Orthofix International Announces 2^nd Quarter 2008 Results

BOSTON--(BUSINESS WIRE)--Orthofix International N.V. (NASDAQ:OFIX) (the Company) announced today that total revenue for the second quarter ended June 30, 2008 was $130.0 million, an increase of 5% over the second quarter of 2007. The impact of foreign currency rates on sales for the second quarter of 2008 was a positive $2.9 million.

Reported second quarter net income totaled $5.8 million, or $0.34 per diluted share. This included non-operating costs of approximately $1.3 million ($887,000 net of tax, or $0.05 per diluted share) associated with the Company’s strategic initiatives. These included the exploration of the potential divestiture of certain fixation assets in its orthopedic division earlier this year, and costs incurred in connection with the execution of development and commercialization agreements with the Musculoskeletal Transplant Foundation (MTF) that was also announced today. Under these new agreements Orthofix will collaborate with MTF to complete the development of and launch a new stem cell-based bone growth biologic matrix for use in spinal and orthopedic surgeries. Excluding these non-operating costs associated with the Company’s strategic activities, adjusted net income was $6.7 million, or $0.39 per diluted share.

Additionally, adjusted net income, excluding specified non-cash items was $11.6 million, or $0.67 per diluted share, as indicated in the table below.

“We continued to drive strong revenue growth in our sports medicine, orthopedic and stimulation businesses as a direct result of planned investments in our distribution networks and product pipelines. These increases were partially offset by a year-over-year decrease in our spine implant revenue, which reflected the ongoing transition of the spine distribution network and customer base,” said CEO Alan Milinazzo.

The Company reiterated its previous full-year revenue guidance of $520-$540 million, and announced revisions to its earnings guidance for the remainder of the year. During the third and fourth quarters Orthofix expects to incur total costs of approximately $10.8 ($7.4 million net of tax or, $0.43 per diluted share) associated with the Company’s strategic initiatives, primarily those related to the MTF development agreement and the purchase of intellectual property from Intelligent Implant Systems that was previously announced. Additionally, Orthofix expects to incur approximately $2.5 million ($1.7 million net of tax, or $0.10 per diluted share) in corporate reorganization expenses during the second half of 2008. The Company also expects the ongoing transition of its spine distribution network and customer base to negatively impact earnings in the third and fourth quarters. As a result of these items, full-year 2008 reported EPS guidance was lowered to $0.65 to $0.75. Adjusted net income guidance, excluding $0.43 per share in strategic initiative costs as well as $0.10 per share in corporate reorganization costs, was revised to $1.43 to $1.53 per share. The guidance for adjusted net income, excluding specified non-cash items was also revised to a new range of $2.53-$2.65.

For the third quarter of 2008, Orthofix expects to generate total revenue of $130-$135 million. Additionally, the Company expects to earn $0.01-$0.06 per share in reported net income, $0.27-$0.32 per share in adjusted net income, and $0.52-$0.58 per share in adjusted net income, excluding specified non-cash items.

A reconciliation of these third quarter and full-year guidance metrics is included in the Regulation G Supplemental Information Schedule attached to this release.

Non-GAAP Performance Measures

The table below presents a reconciliation between net income calculated in accordance with generally accepted accounting principles (GAAP) and two non-GAAP performance measures, referred to as “adjusted net income” and “adjusted net income, excluding specified non-cash items”, that exclude from net income the items specified in the table. Management believes it is important to provide investors with the same non-GAAP metrics which it uses to supplement information regarding the performance and underlying trends of Orthofix’s business operations, facilitate comparisons to its historical operating results and internally evaluate the effectiveness of the Company’s operating strategies. A more detailed explanation of the items in the table below that are excluded from GAAP net income, as well as why management believes the non-GAAP measures are useful to them, is included in the Regulation G Supplemental Information schedule attached to this press release.

Reconciliation of Non-GAAP Performance Measures
Second Quarter		Q208						Q207
		($000's)			Impact Per Diluted Share			($000's)			Impact Per Diluted Share
Reported GAAP net income		$	5,808		$	0.34		$	7,189		$	0.43
Specified Items:
Costs associated with strategic initiatives			516			0.03			-			-
Costs associated with corporate reorganizations			371			0.02			-			-
Adjusted net income		$	6,695		$	0.39		$	7,189		$	0.43
Specified Non-Cash Items:
Non-cash BREG amortization		$	816			0.05			861			0.05
Non-cash Blackstone amortization		$	2,130			0.12			2,400			0.14
Equity compensation expense (FAS 123R)		$	1,935			0.11			1,708			0.10
Adj. net income, excluding specified non-cash items		$	11,576		$	0.67		$	12,158		$	0.72
NOTE: Some calculations may be impacted by rounding.

Revenue

Total second quarter sales in the Company’s spine sector grew 2% year-over-year, to $62.7 million. Spine stimulation revenue increased 13%, to $35.4 million. Implant and biologic revenue was $27.3 million, including international revenue, which was 9% lower than the second quarter of 2007. The decrease in implant and biologic revenue was driven by lower revenue from the Company’s implant devices, partially offset by an increase in revenue from biologic products.

Revenue from the Company’s orthopedic business grew 19%, to $33.3 million, compared with the prior year. The increase was driven primarily by a 16% increase in sales of Physio-Stim™ bone growth stimulation devices used for non-union fractures, as well as revenue from the Company’s internal fixation and deformity correction devices, which was up 39% year-over-year.

Sports medicine revenue in the second quarter grew 9% compared with 2007, to $23.2 million. The Company previously announced that during the first quarter this year it sold all of the assets associated with its Pain Care® line of ambulatory infusion pumps as part of the strategic goal of narrowing the focus of its sports medicine business to its functional knee bracing and cold therapy products. In the second quarter, revenue from the Company’s functional knee bracing and cold therapy products rose 14% year-over-year.

Gross Margin

The gross margin percentage in the second quarter of 2008 was 73.0%, which was 20 basis points lower than the second quarter of 2007. The decrease is primarily attributable to changes in product and geographic mix, as well as the negative impact of foreign currency valuations related to products manufactured in Europe and sold in U.S. dollars. The Company expects these trends to continue through the end of 2008 and, as such, lowered it’s full year gross margin guidance to 72%-73%.

Operating Expenses

Second quarter sales and marketing (S&M) expenses as a percent of revenue increased by 250 basis points year-over-year, to 40.9%. The increase in the S&M ratio is primarily due to an increase in the overall rate of sales and marketing costs, including the addition of new direct spine sales representatives and retention payments made in connection with the potential divestiture of certain fixation assets earlier this year.

Second quarter general and administrative (G&A) expenses in 2008 increased by 80 basis points year-over-year, to 14.4% of sales. The increase in the G&A ratio primarily reflected the impact of higher corporate expenses, including accounting, legal, and business development costs, as well as retention payments made in connection with the potential divestiture of certain fixation assets earlier this year.

Research and development (R&D) expenses as a percent of revenues were 5.1% in the second quarter of 2008. This was an increase of 20 basis points compared with 2007.

Amortization expense in the second quarter of 2008 was 3.7% of revenue, which was flat with the prior year.

Other Income and Expenses

Orthofix reported second quarter net interest expense of $4.1 million, compared with interest expense of approximately $5.9 million in the first quarter of 2007. The lower interest expense in the second quarter of 2008 was primarily due to a reduction in the interest rate as well as the balance of the outstanding debt compared with the prior year.

Taxes

The tax rate in the second quarter of 2008 was approximately 28%. This was lower than the Company’s full-year guidance of 33%-34%. The lower tax rate in the second quarter was primarily the result of lower projected taxable earnings from U.S.-sourced income which carries a higher tax rate than foreign sourced income.

Conference Call

Orthofix will host a conference call today at 11:00 AM Eastern time to discuss the Company’s financial results for the second quarter of 2008. Interested parties may access the conference call by dialing (866) 626-7622 in the U.S., and (706) 758-3283 outside the U.S., and providing the conference ID 56580604. A replay of the call will be available for one week by dialing (800) 642-1687 in the U.S., and (706) 645-9291 outside the U.S., and entering the conference ID 56580604.

About Orthofix

Orthofix International, N.V., a global diversified orthopedic products company, offers a broad line of minimally invasive surgical, and non-surgical, products for the spine, orthopedic, and sports medicine market sectors that address the lifelong bone-and-joint health needs of patients of all ages–helping them achieve a more active and mobile lifestyle. Orthofix’s products are widely distributed around the world to orthopedic surgeons and patients via Orthofix’s sales representatives and its subsidiaries, including BREG, Inc. and Blackstone Medical, Inc., and via partnerships with other leading orthopedic product companies. In addition, Orthofix is collaborating in R&D partnerships with leading medical institutions such as the Orthopedic Research and Education Foundation, Rutgers University, the Cleveland Clinic Foundation, and National Osteoporosis Institute. For more information about Orthofix, please visit www.orthofix.com.

FORWARD-LOOKING STATEMENTS

This communication contains certain forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements, which may include, but are not limited to, statements concerning the projections, financial condition, results of operations and businesses of Orthofix and its subsidiaries and are based on management’s current expectations and estimates and involve risks and uncertainties that could cause actual results or outcomes to differ materially from those contemplated by the forward-looking statements.

Factors that could cause or contribute to such differences may include, but are not limited to, risks relating to the expected sales of its products, including recently launched products, unanticipated expenditures, changing relationships with customers, suppliers and strategic partners, risks relating to the protection of intellectual property, changes to the reimbursement policies of third parties, changes to and interpretation of governmental regulation of medical devices, the impact of competitive products, changes to the competitive environment, the acceptance of new products in the market, conditions of the orthopedic industry and the economy, corporate development and market development activities, including acquisitions or divestitures, unexpected costs or operating unit performance related to recent acquisitions and other factors described in our annual report on Form 10-K and other periodic reports filed by the Company with the Securities and Exchange Commission.

ORTHOFIX INTERNATIONAL N.V.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, U.S. Dollars, in thousands, except per share and share data)
		Three Months Ended June 30,								Six Months Ended June 30,
		2008				2007				2008				2007
Net sales		$	130,039			$	123,336			$	258,071			$	240,368
Cost of sales			35,048				33,008				69,286				63,804
Gross profit			94,991				90,328				188,785				176,564
Operating expenses
Sales and marketing			53,246				47,310				103,442				91,893
General and administrative			18,779				16,806				40,959				32,711
Research and development			6,599				6,023				12,953				12,360
Amortization of intangible assets			4,830				4,571				9,873				9,039
Other Income/ (Expense) Gain on sale of Pain Care® Operations			-				-				(1,570	)			-
			83,454				74,710				165,657				146,003
Operating income			11,537				15,618				23,128				30,561
Other income (expense)
Interest income/ (expense), net			(4,069	)			(5,869	)			(9,459	)			(11,534	)
Other, net			591				314				1,085				(242	)
Other income/ (expense), net			(3,478	)			(5,555	)			(8,374	)			(11,776	)
Income before minority interests and income taxes			8,059				10,063				14,754				18,785
Minority Interests			-				-				-				(43	)
Income before income taxes			8,059				10,063				14,754				18,742
Income tax expense			(2,251	)			(2,874	)			(5,340	)			(5,286	)
Net income		$	5,808			$	7,189			$	9,414			$	13,456
Net income per common share - basic		$	0.34			$	0.43			$	0.55			$	0.82
Net income per common share - diluted		$	0.34			$	0.43			$	0.55			$	0.80
Weighted average number of common shares outstanding - basic			17,090,217				16,533,646				17,088,735				16,499,299
Weighted average number of common shares outstanding - diluted			17,116,015				16,819,166				17,240,004				16,852,769

ORTHOFIX INTERNATIONAL N.V.
CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S. Dollars, in thousands)
		June 30,		December 31,
		2008		2007
Assets
Current assets:
Cash and cash equivalents		$16,845		$25,064
Restricted cash		11,709		16,453
Trade accounts receivable, net		119,097		108,900
Inventory, net		113,333		93,952
Deferred income taxes		11,373		11,373
Prepaid expenses and other current assets		28,858		25,035
Total current assets		301,215		280,777
Investments		4,427		4,427
Property, plant and equipment, net		35,255		33,444
Patents and other intangible assets, net		223,181		230,305
Goodwill		318,769		319,938
Deferred taxes and other long-term assets		16,750		16,773
Total assets		$899,597		$885,664
Liabilities and shareholders' equity
Current liabilities:
Bank borrowings		$8,236		$8,704
Current portion of long-term debt		3,340		3,343
Trade accounts payable		28,606		24,715
Other current liabilities		31,278		36,544
Total current liabilities		71,460		73,306
Long-term debt		289,242		294,588
Deferred income taxes		74,809		75,908
Other long-term liabilities		12,039		7,922
Total liabilities		447,550		451,724
Shareholders' equity:
Common shares		1,710		1,704
Additional paid-in capital		163,944		157,349
		165,654		159,053
Retained earnings		267,615		258,201
Accumulated other comprehensive income		18,778		16,686
Total shareholders' equity		452,047		433,940
Total liabilities and shareholders' equity		$899,597		$885,664

ORTHOFIX INTERNATIONAL N.V.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, U.S. Dollars, in thousands)
		Six Months Ended June 30,
		2008		2007
Cash flows from operating activities:
Net income		$9,414		$13,456
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		14,777		13,958
Amortization of debt costs		632		203
Provision for doubtful accounts		3,019		2,004
Deferred taxes		-		(3,103)
Share-based compensation		4,657		5,121
Minority interest		235		(10)
Amortization of step up of fair value in inventory		242		1,860
Gain on sale of Pain Care® operations		(1,570)		-
Other		515		(1,368)
Change in operating assets and liabilities:
Restricted cash		4,772		(1,219)
Accounts receivable		(10,630)		(14,120)
Inventories		(16,734)		(15,682)
Prepaid expenses and other current assets		(4,486)		(2,890)
Accounts payable		3,250		2,265
Other current liabilities		(5,839)		1,282
Net cash provided by operating activities		2,254		1,757
Cash flows from investing activities:
Payments made in connection with acquisitions and investments, net of cash acquired		-		(1,456)
Capital expenditures		(12,150)		(17,123)
Proceeds from sale of Pain Care® operations		5,980		-
Net cash used in investing activities		(6,170)		(18,579)
Cash flows from financing activities:
Net proceeds from issue of common shares		1,922		2,964
Repayments of long-term debt		(5,351)		(5,649)
Proceeds from bank borrowings		(1,131)		8,438
Tax benefit on non-qualified stock options		22		694
Net cash (used in) provided by financing activities		(4,538)		6,447
Effect of exchange rate changes on cash		235		178
Net decrease in cash and cash equivalents		(8,219)		(10,197)
Cash and cash equivalents at the beginning of the year		25,064		25,881
Cash and cash equivalents at the end of the period		$16,845		$15,684

External net sales by market sector
(In US$ millions)
		Three Months Ended June 30,									Six Months Ended June 30,
		2008			2007			% Increase			2008			2007			% Increase
Spine
Stimulation		$	35.4		$	31.3		13	%		$	68.7		$	60.8		13	%
Implants and Biologics			27.3			30.1		-9