherwise.
Factors
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 could cause or contribute to such differences may include, but arewe will not limited to, risks relating to: the expected sales of our products, including recently launched products; the continuation of our ongoing share repurchase program; our ongoing settlement discussions with the staff of the Division of Enforcement (the “SEC Enforcement Staff”) of the Securities and Exchange Commission (the “SEC”) related to investigations that arose out of our prior accounting review and restatements of financial statements and our review of allegations of improper payments involving our Brazil-based subsidiary (which are each further described in Note 11assert, to the Notes to the Unaudited Condensed Consolidated Financial Statements contained herein); the geographic concentration of certain accounts receivable in countries or territories that are facing severe fiscal challenges; 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 (includingfullest extent under applicable law, our indemnification obligations with respect to certain product liability claims against our former sports medicine global business unit (as further described in Part I, Item 3, “Legal Proceedings”); 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); 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, 2015, as well as in other current and periodic reports that we file with the SEC in the future.rights thereto.
ORTHOFIX INTERNATIONAL N.V.
Condensed Consolidated Balance Sheets
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| September 30, |
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| December 31, |
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(U.S. Dollars, in thousands, except share data) |
| 2016 |
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| 2015 |
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| June 30, 2017 |
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| December 31, 2016 |
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| (Unaudited) |
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| (unaudited) |
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Assets |
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Current assets: |
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Current assets |
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Cash and cash equivalents |
| $ | 46,824 |
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| $ | 63,663 |
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| $ | 44,330 |
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| $ | 39,572 |
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Trade accounts receivable, less allowance for doubtful accounts of $8,840 and $8,923 at September 30, 2016 and December 31, 2015, respectively |
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| 52,893 |
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| 59,839 |
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Restricted cash |
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| — |
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| 14,369 |
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Accounts receivable, net of allowances of $8,480 and $8,396, respectively |
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| 61,213 |
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| 57,848 |
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Inventories |
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| 65,013 |
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| 57,563 |
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| 75,869 |
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| 63,346 |
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Prepaid expenses and other current assets |
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| 20,519 |
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| 31,187 |
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| 17,192 |
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| 19,238 |
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Total current assets |
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| 185,249 |
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| 212,252 |
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| 198,604 |
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| 194,373 |
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Property, plant and equipment, net |
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| 51,861 |
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| 52,306 |
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| 46,651 |
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| 48,916 |
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Patents and other intangible assets, net |
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| 8,020 |
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| 5,302 |
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| 9,508 |
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| 7,461 |
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Goodwill |
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| 53,565 |
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| 53,565 |
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| 53,565 |
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| 53,565 |
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Deferred income taxes |
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| 56,222 |
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| 57,306 |
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| 42,685 |
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| 47,325 |
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Other long-term assets |
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| 21,136 |
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| 19,491 |
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| 16,664 |
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| 20,463 |
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Total assets |
| $ | 376,053 |
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| $ | 400,222 |
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| $ | 367,677 |
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| $ | 372,103 |
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Liabilities and shareholders’ equity |
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Current liabilities: |
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Trade accounts payable |
| $ | 14,375 |
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| $ | 16,391 |
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Current liabilities |
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Accounts payable |
| $ | 14,245 |
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| $ | 14,353 |
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Other current liabilities |
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| 68,900 |
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| 65,597 |
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| 50,858 |
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| 69,088 |
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Total current liabilities |
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| 83,275 |
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| 81,988 |
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| 65,103 |
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| 83,441 |
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Other long-term liabilities |
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| 19,598 |
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| 27,923 |
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| 25,627 |
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| 25,185 |
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Total liabilities |
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| 102,873 |
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| 109,911 |
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| 90,730 |
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| 108,626 |
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Contingencies (Note 11) |
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Shareholders’ equity: |
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Common shares $0.10 par value; 50,000,000 shares authorized; 18,036,712 and 18,659,696 issued and outstanding as of September 30, 2016 and December 31, 2015, respectively |
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| 1,804 |
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| 1,866 |
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Contingencies (Note 6) |
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Shareholders’ equity |
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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 |
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| 1,812 |
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| 1,783 |
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Additional paid-in capital |
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| 208,109 |
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| 232,126 |
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| 211,990 |
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| 204,095 |
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Retained earnings |
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| 67,415 |
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| 62,551 |
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| 65,378 |
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| 64,179 |
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Accumulated other comprehensive loss |
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| (4,148 | ) |
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| (6,232 | ) |
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| (2,233 | ) |
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| (6,580 | ) |
Total shareholders’ equity |
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| 273,180 |
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| 290,311 |
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| 276,947 |
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| 263,477 |
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Total liabilities and shareholders’ equity |
| $ | 376,053 |
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| $ | 400,222 |
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| $ | 367,677 |
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| $ | 372,103 |
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The accompanying notes form an integral part of these condensed consolidated financial statements
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
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| Three Months Ended |
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| Nine Months Ended |
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| September 30, |
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| September 30, |
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| Three Months Ended June 30, |
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| Six Months Ended June 30, |
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(Unaudited, U.S. Dollars, in thousands, except share and per share data) |
| 2016 |
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| 2015 |
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| 2016 |
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| 2015 |
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| 2017 |
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| 2016 |
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| 2017 |
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| 2016 |
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Product sales |
| $ | 84,997 |
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| $ | 87,761 |
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| $ | 261,490 |
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| $ | 251,461 |
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Marketing service fees |
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| 13,500 |
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| 13,390 |
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| 39,761 |
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| 40,406 |
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Net sales |
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| 98,497 |
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| 101,151 |
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| 301,251 |
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| 291,867 |
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| $ | 108,942 |
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| $ | 104,075 |
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| $ | 211,680 |
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| $ | 202,754 |
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Cost of sales |
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| 19,880 |
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| 23,865 |
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| 64,533 |
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| 65,114 |
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| 23,177 |
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| 22,516 |
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| 45,758 |
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| 44,653 |
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Gross profit |
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| 78,617 |
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| 77,286 |
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| 236,718 |
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| 226,753 |
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| 85,765 |
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| 81,559 |
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| 165,922 |
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| 158,101 |
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Operating expenses |
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Sales and marketing |
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| 41,717 |
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| 46,129 |
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| 132,582 |
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| 133,360 |
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| 50,471 |
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| 46,043 |
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| 99,003 |
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| 90,865 |
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General and administrative |
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| 18,581 |
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| 19,348 |
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| 53,341 |
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| 63,423 |
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| 20,409 |
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| 18,545 |
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| 38,691 |
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| 35,550 |
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Research and development |
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| 6,858 |
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| 6,523 |
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| 21,294 |
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| 18,819 |
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| 6,887 |
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| 6,796 |
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| 14,311 |
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| 14,436 |
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Restatements and related costs |
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| 691 |
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| 1,147 |
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| 1,481 |
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| 9,276 |
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Charges related to U.S. Government resolutions (Note 11) |
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| 1,499 |
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| — |
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| 14,369 |
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| — |
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| 69,346 |
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| 73,147 |
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| 223,067 |
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| 224,878 |
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Operating income |
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| 9,271 |
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| 4,139 |
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| 13,651 |
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| 1,875 |
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Other income and expense |
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Charges related to U.S. Government resolutions |
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| — |
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| 12,870 |
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| — |
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| 12,870 |
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Operating income (loss) |
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| 7,998 |
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| (2,695 | ) |
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| 13,917 |
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| 4,380 |
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Interest income (expense), net |
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| 471 |
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| (125 | ) |
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| 320 |
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| (323 | ) |
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| 76 |
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| (113 | ) |
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| 121 |
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| (151 | ) |
Other (expense) income, net |
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| (634 | ) |
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| (1,736 | ) |
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| 1,346 |
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| (192 | ) | ||||||||||||||||
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| (163 | ) |
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| (1,861 | ) |
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| 1,666 |
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| (515 | ) | ||||||||||||||||
Income before income taxes |
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| 9,108 |
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| 2,278 |
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| 15,317 |
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| 1,360 |
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Income tax benefit (expense) |
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| 1,276 |
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| (3,066 | ) |
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| (6,703 | ) |
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| (5,808 | ) | ||||||||||||||||
Other income (expense), net |
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| 585 |
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| 147 |
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| (3,763 | ) |
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| 1,980 |
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Income (loss) before income taxes |
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| 8,659 |
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| (2,661 | ) |
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| 10,275 |
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| 6,209 |
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Income tax expense |
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| (3,924 | ) |
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| (3,685 | ) |
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| (7,848 | ) |
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| (7,979 | ) | ||||||||||||||||
Net income (loss) from continuing operations |
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| 10,384 |
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| (788 | ) |
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| 8,614 |
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| (4,448 | ) |
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| 4,735 |
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| (6,346 | ) |
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| 2,427 |
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| (1,770 | ) |
Discontinued operations (Note 11) |
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Discontinued operations (Note 6) |
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Loss from discontinued operations |
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| (1,018 | ) |
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| (804 | ) |
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| (3,580 | ) |
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| (2,315 | ) |
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| (1,300 | ) |
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| (1,572 | ) |
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| (1,827 | ) |
|
| (2,562 | ) |
Income tax benefit |
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| 530 |
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| 221 |
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| 1,258 |
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| 585 |
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| 418 |
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| 474 |
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| 599 |
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| 728 |
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Net loss from discontinued operations |
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| (488 | ) |
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| (583 | ) |
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| (2,322 | ) |
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| (1,730 | ) |
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| (882 | ) |
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| (1,098 | ) |
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| (1,228 | ) |
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| (1,834 | ) |
Net income (loss) |
| $ | 9,896 |
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| $ | (1,371 | ) |
| $ | 6,292 |
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| $ | (6,178 | ) |
| $ | 3,853 |
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| $ | (7,444 | ) |
| $ | 1,199 |
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| $ | (3,604 | ) |
Net income (loss) per common share—basic: |
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Net income (loss) per common share—basic |
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Net income (loss) from continuing operations |
| $ | 0.57 |
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| $ | (0.04 | ) |
| $ | 0.47 |
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| $ | (0.24 | ) |
| $ | 0.26 |
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| $ | (0.35 | ) |
| $ | 0.13 |
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| $ | (0.10 | ) |
Net loss from discontinued operations |
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| (0.02 | ) |
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| (0.03 | ) |
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| (0.13 | ) |
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| (0.09 | ) |
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| (0.05 | ) |
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| (0.06 | ) |
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| (0.06 | ) |
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| (0.10 | ) |
Net income (loss) per common share—basic |
| $ | 0.55 |
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| $ | (0.07 | ) |
| $ | 0.34 |
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| $ | (0.33 | ) |
| $ | 0.21 |
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| $ | (0.41 | ) |
| $ | 0.07 |
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| $ | (0.20 | ) |
Net income (loss) per common share—diluted: |
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Net income (loss) per common share—diluted |
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Net income (loss) from continuing operations |
| $ | 0.56 |
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| $ | (0.04 | ) |
| $ | 0.46 |
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| $ | (0.24 | ) |
| $ | 0.26 |
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| $ | (0.35 | ) |
| $ | 0.13 |
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| $ | (0.10 | ) |
Net loss from discontinued operations |
|
| (0.02 | ) |
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| (0.03 | ) |
|
| (0.12 | ) |
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| (0.09 | ) |
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| (0.05 | ) |
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| (0.06 | ) |
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| (0.06 | ) |
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| (0.10 | ) |
Net income (loss) per common share—diluted |
| $ | 0.54 |
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| $ | (0.07 | ) |
| $ | 0.34 |
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| $ | (0.33 | ) |
| $ | 0.21 |
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| $ | (0.41 | ) |
| $ | 0.07 |
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| $ | (0.20 | ) |
Weighted average number of common shares: |
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Basic |
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| 18,091,650 |
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| 18,855,533 |
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| 18,238,533 |
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| 18,785,696 |
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| 18,050,551 |
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| 18,147,681 |
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| 18,015,308 |
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| 18,312,781 |
|
Diluted |
|
| 18,382,118 |
|
|
| 18,855,533 |
|
|
| 18,569,861 |
|
|
| 18,785,696 |
|
|
| 18,343,038 |
|
|
| 18,147,681 |
|
|
| 18,288,050 |
|
|
| 18,312,781 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Unrealized (loss) gain on derivative instruments, net of tax |
|
| (2 | ) |
|
| (706 | ) |
|
| 74 |
|
|
| 230 |
| ||||||||||||||||
Unrealized gain on debt securities, net of tax |
|
| 3,008 |
|
|
| — |
|
|
| 539 |
|
|
| — |
| ||||||||||||||||
Foreign currency translation adjustment |
|
| 820 |
|
|
| (365 | ) |
|
| 1,471 |
|
|
| (3,666 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
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) |
| $ | 13,722 |
|
| $ | (2,442 | ) |
| $ | 8,376 |
|
| $ | (9,614 | ) |
| $ | 6,501 |
|
| $ | (9,906 | ) |
| $ | 5,546 |
|
| $ | (5,346 | ) |
The accompanying notes form an integral part of these condensed consolidated financial statements
Condensed Consolidated Statements of Cash Flows
|
| Nine Months Ended |
| |||||
|
| September 30, |
| |||||
(Unaudited, U.S. Dollars, in thousands) |
| 2016 |
|
| 2015 |
| ||
|
|
|
|
|
| (As Adjusted) |
| |
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
| $ | 38,396 |
|
| $ | 26,539 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Capital expenditures for property, plant and equipment |
|
| (12,934 | ) |
|
| (20,980 | ) |
Capital expenditures for intangible assets |
|
| (1,327 | ) |
|
| (219 | ) |
Purchases of assets and investments |
|
| (3,613 | ) |
|
| — |
|
Purchase of debt securities |
|
| — |
|
|
| (15,250 | ) |
Net proceeds from sale of assets |
|
| — |
|
|
| 4,800 |
|
Net cash used in investing activities |
|
| (17,874 | ) |
|
| (31,649 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from issuance of common shares |
|
| 19,688 |
|
|
| 3,106 |
|
Tax payments for shares withheld to satisfy withholding obligations |
|
| (2,354 | ) |
|
| (1,437 | ) |
Payment of debt issuance costs |
| — |
|
|
| (1,723 | ) | |
Changes in restricted cash |
| — |
|
|
| 34,424 |
| |
Repurchase and retirement of common shares |
|
| (54,996 | ) |
| — |
| |
Net cash (used in) provided by financing activities |
|
| (37,662 | ) |
|
| 34,370 |
|
Effect of exchange rate changes on cash |
|
| 301 |
|
|
| (2,381 | ) |
Net (decrease) increase in cash and cash equivalents |
|
| (16,839 | ) |
|
| 26,879 |
|
Cash and cash equivalents at the beginning of the period |
|
| 63,663 |
|
|
| 36,815 |
|
Cash and cash equivalents at the end of the period |
| $ | 46,824 |
|
| $ | 63,694 |
|
|
| 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
Notes to the Unaudited Condensed Consolidated Financial Statements
1. Nature of operations,Business and basis of presentation and recently issued accounting pronouncements
Nature of operations
Orthofix International N.V. (together with its subsidiaries, the(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 is comprised ofhas four strategic business units (SBUs):(“SBUs”) that are also its reporting segments: BioStim, Biologics, Extremity Fixation, and Spine Fixation.
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, 2015 (the “2015 Form 10-K”).2016. Operating results for the three and ninesix months ended SeptemberJune 30, 2016,2017 are not necessarily indicative of the results that may be expected for other interim periods or the year ending December 31, 2016.2017. The balance sheet at December 31, 2015, hasoperating results for the three and six months ended June 30, 2016 have been derivedadjusted from the audited financial statements at that date, but does not include allpreviously reported amounts as a result of the information and footnotes required by U.S. GAAP for complete financial statements.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 shared-basedshare-based compensation. Actual results could differ from these estimates.As permitted under U.S. GAAP, interim accounting for certain expenses, including income taxes, is based on full year forecasts.
Change in accounting principle for goodwill
During the quarter ended September 30, 2016, the Company voluntarily changed its annual goodwill testing date from the end of the fourth quarter, December 31, to the beginning of the fourth quarter, October
1. The Company believes this change in the method of applying the accounting principle is preferable, as it will more closely align the annual impairment testing date with the most current information from the budgeting and strategic planning process and will provide management with additional time to complete its annual assessment in advance of our year-end reporting. The change will not delay, accelerate or avoid an impairment charge. This change is not applied retrospectively, as it is impracticable to do so because retrospective application would require application of significant estimates and assumptions with the use of hindsight. Accordingly, the change will be applied prospectively.
Recently adopted accounting standard
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Improvements to Employee Share-Based Payment Accounting. This ASU simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, accounting for forfeitures, and classification on the statement of cash flows. During the quarter ended September 30, 2016, the Company early adopted this new accounting standard with an effective date of January 1, 2016. Under the new standard, all excess tax benefits and tax deficiencies will be recognized as income tax expense or benefit in the income statement as discrete items in the reporting period in which they occur. The Company has applied guidance related to the classification of excess tax benefits on the statement of cash flows on a retrospective basis. Additionally, the Company has elected to account for forfeitures as they occur and recorded the impact of such change on previously reported periods through a $1.4 cumulative-effect adjustment to retained earnings as of January 1, 2016. Further, the Company has applied the guidance for employee taxes paid to tax authorities when shares are withheld to satisfy the employer’s statutory income tax withholding obligation on a retrospective basis. The adoption resulted in a $0.3 million decrease in net cash provided by financing activities and a $0.3 million increase in net cash from operating activities for the nine months ended September 30, 2015. The adoption did not have a material impact on the Company’s consolidated statement of operations and comprehensive income (loss) for the three and nine month periods ended September 30, 2016.
Recently issued accounting pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). 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. As currently amended, the standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted. 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 and developing processes and procedures to implement this guidance.
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 |
|
Topic | Description of Guidance | Effective Date | Status of Company's Evaluation | |||
(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
The Company’s inventories are valued at the lower of cost or estimated net realizable value, after provision for excess or obsolete items, which is reviewed and updated on a periodic basis by management determined on a first-in, first-out basis. Work-in-process and finished products include the cost of materials, labor and other production costs. Finished products include field inventory which represents immediately saleable finished products that are in the possession of the Company’s independent 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, 2016 |
|
| December 31, 2015 |
| ||
|
|
|
|
|
|
|
|
|
Raw materials |
| $ | 4,809 |
|
| $ | 4,976 |
|
Work-in-process |
|
| 7,838 |
|
|
| 5,087 |
|
Finished products |
|
| 48,358 |
|
|
| 42,947 |
|
Deferred cost of sales |
|
| 4,008 |
|
|
| 4,553 |
|
Total inventory |
| $ | 65,013 |
|
| $ | 57,563 |
|
(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
On August 31, 2015,As of June 30, 2017, the Company through certain ofhas not made any borrowings under its subsidiaries entered into a Credit Agreement (the “Credit Agreement”)five year $125 million secured revolving credit facility with JPMorgan Chase Bank, N.A., as Administrative Agent, and certain lenders party thereto. The Credit Agreement provides for a
five year $125 million secured revolving credit facility (the “Facility”). As of September 30, 2016, the Company has also not made any borrowings under the Credit Agreement.
The Credit Agreement contains financial covenants requiring the Company to maintain, ason its €5.8 million ($6.6 million) available line 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 ofcredit in Italy at least 3.0 to 1.0 based upon the Company’s consolidated adjusted earnings.June 30, 2017. The Company is in compliance with all required financial covenants as of SeptemberJune 30, 2016. The 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.
The Company had not made any borrowings on its €5.8 million ($6.5 million and $6.3 million) available line of credit in Italy at September 30, 2016 and December 31, 2015, respectively. 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
In the ordinary course of business, the Company is exposed to the impact of changes in interest rates and foreign currency fluctuations. During 2016 and 2015, the Company made use of a foreign cross-currency swap agreement, which is designated and accounted for as a cash flow hedge, to manage cash flow exposure generated from foreign currency fluctuations.
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). Any gains or losses reported in accumulated other comprehensive income are reclassified into earnings upon maturity.
(U.S. Dollars, in thousands) As of September 30, 2016 |
| Fair value: favorable (unfavorable) |
|
| Balance sheet classification | |
Cross-currency swap |
| $ | 2,247 |
|
| Prepaid expenses and other current assets |
Warrants |
| $ | 321 |
|
| Other long-term assets |
|
|
|
|
|
|
|
As of December 31, 2015 |
|
|
|
|
|
|
Cross-currency swap |
| $ | 2,485 |
|
| Prepaid expenses and other current assets |
Warrants |
| $ | 321 |
|
| Other long-term assets |
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(U.S. Dollars, in thousands) |
| 2016 |
|
| 2015 |
|
| 2016 |
|
| 2015 |
| ||||
Cross-currency swap unrealized (loss) gain, net of taxes |
| $ | (2 | ) |
| $ | (706 | ) |
| $ | 74 |
|
| $ | 230 |
|
Warrants unrealized loss, net of taxes |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
2017.
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) |
| September 30, 2016 |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
|
| Total |
| |||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Collective trust funds |
| $ | 1,594 |
|
| $ | — |
|
| $ | 1,594 |
|
| $ | — |
|
| $ | — |
|
| $ | 1,574 |
|
| $ | — |
|
| $ | 1,574 |
|
| $ | 1,584 |
|
Treasury securities |
|
| 487 |
|
|
| 487 |
|
|
| — |
|
|
| — |
|
|
| 525 |
|
|
| — |
|
|
| — |
|
|
| 525 |
|
|
| 467 |
|
Certificates of deposit |
|
| 452 |
|
|
| 452 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 468 |
|
Derivative instruments |
|
| 2,247 |
|
|
| — |
|
|
| 2,247 |
|
|
| — |
| ||||||||||||||||||||
Debt securities |
|
| 14,470 |
|
|
| — |
|
|
| — |
|
|
| 14,470 |
| ||||||||||||||||||||
Debt security |
|
| — |
|
|
| — |
|
|
| 9,000 |
|
|
| 9,000 |
|
|
| 12,220 |
| ||||||||||||||||
Total |
| $ | 19,250 |
|
| $ | 939 |
|
| $ | 3,841 |
|
| $ | 14,470 |
|
| $ | 525 |
|
| $ | 1,574 |
|
| $ | 9,000 |
|
| $ | 11,099 |
|
| $ | 14,739 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan |
| $ | (1,488 | ) |
| $ | — |
|
| $ | (1,488 | ) |
| $ | — |
|
| $ | — |
|
| $ | (1,271 | ) |
| $ | — |
|
| $ | (1,271 | ) |
| $ | (1,452 | ) |
Total |
| $ | (1,488 | ) |
| $ | — |
|
| $ | (1,488 | ) |
| $ | — |
|
| $ | — |
|
| $ | (1,271 | ) |
| $ | — |
|
| $ | (1,271 | ) |
| $ | (1,452 | ) |
(U.S. Dollars, in thousands) |
| December 31, 2015 |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||
Assets |
|
|
|
|
|
|
|
|
|
|
| |||||
Collective trust funds |
| $ | 1,622 |
|
| $ | — |
|
| $ | 1,622 |
|
| $ | — |
|
Treasury securities |
|
| 495 |
|
|
| 495 |
|
|
| — |
|
|
| — |
|
Certificates of deposit |
|
| 337 |
|
|
| 337 |
|
|
| — |
|
|
| — |
|
Derivative instruments |
|
| 2,485 |
|
|
| — |
|
|
| 2,485 |
|
|
| — |
|
Debt securities |
|
| 12,658 |
|
|
| — |
|
|
| — |
|
|
| 12,658 |
|
Total |
| $ | 17,597 |
|
| $ | 832 |
|
| $ | 4,107 |
|
| $ | 12,658 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan |
| $ | (1,503 | ) |
| $ | — |
|
| $ | (1,503 | ) |
| $ | — |
|
Total |
| $ | (1,503 | ) |
| $ | — |
|
| $ | (1,503 | ) |
| $ | — |
|
Debt Securities
On March 4, 2015, the Company entered into an OptionAgreement (the “OptionAgreement”)witheNeura, Inc. (“eNeura”), a privately held medical technologycompany that is developing devices for the treatment of migraines. The OptionAgreement providedthe Company with anexclusive option to acquire eNeura (the “Option”)during an 18-month period following the grant of the Option, which the Company elected to let expire in September 2016. In considerationforthe Option, (i) the Company paid a non-refundable $0.3 millionfee to eNeura, and (ii) eNeura issued a ConvertiblePromissoryNote (the “eNeura Note”) to the Company. The principal amount ofthe eNeura Note is $15.0 million and interest accrues at 8.0%. The eNeura Note will mature on March4, 2019 and interest is due when the note matures, provided that if a change in control of eNeura (generally defined as a third party acquisition of fifty percent or more of eNeura’s voting equity or all or substantially all of eNeura’s assets) occurs prior to the maturity date, the eNeura Note will automatically convert into preferred stock of eNeura. 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 debt security, which is recorded within other long-term assets, is based upon significant unobservable inputs, including the use of a discounted cash flowsflow model, requiring the Company to develop its own assumptions; therefore, the Company has categorized this asset as a Level 3 financial asset. OneAs of the more significant unobservable inputs used in the fair value measurement of the debt security is the discount rate. Holding other inputs constant, changes in the discount rate could result in a significant change in the fair value of the debt security. During the first and second quarters of 2016,June 30, 2017, the Company revised the estimatedreassessed its estimate of fair value of the security which resulted in impairments of $0.8 million and $3.0 million, respectively. During the third quarter of 2016, the Company further revised its estimate based on current financial information and other assumptions, resulting in an increase to thea fair value of $4.7$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 as an unrealized gain on debt securities. The Company continues to classify the accumulated impairment of $2.5 million as temporary in nature as the Company does not intend to sell the debt security nor does it believe that recoverability of the investment will not occur.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) |
|
|
|
|
Balance at December 31, 2015 |
| $ | 12,658 |
|
Accrued interest income |
|
| 969 |
|
Unrealized gain on debt securities |
|
| 843 |
|
Balance at September 30, 2016 |
| $ | 14,470 |
|
(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. 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 |
|
| Derivatives |
|
| Debt Securities |
|
| Accumulated Other Comprehensive Loss |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015 |
| $ | (4,389 | ) |
| $ | 228 |
|
| $ | (2,071 | ) |
| $ | (6,232 | ) |
Unrealized gain on derivative instruments, net of tax of $50 |
|
| — |
|
|
| 74 |
|
|
| — |
|
|
| 74 |
|
Unrealized gain on debt securities, net of tax benefit of $304 |
|
| — |
|
|
| — |
|
|
| 539 |
|
|
| 539 |
|
Foreign currency translation adjustment (1) |
|
| 1,471 |
|
|
| — |
|
|
| — |
|
|
| 1,471 |
|
Balance at September 30, 2016 |
| $ | (2,918 | ) |
| $ | 302 |
|
| $ | (1,532 | ) |
| $ | (4,148 | ) |
___________________________________________
|
|
7. Earnings per share
For the three and nine months ended September 30, 2016 and 2015, no adjustments were made 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 income (loss) per common share computations.
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2016 |
|
| 2015 |
|
| 2016 |
|
| 2015 |
| ||||
Weighted average common shares-basic |
|
| 18,091,650 |
|
|
| 18,855,533 |
|
|
| 18,238,533 |
|
|
| 18,785,696 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unexercised stock options and employee stock purchase plan, net of treasury share repurchase |
|
| 290,468 |
|
|
| — |
|
|
| 331,328 |
|
|
| — |
|
Weighted average common shares-diluted |
|
| 18,382,118 |
|
|
| 18,855,533 |
|
|
| 18,569,861 |
|
|
| 18,785,696 |
|
Options to purchase shares of common stock with exercise prices in excess of the average market price of common shares and performance-based restricted stock awards deemed not probable to vest are not included in the computation of diluted earnings per share. There were 571,601 and 468,286 outstanding awards and options not included in the diluted earnings per share computation for the three and nine months ended September 30, 2016, because their inclusion was antidilutive.
Due to the Company having a net loss from continuing operations position for the three and nine months ended September 30, 2015, there were 1,203,424 and 1,153,763 potentially dilutive shares excluded from the computation, respectively, as their effects were antidilutive.
8. Share-based compensation
All share-based compensation awards are measured at the grant date, based on the estimated fair value of the award, and recognized as expense in the condensed consolidated statements of operations over the requisite service period. The Company recognized $8.1 million and $12.2 million, respectively, of share-based compensation expense for the three and nine months ended September 30, 2016 and $1.9 million and $5.5 million, respectively, for the three and nine months ended September 30, 2015.
On June 30, 2014, the Company granted 99,600 shares of performance-based vesting restricted stock to executive officers and certain employees. Vesting is based on achieving adjusted earnings targets in two consecutive rolling four quarter periods prior to December 31, 2017. As of September 30, 2016, the Company determined these performance-based awards were probable to vest, resulting in the recognition of $2.7 million of expense for the quarter ended September 30, 2016.
Between June 30, 2015 and August 5, 2015, the Company granted 110,660 shares of performance-based vesting restricted stock, coupled with performance stock units (“PSUs”), to executive officers and certain employees. Vesting of the restricted stock is based on achieving adjusted earnings or return on invested capital targets as of and for any of the years ended December 31, 2016, 2017 or 2018. As of September 30, 2016, the Company determined these performance-based awards were probable to vest, resulting in the recognition of $2.4 million of expense for the quarter ended September 30, 2016. The PSUs, which represent the potential to receive additional shares of common stock in an amount up to 50% of the shares of restricted stock granted, are based on adjusted earnings and return on invested capital targets as of and for the year ended December 31, 2018.
On July 1, 2016, the Company granted 96,245 market-based PSUs to executive officers and certain employees. The awards, if performance goals are achieved, will be settled in shares of common stock, with one share of common stock issued per PSU if targets are achieved at a 100% level. Awards may be achieved at a minimum level of 50% and a maximum level of 200%. The performance targets are based the Company’s stock achieving certain total shareholder return targets relative to specified index companies during a 3-year performance period beginning on July 1, 2016. As of September 30, 2016, approximately $0.5 million of expense has been recognized for these contingent performance units.
During the three months ended September 30, 2016 and 2015, there were 181,235 and 43,326 shares, respectively, of common stock issued related to stock purchase plan issuances, stock option exercises and the vesting of restricted stock awards. During the nine months ended September 30, 2016 and 2015, there were 710,026 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.
9. Income taxes
For the third quarter, the effective tax rate on continuing operations was (14.0)%, resulting in a benefit of $1.3 million, as compared to 134.6%, resulting in expense of $3.1 million, for the same period in the prior year. Excluding the impact of discrete tax items, the effective tax rate on continuing operations for the third quarter of 2016 and 2015 was 29.2% and 63.3%, respectively. For the first nine months of 2016, the effective tax rate on continuing operations was 43.8%, or $6.7 million, as compared to 427.1%, or $5.8 million, for the same period in the prior year. Excluding the impact of discrete tax items, the effective tax rate on continuing operations for the first nine months of 2016 and 2015 was 66.5% and 279.2%, respectively.
During the third quarter of 2016, the Company changed its estimate relating to the deductibility of certain compensation expenses. This change in estimate reduced tax expense and increased net income from continuing operations by $2.9 million and increased earnings per share by $0.16 for both the three and nine months ended September 30, 2016.
The primary factors affecting the Company’s effective tax rate for the three and nine months ended September 30, 2016, were expense categorized as “Charges related to US Government Resolutions,” which represents anticipated settlement payments with substantially no tax benefit, and the change in estimate relating to the deductibility of certain compensation expenses. Other factors affecting the Company’s effective tax rate for the three and nine months ended September 30, 2016, and 2015 were the mix of earnings among 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 the Company’s federal income tax return for 2012. Further, in October 2016, the Company was notified of an examination of the Company’s federal income tax return for 2013. The Company cannot reasonably determine if these examinations will have a material impact on its financial statements and cannot predict the timing regarding resolution of these tax examinations.
10. Business segment information
The Company has four 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 the Company defines 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 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 the Biologics segment.
|
| Three Months Ended September 30, |
| |||||||||
(U.S. Dollars, in thousands) |
| 2016 |
|
| 2015 |
|
| Change |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
BioStim |
| $ | 42,956 |
|
| $ | 41,559 |
|
|
| 3.4 | % |
Biologics |
|
| 14,335 |
|
|
| 14,639 |
|
|
| (2.1 | )% |
Extremity Fixation |
|
| 24,314 |
|
|
| 24,694 |
|
|
| (1.5 | )% |
Spine Fixation |
|
| 16,892 |
|
|
| 20,259 |
|
|
| (16.6 | )% |
Total net sales |
| $ | 98,497 |
|
| $ | 101,151 |
|
|
| (2.6 | )% |
|
| Nine Months Ended September 30, |
| |||||||||
(U.S. Dollars, in thousands) |
| 2016 |
|
| 2015 |
|
| Change |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
BioStim |
| $ | 128,758 |
|
| $ | 119,962 |
|
|
| 7.3 | % |
Biologics |
|
| 42,685 |
|
|
| 43,874 |
|
|
| (2.7 | )% |
Extremity Fixation |
|
| 75,840 |
|
|
| 72,103 |
|
|
| 5.2 | % |
Spine Fixation |
|
| 53,968 |
|
|
| 55,928 |
|
|
| (3.5 | )% |
Total net sales |
| $ | 301,251 |
|
| $ | 291,867 |
|
|
| 3.2 | % |
The table below presents net margin by SBU reporting segment for the three and nine months ended September 30, 2016 and 2015:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(U.S. Dollars, in thousands) |
| 2016 |
|
| 2015 |
|
| 2016 |
|
| 2015 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BioStim |
| $ | 19,996 |
|
| $ | 16,834 |
|
| $ | 54,980 |
|
| $ | 47,634 |
|
Biologics |
|
| 6,821 |
|
|
| 6,296 |
|
|
| 19,642 |
|
|
| 19,525 |
|
Extremity Fixation |
|
| 8,834 |
|
|
| 6,442 |
|
|
| 24,170 |
|
|
| 22,607 |
|
Spine Fixation |
|
| 1,388 |
|
|
| 1,938 |
|
|
| 5,925 |
|
|
| 4,582 |
|
Corporate |
|
| (139 | ) |
|
| (353 | ) |
|
| (581 | ) |
|
| (955 | ) |
Total net margin |
|
| 36,900 |
|
|
| 31,157 |
|
|
| 104,136 |
|
|
| 93,393 |
|
General and administrative |
|
| 18,581 |
|
|
| 19,348 |
|
|
| 53,341 |
|
|
| 63,423 |
|
Research and development |
|
| 6,858 |
|
|
| 6,523 |
|
|
| 21,294 |
|
|
| 18,819 |
|
Restatements and related costs |
|
| 691 |
|
|
| 1,147 |
|
|
| 1,481 |
|
|
| 9,276 |
|
Charges related to U.S. Government resolutions |
|
| 1,499 |
|
|
| – |
|
|
| 14,369 |
|
|
| – |
|
Operating income |
| $ | 9,271 |
|
| $ | 4,139 |
|
| $ | 13,651 |
|
| $ | 1,875 |
|
11. Contingencies
The Company is party to outstanding legal proceedings, investigations and claims, as previously described in (i) Part I, Item 3, “Legal Proceedings,” of the 2015 Form 10-K and (ii) note 14 to the Company’s audited consolidated financial statements filed with the 2015 Form 10-K. The Company believes that it is unlikely that the outcome of any of the matters that remain pending will have a material adverse effect on it and its subsidiaries as a whole, notwithstanding that the unfavorable resolution of any matter may have a material effect on the Company’s net earnings (if any) in any particular quarter. However, the Company cannot predict with any certainty the final outcome of any of these legal proceedings, investigations (including any settlement discussions with the government seeking to resolve such investigations) or claims, and there can be no assurance that the ultimate resolution of any such matters will not have a material adverse impact on the Company’s consolidated financial position, results of operations, or cash flows.
In addition to the matters described in the paragraphs below, and in the 2015 Form 10-K, 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. To the extent losses related to these contingencies are both probable and reasonably estimable, the Company accrues appropriate amounts in the accompanying financial statements and provides disclosures as to the possible range of loss in excess of the amount accrued, if such
range is reasonably estimable. The Company believes losses with respect to these additional matters are individually and collectively immaterial as to a possible loss and range of loss.
Commercial Litigation Settlement
During the third quarter of 2016, the Company entered into an agreement to settle an outstanding commercial litigation matter, whereby the Company will receive a $3.0 million cash payment.
Discontinued Operations – Matters Related to the Audit Committee’s Review and the Restatement of Certain of our Consolidated Financial Statements
Audit Committee Review
In July 2013, the Audit Committee of our Board of Directors began conducting an independent review, with the assistance of outside professionals, of certain accounting matters. This review resulted in a restatement of our previously filed consolidated financial statements for the fiscal years ended December 31, 2012, 2011 and 2010 and the fiscal quarter ended March 31, 2013, as well as the restatement of certain financial information for the fiscal years ended December 31, 2009, 2008 and 2007.
In connection with the Company’s preparation of its consolidated interim quarterly financial statements for the fiscal quarter ended June 30, 2014, the Company determined that certain entries with respect to the previously filed financial statements contained in the filings containing the restatement were not properly accounted for under U.S. GAAP. As a result, the Company determined in August 2014 to restate its previously filed consolidated financial statements for the fiscal years ended December 31, 2013, 2012 and 2011 and quarterly reporting periods contained within the fiscal years ended December 31, 2013 and 2012, as well as the fiscal quarter ended March 31, 2014.
SEC Investigation
In connection with the initiation of the Audit Committee’s independent review, the Company initiated contact with the staff of the Division of Enforcement of the SEC (the “SEC Enforcement Staff”) in July 2013 to advise them of these matters. The SEC conducted a formal investigation of these matters, and both the Company and the Audit Committee cooperated fully with the SEC.
The Company is currently engaged in discussions with the SEC Enforcement Staff regarding a possible negotiated resolution of these matters as to the Company. Although such discussions remain ongoing, and any agreement reached between the SEC Enforcement Staff and the Company will be subject to approval by the full Commission, the Company has reached an agreement in principle with the SEC Enforcement Staff that any negotiated resolution will include a civil money penalty of approximately $8.3 million, and the Company previously recorded a charge in this amount during the second quarter of 2016 for this matter. However, no assurance can be given that we will be able to achieve a final, definitive resolution with the SEC to resolve this matter on these or other terms, and the failure to resolve this matter on these or other terms could adversely affect our business and operations.
Deferred Prosecution Agreement and Review of Potentially Improper Payments Involving Brazil Subsidiary
In 2012, the Company entered into definitive agreements with the U.S. Department of Justice (the “DOJ”) and the SEC agreeing to settle a self-initiated and self-reported internal investigation of our former Mexican subsidiary, Promeca S.A. de C.V. (“Promeca”), regarding non-compliance by Promeca with the U.S. Foreign Corrupt Practices Act (the “FCPA”). As part of the settlement, the Company entered into a three-year deferred prosecution agreement (“DPA”) with the DOJ and a consent to final judgment (the “Consent”) with the SEC. Under the DPA, the DOJ agreed not to pursue any criminal charges against the Company in connection with the Promeca matter if the Company complied with the terms of the DPA. The DPA took note of the Company’s self-reporting of this matter to the DOJ and the SEC, and of remedial measures, including the implementation of an enhanced compliance program, previously undertaken by the Company. The DPA and the Consent collectively required, among other things that with respect to anti-bribery compliance matters the Company would continue to cooperate fully with the government in any future matters related to corrupt payments, false books and records or inadequate internal controls. In that regard, the Company represented that it had implemented and would continue to implement a compliance and ethics program designed to prevent and detect violations of the FCPA and other applicable anti-corruption laws, which includes maintaining a system of internal controls. The Company periodically reported to the government during the terms of the DPA and Consent regarding such remediation and implementation of compliance measures.
In August 2013, during the terms of the DPA and Consent, the Company’s internal legal department was notified of certain allegations involving potentially improper payments with respect to its Brazilian subsidiary, Orthofix do Brasil Ltda., and promptly contacted both the DOJ and the SEC Enforcement Staff to voluntarily self-report the allegations. Following the self-report, the Company cooperated fully with the DOJ’s investigation of those allegations. On June 15, 2015, the Company and the DOJ agreed to extend the term of the DPA for two months (through September 17, 2015) to permit the DOJ additional time to evaluate the
Company’s compliance with the internal controls and compliance undertakings in the DPA and to further investigate the Brazil-related allegations. On September 17, 2015, the DOJ extended the term of the DPA for an additional ten months (through July 17, 2016), stating that the Company’s efforts to comply with the internal controls and compliance requirements of the DPA during the first eighteen months of the DPA were insufficient. On July 17, 2016, the DPA expired; on July 29, 2016, the DOJ filed with the court a dismissal of the underlying Promeca-related case; and, on August 1, 2016, the court entered an order granting the DOJ’s motion to dismiss such case without prejudice.
The Company also fully cooperated with the SEC’s investigation of the allegations in Brazil. The Company has been engaged in discussions with the SEC Enforcement Staff regarding a resolution of the Brazil-related allegations as they relate to the SEC's jurisdiction. Although such discussions remain ongoing, and any agreement reached between the SEC Enforcement Staff and the Company will be subject to approval by the full Commission, the Company has reached an agreement in principle with the SEC Enforcement Staff. The Company recorded a charge of $4.6 million in the second quarter of 2016, and a further charge of approximately $1.5 million in the third quarter of 2016, for this matter. However, no assurance can be given that we will be able to achieve a final, definitive resolution with the SEC on these or other terms, and the failure to resolve this matter on these or other terms could adversely affect our business and operations.
Matters Related to the Company’s Former Breg Subsidiary 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”) pursuant to a stock purchase agreement (the “Breg SPA”). Under the terms of the Breg SPA, upon closing of the sale,agreement, the Company and its subsidiary, Orthofix Holdings, Inc., agreed to indemnifyindemnified 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.” The Company incurred losses for settlements and judgments in connection with these matters during the first nine months of 2016 of $0.8 million as compared to $0.3 million in the first nine months of 2015. In addition, several cases remainOne case remains outstanding for which the Company currently cannot reasonably estimate the possible loss, or range of loss.
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, alleging the use of cold therapy causes skin and/or nerve injury and seeking damages on behalf of individual plaintiffs who were allegedly injured by such units or who would not have purchased the units had they known they could be injured. In September 2014, the Company entered into a master settlement agreement resolving all pending pre-close claims. Pursuant to the terms of the settlement agreement, the Company paid approximately $1.3 million, and additional amounts owed under the settlement were paid directly by the Company’s insurance providers. These amounts paid by the Company were recorded as an expense in discontinued operations during the fiscal quarter ended June 30, 2014. Remaining cold therapy claims include a putative consumer class of individuals who did not suffer physical harm following use of the devices, and an appeal of an adverse July 2012 California jury verdict and a post-close cold therapy claim pending in California state court. As of September 30, 2016, the Company has accrued $5.7 million for the July 2012 verdict and post-close cold therapy liabilities; however, actual liability could be higher or lower than the amount accrued. The putative class action is at an early stage and the Company currently cannot reasonably estimate the possible loss, or range of loss. On October 28, 2016, the California Court of Appeal issued a ruling in Engler v. Breg, Inc. et al., reversing in part and affirming in part the judgment entered against Breg in 2012. The Company is evaluating the ruling.
Charges incurred as a result of this indemnification are reflected as discontinued operations in our Condensed Consolidated Statementsthe condensed consolidated statements of Operations and Comprehensive Loss.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 | % |
| 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 |
|
|
| 148 |
|
|
| 420 |
|
|
| 296 |
|
|
| $ | 2,676 |
|
| $ | 1,913 |
|
| $ | 5,492 |
|
| $ | 4,012 |
|
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
(U.S. Dollars, in thousands) |
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Stock options |
| $ | 523 |
|
| $ | 467 |
|
| $ | 1,118 |
|
| $ | 942 |
|
Time-based restricted stock awards |
|
| 1,239 |
|
|
| 1,130 |
|
|
| 2,531 |
|
|
| 2,438 |
|
Performance-based restricted stock awards |
|
| 113 |
|
|
| — |
|
|
| 225 |
|
|
| — |
|
Performance-based and market-based restricted stock units |
|
| 472 |
|
|
| — |
|
|
| 938 |
|
|
| — |
|
Stock purchase plan |
|
| 329 |
|
|
| 316 |
|
|
| 680 |
|
|
| 632 |
|
|
| $ | 2,676 |
|
| $ | 1,913 |
|
| $ | 5,492 |
|
| $ | 4,012 |
|
12. Share repurchaseDuring the three months ended June 30, 2017 and 2016, the Company issued 76,596 and 325,393 shares, respectively, of common stock related to stock purchase plan issuances, stock option exercises and the vesting of restricted stock awards. During the six months ended June 30, 2017 and 2016, the Company issued 291,275 and 528,791 shares, respectively, of common stock related to stock purchase plan issuances, stock option exercises and the vesting of restricted stock awards.
11. Income taxes
Income tax provisions for interim periods are based on an estimated annual income tax rate, adjusted for discrete tax items. As a result, the Company’s interim effective tax rates may vary significantly from the statutory tax rate and the annual effective tax rate.
For the three months ended June 30, 2017 and 2016, the effective tax rate on continuing operations was 45.3% and (138.5%), respectively. For the six months ended June 30, 2017 and 2016, the effective tax rate on continuing operations was 76.4% and 128.5%.The primary factors affecting the Company’s effective tax rate for the three and six months ended June 30, 2017, were the method for estimating income taxes at interim periods, the mix of earnings among tax jurisdictions and current period losses in certain jurisdictions for which the Company does not currently receive a tax benefit.
The Company’s Board of Directors authorized a share repurchase plan in the fourth quarter of 2015, authorizing the purchase of up to $75 millionInternal Revenue Service is currently conducting examinations of the Company’s common stock throughfederal income tax returns for 2012 and including September 2017. Under2013. The Company cannot reasonably determine if these examinations will have a material impact on its financial statements and cannot predict the program, commontiming regarding resolution of these tax examinations.
12. Earnings per share repurchases(“EPS”)
For the three and six months ended June 30, 2017 and 2016, no adjustments were made to date have consistednet income (loss) for purposes of open market transactions at prevailing market prices in accordance with the guidelines specified under Rule 10b-18calculating basic and diluted EPS. The following is a reconciliation of the Exchange Act, thoughweighted average shares used in diluted EPS computations.
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Weighted average common shares-basic |
|
| 18,050,551 |
|
|
| 18,147,681 |
|
|
| 18,015,308 |
|
|
| 18,312,781 |
|
Effect of dilutive securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unexercised stock options and stock purchase plan |
|
| 156,109 |
|
|
| — |
|
|
| 115,560 |
|
|
| — |
|
Unvested time-based restricted stock awards |
|
| 136,378 |
|
|
| — |
|
|
| 157,182 |
|
|
| — |
|
Weighted average common shares-diluted |
|
| 18,343,038 |
|
|
| 18,147,681 |
|
|
| 18,288,050 |
|
|
| 18,312,781 |
|
There were 462,146 and 532,277 outstanding options, restricted stock, and performance-based or market-based equity awards not included in the Company may also make repurchases through block trades or privately negotiated transactions. Repurchases may be made from cash on hand, cash generated from operations, and/or borrowings under the Company’s secured revolving credit facility. The program does not obligate the Company to acquire any specific number of shares and may be discontinued at any time. During the quarter ended September 30, 2016, the Company repurchased 253,063 shares of common stock for $11.1 million with an average pricediluted earnings per share computation for the three months ended June 30, 2017 and 2016, respectively, and 506,964 and 499,620 outstanding options, restricted stock, and performance-based or market-based equity awards not included in the diluted earnings per share computation for the six months ended June 30, 2017 and 2016, respectively, because inclusion of $43.90 which werethese awards was anti-dilutive or, for performance-based and market-based awards, all retired upon repurchase. Asnecessary conditions had not been satisfied by the end of September 30, 2016, there was $8.4 million remaining under this share repurchase authorization. From October 1, 2016, to October 28, 2016, the Company made additional repurchases of 211,671 shares for an amount equal to $8.4 million to complete the share repurchase plan.respective period.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis addresses theof our financial condition and results of our operations which are based upon the condensed consolidated financial statements included herein, which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), for the three and nine months ended September 30, 2016, compared to the three and nine months ended September 30, 2015. These discussions should be read in conjunction with the “Forward-Looking Statements” and our historicalcondensed consolidated financial statements and related notes thereto and the other financial information includedappearing elsewhere in this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2016.10-Q.
GeneralExecutive Summary
We areOrthofix International N.V. (sometimes referred to as “we,” “us” or “our”) is a diversified, global medical device company focused on improving patients’ lives by providing superior reconstructive and regenerative orthopedic and spine solutions to physicians worldwide. Headquartered in Lewisville, Texas, the Company haswe have four strategic business units (SBUs),(“SBUs”) that are also our reporting segments: BioStim, Biologics, Extremity Fixation and Spine Fixation, which are described in further detail below under “Business Segments.” Orthofix®Fixation. Our products are widely distributed via the Company’sby our sales representatives and distributors.
Notable highlights and achievements in the second quarter of 2017 include the following:
Net sales were $108.9 million, an increase of 4.7% on a reported basis and 5.1% on a constant currency basis
Strong performance in our Biologics and Spine Fixation SBUs due to the renewed engagement of our sales partners, the addition of new distributors in underserved markets and its subsidiaries. In addition, Orthofix is collaborating on research and development activities with leading organizations suchour flow of new products to the field
Operating income of $8.0 million, an increase of $10.7 million, compared to operating loss of $2.7 million in the prior year
Results of Operations
The following table provides certain items in our condensed consolidated statements of operations as the Musculoskeletal Transplant Foundation (“MTF”) and the Texas Scottish Rite Hospital for Children.
Our strategy in 2016 has been built upon the following key objectives:a percent of net sales:
|
|
|
|
|
|
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2017 (%) |
|
| 2016 (%) |
|
| 2017 (%) |
|
| 2016 (%) |
| ||||
Net sales |
|
| 100.0 |
|
|
| 100.0 |
|
|
| 100.0 |
|
|
| 100.0 |
|
Cost of sales |
|
| 21.3 |
|
|
| 21.6 |
|
|
| 21.6 |
|
|
| 22.0 |
|
Gross profit |
|
| 78.7 |
|
|
| 78.4 |
|
|
| 78.4 |
|
|
| 78.0 |
|
Sales and marketing |
|
| 46.3 |
|
|
| 44.2 |
|
|
| 46.8 |
|
|
| 44.8 |
|
General and administrative |
|
| 18.7 |
|
|
| 17.8 |
|
|
| 18.3 |
|
|
| 17.5 |
|
Research and development |
|
| 6.4 |
|
|
| 6.6 |
|
|
| 6.7 |
|
|
| 7.1 |
|
Charges related to U.S. Government resolutions |
|
| — |
|
|
| 12.4 |
|
|
| — |
|
|
| 6.4 |
|
Operating income (loss) |
|
| 7.3 |
|
|
| (2.6 | ) |
|
| 6.6 |
|
|
| 2.2 |
|
Net income (loss) from continuing operations |
|
| 4.3 |
|
|
| (6.1 | ) |
|
| 1.1 |
|
|
| (0.9 | ) |
In addition, the North American Spine Society (“NASS”) has issued its first-of-its-kind coverage recommendations for electrical bone growth stimulators. These evidence-based coverage policy recommendations support the use of PEMF devices as an adjunct to spinal fusion surgery. Net Sales by Strategic Business Unit
The just-issued NASS coverage policy recommends the use of electrical stimulation for spinal fusion healing in all regions of the spine, including cervical and lumbar regions. Currently, Orthofix is the only company with a bone growth stimulator approvedfollowing tables provide net sales by the U.S. Food and Drug Administration (“FDA”) as a noninvasive, adjunctive treatment option for cervical fusion. We expect that the validation of PEMF electrical stimulation from this leading surgical society will further support our efforts to expand the availability and use of the therapy to the many patients who can benefit from it.
SBU:
|
| Three Months Ended June 30, |
|
| Percentage Change |
| ||||||||||
(U.S. Dollars, in thousands) |
| 2017 |
|
| 2016 |
|
| Reported |
|
| Constant Currency |
| ||||
BioStim |
| $ | 47,174 |
|
| $ | 44,758 |
|
|
| 5.4 | % |
|
| 5.4 | % |
Biologics |
|
| 15,661 |
|
|
| 14,256 |
|
|
| 9.9 | % |
|
| 9.9 | % |
Extremity Fixation |
|
| 24,747 |
|
|
| 26,817 |
|
|
| -7.7 | % |
|
| -6.0 | % |
Spine Fixation |
|
| 21,360 |
|
|
| 18,244 |
|
|
| 17.1 | % |
|
| 17.1 | % |
Net sales |
| $ | 108,942 |
|
| $ | 104,075 |
|
|
| 4.7 | % |
|
| 5.1 | % |
The table below presents net margin, which is a Non-GAAP measure, which the Company defines as gross profit less sales and marketing expense, by SBU reporting segment for the three and nine months ended September 30, 2016 and 2015:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
| Six Months Ended June 30, |
|
| Percentage Change |
| ||||||||||||||||||||
(U.S. Dollars, in thousands) |
| 2016 |
|
| 2015 |
|
| 2016 |
|
| 2015 |
|
| 2017 |
|
| 2016 |
|
| Reported |
|
| Constant Currency |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Gross profit |
| $ | 78,617 |
|
| $ | 77,286 |
|
| $ | 236,718 |
|
| $ | 226,753 |
| ||||||||||||||||
Sales and marketing |
|
| (41,717 | ) |
|
| (46,129 | ) |
|
| (132,582 | ) |
|
| (133,360 | ) | ||||||||||||||||
Total net margin |
| $ | 36,900 |
|
| $ | 31,157 |
|
| $ | 104,136 |
|
| $ | 93,393 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
BioStim |
| $ | 19,996 |
|
| $ | 16,834 |
|
| $ | 54,980 |
|
| $ | 47,634 |
|
| $ | 91,713 |
|
| $ | 85,802 |
|
|
| 6.9 | % |
|
| 6.9 | % |
Biologics |
|
| 6,821 |
|
|
| 6,296 |
|
|
| 19,642 |
|
|
| 19,525 |
|
|
| 30,648 |
|
|
| 28,350 |
|
|
| 8.1 | % |
|
| 8.1 | % |
Extremity Fixation |
|
| 8,834 |
|
|
| 6,442 |
|
|
| 24,170 |
|
|
| 22,607 |
|
|
| 48,692 |
|
|
| 51,526 |
|
|
| -5.5 | % |
|
| -3.6 | % |
Spine Fixation |
|
| 1,388 |
|
|
| 1,938 |
|
|
| 5,925 |
|
|
| 4,582 |
|
|
| 40,627 |
|
|
| 37,076 |
|
|
| 9.6 | % |
|
| 9.6 | % |
Corporate |
|
| (139 | ) |
|
| (353 | ) |
|
| (581 | ) |
|
| (955 | ) | ||||||||||||||||
Total net margin |
| $ | 36,900 |
|
| $ | 31,157 |
|
| $ | 104,136 |
|
| $ | 93,393 |
| ||||||||||||||||
Net sales |
| $ | 211,680 |
|
| $ | 202,754 |
|
|
| 4.4 | % |
|
| 4.9 | % |
BioStim
The BioStim SBU manufactures, distributes, and provides support services of market leading devices that enhance bone fusion. These Class III medical devices are indicated as an adjunctive, noninvasive treatment to improve fusion success rates in cervical and lumbar spine as well as a therapeutic treatment for non-spine fractures that have not healed (non-unions). These devices utilize pulsed electromagnetic field technology, which is supported by strong basic mechanism of action data in the scientific literature and as well as strong level one randomized controlled clinical trials in the medical literature. Current research and clinical studies are also underway to identify potential new clinical indications. This SBUBioStim uses distributors and sales representatives to sell its devices to hospitals, doctors, and other healthcare providers, and patients, primarily inpatients.
Three months ended June 30, 2017 compared to 2016
Net sales increased $2.4 million, or 5.4%, as we continue to leverage the U.S.engagement of our expansive sales force, the positive North American Spine Society (“NASS”) coverage recommendation and the launch of our next generation products
Six months ended June 30, 2017 compared to 2016
Net sales increased $5.9 million, or 6.9%, as we continue to leverage the engagement of our expansive sales force, the positive NASS coverage recommendation and the launch of our next generation products
Biologics
The Biologics SBU provides a portfolio of regenerative products and tissue forms that allow physicians to successfully treat a variety of spinal and orthopedic conditions. This SBU specializes in the marketing of the Company’s regenerative tissue forms. Biologics markets its tissues primarily in the U.S. through a network of distributors and independent sales representatives and affiliates to supply to hospitals, doctors, and other healthcare providers, primarilyproviders.
Three months ended June 30, 2017 compared to 2016
Net sales increased $1.4 million or 9.9%
Increase in the U.S. Our partnership with the MTF allows us to exclusively marketvolume for our Trinity Evolutionproducts driven by the addition of new distributors over the past twelve months
Benefit from improving performance from our national distribution partner and the reacquisition of a national hospital contract
Six months ended June 30, 2017 compared to 2016
Net sales increased $2.3 million or 8.1%
Increase in volume for our Trinity ELITE tissue forms for musculoskeletal defects to enhance bony fusion.products driven by the addition of new distributors over the past twelve months
Benefit from improving performance from our national distribution partner and the reacquisition of a national hospital contract
Extremity Fixation
The Extremity Fixation SBU offers products and solutions that allow physicians to successfully treat a variety of orthopedic conditions unrelated to the spine. This SBU specializes in the design, development, and marketing of the Company’s orthopedic products used in fracture repair, adult and pediatric deformity correction and bone reconstruction procedures, including for the foot and ankle. Extremity Fixation distributes its products globally through a network of distributors and sales representatives and affiliates to sell orthopedic products to hospitals, doctors, and other health providers, globally.providers.
Three months ended June 30, 2017 compared to 2016
Net sales decreased $2.0 million or 7.7%
Decrease related to our international restructuring, which consists of the divestiture of a non-core business in the United Kingdom and a reduction in sales in Brazil and Puerto Rico as we convert from a direct sales model to the use of stocking distributors of $1.0 million
Decrease as a result of changes in foreign currency exchange rates of $0.5 million
Decrease in year-over-year cash collections for the quarter from international distributors whose revenue is recognized upon cash receipt
Partially offset by growth in the U.S., largely due to the continued adoption of our TL-HEX product line
Six months ended June 30, 2017 compared to 2016
Net sales decreased $2.8 million or 5.5%
Decrease related to our international restructuring, which consists of the divestiture of a non-core business in the United Kingdom and a reduction in sales in Brazil and Puerto Rico as we convert from a direct sales model to the use of stocking distributors of $1.5 million
Decrease as a result of changes in foreign currency exchange rates of $1.0 million
Decrease in year-over-year cash collections for the quarter from international distributors whose revenue is recognized upon cash receipt
Partially offset by growth in the U.S., largely due to the continued adoption of our TL-HEX product line
Spine Fixation
The Spine Fixation SBU specializes in the design, development and marketing of a broad portfolio of implant products used in surgical procedures of the spine. Spine Fixation distributes its products globally through a network of distributors and sales representatives and affiliates to sell spine products to hospitals, doctors and other healthcare providers, globally.providers.
CorporateThree months ended June 30, 2017 compared to 2016
Corporate activities are comprisedNet sales increased $3.1 million or 17.1%
Increase in U.S. sales due to the addition of new distributor partners in the operating expenseslast several quarters, the uptake of Orthofix International N.V.recent product introductions, and its holding company subsidiaries, along with activities not necessarily identifiable withinimproved distributor engagement
Partially offset by a decrease in year-over-year international sales, largely due to a decrease in cash collections for the four SBUs.quarter from international distributors whose revenue is recognized upon cash receipt
Six months ended June 30, 2017 compared to 2016
Net sales increased $3.6 million or 9.6%
Increase in U.S. sales due to the addition of new distributor partners in the last several quarters, the uptake of recent product introductions, and improved distributor engagement
Partially offset by a decrease in year-over-year international sales, largely due to a decrease in cash collections for the quarter from international distributors whose revenue is recognized upon cash receipt
Gross Profit and Non-GAAP Net Margin
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||||||||||
(U.S. Dollars, in thousands) |
| 2017 |
|
| 2016 |
|
| % Change |
|
| 2017 |
|
| 2016 |
|
| % Change |
| ||||||
Gross profit |
| $ | 85,765 |
|
| $ | 81,559 |
|
|
| 5.2 | % |
| $ | 165,922 |
|
| $ | 158,101 |
|
|
| 4.9 | % |
Sales and marketing |
|
| (50,471 | ) |
|
| (46,043 | ) |
|
| 9.6 | % |
|
| (99,003 | ) |
|
| (90,865 | ) |
|
| 9.0 | % |
Non-GAAP net margin |
| $ | 35,294 |
|
| $ | 35,516 |
|
|
| -0.6 | % |
| $ | 66,919 |
|
| $ | 67,236 |
|
|
| -0.5 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
| 78.7 | % |
|
| 78.4 | % |
|
| 0.3 | % |
|
| 78.4 | % |
|
| 78.0 | % |
|
| 0.4 | % |
Non-GAAP net margin as a percentage of net sales |
|
| 32.4 | % |
|
| 34.1 | % |
|
| -1.7 | % |
|
| 31.6 | % |
|
| 33.2 | % |
|
| -1.6 | % |
The following table presents certain items in our condensed consolidated statements of operations as a percentage of total net sales for the periods indicated:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2016 (%) |
|
| 2015 (%) |
|
| 2016 (%) |
|
| 2015 (%) |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
| 100.0 |
|
|
| 100.0 |
|
|
| 100.0 |
|
|
| 100.0 |
|
Cost of sales |
|
| 20.2 |
|
|
| 23.6 |
|
|
| 21.4 |
|
|
| 22.3 |
|
Gross profit |
|
| 79.8 |
|
|
| 76.4 |
|
|
| 78.6 |
|
|
| 77.7 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
| 42.4 |
|
|
| 45.6 |
|
|
| 44.0 |
|
|
| 45.7 |
|
General and administrative |
|
| 18.9 |
|
|
| 19.1 |
|
|
| 17.7 |
|
|
| 21.7 |
|
Research and development |
|
| 7.0 |
|
|
| 6.4 |
|
|
| 7.1 |
|
|
| 6.4 |
|
Restatements and related costs |
|
| 0.7 |
|
|
| 1.1 |
|
|
| 0.5 |
|
|
| 3.3 |
|
Charges related to U.S. Government resolutions |
|
| 1.4 |
|
|
| — |
|
|
| 4.8 |
|
|
| — |
|
Operating income |
|
| 9.4 |
|
|
| 4.2 |
|
|
| 4.5 |
|
|
| 0.6 |
|
Net income (loss) |
|
| 10.0 |
|
|
| (1.4 | ) |
|
| 2.1 |
|
|
| (2.1 | ) |
Three and Nine Months Ended September 30, 2016 Compared to Three and Nine Months Ended September 30, 2015
Net Sales
The tables below present net sales by SBU reporting segment for the three and nine months ended SeptemberJune 30, 2016 and 2015. Constant currency, a Non-GAAP measure presented below, measures revenue using foreign currency rates from the comparable, prior-year period, to present revenue at comparable rates. Constant currency is used by the Company’s management to compare revenues with and without the impact of changes in foreign currencies.
|
| Three Months Ended September 30, |
| |||||||||||||
(U.S. Dollars, in thousands) |
| 2016 |
|
| 2015 |
|
| Change |
|
| Constant Currency Change |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BioStim |
| $ | 42,956 |
|
| $ | 41,559 |
|
|
| 3.4 | % |
|
| 3.4 | % |
Biologics |
|
| 14,335 |
|
|
| 14,639 |
|
|
| (2.1 | )% |
|
| (2.1 | )% |
Extremity Fixation |
|
| 24,314 |
|
|
| 24,694 |
|
|
| (1.5 | )% |
|
| 0.0 | % |
Spine Fixation |
|
| 16,892 |
|
|
| 20,259 |
|
|
| (16.6 | )% |
|
| (16.7 | )% |
Total net sales |
| $ | 98,497 |
|
| $ | 101,151 |
|
|
| (2.6 | )% |
|
| (2.3 | )% |
|
| Nine Months Ended September 30, |
| |||||||||||||
(U.S. Dollars, in thousands) |
| 2016 |
|
| 2015 |
|
| Change |
|
| Constant Currency Change |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BioStim |
| $ | 128,758 |
|
| $ | 119,962 |
|
|
| 7.3 | % |
|
| 7.3 | % |
Biologics |
|
| 42,685 |
|
|
| 43,874 |
|
|
| (2.7 | )% |
|
| (2.7 | )% |
Extremity Fixation |
|
| 75,840 |
|
|
| 72,103 |
|
|
| 5.2 | % |
|
| 8.1 | % |
Spine Fixation |
|
| 53,968 |
|
|
| 55,928 |
|
|
| (3.5 | )% |
|
| (3.4 | )% |
Total net sales |
| $ | 301,251 |
|
| $ | 291,867 |
|
|
| 3.2 | % |
|
| 3.9 | % |
For the third quarter, net sales decreased $2.7 million, or 2.6%, when2017 compared to 2016
Gross profit, sales and marketing expense, and non-GAAP net margin, an internal metric that we define as gross profit less sales and marketing expense changed as follows:
Gross profit increased $4.2 million, primarily due to the same period of the prior year. Excluding the impact of foreign currency,growth in net sales for the third quarter decreased by approximately $2.3
Sales and marketing expense increased $4.4 million, or 2.3%, when comparedprimarily due to the same perioda higher mix of sales from new distributors in the prior year. For theBiologics, who typically receive higher commissions in their first nine months of 2016, net sales increased $9.4 million, or 3.2%, when compared to the same period of the prior year. Excluding the impact of foreign currency, net sales for the first nine months increased by approximately $11.5 million, or 3.9%, when compared to the same periodyear, and higher spending in the prior year.
Net Sales by SBU
For the third quarter, net sales in our BioStim SBU increased $1.4 million, or 3.4%, as compared to the same period in the prior year. For the first nine months of 2016, net sales in our BioStim SBU increased $8.8 million, or 7.3%, as compared to the same period in the prior year. The growth was primarily driven by increased order counts from an expanding customer base and our order to cash process improvements that increased the overall percentage that we collect on orders and therefore increased net sales.
For the third quarter, net sales in our Biologics SBU decreased $0.3 million, or 2.1%, as compared to the same period in the prior year. Although volume increased for our Trinity ELITE tissue form in the U.S., this increase was offset by an increasing number of competitors in the stem cell allograft market and an associated reduction in average selling price for our products as compared to the same period in the prior year. For the first nine months of 2016, net sales in our Biologics SBU decreased $1.2 million, or 2.7%, as compared to the same period in the prior year. This decrease was primarily driven by the exclusion from a large national hospital account, the addition of competing product offerings and a low single-digit average selling price decrease.
For the third quarter, net sales in our Extremity Fixation SBU decreased $0.4 million, or 1.5%, as comparedrelated to the same period in the prior year, driven by a negative impact from foreign currency translation of $0.4 million. Excluding the impact of foreign currency, netour sales for the third quarter were consistent with the same period in the prior year. For the first nine months of 2016, net sales in our Extremity Fixation SBU increased $3.7 million, or 5.2%, as compared to the same period in the prior year, despite a negative impact from foreign currency translation of $2.1 million. Excluding the impact of foreign currency, net sales in the first nine months of 2016 for our Extremity Fixation SBU increased $5.8 million, or 8.1%, primarily driven by growth in the U.S.
Non-GAAP net margin decreased by $0.2 million as a result of the increased adoption of our TL-HEX systemchanges in gross profit and higher international cash collections.
For the third quarter, net sales in our Spine Fixation SBU decreased $3.4 million, or 16.6%, asand marketing expense
Six months ended June 30, 2017 compared to the same period in the prior year. For the first nine months of 2016
Gross profit, sales and marketing expense, and non-GAAP net margin, an internal metric that we define as gross profit less sales in our Spine Fixation SBU decreased $2.0and marketing expense changed as follows:
Gross profit increased $7.8 million, or 3.5%, as compared to the same period in the prior year. These decreases were primarily due to the timinggrowth in net sales
Sales and marketing expense increased $8.1 million, primarily due to a higher mix of international cash collections, the loss of several key surgeon customerssales from new distributors in Biologics and Spine Fixation, who typically receive higher commissions in their first year, and higher spending in Extremity Fixation related to our sales growth in the U.S. and exclusion from
Non-GAAP net margin decreased by $0.3 million as a large national hospital account.
Gross Profit
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(U.S. Dollars, in thousands) |
| 2016 |
|
| 2015 |
|
| 2016 |
|
| 2015 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
| $ | 98,497 |
|
| $ | 101,151 |
|
| $ | 301,251 |
|
| $ | 291,867 |
|
Cost of sales |
|
| 19,880 |
|
|
| 23,865 |
|
|
| 64,533 |
|
|
| 65,114 |
|
Total gross profit |
| $ | 78,617 |
|
| $ | 77,286 |
|
| $ | 236,718 |
|
| $ | 226,753 |
|
For the third quarter, gross profit increased by $1.3 million, or 1.7%, and increased $10.0 million, or 4.4% in the first nine months of 2016, when compared to the same period in the prior year. Gross margin was 79.8% in the third quarter of 2016 compared to 76.4% for the same periodresult of the prior year and was 78.6% in the first nine months of 2016 compared to 77.7% for the same period of the prior year. The increaseschanges in gross profit and gross margin were primarily driven by lower fixed costs and an increased sales mix for our BioStim products, which have higher margins, compared to our other products.
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(U.S. Dollars, in thousands) |
| 2016 |
|
| 2015 |
|
| 2016 |
|
| 2015 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
| $ | 41,717 |
|
| $ | 46,129 |
|
| $ | 132,582 |
|
| $ | 133,360 |
|
General and administrative |
|
| 18,581 |
|
|
| 19,348 |
|
|
| 53,341 |
|
|
| 63,423 |
|
Research and development |
|
| 6,858 |
|
|
| 6,523 |
|
|
| 21,294 |
|
|
| 18,819 |
|
Restatements and related costs |
|
| 691 |
|
|
| 1,147 |
|
|
| 1,481 |
|
|
| 9,276 |
|
Charges related to U.S. Government resolutions |
|
| 1,499 |
|
|
| – |
|
|
| 14,369 |
|
|
| – |
|
Total operating expenses |
| $ | 69,346 |
|
| $ | 73,147 |
|
| $ | 223,067 |
|
| $ | 224,878 |
|
Sales and Marketing Expense
For the third quarter, sales and marketing expense decreased $4.4 million, or 9.6%, when compared to
The following table provides non-GAAP net margin by SBU. The reasons for the same periodchanges in non-GAAP net margin by SBU are generally consistent with the prior year. The decrease was primarily due to bad debt expenseinformation provided above for Puerto Rico in the third quarter of 2015gross profit and a reduction of certain indirect tax liabilities in the current quarter. As a percentage of net sales, sales and marketing expense was 42.4% and 45.6% in the third quarter of 2016 and 2015, respectively.expense.
For the first nine months of 2016, sales and marketing expense decreased $0.8 million, or 0.6%, when compared to the same period in the prior year. The decrease was primarily due to bad debt expense for Puerto Rico in the prior year and a reduction of certain indirect tax liabilities in the current quarter, partially offset by an increase in commissions. As a percentage of net sales, sales and marketing expense was 44.0% and 45.7% in the first nine months of 2016 and 2015, respectively.
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||||||||||
(U.S. Dollars, in thousands) |
| 2017 |
|
| 2016 |
|
| % Change |
|
| 2017 |
|
| 2016 |
|
| % Change |
| ||||||
BioStim |
| $ | 19,469 |
|
| $ | 18,575 |
|
|
| 4.8 | % |
| $ | 36,602 |
|
| $ | 34,983 |
|
|
| 4.6 | % |
Biologics |
|
| 6,470 |
|
|
| 6,718 |
|
|
| -3.7 | % |
|
| 12,641 |
|
|
| 12,822 |
|
|
| -1.4 | % |
Extremity Fixation |
|
| 6,766 |
|
|
| 8,161 |
|
|
| -17.1 | % |
|
| 13,178 |
|
|
| 15,336 |
|
|
| -14.1 | % |
Spine Fixation |
|
| 2,696 |
|
|
| 2,201 |
|
|
| 22.5 | % |
|
| 4,703 |
|
|
| 4,536 |
|
|
| 3.7 | % |
Corporate |
|
| (107 | ) |
|
| (139 | ) |
|
| -23.0 | % |
|
| (205 | ) |
|
| (441 | ) |
|
| -53.5 | % |
Non-GAAP net margin |
| $ | 35,294 |
|
| $ | 35,516 |
|
|
| -0.6 | % |
| $ | 66,919 |
|
| $ | 67,236 |
|
|
| -0.5 | % |
General and Administrative Expense
For the third quarter, general
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||||||||||
(U.S. Dollars, in thousands) |
| 2017 |
|
| 2016 |
|
| % Change |
|
| 2017 |
|
| 2016 |
|
| % Change |
| ||||||
General and administrative |
| $ | 20,409 |
|
| $ | 18,545 |
|
|
| 10.1 | % |
| $ | 38,691 |
|
| $ | 35,550 |
|
|
| 8.8 | % |
As a percentage of net sales |
|
| 18.7 | % |
|
| 17.8 | % |
|
| 0.9 | % |
|
| 18.3 | % |
|
| 17.5 | % |
|
| 0.8 | % |
Three months ended June 30, 2017 compared to 2016
General and administrative expense decreased $0.8 million, or 4.0%, when compared to the same period in the prior year. The decrease was primarily driven by a commercial litigation settlement whereby the Company will receive a $3.0 million cash payment, a decrease in other professional fees and consulting costs ofincreased $1.9 million
Increase in spending related to strategic initiatives of $2.0 million and a decrease due to the moratorium on the medical device tax, partially offset by an increaselegal settlements of $1.4 million
Increase in share-based compensation expense of $5.8$0.6 million which included $4.8related to performance-based and market-based awards
Partially offset by a reduction in Project Bluecore expenses of $1.3 million as the project was completed in 2016
Further offset by $1.0 million in expense associated with the vesting probability of the Company’s 2014cost containment in professional fees within our finance and 2015 performance-based restricted stock grants. As a percentage of net sales, generallegal departments
Six months ended June 30, 2017 compared to 2016
General and administrative expense was 18.9%increased $3.1 million
Increase in spending related to strategic initiatives of $3.3 million and 19.1%legal settlements of $1.6 million
Increase in the third quarter of 2016 and 2015, respectively.
For the first nine months of 2016, general and administrative expense decreased $10.1 million, or 15.9%, when compared to the same period in the prior year. The decrease was primarily driven by decreases in other professional and consulting fees of $6.7 million, largely associated with the Company’s internal control remediation efforts and project Bluecore in the prior year, commercial litigation settlement whereby the Company will receive a $3.0 million cash payment, legal costs of $1.1 million due to a legal judgment incurred in the prior year, a decrease of $1.0 million due to the moratorium on the medical device tax in 2016, and reductions in controllable expenses. These decreases were partially offset by an increase in compensation related costs, including share-based compensation expense of $5.0 million. As$1.2 million related to performance-based and market-based awards
Partially offset by a percentagereduction in Project Bluecore expenses of net sales, general and administrative expense$2.2 million as the project was 17.7% and 21.7%completed in the first nine months of 2016 and 2015, respectively.
• | Further offset by $0.5 million cost containment in professional fees within our finance and legal departments |
Research and Development Expense
For the third quarter, research
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||||||||||
(U.S. Dollars, in thousands) |
| 2017 |
|
| 2016 |
|
| % Change |
|
| 2017 |
|
| 2016 |
|
| % Change |
| ||||||
Research and development |
| $ | 6,887 |
|
| $ | 6,796 |
|
|
| 1.3 | % |
| $ | 14,311 |
|
| $ | 14,436 |
|
|
| -0.9 | % |
As a percentage of net sales |
|
| 6.4 | % |
|
| 6.6 | % |
|
| -0.2 | % |
|
| 6.7 | % |
|
| 7.1 | % |
|
| -0.4 | % |
Three months ended June 30, 2017 compared to 2016
Research and development expense increased $0.3by less than $0.1 million or 5.1%, when compared to the same period in the prior year. The increase was primarily driven by increased costs associated with clinical studies of $0.8 million. As a percentage of net sales, researchyear
Six months ended June 30, 2017 compared to 2016
Research and development expense was 7.0% and 6.4% in the third quarter of 2016 and 2015, respectively.
For the first nine months of 2016, research and development expense increased $2.5decreased by $0.1 million or 13.2%, when compared to the same period in the prior year. The increase was primarily driven by a $1.3 million investment made in the first quarter of 2016 to expand the processing and storage capabilities of MTF, the supplier of our Trinity Evolution and Trinity ELITE tissue forms, and increased costs associated with clinical studies of $0.9 million. As a percentage of net sales, research and development expense was 7.1% and 6.4% in the first nine months of 2016 and 2015, respectively.year
Restatements and Related Costs
The costs incurred in 2016 are primarily continuing legal fees incurred as part of the SEC Investigation, resulting from the Company’s two prior financial restatements, which are expected to continue to decline in future periods. The costs incurred in 2015 were related to the second of these two restatements and legal costs from the resulting SEC investigation and class action complaint.
Charges Related to U.S. Government Resolutions
The Company recorded $1.5
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||||||||||
(U.S. Dollars, in thousands) |
| 2017 |
|
| 2016 |
|
| % Change |
|
| 2017 |
|
| 2016 |
|
| % Change |
| ||||||
Charges related to U.S. Government resolutions |
| $ | — |
|
| $ | 12,870 |
|
|
| -100.0 | % |
| $ | — |
|
| $ | 12,870 |
|
|
| -100.0 | % |
As a percentage of net sales |
|
| 0.0 | % |
|
| 12.4 | % |
|
| -12.4 | % |
|
| 0.0 | % |
|
| 6.4 | % |
|
| -6.4 | % |
Three and Six months ended June 30, 2017 compared to 2016
Decrease of $12.9 million and $14.4 millionrelated to charges for the third quarter and the first nine months of 2016, respectively. These charges relate to our ongoing settlement discussionssettlements with the Division of Enforcement of the SEC in 2016 related to the SEC’s investigation of (1) our prior accounting review and restatements of financial statements and (2) allegations of improper payments with respect to our Brazil-based subsidiary.in Brazil. For additional information, see Note 1112 within our Form 10-K for the year ended December 31, 2016.
Non-operating Income and Expense
In the first quarter of 2017, we recorded an other-than-temporary impairment on the eNeura debt security of $5.6 million before income taxes. For additional discussion see Note 5 to the Notes to the Unaudited Condensed Consolidated Financial Statements.
Non-operating Income and ExpenseTaxes
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(U.S. Dollars, in thousands) |
| 2016 |
|
| 2015 |
|
| 2016 |
|
| 2015 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net |
| $ | 471 |
|
| $ | (125 | ) |
| $ | 320 |
|
| $ | (323 | ) |
Other (expense) income, net |
|
| (634 | ) |
|
| (1,736 | ) |
|
| 1,346 |
|
|
| (192 | ) |
Total non-operating (loss) income |
| $ | (163 | ) |
| $ | (1,861 | ) |
| $ | 1,666 |
|
| $ | (515 | ) |
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||||||||||
(U.S. Dollars, in thousands) |
| 2017 |
|
| 2016 |
|
| % Change |
|
| 2017 |
|
| 2016 |
|
| % Change |
| ||||||
Income tax expense |
| $ | 3,924 |
|
| $ | 3,685 |
|
|
| 6.5 | % |
| $ | 7,848 |
|
| $ | 7,979 |
|
|
| -1.6 | % |
Effective tax rate |
|
| 45.3 | % |
|
| -138.5 | % |
|
| 183.8 | % |
|
| 76.4 | % |
|
| 128.5 | % |
|
| -52.1 | % |
Interest Income (Expense), Net
Interest income, net was $0.5 million in the third quarterThree months ended June 30, 2017 compared to interest expense, net of $0.1 million for the same period2016
The increase in the prior year. Interest income, net was $0.3 million for the first nine months of 2016 compared to interest expense, net of $0.3 million for the same period in the prior year.
Other (Expense) Income, Net
Other expense, net was $0.6 million in the third quarter as compared to $1.7 million for the same period in the prior year. Other income, net was $1.3 million for the first nine months of 2016 compared to other expense, net of $0.2 million for the same period in the prior year. The quarter to date and year to date increases were primarily driven by favorable impacts of foreign exchange rates of $1.1 million and $4.8 million when compared to the prior year, respectively, with the year to date increase partially offset by a $3.1 million gain on the sale of the Company’s Tempus Cervical Plate product line in 2015.
Income Taxes
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(U.S. Dollars, in thousands) |
| 2016 |
|
| 2015 |
|
| 2016 |
|
| 2015 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (expense) from continuing operations |
| $ | 1,276 |
|
| $ | (3,066 | ) |
| $ | (6,703 | ) |
| $ | (5,808 | ) |
Effective tax rate |
|
| (14.0 | )% |
|
| 134.6 | % |
|
| 43.8 | % |
|
| 427.1 | % |
For the third quarter, our effective tax rate on continuing operations was (14.0)%, resulting in a benefit of $1.3 million, as compared to 134.6%, resulting in expense of $3.1 million, for the same period in the prior year. Excluding the impact of discrete tax items, the effective tax rate on continuing operationsis due to charges related to U.S. Government resolutions which were non-deductible for the third quarter of 2016tax purposes and 2015 was 29.2% and 63.3%, respectively. In the first nine months of 2016, our effective tax rate on continuing operations was 43.8%, or $6.7 million, as compared to 427.1%, or $5.8 million, for the same perioddid not recur in the prior year. Excluding the impact of discrete tax items, the effective tax rate on continuing operations for the first nine months of 2016 and 2015 was 66.5% and 279.2%, respectively.
2017. The primary factors affecting the Company’sour effective tax rate for the three and nine months ended September 30, 2016, were expense categorizedsecond quarter of 2017 are as “Charges related to US Government Resolutions”, which represents anticipated settlement payments with substantially no tax benefit, and a change in estimate relating to the deductibility of certain compensation expenses. Other factors affecting the Company’s effective tax rate for the three and nine months ended September 30, 2016, and 2015 were thefollows:
The mix of earnings among tax jurisdictions state taxes, and current
Current period losses in certain jurisdictions for which the Company doeswhere we do not currently receive a tax benefit.benefit
Six months ended June 30, 2017 compared to 2016
The decrease in the effective tax rate was primarily a result of the following factors:
• | Charges related to U.S. Government resolutions in 2016, which were non-deductible for tax purposes, that did not recur in 2017 |
Net loss from discontinued operations was approximately $0.5 million and $2.3 millionThe primary factors affecting our effective tax rate for the third quarter and for the first ninesix months ended June 30, 2017 are as follows:
The mix of 2016, respectively, as compared to net loss of $0.6 million and $1.7 million for the same periodsearnings among tax jurisdictions
Current period losses in the prior year. The activity in discontinued operations is comprised of legal settlements and legal costs, net of income taxes, related to certain specified product liability matters related to our former subsidiary, Breg. We previously agreed to indemnify Breg and its purchaser with respect to such matters as part of the original sale agreement entered into in 2012.jurisdictions where we do not currently receive a tax benefit
Liquidity and Capital Resources
Cash Flow
Cash and cash equivalents at SeptemberJune 30, 2016, was $46.82017, were $44.3 million compared to cash and cash equivalents of $63.7$39.6 million at December 31, 2015.2016.
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| Nine Months Ended September 30, |
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(U.S. Dollars, in thousands) |
| 2016 |
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| 2015 |
|
| Change |
| |||
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|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
| $ | 38,396 |
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| $ | 26,539 |
|
| $ | 11,857 |
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Net cash used in investing activities |
|
| (17,874 | ) |
|
| (31,649 | ) |
|
| 13,775 |
|
Net cash (used in) provided by financing activities |
|
| (37,662 | ) |
|
| 34,370 |
|
|
| (72,032 | ) |
Effect of exchange rate changes on cash |
|
| 301 |
|
|
| (2,381 | ) |
|
| 2,682 |
|
Net (decrease) increase in cash and cash equivalents |
| $ | (16,839 | ) |
| $ | 26,879 |
|
| $ | (43,718 | ) |
|
| Six Months Ended June 30, |
| |||||||||
(U.S. Dollars, in thousands) |
| 2017 |
|
| 2016 |
|
| Change |
| |||
Net cash from operating activities |
| $ | 9,727 |
|
| $ | 21,373 |
|
| $ | (11,646 | ) |
Net cash from investing activities |
|
| (8,119 | ) |
|
| (13,969 | ) |
|
| 5,850 |
|
Net cash from financing activities |
|
| 2,431 |
|
|
| (30,850 | ) |
|
| 33,281 |
|
Effect of exchange rate changes on cash |
|
| 719 |
|
|
| 265 |
|
|
| 454 |
|
Net change in cash and cash equivalents |
| $ | 4,758 |
|
| $ | (23,181 | ) |
| $ | 27,939 |
|
The following table presents free cash flow, a non-GAAP financial measure, which is calculated by subtracting capital expenditures from net cash from operating activities.
|
| Six Months Ended June 30, |
| |||||||||
(U.S. Dollars, in thousands) |
| 2017 |
|
| 2016 |
|
| Change |
| |||
Net cash from operating activities |
| $ | 9,727 |
|
| $ | 21,373 |
|
| $ | (11,646 | ) |
Capital expenditures |
|
| (8,593 | ) |
|
| (10,356 | ) |
|
| 1,763 |
|
Free cash flow |
| $ | 1,134 |
|
| $ | 11,017 |
|
| $ | (9,883 | ) |
Operating Activities
Net cash provided byCash flows from operating activities increaseddecreased $11.6 million
Increase in net income of $4.8 million
Net increase of $10.6 million for non-cash gains and losses, largely related to the nine months ended September 30, 2016 largelyother-than-temporary impairment on the eNeura debt security in the first quarter of 2017, deferred income tax expense, and share-based compensation expense
Net decrease of $27.0 million relating to changes in working capital accounts, primarily attributable to changes in other current liabilities as a result of U.S. Government resolutions (discussed in further detail below), an increase in our inventory balance as a result of new product introductions, and accounts receivable as a result of the increase in net income assales
Our two primary working capital accounts are accounts receivable and inventory. Days sales in receivables were 51 days at June 30, 2017 compared to the same period in the prior year. Net income increased $12.5 million to net income49 days at June 30, 2016. Inventory turns were 1.2 times as of $6.3 million for the nine months ended SeptemberJune 30, 2016, as2017 compared to net loss1.5 times at June 30, 2016. The decline in inventory turns reflects the new product introductions in our Spine Fixation and Extremity Fixation SBUs.
U.S. Government Resolutions
In January 2017, the U.S. Securities and Exchange Commission (the “SEC”) approved our offers of $6.2 million for the comparable prior year period.
Investing Activities
Net cash used in investing activities decreased for the nine months ended September 30, 2016 due to the purchase of debt securitiessettlement in connection with the Option Agreement with eNeuraSEC’s investigations of $15.3accounting matters leading to our prior restatement of financial statements and our review of improper payments in Brazil. The settlements approved by the SEC resolved these two matters, and included payments to the SEC of amounts previously accrued and funded into escrow during 2016.
Investing Activities
Cash flows from investing activities increased $5.9 million in the first quarter
• | Increase of $3.6 million from the purchase of certain inventory and intellectual property assets of $2.6 million and our additional investment in Bone Biologics, Inc. of $1.0 million during 2016 |
Increase of 2015 and a decrease in$1.8 million related to reduced capital expenditures, largely as a result of $6.9 million. These decreases were partially offset by proceeds from the sale of assets of $4.8 millioncompleting Project Bluecore in the prior year, the purchase of certain inventory and intellectual property assets of $2.6 million in the second quarter of 2016 and an increase in our investment in Bone Biologics, Inc. of $1.0 million in the first quarter of 2016.
Financing Activities
Net cashCash flows from financing activities decreased for the nine months ended September 30, 2016 largely dueincreased $33.3 million
Increase of $43.9 million related to the repurchases of the Company’s common stock under the share repurchase plan, authorizedwhich was completed in 2016
Partially offset by the Board of Directors and the removal of the restricted cash requirement associated with the Company’s credit facility in the prior year. During the first nine months of 2016, the Company repurchased approximately 1.3 million shares for $55.0 million. The removal of the restricted cash requirement associated with the Company’s credit facility also resulted in a decrease in cash flows from financing activities of $34.4 million when compared to the prior year. During the nine months ended September 30, 2016 and 2015, the Company also receivednet proceeds of $17.3$10.6 million and $1.7 million, respectively, from the issuance of common stock, net of any shares withheld to cover the Company’s statutory income tax withholding obligation. Also, in connection with the Company’s credit facility, the Company paid $1.7 million in debt issuance costs during the nine months ended September 30, 2015.
Infrastructure Initiative
In 2014, we initiated project Bluecore to improve the reliability and efficiency of our systems, processes and reporting as well as drive down our overhead expenses. In addition to re-implementing our Oracle ERP platform in the U.S. and Italy, this initiative improved supply chain management, simplified finance and accounting procedures and allowed the Company to reduce the use of manual and redundant processes. The Company’s re-implementation of its Oracle ERP platform was placed into production in the U.S. and Italy in the second and third quarters of 2016, respectively. For the nine months ended September 30, 2016, the Company spent $6.4 million pursuant to this initiative, $3.3 million of which was capitalized. Over the life of the project, the Company has spent
$26.6 million, of which $18.1 million has been capitalized. We expect to spend an additional $0.8 million over the remainder of the project.
Credit Facilities
There have been no material changes to our debt instruments as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015.
Share Repurchase Plan
In August 2015, the Company’s Board of Directors authorized a share repurchase plan, authorizing the purchase of up to $75 million of the Company’s common stock through and including September 2017. Under the program, common share repurchases to date have consisted of open market transactions at prevailing market prices in accordance with the guidelines specified under Rule 10b-18 of the Exchange Act, as amended, though the Company may also make repurchases through block trades or privately negotiated transactions. Repurchases may be made from cash on hand, cash generated from operations, and/or borrowings under the Company’s secured revolving credit facility. The program does not obligate the Company to acquire any specific number of shares and may be discontinued at any time. As of September 30, 2016, the Company had repurchased a cumulative total of 1,627,001 shares of common stock for $66.6 million under this authorization. From October 1, 2016 to October 28, 2016, the Company made additional repurchases of 211,671 shares for an amount equal to $8.4 million to complete the share repurchase plan.2016.
Other
The Company has been engaged in settlement discussions with the SEC Enforcement Staff regarding a resolution of the SEC’s investigation of (1) our prior accounting review and restatements of financial statements and (2) allegations of improper payments involving our Brazil-based subsidiary. Accordingly, the Company has accrued, but not paid as of September 30, 2016, a charge of approximately $14.4 million in connection with these matters. The Company may draw on its credit facility to pay amounts due once a final, definitive resolution of these matters is achieved. For additional information, see Note 11 to the Notes to the Unaudited Condensed Consolidated Financial Statements.
For information regarding Contingencies, see Note 11 to the Notes to the Unaudited Condensed Consolidated Financial Statements contained herein.
As a multinational company, we are subject to certain market risks, including foreign currency. We consider a variety of practices to manage these market risks. For information regarding the derivative instruments the Company owns to manage these risks, see Note 46 to the Notes to the Unaudited Condensed Consolidated Financial Statements contained herein.
Off-balance Sheet Arrangements
As of SeptemberJune 30, 2016,2017, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, cash flows, liquidity, capital expenditures or capital resources that are material to investors.
Contractual Obligations
There have been no material changes in any of our material contractual obligations as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015.2016.
Critical Accounting Policies and Estimates
There have been no material changes to our critical accounting policies,estimates, as described in our Annual Report on Form 10-K for the year ended December 31, 2015, except as described below.
Goodwill and Other Intangible Assets
During the quarter ended September 30, 2016, the Company voluntarily changed its annual goodwill testing date from the end of the fourth quarter, December 31, to the beginning of the fourth quarter, October 1. The Company believes this change in the method of applying the accounting principle is preferable, as it will more closely align the annual impairment testing date with the most current information from our budgeting and strategic planning process and will provide management with additional time to complete its annual
assessment in advance of our year-end reporting. The change will not delay, accelerate or avoid an impairment charge. This change is not applied retrospectively as it is impracticable to do so because retrospective application would require application of significant estimates and assumptions with the use of hindsight. Accordingly, the change will be applied prospectively.2016.
Recently Issued Accounting Pronouncements
See Note 1 of the Notes to the Unaudited Condensed Consolidated Financial Statements for detailed information regarding the status of recently issued accounting pronouncements.
Non-GAAP Financial Measures
We believe that providing non-GAAP financial measures that exclude certain items provides investors with greater transparency to the information used by senior management in its financial and operational decision-making. We believe it is important to provide investors with the same non-GAAP metrics used to supplement information regarding the performance and underlying trends of our business operations in order to facilitate comparisons to historical operating results and internally evaluate the effectiveness of the our operating strategies. Disclosure of these non-GAAP financial measures also facilitates comparisons of our underlying operating performance with other companies in the industry that also supplement their GAAP results with non-GAAP financial measures.
The non-GAAP financial measures used in this filing may have limitations as analytical tools, and should not be considered in isolation or as a replacement for GAAP financial measures. Some of the limitations associated with the use of these non-GAAP financial measures are that they exclude items that reflect an economic cost that can have a material effect on cash flows.
Constant currency is calculated by using foreign currency rates from the comparable, prior-year period, to present net sales at comparable rates. Constant currency can be presented for numerous GAAP measures, but is most commonly used by management to analyze net sales without the impact of changes in foreign currency rates.
Non-GAAP Net Margin
Non-GAAP net margin is an internal metric that we define as gross profit less sales and marketing expense. Non-GAAP net margin is the primary metric used by our Chief Operating Decision Maker in managing the business.
Free Cash Flow
Free cash flow is calculated by subtracting capital expenditures from net cash from operating activities. Free cash flow is an important indicator of how much cash is generated or used by our normal business operations, including capital expenditures. Management uses free cash flow as a measure of progress on its capital efficiency and cash flow initiatives.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a multinational company, we are subject to certain market risks including foreign currency, interest rate, and concentration of credit. We consider a variety of practices to manage these market risks. There have been no material changes to our market risks as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015.2016.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintainsWe maintain disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) designed to provide reasonable assurance that the information required to be disclosed by the Company in the reports that it filesfiled or submitssubmitted under the Exchange Act isare recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. These include controls and procedures designed to ensure that this information is accumulated and communicated to the Company's management, including itsour President and Chief Executive Officer and itsour Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management, with the participation of the President and Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the Company'sour disclosure controls and procedures as of SeptemberJune 30, 2016.2017. Based on this evaluation, the Company'sour President and Chief Executive Officer and theour Chief Financial Officer have concluded that the Company's disclosure controls and procedures were effective as of SeptemberJune 30, 2016.2017.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’sour internal control over financial reporting during the quarter ended SeptemberJune 30, 20162017 that have materially affected, or are reasonably likely to materially affect, the Company’sour internal control over financial reporting.
For information regarding legal proceedings, see Note 116 to the Notes to the Unaudited Condensed Consolidated Financial Statements contained herein, which is incorporated by reference into this Part II, Item 1.
There have been no material changes fromto the risk factors disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2015.2016.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Stock Repurchases Made in the Quarter
Under our share repurchase plan,We have not made any repurchases are being made from time to time in the open market based on market conditions, securities law limitations and other factors. The following table sets forth information with respect to shares of our common stock purchased by the Company during the thirdsecond quarter of 2016.2017.
Period |
| Total Number of Shares Purchased |
|
| Average price Paid Per Share |
|
| Total Number of Shares Purchased under Approved Stock Repurchase Program |
|
| Maximum Dollar Value of Shares Yet to be Purchased under Approved Stock Repurchase Program As of End of Applicable Period |
| ||||
July 2016 |
|
| 45,108 |
|
| $ | 45.83 |
|
|
| 45,108 |
|
| $ | 17,472,275 |
|
August 2016 |
|
| 119,477 |
|
| $ | 43.30 |
|
|
| 119,477 |
|
| $ | 12,299,160 |
|
September 2016 |
|
| 88,478 |
|
| $ | 43.74 |
|
|
| 88,478 |
|
| $ | 8,429,132 |
|
Total |
|
| 253,063 |
|
| $ | 43.90 |
|
|
| 253,063 |
|
| $ | 8,429,132 |
|
Item 3. Defaults Upon Senior Securities
There are no matters to be reported under this heading.Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
There are no matters to be reported under this heading.
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31.1* |
| Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. |
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31.2* |
| Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. |
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32.1* |
| Section 1350 Certifications of each of the Chief Executive Officer and Chief Financial Officer. |
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101* |
| The following materials from this Form 10-Q, formatted in Extensible Business Reporting Language (“XBRL”): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), (iii) Condensed Consolidated Statements of Cash Flows and (iv) related notes, detail tagged. |
* | Filed herewith. |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ORTHOFIX INTERNATIONAL N.V. | ||
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Date: | By: |
| /s/ BRADLEY R. MASON |
| Name: |
| Bradley R. Mason |
| Title: |
| President and Chief Executive Officer |
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Date: | By: |
| /s/ DOUG RICE |
| Name: |
| Doug Rice |
| Title: |
| Chief Financial Officer |
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