Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2009
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the transition period from
to
COMMISSION FILE NO. 0-26224
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
| DELAWARE | 51-0317849 | |
| (STATE OR OTHER JURISDICTION OF | (I.R.S. EMPLOYER | |
| INCORPORATION OR ORGANIZATION) | IDENTIFICATION NO.) | |
| 311 ENTERPRISE DRIVE | ||
| PLAINSBORO, NEW JERSEY | ||
| (ADDRESS OF PRINCIPAL | 08536 | |
| EXECUTIVE OFFICES) | (ZIP CODE) |
REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (609) 275-0500
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 þ No o
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 o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated
filer’, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
| Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The number of shares of the registrant’s Common Stock, $.01 par value, outstanding as of August 4,
2009 was 28,437,261.
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
INDEX
INDEX
| Page Number | ||||||||
| 3 | ||||||||
| 4 | ||||||||
| 5 | ||||||||
| 6 | ||||||||
| 18 | ||||||||
| 32 | ||||||||
| 32 | ||||||||
| 33 | ||||||||
| 33 | ||||||||
| 36 | ||||||||
| 36 | ||||||||
| 37 | ||||||||
| 38 | ||||||||
| Exhibit 31.1 | ||||||||
| Exhibit 31.2 | ||||||||
| Exhibit 32.1 | ||||||||
| Exhibit 32.2 | ||||||||
Table of Contents
PART I. FINANCIAL INFORMATION
| Item 1. | Financial Statements |
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share amounts)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
Total Revenue |
$ | 165,725 | $ | 157,198 | $ | 326,675 | $ | 313,206 | ||||||||
Costs and Expenses: |
||||||||||||||||
Cost of product revenues |
59,805 | 58,159 | 117,953 | 120,371 | ||||||||||||
Research and development |
10,302 | 7,793 | 20,945 | 15,591 | ||||||||||||
Selling, general and administrative |
68,252 | 63,475 | 134,703 | 125,964 | ||||||||||||
Intangible asset amortization |
3,461 | 2,973 | 6,917 | 5,946 | ||||||||||||
Total costs and expenses |
141,820 | 132,400 | 280,518 | 267,872 | ||||||||||||
Operating income |
23,905 | 24,798 | 46,157 | 45,334 | ||||||||||||
Interest income |
134 | 444 | 381 | 1,131 | ||||||||||||
Interest expense |
(6,174 | ) | (6,922 | ) | (12,858 | ) | (15,489 | ) | ||||||||
Other (expense) income, net |
(481 | ) | (451 | ) | (1,349 | ) | 1,056 | |||||||||
Income before income taxes |
17,384 | 17,869 | 32,331 | 32,032 | ||||||||||||
Income tax expense |
6,159 | 5,592 | 11,539 | 10,705 | ||||||||||||
Net income |
$ | 11,225 | $ | 12,277 | $ | 20,792 | $ | 21,327 | ||||||||
Basic net income per common share |
$ | 0.38 | $ | 0.44 | $ | 0.71 | $ | 0.77 | ||||||||
Diluted net income per common share |
$ | 0.38 | $ | 0.43 | $ | 0.71 | $ | 0.75 | ||||||||
Weighted average common shares
outstanding (See Note 9): |
||||||||||||||||
Basic |
29,004 | 27,664 | 28,974 | 27,276 | ||||||||||||
Diluted |
29,202 | 28,277 | 29,228 | 27,884 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
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INTEGRA LIFESCIENCES HOLDINGS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands)
| June 30, 2009 | December 31, 2008 | |||||||
ASSETS |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 138,717 | $ | 183,546 | ||||
Trade accounts receivable, net of allowances of $10,752 and $10,052 |
101,462 | 112,417 | ||||||
Inventories, net |
139,319 | 146,103 | ||||||
Deferred tax assets |
21,115 | 24,135 | ||||||
Prepaid expenses and other current assets |
22,636 | 31,191 | ||||||
Total current assets |
423,249 | 497,392 | ||||||
Property, plant and equipment, net |
70,777 | 70,382 | ||||||
Intangible assets, net |
217,447 | 225,998 | ||||||
Goodwill |
211,767 | 212,094 | ||||||
Other assets |
23,132 | 20,148 | ||||||
Total assets |
$ | 946,372 | $ | 1,026,014 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
Current Liabilities: |
||||||||
Borrowings under senior credit facility |
$ | 40,000 | $ | 100,000 | ||||
Convertible securities |
110,443 | — | ||||||
Accounts payable, trade |
19,899 | 22,964 | ||||||
Deferred revenue |
3,325 | 3,053 | ||||||
Accrued compensation |
17,082 | 16,030 | ||||||
Accrued expenses and other current liabilities |
26,085 | 32,704 | ||||||
Total current liabilities |
216,834 | 174,751 | ||||||
Long-term borrowings under senior credit facility |
160,000 | 160,000 | ||||||
Long-term convertible securities |
145,712 | 299,480 | ||||||
Other liabilities |
21,051 | 19,474 | ||||||
Total liabilities |
543,597 | 653,705 | ||||||
Commitments and contingencies |
||||||||
Stockholders’ Equity: |
||||||||
Common stock; $.01 par value; 60,000 authorized shares; 34,743 and 34,352
issued at June 30, 2009 and December 31, 2008, respectively |
347 | 344 | ||||||
Additional paid-in capital |
506,882 | 502,784 | ||||||
Treasury stock, at cost; 6,354 shares at June 30, 2009 and December 31, 2008 |
(252,380 | ) | (252,380 | ) | ||||
Accumulated other comprehensive income (loss): |
||||||||
Foreign currency translation adjustment |
12,039 | 6,314 | ||||||
Pension liability adjustment, net of tax |
(1,111 | ) | (959 | ) | ||||
Retained earnings |
136,998 | 116,206 | ||||||
Total stockholders’ equity |
402,775 | 372,309 | ||||||
Total liabilities and stockholders’ equity |
$ | 946,372 | $ | 1,026,014 | ||||
The accompanying notes are an integral part of these consolidated financial statements
4
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INTEGRA LIFESCIENCES HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
| Six Months Ended June 30, | ||||||||
| 2009 | 2008 | |||||||
OPERATING ACTIVITIES: |
||||||||
Net income |
$ | 20,792 | $ | 21,327 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
17,143 | 14,044 | ||||||
Deferred income tax (benefit) |
(1,850 | ) | (4,670 | ) | ||||
Amortization of bond issuance costs |
1,434 | 1,218 | ||||||
Non-cash interest expense |
5,527 | 7,013 | ||||||
Payment of accreted interest |
(2,722 | ) | — | |||||
Gain on bond repurchases |
(1,124 | ) | — | |||||
Share-based compensation |
7,731 | 7,078 | ||||||
Excess tax benefits from stock-based compensation arrangements |
(7 | ) | (659 | ) | ||||
Other, net |
— | 18 | ||||||
Changes in assets and liabilities, net of business acquisitions: |
||||||||
Accounts receivable |
9,906 | (3,262 | ) | |||||
Inventories |
6,237 | (5,437 | ) | |||||
Prepaid expenses and other current assets |
8,487 | (13,387 | ) | |||||
Other non-current assets |
5,424 | (1,185 | ) | |||||
Accounts payable, accrued expenses and other current liabilities |
(8,931 | ) | (4,052 | ) | ||||
Deferred revenue |
(344 | ) | (135 | ) | ||||
Other non-current liabilities |
122 | 460 | ||||||
Net cash provided by operating activities |
67,825 | 18,371 | ||||||
INVESTING ACTIVITIES: |
||||||||
Cash used in business acquisition, net of cash acquired |
(4,141 | ) | (33 | ) | ||||
Purchases of property and equipment |
(8,269 | ) | (6,103 | ) | ||||
Net cash used in investing activities |
(12,410 | ) | (6,136 | ) | ||||
FINANCING ACTIVITIES: |
||||||||
Borrowings under senior credit facility |
— | 120,000 | ||||||
Repayments under senior credit facility |
(60,000 | ) | — | |||||
Repayment of loans |
— | (119,558 | ) | |||||
Repurchase of liability component of convertible notes |
(44,819 | ) | — | |||||
Proceeds from exercised stock options |
592 | 3,628 | ||||||
Excess tax benefits from stock-based compensation arrangements |
7 | 659 | ||||||
Net cash (used in) provided by financing activities |
(104,220 | ) | 4,729 | |||||
Effect of exchange rate changes on cash and cash equivalents |
3,976 | 3,035 | ||||||
Net change in cash and cash equivalents |
(44,829 | ) | 19,999 | |||||
Cash and cash equivalents at beginning of period |
183,546 | 57,339 | ||||||
Cash and cash equivalents at end of period |
$ | 138,717 | $ | 77,338 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements
5
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INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
General
The terms “we,” “our,” “us,” “Company” and “Integra” refer to Integra LifeSciences Holdings
Corporation, a Delaware corporation, and its subsidiaries unless the context suggests otherwise.
In the opinion of management, the June 30, 2009 unaudited condensed consolidated financial
statements contain all adjustments (consisting only of normal recurring adjustments) necessary for
a fair statement of the financial position, results of operations and cash flows of the Company.
Certain information and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or omitted in
accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These unaudited
condensed consolidated financial statements should be read in conjunction with the Company’s
consolidated financial statements for the year ended December 31, 2008 included in the Company’s
Annual Report on Form 10-K. The December 31, 2008 condensed consolidated balance sheet was derived
from audited financial statements but does not include all disclosures required by accounting
principles generally accepted in the United States. Operating results for the six-month period
ended June 30, 2009 are not necessarily indicative of the results to be expected for the entire
year.
The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities, the disclosure of contingent liabilities, and
the reported amounts of revenues and expenses. Significant estimates affecting amounts reported or
disclosed in the consolidated financial statements include allowances for doubtful accounts
receivable and sales returns, net realizable value of inventories, estimates of future cash flows
associated with long-lived asset valuations, depreciation and amortization periods for long-lived
assets, fair value estimates of stock-based compensation awards, valuation allowances recorded
against deferred tax assets, estimates of amounts to be paid to employees and other exit costs to
be incurred in connection with the restructuring of our operations and loss contingencies. These
estimates are based on historical experience and on various other assumptions that are believed to
be reasonable under the current circumstances. Actual results could differ from these estimates.
Certain reclassifications have been made to the prior year financial statements to conform to the
current year presentation.
Recently Adopted Accounting Standards
Effective January 1, 2009, the Company adopted Financial Accounting Standards Board (“FASB”) Staff
Position No. APB 14-1, Accounting for Convertible Debt Instruments that May be Settled in Cash Upon
Conversion (Including Partial Cash Settlement) (“FSP APB 14-1”). FSP APB 14-1 requires that the
liability and equity components of convertible debt instruments that may be settled in cash upon
conversion (including partial cash settlement) be separately accounted for in a manner that
reflects an issuer’s nonconvertible debt borrowing rate. FSP APB 14-1 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. FSP APB 14-1 is effective for our $330.0 million, of which $279.2 million
remains outstanding, aggregate principal amount of our senior convertible notes due June 2010 and
June 2012 with an annual rate of 2.75% and 2.375%, respectively, (the “2010 Notes” and the “2012
Notes,” respectively), and the $119.5 million exchanged portion of our contingent convertible
subordinated notes due March 2008 with an annual rate of 2.5% (the “2008 Notes”) and requires
retrospective application for all periods presented. FSP APB 14-1 requires the issuer of
convertible debt instruments with cash settlement features to separately account for the liability.
As of the date of issuance for the 2010 Notes and the 2012 Notes, and the date of modification for
the 2008 Notes (collectively, the “Covered Notes”), the result of the impact of FSP APB 14-1 for
each of the Covered Notes is as follows (in millions):
| 2008 | 2010 | 2012 | ||||||||||
| Notes | Notes | Notes | ||||||||||
Date impacted by FSP APB 14-1 |
September 2006 | June 2007 | June 2007 | |||||||||
Total Amount |
$ | 119.5 | $ | 165.0 | $ | 165.0 | ||||||
Liability Component |
103.0 | 142.2 | 122.5 | |||||||||
Equity Component |
11.6 | 16.0 | 29.9 | |||||||||
Deferred Tax Component |
4.9 | 6.8 | 12.6 | |||||||||
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The liability component was recognized at the present value of its cash flows discounted using
discount rates of 9.70%, 6.47% and 6.81%, our borrowing rate at the date of exchange of the 2008
Notes and the dates of the issuance of the 2010 Notes and the 2012 Notes, respectively, for a
similar debt instrument without the conversion feature. For additional information, see Note 5,
“Debt.” FSP APB 14-1 also requires an accretion of the resultant debt discount over the expected
life of the Covered Notes, which is March 2008 to June 2012.
The following table sets forth the effect of the retrospective application of FSP APB 14-1 on
certain previously reported line items (in thousands, except per share amounts):
Condensed Consolidated Statements of Operations:
| Three Months Ended June 30, 2008 | Six Months Ended June 30, 2008 | |||||||||||||||||||||||
| Originally | As | Originally | As | |||||||||||||||||||||
| Reported | Adjustments | Adjusted | Reported | Adjustments | Adjusted | |||||||||||||||||||
Interest expense |
$ | (4,261 | ) | $ | (2,661 | ) | $ | (6,922 | ) | $ | (8,476 | ) | $ | (7,013 | ) | $ | (15,489 | ) | ||||||
Income tax expense |
6,716 | (1,124 | ) | 5,592 | 13,666 | (2,961 | ) | 10,705 | ||||||||||||||||
Net income |
13,814 | (1,537 | ) | 12,277 | 25,379 | (4,052 | ) | 21,327 | ||||||||||||||||
Basic earnings per share |
$ | 0.50 | $ | 0.44 | $ | 0.93 | $ | 0.77 | ||||||||||||||||
Diluted earnings per share |
$ | 0.48 | $ | 0.43 | $ | 0.90 | $ | 0.75 | ||||||||||||||||
Condensed Consolidated Balance Sheets:
| December 31, 2008 | ||||||||||||
| Originally | As | |||||||||||
| Reported | Adjustments | Adjusted | ||||||||||
Other assets |
$ | 28,565 | $ | (8,417 | ) | $ | 20,148 | |||||
Long-term convertible securities |
330,000 | (30,520 | ) | 299,480 | ||||||||
Additional paid-in capital |
464,668 | 38,116 | 502,784 | |||||||||
Retained earnings |
132,219 | (16,013 | ) | 116,206 | ||||||||
Total stockholders’ equity |
350,206 | 22,103 | 372,309 | |||||||||
Condensed Consolidated Statements of Cash Flows:
| Six Months Ended June 30, 2008 | ||||||||||||
| Originally | As | |||||||||||
| Reported | Adjustments | Adjusted | ||||||||||
Net income |
$ | 25,379 | $ | (4,052 | ) | $ | 21,327 | |||||
Deferred income tax (benefit) |
(1,709 | ) | (2,961 | ) | (4,670 | ) | ||||||
Non-cash interest expense |
— | 7,013 | 7,013 | |||||||||
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For the three months ended June 30, 2009, the additional pre-tax non-cash interest expense
recognized in the condensed consolidated income statement was $2.9 million. Accumulated
amortization related to the debt discount was $19.0 million and $11.5 million as of
June 30, 2009 and December 31, 2008, respectively. The pre-tax increase in non-cash interest
expense on our condensed consolidated statements of income to be recognized through 2012, the
latest maturity date of the Covered Notes, is as follows (in millions):
| 2009 | 2010 | 2011 | 2012 | |||||||||||||
Pre-tax increase in non-cash interest expense |
$ | 10.3 | $ | 7.8 | $ | 6.7 | $ | 2.9 | ||||||||
Effective January 1, 2009, the Company adopted FASB Staff Position No. EITF 03-6-1, Determining
Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP
03-6-1”). In FSP 03-6-1, unvested share-based payment awards that contain rights to receive
nonforfeitable dividends or dividend equivalents (whether paid or unpaid) are participating
securities, and thus, should be included in the two-class method of computing earnings per share
(“EPS”). The adoption of this standard did not have a material impact on the Company’s disclosure
of EPS. See Note 9, “Net Income Per Share” for a further discussion.
Effective January 1, 2009, the Company adopted FASB Statement No. 141(R), Business Combinations
(“Statement 141(R)”), a replacement of FASB Statement No. 141. Statement 141(R) changes the
practice for accounting for business combinations, such as requiring that the Company (1) expense
transaction costs as incurred, rather than capitalizing them as part of the purchase price; (2)
record contingent consideration arrangements and pre-acquisition contingencies, such as legal
issues, at fair value at the acquisition date, with subsequent changes in fair value recorded in
the income statement; (3) capitalize the fair value of acquired research and development assets
separately from goodwill, whereas the Company previously determined the acquisition-date fair value
and then immediately charged the value to expense; and (4) limit the conditions under which
restructuring expenses can be accrued in the opening balance sheet of a target to only those where
the requirements in FASB Statement No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, would have been met at the acquisition date. Additionally, Statement 141(R) provides
that, upon initially obtaining control, an acquirer shall recognize 100 percent of the fair values
of acquired assets, including goodwill, and assumed liabilities, with only limited exceptions, even
if the acquirer has not acquired 100 percent of its target. The implementation of Statement 141(R)
could result in an increase or decrease in future selling, general and administrative and other
operating expenses, depending upon the extent of the Company’s acquisition related activities going
forward. No business combination transactions occurred since the Company adopted Statement 141(R).
The adoption of this standard did not have a material impact on the Company’s financial condition
or results of operations.
Effective January 1, 2009, the Company adopted FASB Staff Position No. FAS 142-3, Determination of
the Useful Life of Intangible Assets (“FAS 142-3”). FAS 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets (“SFAS 142”). The intent of FAS 142-3 is to improve the consistency between
the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash
flows used to measure the fair value of the asset under SFAS 141(R), and other generally accepted
accounting principles. The adoption of this standard did not have a material impact on the
Company’s financial condition or results of operations.
Effective January 1, 2009, the Company adopted FASB Staff Position No. 157-2, Effective Date of
FASB Statement No. 157 (“FSP 157-2”), which delayed the effective date of Statement of Financial
Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”), for all non-financial assets
and non-financial liabilities, except for items that are recognized or disclosed at fair value on a
recurring basis (at least annually). The adoption of this standard did not have a material impact
on the Company’s financial condition or results of operations.
Effective January 1, 2009, the Company adopted FASB Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities (“FAS 161”). FAS 161 requires enhanced disclosures about
derivative instruments and hedging activities to allow for a better understanding of their effects
on an entity’s financial position, financial performance, and cash flows. Among other things, FAS
161 requires disclosure of the fair values of derivative instruments and associated gains and
losses in a tabular format. Since FAS 161 requires only additional disclosures about our
derivatives and hedging activities, the adoption of FAS 161 does not affect our financial position
or results of operations.
Effective January 1, 2009, the Company adopted Emerging Issues Task Force (“EITF”) Issue No. 07-05,
Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock (“EITF
07-05”). EITF 07-05 mandates a two-step process for evaluating whether an equity-linked financial
instrument or embedded feature is indexed to the entity’s own stock, for the purpose of applying
the Paragraph 11(a) scope exception in FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. Upon the adoption of EITF 07-05, equity instruments that a
company issues that contain a strike price adjustment feature
may no longer be considered indexed to the company’s own stock. Accordingly, adoption of EITF 07-05
may change the current classification (from equity to liability) and the related accounting for
such equity instruments outstanding at that date. The adoption of this standard did not change the
classification of the Company’s warrants issued in connection with the convertible debt.
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In May 2009, the FASB issued and the Company adopted SFAS No. 165, Subsequent Events (“SFAS 165”).
SFAS 165 establishes general standards of accounting for and disclosure of events that occur after
the balance sheet date but before the financial statements are issued. SFAS 165 requires disclosure
of the date through which an entity has evaluated subsequent events and the basis for that date.
That is, whether the date represents the date the financial statements were issued or were
available to be issued. SFAS 165 is effective in the first interim period ending after June 15,
2009. The adoption of this standard did not have a material impact on the Company’s financial
condition or results of operations.
Recently Issued Accounting Standards
In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, The Hierarchy of
Generally Accepted Accounting Principles (“SFAS 162”). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the preparation of
financial statements of nongovernmental entities that are presented in conformity with GAAP in the
U.S. Any effect of applying the provisions of SFAS 162 shall be reported as a change in accounting
principle in accordance with Statement of Financial Accounting Standards No. 154, Accounting
Changes and Error Corrections. SFAS 162 is effective 60 days following approval by the Securities
and Exchange Commission of the Public Company Accounting Oversight Board amendments to AU
Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting
Principles. The Company does not anticipate that the adoption of SFAS 162 will have a material
impact on its financial statements.
In June 2009, the FASB issued SFAS 168, The FASB Accounting Standards Codification™ and the
Hierarchy of Generally Accepted Accounting Principles (“SFAS 168”). When effective, SFAS 168 will
become the single official source of authoritative, nongovernmental U.S. generally accepted
accounting principles. SFAS 168 will be effective for interim and annual periods ending after
September 15, 2009. The Company is required to report using SFAS 168 for the quarter ended
September 30, 2009. The Company does not anticipate that reporting under SFAS 168 will have a
material impact on its financial statements.
2. BUSINESS ACQUISITIONS
Minnesota Scientific, Inc.
In December 2008, the Company acquired Minnesota Scientific, Inc., doing business as Omni-Tract
Surgical (“Omni-Tract”), for $6.4 million in cash paid at closing, 310,000 unregistered shares of
the Company’s common stock valued at $10.7 million (of which 135,000 shares were issued at closing,
with the remainder issued in January 2009), working capital adjustments of $0.1 million and
$0.3 million in transaction related costs, subject to certain adjustments. Omni-Tract is a global
leader in the development and manufacture of table mounted retractors and is based in St. Paul,
Minnesota. Omni-Tract markets and sells these retractor systems for use in vascular, bariatric,
general, urologic, orthopedic, spine, pediatric, and laparoscopic surgery. The Company has
integrated Omni-Tract’s product lines into its combined offering of JARIT®, Padgett™, R&B Redmond™,
and Luxtec® lines of surgical instruments and illumination systems sold by the Integra Medical
Instruments sales organization.
The following summarizes the allocation of the purchase price based on fair value of the assets
acquired and liabilities assumed (in thousands):
Cash |
$ | 1,501 | ||||||
Accounts receivable |
1,324 | |||||||
Inventory |
544 | |||||||
Other current assets |
110 | |||||||
Property, plant and equipment |
377 | |||||||
Intangible assets: |
Wtd. Avg. Life | |||||||
Technology |
3,816 | 15 years | ||||||
Tradename |
13,084 | Indefinite | ||||||
Goodwill |
3,098 | |||||||
Total assets acquired |
23,854 | |||||||
Accounts payable and other current liabilities |
335 | |||||||
Deferred tax liabilities — non current |
6,030 | |||||||
Total liabilities assumed |
6,365 | |||||||
Net assets acquired |
$ | 17,489 | ||||||
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Management determined the preliminary fair value of assets acquired during the fourth quarter
of 2008. The purchase price was finalized in the second quarter of 2009 with only minor changes
being recorded to goodwill resulting from the working capital adjustment. The goodwill recorded in
connection with this acquisition is based on the benefits the Company expects to generate from
Omni-Tract’s future cash flows.
Integra Neurosciences Pty Ltd.
In October 2008, the Company acquired Integra Neurosciences Pty Ltd. in Australia and Integra
Neurosciences Pty Ltd. in New Zealand for $4.0 million (6.0 million Australian Dollars) in cash at
closing, $0.3 million in acquisition expenses and working capital adjustments, and up to $2.1
million (3.1 million Australian Dollars) in future payments based on the performance of business in
the three years after closing. With this acquisition of the Company’s long-standing distributor,
the Company now has a direct selling presence in Australia and New Zealand.
The following summarizes the preliminary allocation of the purchase price based on fair value of
the assets acquired and liabilities assumed (in thousands):
Cash |
$ | 630 | ||||||
Inventory |
1,234 | |||||||
Property, plant and equipment |
66 | |||||||
Intangible assets: |
Wtd. Avg. Life | |||||||
Customer relationships |
4,367 | 15 years | ||||||
Tradename |
90 | 1 year | ||||||
Total assets acquired |
6,387 | |||||||
Accounts payable and other current liabilities |
70 | |||||||
Deferred tax liabilities — non current |
1,388 | |||||||
Other non-current liabilities |
628 | |||||||
Total liabilities assumed |
2,086 | |||||||
Net assets acquired |
$ | 4,301 | ||||||
Management determined the preliminary fair value of assets acquired during the fourth quarter
of 2008. The purchase price was finalized in the second quarter of 2009 with only minor changes
being recorded for working capital adjustments.
Theken
In August 2008 the Company acquired Theken Spine, LLC, Theken Disc, LLC and Therics, LLC
(collectively, “Theken”) for $75.0 million in cash, acquisition expenses of $2.4 million, working
capital adjustments of $4.0 million, and up to approximately $121.0 million in future payments
based on the revenue performance of the business in the two years after closing. Theken, based in
Akron, Ohio, designs, develops and manufactures spinal fixation products, synthetic bone substitute
products and spinal arthroplasty products.
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The following summarizes the allocation of the purchase price based on fair value of the assets
acquired and liabilities assumed (in thousands):
Cash |
$ | 167 | ||||||
Inventory |
15,130 | |||||||
Accounts receivable |
5,969 | |||||||
Other current assets |
699 | |||||||
Property, plant and equipment |
8,244 | |||||||
Other assets |
1 | |||||||
Intangible assets: |
Wtd. Avg. Life | |||||||
Technology |
13,470 | 11 years | ||||||
Customer relationships |
15,630 | 8 years | ||||||
In-process research and development |
25,240 | Expensed immediately | ||||||
Goodwill |
6,533 | |||||||
Total assets acquired |
91,083 | |||||||
Accounts payable and other current liabilities |
9,716 | |||||||
Net assets acquired |
$ | 81,367 | ||||||
Management determined the preliminary fair value of assets acquired during the third quarter
of 2008. The in-process research and development had not yet reached technological feasibility and
had no alternative future use at the date of acquisition. The Company recorded an in-process
research and development charge of $25.2 million in the third quarter of 2008 in connection with
this acquisition, which was included in research and development expense. The goodwill recorded in
connection with this acquisition is based on the benefits the Company expects to generate from
Theken’s future cash flows. The purchase price was finalized in the first quarter of 2009 with only
minor changes being recorded to goodwill.
The fair value of the in-process research and development was determined by estimating the costs to
develop the acquired technology into commercially viable products and estimating the net present
value of the resulting net cash flows from these projects. These cash flows were based on our best
estimates of revenue, cost of sales, research and development costs, selling, general and
administrative costs and income taxes from the development projects. A summary of the estimates
used to calculate the net cash flows for the projects is as follows:
| Discount rate | ||||||||||||
| Year net cash | including factor | |||||||||||
| In-flows | to account for | Acquired In- | ||||||||||
| expected to | uncertainty of | Process Research | ||||||||||
| Project | begin | success | and Development | |||||||||
eDisc artificial lumbar disc |
2013 | 23 | % | $ | 13.0 million | |||||||
eDisc artificial cervical disc |
2016 | 23 | % | 7.2 million | ||||||||
Spinal fixation implants |
2009 | 15 | % | 4.7 million | ||||||||
All other |
2009 | 15 | % | 0.3 million | ||||||||
Pro Forma Results (unaudited)
The following unaudited pro forma financial information summarizes the results of operations for
the three and six months ended June 30, 2008 as if the acquisitions completed by the Company during
2008 had been completed as of the beginning of the period presented. The pro forma results are
based upon certain assumptions and estimates, and they give effect to actual operating results
prior to the acquisitions and adjustments to reflect increased interest expense, depreciation
expense, intangible asset amortization, and income taxes at a rate consistent with the Company’s
statutory rate. No effect has been given to cost reductions or operating synergies. As a result,
the pro forma results do not necessarily represent results that would have occurred if the
acquisitions had taken place on the basis assumed above, nor are they indicative of the results of
future combined operations.
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| Three Months | Six Months | |||||||
| Ended June 30, 2008 | Ended June 30, 2008 | |||||||
| (in thousands, except per share amounts) | ||||||||
Total Revenue |
$ | 166,706 | $ | 332,605 | ||||
Net income |
10,388 | 18,080 | ||||||
Net income per common share: |
||||||||
Basic |
$ | 0.38 | $ | 0.66 | ||||
Diluted |
$ | 0.37 | $ | 0.65 | ||||
3. INVENTORIES
Inventories, net consisted of the following:
| June 30, | December 31, | |||||||
| 2009 | 2008 | |||||||
| (in thousands) | ||||||||
Finished goods |
$ | 100,675 | $ | 109,033 | ||||
Work-in process |
22,998 | 21,883 | ||||||
Raw materials |
41,690 | 38,688 | ||||||
Less: reserves |
(26,044 | ) | (23,501 | ) | ||||
| $ | 139,319 | $ | 146,103 | |||||
4. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill for the six months ended June 30, 2009 were as follows:
Balance at December 31, 2008 |
$ | 212,094 | ||
Purchase price allocation adjustments |
(120 | ) | ||
Foreign currency translation |
(207 | ) | ||
Balance at June 30, 2009 |
$ | 211,767 | ||
The components of the Company’s identifiable intangible assets were as follows (in thousands):
| Weighted | June 30, 2009 | December 31, 2008 | ||||||||||||||||||||||||||
| Average | Accumulated | Accumulated | ||||||||||||||||||||||||||
| Life | Cost | Amortization | Net | Cost | Amortization | Net | ||||||||||||||||||||||
Completed technology |
12 years | $ | 67,651 | $ | (18,812 | ) | $ | 48,839 | $ | 67,154 | $ | (15,658 | ) | $ | 51,496 | |||||||||||||
Customer relationships |
12 years | 95,455 | (31,294 | ) | 64,161 | 94,487 | (26,104 | ) | 68,383 | |||||||||||||||||||
Trademarks/brand names |
35 years | 34,679 | (7,289 | ) | 27,390 | 34,582 | (6,547 | ) | 28,035 | |||||||||||||||||||
Trademarks/brand names |
Indefinite | 50,034 | — | 50,034 | 50,034 | — | 50,034 | |||||||||||||||||||||
Noncompetition
agreements |
5 years | 6,451 | (6,213 | ) | 238 | 6,449 | (5,724 | ) | 725 | |||||||||||||||||||
Supplier relationships |
30 years | 29,300 | (3,060 | ) | 26,240 | 29,300 | (2,670 | ) | 26,630 | |||||||||||||||||||
All other |
15 years | 1,531 | (986 | ) | 545 | 1,531 | (836 | ) | 695 | |||||||||||||||||||
| $ | 285,101 | $ | (67,654 | ) | $ | 217,447 | $ | 283,537 | $ | (57,539 | ) | $ | 225,998 | |||||||||||||||
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Annual amortization expense is expected to approximate $19.2 million in 2009, $16.7 million in
2010, $16.5 million in 2011, $16.3 million in 2012, $13.6 million in 2013 and $85.1 million
thereafter. Identifiable intangible assets are initially recorded at fair market value at the time
of acquisition generally using an income or cost approach.
5. DEBT
2010 and 2012 Senior Convertible Notes
On June 11, 2007, the Company issued $165 million aggregate principal amount of its 2010 Notes and
$165 million aggregate principal amount of its 2012 Notes (the 2010 Notes and the 2012,
collectively the “Notes”). The 2010 Notes and the 2012 Notes bear interest at a rate of 2.75% per
annum and 2.375% per annum, respectively, in each case payable semi-annually in arrears on December
1 and June 1 of each year. The fair value of the 2010 Notes and the 2012 Notes at June 30, 2009 was
approximately $111.3 million and $151.0 million, respectively. The Notes are senior, unsecured
obligations of the Company, and are convertible into cash and, if applicable, shares of its common
stock based on an initial conversion rate, subject to adjustment, of 15.0917 shares per $1,000
principal amount of notes for the 2010 Notes and 15.3935 shares per $1,000 principal amount of
notes for the 2012 Notes (which represents an initial conversion price of approximately $66.26 per
share and approximately $64.96 per share for the 2010 Notes and the 2012 Notes, respectively.) The
Company will satisfy any conversion of the Notes with cash up to the principal amount of the
applicable series of Notes pursuant to the net share settlement mechanism set forth in the
applicable indenture and, with respect to any excess conversion value, with shares of the Company’s
common stock. The Notes are convertible only in the following circumstances: (1) if the closing
sale price of the Company’s common stock exceeds 130% of the conversion price during a period as
defined in the indenture; (2) if the average trading price per $1,000 principal amount of the Notes
is less than or equal to 97% of the average conversion value of the Notes during a period as
defined in the indenture; (3) at any time on or after December 15, 2009 (in connection with the
2010 Notes) or anytime after December 15, 2011 (in connection with the 2012 Notes); or (4) if
specified corporate transactions occur. The issue price of the Notes was equal to their face
amount, which is also the amount holders are entitled to receive at maturity if the Notes are not
converted. As of June 30, 2009, the 2010 Notes are classified as current due to their maturity
date. However, none of these conditions existed and, as a result, the 2012 Notes are classified as
long-term.
Holders of the Notes, who convert their notes in connection with a qualifying fundamental change,
as defined in the related indenture, may be entitled to a make-whole premium in the form of an
increase in the conversion rate. Additionally, following the occurrence of a fundamental change,
holders may require that the Company repurchase some or all of the Notes for cash at a repurchase
price equal to 100% of the principal amount of the notes being repurchased, plus accrued and unpaid
interest, if any.
The Notes, under the terms of the private placement agreement, are guaranteed fully by Integra
LifeSciences Corporation, a subsidiary of the Company. The 2010 Notes will rank equal in right of
payment to the 2012 Notes. The Notes will be the Company’s direct senior unsecured obligations and
will rank equal in right of payment to all of the Company’s existing and future unsecured and
unsubordinated indebtedness.
In connection with the issuance of the Notes, the Company entered into call transactions and
warrant transactions, primarily with affiliates of the initial purchasers of the Notes (the “hedge
participants”), in connection with each series of Notes. The cost of the call transactions to the
Company was approximately $46.8 million. The Company received approximately $21.7 million of
proceeds from the warrant transactions. The call transactions involve the Company’s purchasing call
options from the hedge participants, and the warrant transactions involve the Company’s selling
call options to the hedge participants with a higher strike price than the purchased call options.
The initial strike price of the call transactions is (1) for the 2010 Notes, approximately $66.26
per share of Common Stock, and (2) for the 2012 Notes, approximately $64.96, in each case subject
to anti-dilution adjustments substantially similar to those in the Notes. The initial strike price
of the warrant transactions is (x) for the 2010 Notes, approximately $77.96 per share of Common
Stock and (y) for the 2012 Notes, approximately $90.95, in each case subject to customary
anti-dilution adjustments.
In March 2009, the Company repurchased $32.1 million principal amount of the 2010 Notes and
recognized a gain of $1.2 million. Total cash paid for this repurchase was $29.5 million of which
$28.0 million related to repayment of the liability component of the Notes and $1.5 million for
payment of accreted interest. In June 2009, the Company repurchased $18.7 million principal amount
of the 2010 Notes and recognized a loss of $0.1 million. Total cash paid for this repurchase was
$18.0 million of which $16.8 million related to repayment of the liability component of the Notes
and $1.2 million for payment of accreted interest. The bond hedge contracts were terminated on a
pro-rata basis and the number of options was adjusted to reflect the number of convertible
securities outstanding that together have a total principal amount of $114.2 million. In separate
transactions, we amended the warrant transactions to reduce the number of warrants outstanding to
reflect such number of convertible securities outstanding.
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See Note 1, “Basis of Presentation,” for a discussion of the liability component associated with
the Covered Notes and the retrospective accounting change resulting from the adoption of FSP APB
14-1 effective January 1, 2009.
Senior Secured Revolving Credit Facility
As of June 30, 2009 the Company had $200.0 million of outstanding borrowings under this credit
facility at a weighted average rate of 1.32%. The fair value of the $200.0 million outstanding
borrowings on this credit facility at June 30, 2009 was
approximately $183.9 million. The Company
used a portion of the proceeds to repay all of the remaining 2008 Notes totaling approximately
$119.4 million in the second quarter of 2008 and $3.3 million of related accrued and contingent
interest during March 2008. On July 28, 2008 and October 30, 2008, the Company borrowed
$80.0 million and $60.0 million, respectively, to fund the acquisition of Theken and for other
general corporate purposes. During June 2009, the Company repaid $60.0 million of its outstanding
borrowings. The Company regularly borrows under the credit facility and makes payments each month
with respect thereto and considers $40.0 million of such outstanding amounts to be short-term in
nature based on its current intent and ability to repay borrowing within the next twelve months. If
additional borrowings are made in connection with, for instance, future acquisitions, such
activities could impact the timing of when the Company intends to repay amounts under this credit
facility, which expires in December 2011.
6. STOCK-BASED COMPENSATION
As of June 30, 2009, the Company had stock options, restricted stock awards, performance stock
awards, contract stock awards and restricted stock unit awards outstanding under seven plans, the
1993 Incentive Stock Option and Non-Qualified Stock Option Plan (the “1993 Plan”), the 1996
Incentive Stock Option and Non-Qualified Stock Option Plan (the “1996 Plan”), the 1998 Stock Option
Plan (the “1998 Plan”), the 1999 Stock Option Plan (the “1999 Plan”), the 2000 Equity Incentive
Plan (the “2000 Plan”), the 2001 Equity Incentive Plan (the “2001 Plan”), and the 2003 Equity
Incentive Plan (the “2003 Plan,” and collectively, the “Plans”). No new awards may be granted under
the 1993 Plan, the 1996 Plan or the 1998 Plan.
Stock options issued under the Plans become exercisable over specified periods, generally within
four years from the date of grant for officers, employees and consultants, and generally expire six
years from the grant date. The transfer and non-forfeiture provisions of restricted stock issued
under the Plans lapse over specified periods, generally three years after the date of grant.
Stock Options
The Company granted 62,500 and no stock options during the six months ended June 30, 2009 and June
30, 2008, respectively. As of June 30, 2009, there were approximately $6.5 million of total
unrecognized compensation costs related to unvested stock options. These costs were expected to be
recognized over a weighted-average period of approximately 2.2 years. The Company received proceeds
of $0.6 million and $3.6 million from stock option exercises for the six months ended June 30, 2009
and 2008, respectively.
Awards of Restricted Stock, Performance Stock and Contract Stock
Performance stock awards have performance features associated with them. Performance stock,
restricted stock and contract stock awards generally have requisite service periods of three years.
The fair value of these awards is being expensed on a straight-line basis over the vesting period
or requisite service period, whichever is shorter. As of June 30, 2009, there was approximately
$18.1 million of total unrecognized compensation costs related to unvested awards. These costs are
expected to be recognized over a weighted-average period of approximately 2.3 years.
The Company has no formal policy related to the repurchase of shares for the purpose of satisfying
stock-based compensation obligations. Independent of these programs, the Company does have a
practice of repurchasing shares, from time to time, in the open market.
The Company also maintains an Employee Stock Purchase Plan (the “ESPP”), which provides eligible
employees of the Company with the opportunity to acquire shares of common stock at periodic
intervals by means of accumulated payroll deductions. The ESPP is a non-compensatory plan under
FASB Statement No. 123(R), Share Based Payments.
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7. RETIREMENT BENEFIT PLANS
The Company maintains defined benefit pension plans that cover employees in its manufacturing
plants located in Andover, United Kingdom (the “UK Plan”) and Tuttlingen, Germany (the “Germany
Plan”). The Company had maintained a plan covering its employees located in York, Pennsylvania (the
“Miltex Plan”) which was terminated in the fourth quarter of 2008 with all distributions made to
participants. The Miltex Plan was frozen and all future benefits were curtailed prior to the
acquisition of Miltex by the Company. Accordingly, the Miltex Plan had no assets or liabilities
remaining at December 31, 2008. The Company closed the Tuttlingen, Germany plant in December 2005.
However, the Germany Plan was not terminated and the Company remains obligated for the accrued
pension benefits related to this plan. The plans cover certain current and former employees. Net
periodic benefit costs for the Company’s defined benefit pension plans included the following
amounts (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
Service cost |
$ | 30 | $ | 72 | $ | 57 | $ | 143 | ||||||||
Interest cost |
151 | 361 | 285 | 721 | ||||||||||||
Expected return on plan assets |
(103 | ) | (307 | ) | (199 | ) | (612 | ) | ||||||||
Recognized net actuarial loss |
115 | 6 | 222 | 11 | ||||||||||||
Net period benefit cost |
$ | 193 | $ | 132 | $ | 365 | $ | 263 | ||||||||
The
Company made $191,623 and $255,000 of contributions to its defined benefit pension plans during
the six months ended June 30, 2009 and 2008, respectively.
8. COMPREHENSIVE INCOME
Comprehensive income was as follows (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
Net Income |
$ | 11,225 | $ | 12,277 | $ | 20,792 | $ | 21,327 | ||||||||
Foreign currency translation adjustment |
13,691 | 2,108 | 5,726 | 12,238 | ||||||||||||
Comprehensive income |
$ | 24,916 | $ | 14,385 | $ | 26,518 | $ | 33,565 | ||||||||
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9. NET INCOME PER SHARE
Basic and diluted net income per share was as follows (in thousands, except per share amounts):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
Basic net income per share: |
||||||||||||||||
Net income attributable to common shares |
$ | 11,225 | $ | 12,277 | $ | 20,792 | $ | 21,327 | ||||||||
Percentage allocated to common shares |
99.2 | % | 98.1 | % | 99.2 | % | 98.1 | % | ||||||||
Net income attributable to common shares |
11,135 | 12,044 | 20,627 | 20,922 | ||||||||||||
Weighted average common shares outstanding |
29,004 | 27,664 | 28,974 | 27,276 | ||||||||||||
Basic net income per common share |
$ | 0.38 | $ | 0.44 | $ | 0.71 | $ | 0.77 | ||||||||
Diluted net income per share: |
||||||||||||||||
Net income attributable to diluted shares |
$ | 11,135 | $ | 12,044 | $ | 20,627 | $ | 20,922 | ||||||||
Weighted average common shares outstanding — Basic |
29,004 | 27,664 | 28,974 | 27,276 | ||||||||||||
Effect of dilutive securities: |
||||||||||||||||
Stock options and restricted stock |
198 | 613 | 254 | 608 | ||||||||||||
Weighted average common shares for diluted
earnings per share |
29,202 | 28,277 | 29,228 | 27,884 | ||||||||||||
Diluted net income per common share |
$ | 0.38 | $ | 0.43 | $ | 0.71 | $ | 0.75 | ||||||||
Weighted average common shares outstanding |
29,004 | 27,664 | 28,974 | 27,276 | ||||||||||||
Weighted average common shares and other
participating securities |
29,246 | 28,212 | 29,221 | 27,803 | ||||||||||||
Common share percentage |
99.2 | % | 98.1 | % | 99.2 | % | 98.1 | % | ||||||||
Diluted share percentage |
99.2 | % | 98.1 | % | 99.2 | % | 98.1 | % | ||||||||
As described in Note 1, “Basis of Presentation,” the Company adopted FSP 03-6-1 on January 1, 2009.
Certain of the Company’s unvested restricted share units contain rights to receive nonforfeitable
dividends, and thus, are participating securities requiring the two-class method of computing EPS.
The calculation of earnings per share for common stock shown above excludes the income attributable
to the unvested restricted share units from the numerator and excludes the dilutive impact of those
units from the denominator.
At June 30, 2009 and 2008, the Company had 2.6 million and 2.7 million of outstanding stock
options, respectively. The Company also has warrants outstanding relating to its 2010 Notes and
2012 Notes. Stock options and warrants are included in the diluted earnings per share calculation
using the treasury stock method, unless the effect of including the stock options would be
anti-dilutive. For the three months ended June 30, 2009 and 2008, 2.3 million and 0.5 million
anti-dilutive stock options, respectively, were excluded from the diluted earnings per share
calculation. As the strike price of the warrants exceed the Company’s average stock price for the
period, the warrants are anti-dilutive and the entire number of warrants, the amount of which is
based on the Company’s average stock price, were also excluded from the diluted earnings per share
calculation.
10. SEGMENT AND GEOGRAPHIC INFORMATION
The Company’s management reviews financial results and manages the business on an aggregate basis.
Therefore, financial results are reported in a single operating segment, the development,
manufacture and marketing of medical devices for use in cranial and spinal procedures, peripheral
nerve repair, small bone and joint injuries, and the repair and reconstruction of soft tissue.
The Company presents its revenues in three categories: NeuroSciences, Orthopedics and Medical
Instruments. The Company’s revenues were as follows (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
Revenues: |
||||||||||||||||
NeuroSciences |
$ | 61,448 | $ | 62,762 | $ | 121,179 | $ | 124,466 | ||||||||
Orthopedics |
65,164 | 50,993 | 129,530 | 101,348 | ||||||||||||
Medical Instruments |
39,113 | 43,443 | 75,966 | 87,392 | ||||||||||||
Total Revenues |
$ | 165,725 | $ | 157,198 | $ | 326,675 | $ | 313,206 | ||||||||
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Certain of the Company’s products, including the DuraGen® and NeuraGen® product families and the
INTEGRA® Dermal Regeneration Template and wound-dressing products, contain material derived from
bovine tissue. Products that contain materials derived from animal sources, including food as well
as pharmaceuticals and medical devices, are increasingly subject to scrutiny from the press and
regulatory authorities. These products constituted 22.9% and 22.4% of total revenues in each of the
three-month periods ended June 30, 2009 and 2008, respectively. Accordingly, widespread public
controversy concerning collagen products, new regulation, or a ban of the Company’s products
containing material derived from bovine tissue could have a material adverse effect on the
Company’s current business or its ability to expand its business.
Total revenues by major geographic area are summarized below (in thousands):
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
United States |
$ | 127,086 | $ | 115,754 | $ | 249,671 | $ | 229,129 | ||||||||
Europe |
23,035 | 25,937 | 46,429 | 52,599 | ||||||||||||
Asia Pacific |
7,935 | 6,142 | 15,129 | 13,361 | ||||||||||||
Other Foreign |
7,669 | 9,365 | 15,446 | 18,117 | ||||||||||||
Total |
$ | 165,725 | $ | 157,198 | $ | 326,675 | $ | 313,206 | ||||||||
11. COMMITMENTS AND CONTINGENCIES
In consideration for certain technology, manufacturing, distribution and selling rights and
licenses granted to the Company, the Company has agreed to pay royalties on the sales of products
that are commercialized relative to the granted rights and licenses. Royalty payments under these
agreements by the Company were not significant for any of the periods presented.
Various lawsuits, claims and proceedings are pending or have been settled by the Company. The most
significant of those are described below.
In May 2006, Codman & Shurtleff, Inc., a subsidiary of Johnson & Johnson, commenced an action in
the United States District Court for the District of New Jersey for declaratory judgment against
the Company with respect to United States Patent No. 5,997,895 (the “‘895 Patent”) held by the
Company. The Company’s ‘895 Patent describes dural repair technology related to the Company’s
DuraGen® family of duraplasty products.
The action sought declaratory relief that Codman’s DURAFORM® product does not infringe the
Company’s ‘895 Patent and that the Company’s ‘895 Patent is invalid and unenforceable. The Company
filed a counterclaim seeking a judgment that Codman’s DURAFORM® product infringes the ‘895 Patent.
In August 2009, the parties settled the litigation for an immaterial amount and entered into
covenants not to sue and mutual releases.
In addition to these matters, we are subject to various claims, lawsuits and proceedings in the
ordinary course of our business, including claims by current or former employees, distributors and
competitors and with respect to our products. In the opinion of management, such claims are either
adequately covered by insurance or otherwise indemnified, or are not expected, individually or in
the aggregate, to result in a material adverse effect on our financial condition. However, it is
possible that our results of operations, financial position and cash flows in a particular period
could be materially affected by these contingencies.
The Company accrues for loss contingencies in accordance with SFAS 5; that is, when it is deemed
probable that a loss has been incurred and that loss is estimable. The amounts accrued are based on
the full amount of the estimated loss before considering insurance proceeds, and do not include an
estimate for legal fees expected to be incurred in connection with the loss contingency. The
Company consistently accrues legal fees expected to be incurred in connection with loss
contingencies as those fees are incurred by outside counsel as a period cost, as permitted by EITF
Topic D-77.
12. SUBSEQUENT EVENTS
In accordance with SFAS 165, the Company has evaluated subsequent events through August 6, 2009,
the date of issuance of the unaudited condensed consolidated financial statements. During this
period, the Company did not have any material recognizable subsequent events.
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| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis of our financial condition and results of operations should
be read in conjunction with our condensed consolidated financial statements and the related notes
thereto appearing elsewhere in this report and our consolidated financial statements for the year
ended December 31, 2008 included in our Annual Report on Form 10-K.
We have made statements in this report which constitute forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934 (the “Exchange Act”). These forward-looking statements are subject to a number of risks,
uncertainties and assumptions about the Company. Our actual results may differ materially from
those anticipated in these forward-looking statements as a result of many factors, including but
not limited to those set forth above under the heading “Risk Factors” in our Annual Report on Form
10-K for the year ended December 31, 2008. We undertake no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future events or otherwise.
You can identify these forward-looking statements by forward-looking words such as “believe,”
“may,” “could,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “seek,” “plan,” “expect,”
“should,” “would” and similar expressions in this report.
GENERAL
Integra is a market-leading, innovative medical device company focused on helping the medical
professional enhance the standard of care for patients. Integra provides customers with clinically
relevant, innovative and cost-effective products that improve the quality of life for patients. We
focus on cranial and spinal procedures, small bone and joint injuries, the repair and
reconstruction of soft tissue, and instruments for surgery.
We present revenues in three market categories: NeuroSciences, Orthopedics and Medical Instruments.
Our neurosurgical products group includes, among other things, dural grafts that are indicated for
the repair of the dura mater, ultrasonic surgery systems for tissue ablation, cranial stabilization
and brain retraction systems, systems for measurement of various brain parameters and devices used
to gain access to the cranial cavity and to drain excess cerebrospinal fluid from the ventricles of
the brain. Our orthopedics products include specialty metal implants for surgery of the extremities
and spine, orthobiologics products for repair and grafting of bone, dermal regeneration products
and tissue engineered wound dressings and nerve and tendon repair products. Our medical instruments
products include a wide range of specialty and general surgical and dental instruments and surgical
lighting for sale to hospitals, outpatient surgery centers, and physician, veterinarian and dental
practices.
We manage these product groups and distribution channels on a centralized basis. Accordingly, we
report our financial results under a single operating segment — the development, manufacture and
distribution of medical devices.
We manufacture many of our products in plants located in the U.S., Puerto Rico, France, Germany,
Ireland, the United Kingdom and Mexico. We also source most of our handheld surgical instruments
through specialized third-party vendors.
In the U.S., we have three sales channels. The largest sales channel, Integra Orthopedics, includes
three sales organizations: Integra Extremity Reconstruction, which sells through a large direct
sales organization; Integra OrthoBiologics and Integra Spine, which each sell through specialty
distributors focused on their respective surgical specialties. Integra NeuroSciences, sells
products through directly employed sales representatives. The Integra Medical Instruments market
sales channel sells through two main sales organizations: Integra Surgical, which sells both
directly and through distributors and Miltex, which sells through distributors and wholesalers.
We also market certain products through strategic partners or original equipment manufacturer
customers.
Our objective is to continue to build a customer-focused and profitable medical device company by
developing or acquiring innovative medical devices and other products to sell through our sales
channels. Our strategy therefore entails substantial growth in revenues through both internal means
— through launching new and innovative products and selling existing products more intensively —
and by acquiring existing businesses or already successful product lines.
We aim to achieve this growth in revenues while maintaining strong financial results. While we pay
attention to any meaningful trend
in our financial results, we pay particular attention to measurements that are indicative of
long-term profitable growth. These measurements include revenue growth (derived through
acquisitions and products developed internally), gross margins on total revenues, operating margins
(which we aim to continually expand on as we leverage our existing infrastructure), operating cash
flows (which we aim to increase through improved working capital management), and earnings per
diluted share of common stock.
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We believe that we are particularly effective in the following aspects of our business:
Developing, manufacturing and selling specialty regenerative technology products. We have a broad
technology platform for developing products that regenerate or repair soft tissue and bone. We
believe that we have a particular advantage in developing, manufacturing and selling tissue repair
products derived from bovine collagen. These products comprised 23% and 22% of revenues for the six
months ended June 30, 2009 and 2008, respectively. Products that contain materials derived from
animal sources, including food, pharmaceuticals and medical devices, have been subject to scrutiny
from the media and regulatory authorities. Accordingly, widespread public controversy concerning
collagen products, new regulations, or a ban of our products containing material derived from
bovine tissue, could have a material adverse effect on our current business and our ability to
expand.
Developing metal implants for bone and joint repair, fixation and fusion. Through acquisitions,
particularly those of Theken in 2008 and Newdeal Technologies SAS in 2005, we have acquired
significant expertise in developing metal implants for use in bone and joint repair, fixation and
fusion and in successfully bringing those products to market.
Acquiring and integrating new product lines and complementary businesses. Since 1999, we have
acquired and integrated more than 30 product lines or businesses through an acquisition program
that focuses on acquiring companies or product lines at reasonable valuations which complement our
existing product lines or can be used to leverage our broad technology platform in tissue
regeneration and metal implants. We also employ a team of seasoned managers and executives who have
demonstrated their ability to successfully integrate the acquired product lines and businesses.
ACQUISITIONS
Our strategy for growing our business includes the acquisition of complementary product lines and
companies. Our recent acquisitions of businesses, assets and product lines may make our financial
results for the six months ended June 30, 2009 not directly comparable to those of the
corresponding prior-year period. See Note 2 to the unaudited condensed consolidated financial
statements for a further discussion. Since the beginning of 2008, we have acquired the following
businesses:
In August 2008, we acquired Theken Spine, LLC, Theken Disc, LLC and Therics, LLC (collectively,
“Theken”) for $75.0 million in cash, acquisition expenses of $2.4 million, working capital
adjustments of $4.0 million, and up to approximately $121.0 million in future payments based on the
revenue performance of the business in the two years after closing. Theken, based in Akron, Ohio,
designs, develops and manufactures spinal fixation products, synthetic bone substitute products and
spinal arthroplasty products. With Theken, we acquired a unique and comprehensive portfolio of
spinal implant products and a robust technology pipeline and demonstrated product development
capacity, an established network of spinal hardware distributors with established access to the
orthopedic spine market, and a strong management team with extensive experience in the orthopedic
spine market. Theken does not currently sell its products outside of the U.S. Accordingly, we
expect that the business will benefit from Integra’s large international presence. The Theken
products are now being marketed under the name Integra Spine™.
In October 2008, we acquired Integra Neurosciences Pty Ltd. in Australia and Integra Neurosciences
Pty Ltd. in New Zealand for $4.0 million (6.0 million Australian Dollars) in cash at closing, $0.3
million in acquisition expenses and working capital adjustments, and up to $2.1 million (3.1
million Australian Dollars) in future payments based on the performance of business in the three
years after closing. With this acquisition of the Company’s long-standing distributor, we now have
a direct selling presence in Australia and New Zealand.
In December 2008, we acquired Minnesota Scientific, Inc., doing business as Omni-Tract Surgical
(“Omni-Tract”), for $6.4 million in cash paid at closing, 310,000 unregistered shares of our common
stock valued at $10.7 million (of which 135,000 shares were issued at closing, with the remainder
issued in January 2009), working capital adjustments of $0.1 million and $0.3 million in
transaction related costs, subject to certain adjustments. Omni-Tract is a global leader in the
development and manufacture of table mounted retractors and is based in St. Paul, Minnesota.
Omni-Tract markets and sells these retractor systems for use in vascular, bariatric, general,
urologic, orthopedic, spine, pediatric, and laparoscopic surgery. We have integrated Omni-Tract’s
product lines into our combined
offering of JARIT®, Padgett™, R&B Redmond™, and Luxtec® lines of surgical instruments and
illumination systems sold by the Integra Medical Instruments sales organization.
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RESULTS OF OPERATIONS
Net income for the three months ended June 30, 2009 was $11.2 million, or $0.38 per diluted share,
as compared with net income of $12.3 million, or $0.43 per diluted share, for the three months
ended June 30, 2008.
Net income for the six months ended June 30, 2009 was $20.8 million, or $0.71 per diluted share, as
compared with net income of $21.3 million, or $0.75 per diluted share, for the six months ended
June 30, 2008.
Executive Summary
The decrease in net income for the three months ended June 30, 2009 over the prior year period
resulted primarily from increases in operating expenses and an increase in the effective tax rate
as a percentage of income before taxes from 31.3% during the 2008 period to 35.4% in the second
quarter of 2009, offset by a 5% increase in revenues, and an improvement in gross margin percentage
from 63% in the 2008 period to 64% in 2009.
The decrease in net income for the six months ended June 30, 2009 over the prior year period
resulted primarily from increases in research and development and selling, general and
administrative expenses and an increase in the estimated tax rate, offset by a 4% increase in
revenues, and an improvement in gross margin percentage from 62% in the 2008 period to 64% in 2009.
Our costs and expenses include the following charges (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
Employee termination and related costs |
$ | 196 | $ | — | $ | 646 | $ | — | ||||||||
Inventory fair market value purchase accounting adjustments |
1,924 | 453 | 3,931 | 3,661 | ||||||||||||
Facility consolidation, acquisition integration,
manufacturing and distribution transfer, and system
integration charges |
189 | 201 | 392 | 565 | ||||||||||||
Discontinued product lines |
246 | — | 246 | — | ||||||||||||
Incremental professional and bank fees related to (a) the
delayed filing of financial statements and (b) waivers or
possibility of obtaining waivers under our revolving
credit facility |
— | 493 | 350 | 1,041 | ||||||||||||
(Gain)/loss related to early extinguishment of convertible
note |
89 | — | (1,124 | ) | — | |||||||||||
Non-cash interest expense related to the application of
FSP APB 14-1 |
2,765 | — | 5,527 | — | ||||||||||||
Foreign exchange loss on intercompany loan (1) |
— | — | 1,876 | — | ||||||||||||
Total |
$ | 5,409 | $ | 1,147 | $ | 11,844 | $ | 5,267 | ||||||||
| (1) | This foreign exchange loss is associated with our intercompany loan set up in connection with
the restructuring of a German subsidiary in the fourth quarter of 2008. Net income for the six
months ended June 30, 2009 and prior periods include foreign exchange gains and losses associated
with intercompany loans not related to any restructuring. |
Of these amounts, $4.4 million and $4.1 million were charged to cost of product revenues in the
six-month periods ended June 30, 2009 and 2008, respectively. The remaining amounts, except for
intangible asset amortization and interest expense, were charged to selling, general and
administrative expenses.
We believe that, given our strategy of seeking new acquisitions and integrating recent
acquisitions, our current focus on rationalizing our existing manufacturing and distribution
infrastructure, our recent review of various product lines in relation to our current business
strategy, and a renewed focus on enterprise business systems integrations, charges similar to those
discussed above could recur with
similar materiality in the future. We believe that the delineation of these costs provides useful
information to measure the comparative performance of our business operations across reporting
periods.
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Revenues and Gross Margin on Product Revenues
Our revenues and gross margin on product revenues were as follows (in thousands):
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
NeuroSciences |
$ | 61,448 | $ | 62,762 | $ | 121,179 | $ | 124,466 | ||||||||
Orthopedics |
65,164 | 50,993 | 129,530 | 101,348 | ||||||||||||
Medical Instruments |
39,113 | 43,443 | 75,966 | 87,392 | ||||||||||||
Total revenue |
165,725 | 157,198 | 326,675 | 313,206 | ||||||||||||
Cost of product revenues |
59,805 | 58,159 | 117,953 | 120,371 | ||||||||||||
Gross margin on total revenues |
$ | 105,920 | $ | 99,039 | $ | 208,722 | $ | 192,835 | ||||||||
Gross margin as a percentage of total revenues |
64 | % | 63 | % | 64 | % | 62 | % | ||||||||
THREE MONTHS ENDED JUNE 30, 2009 AS COMPARED TO THREE MONTHS ENDED JUNE 30, 2008
Revenues and Gross Margin
For the three months ended June 30, 2009, total revenues increased by $8.5 million, or 5%, to
$165.7 million from $157.2 million for the same period during 2008. Domestic revenues increased by
$11.3 million to $127.1 million, or 77% of total revenues, for the three months ended June 30, 2009
from $115.8 million, or 74% of total revenues, for the three months ended June 30, 2008.
International revenues decreased to $38.6 million from $41.4 million in the prior-year period, a
decrease of 7%.
In the NeuroSciences category, sales of hospital capital equipment decreased from 2008,
particularly in our Radionics® image-guided surgery and stereotactic radio surgery systems and
ultrasonic surgery systems. We expect that hospitals will continue to spend less on capital
equipment than in prior years for several more quarters. Revenues from implants, particularly our
DuraGen family of products, continued to grow.
In the Orthopedics category, sales of our neurosurgical metal spine implants provided most of the
year-over-year growth, and sales of extremity reconstruction products for skin/wound, mid/hindfoot,
and upper extremity applications also grew according to plan. Private label orthopedics revenues
were down significantly.
In the Medical Instruments category, sales decreased due to eliminated distributed lines and
declining in office-based instruments and pain management sales. Sales of hospital-based
instruments increased as a result of the acquisition of the Omni-Tract line in December 2008.
Foreign exchange fluctuations, primarily due to the weakening of the euro, British pound, and
Canadian, Australian and New Zealand dollars versus the dollar, accounted for a $4.6 million
decrease in second quarter of 2009 revenues as compared to the same period last year.
We expect that the following factors will continue to temper sales growth in the short term:
reduced spending by hospitals on capital equipment, the occurrence of fewer elective surgical
procedures in the current global recessionary economic environment, and our recent elimination of
many of the product lines we distributed for third parties. However, we do expect these factors to
produce a benefit in our gross margin as a percentage of revenue, as most of our capital equipment
products and products distributed for third parties tend to generate lower gross margins as
compared to our other products.
While most of our products are not used in elective surgical procedures, approximately 9% of our
revenues in the three-month period ended June 30, 2009 consisted of sales of capital equipment.
Given the current economic conditions, lower hospital spending on capital equipment is expected to
continue throughout 2009 and potentially beyond then. With our large installed base of capital
equipment, such as Camino® intracranial pressure monitors, CUSA® ultrasonic surgical systems, and
Radionics® image-guided surgery and stereotactic radio surgery systems, we expect to continue to
generate revenue growth from the related disposable products. We expect
to drive future revenue growth by continuing to launch new products and acquire businesses and
products that can be sold through our existing sales organizations, and by gaining additional
market share through the expansion of our Integra Extremity Reconstruction and Integra Spine sales
organizations in the U.S. and leveraging the distribution channels in our Integra Spine, Integra
NeuroSciences, and Integra OrthoBiologics sales organizations to broaden each organization’s access
to spine surgeons. We believe that the biggest opportunities for revenue growth exist in the
extremity reconstruction and spine markets.
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Gross margin increased by $7.0 million to $106.0 million for the three-month period ended June 30,
2009, from $99.0 million for the same period last year. Gross margin as a percentage of total
revenue was 64% for the second quarter 2009 compared to 63% for the same period last year. This
increase results from a higher portion of product sales coming from higher margin implants,
particularly spine and extremity reconstruction, in combination with reduced sales of lower margin
instrument, distributed and capital products. The mix change offset a decrease in margin caused by
an increase in inventory purchase accounting adjustments, where charges of $1.9 million related to
Theken in the second quarter of 2009 versus charges related to our Precise Dental acquisitions
affected the second quarter of 2008 by $0.2 million.
We expect our consolidated gross margin to improve in 2009 as sales of our higher gross margin
implant products, particularly those from the spine business, are expected to continue to increase
as a proportion of total revenues. Our gross margin as a percentage of sales will improve further
if the U.S. dollar continues to weaken against the euro and British pound, as such a weakening
would increase our euro and pound-denominated sales contrasted with a relatively lower cost to
procure and produce inventory from foreign currency denominated sources in prior periods when the
dollar was relatively stronger. Although we continuously identify and implement programs to reduce
costs at our manufacturing plants and to manage our inventory more efficiently, gross margin
improvements in our business are expected to continue to result primarily from changes in sales mix
to a larger proportion of sales of our higher gross margin implant products.
Other Operating Expenses
The following is a summary of other operating expenses as a percent of total revenues (in
thousands):
| Three Months Ended June 30, | ||||||||
| 2009 | 2008 | |||||||
Research and development |
6 | % | 5 | % | ||||
Selling, general and administrative |
41 | % | 40 | % | ||||
Intangible asset amortization |
2 | % | 2 | % | ||||
Total other operating expenses |
49 | % | 47 | % | ||||
Total other operating expenses, which consist of research and development expenses, selling,
general and administrative expenses, and amortization expenses, increased $7.8 million, or 11%, to
$82.0 million in the second quarter of 2009 compared to $74.2 million in the second quarter of
2008. Research and development expenses in the second quarter of 2009 increased by $2.5 million to
$10.3 million, compared to $7.8 million in the same period last year. Most of the increase in
research and development spending is attributable to our spine business and our multi-center
clinical trial to support FDA approval of the DuraGen Plus® Adhesion Barrier Matrix product.
Excluding acquisition-related and other special charges, we target 2009 spending on research and
development to be between 5% and 7% of total revenues. Most of this planned spending for 2009 is
concentrated on product development efforts for our spine, neurosurgery and extremity
reconstruction product lines. Additionally, we are continuing the Adhesion Barrier Matrix clinical
trial and the clinical trial to support FDA approval of expanded claims for our INTEGRA® Dermal
Regeneration Template product.
Selling, general and administrative expenses in the second quarter of 2009 increased by
$4.8 million to $68.3 million, compared to $63.5 million in the same period last year. Selling
expenses increased by $4.1 million primarily due to increase in revenues and the corresponding
commission costs, particularly in connection with our spine fixation product revenues, which
generate relatively higher distributor commission costs. In addition to spine, selling expenses
also increased in the first quarter of 2009 compared to the same period last year in connection
with the acquisitions of the Integra Neurosciences Pty Ltd. in Australia and New Zealand and
Omni-Tract businesses. General and administrative costs increased $0.7 million primarily due to
the acquisitions of the Theken, Integra Neurosciences Pty Ltd. in Australia and New Zealand, and
Omni-Tract businesses. We will continue to expand our direct sales organizations in our direct
selling platforms where business opportunities are most attractive, including extremity
reconstruction, and increase corporate staff to support our information systems infrastructure to
facilitate future growth.
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Amortization expense in the second quarter of 2009 increased by $0.5 million to $3.5 million,
compared to $3.0 million in the same period last year. The increase was primarily related to the
acquisitions of the Theken, Integra Neurosciences Pty Ltd. in Australia and New Zealand, and
Omni-Tract businesses.
Non-Operating Income and Expenses
The following is a summary of non-operating income and expenses (in thousands):
| Three Months Ended June 30 | ||||||||
| 2009 | 2008 | |||||||
Interest income |
$ | 134 | $ | 444 | ||||
Interest expense |
(6,174 | ) | (6,922 | ) | ||||
Other income (expense) |
(481 | ) | (451 | ) | ||||
Interest Income
Interest income decreased in the three months ended June 30, 2009 compared to the same period last
year, primarily as a result of lower interest rates of return.
Interest Expense
Interest expense for the three months ended June 30, 2009 and 2008 included the impact of the
additional interest expense from the adoption of FSP APB 14-1 (see Note 1 for more information).
Interest expense decreased in the three-month period ended June 30, 2009, compared to the same
period last year, primarily due to the settlement of our 2008 Notes, which were fully repaid in
April 2008, and waiver fees paid in 2008. Our reported interest expense for the three-month periods
ended June 30, 2009 and 2008, respectively, includes $4.8 million and $3.4 million of cash interest
expense. The remainder of the expense represents non-cash interest expense related to the adoption
of FSP APB 14-1 and the amortization of debt issuance costs.
Income Taxes
| Three Months Ended June 30, | ||||||||
| (in thousands) | 2009 | 2008 | ||||||
Income before income taxes |
$ | 17,384 | $ | 17,869 | ||||
Income tax expense |
6,159 | 5,592 | ||||||
Net income |
$ | 11,225 | $ | 12,277 | ||||
Effective tax rate |
35.4 | % | 31.3 | % | ||||
Our effective income tax rate for the three months ended June 30, 2009 and 2008 was 35.4% and
31.3%, respectively. Income tax expense included certain discrete items in the quarter.
Our effective tax rate may vary from period to period depending on, among other factors, the
geographic and business mix of taxable earnings and losses. We consider these factors and others,
including our history of generating taxable earnings, in assessing our ability to realize deferred
tax assets. We expect our effective income tax rate for the full year to be approximately 33%.
SIX MONTHS ENDED JUNE 30, 2009 AS COMPARED TO SIX MONTHS ENDED JUNE 30, 2008
Revenues and Gross Margin
For the six-month period ended June 30, 2009, total revenues increased by $13.5 million or 4%, to
$326.7 million from $313.2 million during the prior-year period. Domestic revenues increased by
$20.6 million to $249.7 million and were 76% of total revenues, as compared to 73% of revenues in
the six months ended June 30, 2008. International revenues decreased $7.1 million to $77.0 million,
a decrease of 8% compared to the same period in 2008.
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In the NeuroSciences category, sales of hospital capital equipment decreased from 2008,
particularly in our Radionics® image-guided surgery and stereotactic radio surgery systems and
ultrasonic surgery systems. We expect that hospitals will continue to spend less on capital
equipment than in prior years for several more quarters. Revenues from implants, particularly our
DuraGen family of products, continued to grow.
In the Orthopedics category, sales of our neurosurgical metal spine implants provided most of the
year-over-year growth, and sales of extremity reconstruction products for skin/wound, mid/hindfoot,
and upper extremity applications also grew accordingly to plan. Private label orthopedics revenues
were down significantly.
In the Medical Instruments category, sales decreased due to eliminated distributed lines and
declining in office-based instruments and pain management sales. Sales of hospital-based
instruments increased as a result of the acquisition of the Omni-Tract line in December 2008.
Foreign
exchange fluctuations, primarily due to the weakening of the euro,
British pound, and Canadian,
Australian and New Zealand dollars versus the dollar, accounted for a $9.8 million decrease in the
six month period ended June 30, 2009 revenues as compared to the same period last year.
Gross margin increased by $15.9 million to $208.7 million for the six-month period ended June 30,
2009, from $192.8 million for the same period last year. Gross margin as a percentage of total
revenue was 64% for the first two quarters of 2009, compared to 62% for this same period during
2008. This increase results from a higher portion of product sales coming from higher margin
implants, particularly spine and extremity reconstruction, in combination with reduced sales of
lower margin instrument, distributed and capital products. Inventory purchase accounting adjustment
charges totaled $4.0 million in the six month period ended June 30, 2009 related to our Theken,
Integra Neurosciences Pty. Ltd. in Australia and New Zealand, and Omni-Tract acquisitions, versus
$3.4 million of charges in the same period during 2008 related to our Precise Dental and IsoTis
acquisitions.
Other Operating Expenses
The following is a summary of other operating expenses as a percent of total revenues (in
thousands):
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2009 | 2008 | |||||||
Research and development |
6 | % | 5 | % | ||||
Selling, general and administrative |
41 | % | 40 | % | ||||
Intangible asset amortization |
2 | % | 2 | % | ||||
Total other operating expenses |
49 | % | 47 | % | ||||
Total other operating expenses, which consist of research and development expenses, selling,
general and administrative expenses and amortization expenses, increased $15.1 million, or 10%, to
$162.6 million in the first half of 2009, compared to $147.5 million in the same period last year.
Research and development expenses in the first half of 2009 increased by $5.4 million to $21.0
million, compared to $15.6 million in the same period last year. The increase was due largely to
the acquisition of Theken in August 2008 and to increased spending in our multi-center clinical
trial being conducted under a FDA Investigational Device Exemption initiated in 2006 to support FDA
of our DuraGen Plus® Adhesion Barrier Matrix product in the United States.
Selling, general and administrative expenses in the first half of 2009 increased by $8.7 million to
$134.7 million, compared to $126.0 million in the same period last year. Selling expenses increased
by $9.7 million primarily due to increase in revenues and the corresponding commission costs,
particularly in connection with our spine fixation product revenues, which generate relatively
higher distributor commission costs. In addition to spine, selling expenses also increased in the
first half of 2009 compared to the same period
last year in connection with the acquisitions of the Integra Neurosciences Pty Ltd. in Australia
and New Zealand and Omni-Tract businesses. General and administrative costs decreased $1.0 million
from the prior period primarily due to decreases in cash bonus accruals and lower professional and
consulting fees related to financial operations, partially offset by increases in connection with
the acquisitions of the Theken, Integra Neurosciences Pty Ltd. in Australia and New Zealand, and
Omni-Tract businesses.
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Amortization expense in the first six months of 2009 increased by $1.0 million to $6.9 million,
compared to $5.9 million in the same period last year. The increase was primarily related to the
acquisitions of the Theken, Integra Neurosciences Pty Ltd. in Australia and New Zealand, and
Omni-Tract businesses.
Non-Operating Income and Expenses
The following is a summary of non-operating income and expenses (in thousands):
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2009 | 2008 | |||||||
Interest income |
$ | 381 | $ | 1,131 | ||||
Interest expense |
(12,858 | ) | (15,489 | ) | ||||
Other income (expense) |
(1,349 | ) | 1,056 | |||||
Interest Income
Interest income decreased in the six-month period ended June 30, 2009, compared to the same period
last year, primarily due to lower interest rates and lower average cash and investment balances.
Interest Expense
Interest expense for the six months ended June 30, 2009 and 2008 included the impact of the
additional interest expense from the adoption of FSP APB 14-1 (see Note 1 for more information).
Interest expense decreased in the six-month period ended June 30, 2009, compared to the same period
last year, primarily due to the settlement of our 2008 Notes, which were fully repaid in April
2008, waiver fees paid in 2008, and a larger accretion of interest expense related to FSP APB 14-1.
Our reported interest expense for the six-month periods ended June 30, 2009 and 2008 include $6.6
million of cash interest expense. The remainder of the expense represents non-cash interest expense
related to the adoption of FSP APB 14-1 and the amortization of debt issuance costs.
On March 17, 2008, our 2008 Notes matured and we paid $1.8 million of contingent interest because
our common stock price was greater than $37.56 at thirty days prior to the maturity date. The value
of this contingent interest obligation was marked to its fair value at each balance sheet date,
with changes in the fair value recorded to interest expense. In accordance with the terms of the
2008 Notes we paid approximately $0.2 million and $119.4 million and issued 12,000 and 756,000
shares of our common stock in March and April 2008, respectively. We borrowed $120 million under
our credit facility in March 2008 in order to repay the 2008 Notes, which were entirely repaid in
April 2008. The changes in the estimated fair value of the contingent interest obligation
increased/decreased interest expense by $25,000 for the six months ended June 30, 2008.
Other Income (Expense)
Other income (expense) decreased in the six months ended June 30, 2009, compared to the same period
last year, primarily as a result of foreign exchange losses of $2.9 million in the six months ended
June 30, 2009, compared to foreign exchange gains of $0.9 million in the six months ended June 30,
2008 Offsetting this loss in 2009 was $1.1 million of net gains related to the March and June 2009
repurchases of our 2010 Notes totaling $50.8 million (as defined below).
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Income Taxes
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2009 | 2008 | |||||||
| (in thousands) | ||||||||
Income before income taxes |
$ | 32,331 | $ | 32,032 | ||||
Income tax expense |
11,539 | 10,705 | ||||||
Net income |
$ | 20,792 | $ | 21,327 | ||||
Effective tax rate |
35.7 | % | 33.4 | % | ||||
Our effective income tax rate for the six months ended June 30, 2009 and 2008 was 35.7% and 33.4%,
respectively. Our effective tax rate may vary from period to period depending on, among other
factors, the geographic and business mix of taxable earnings and losses. We consider these factors
and others, including our history of generating taxable earnings, in assessing our ability to
realize deferred tax assets.
GEOGRAPHIC PRODUCT REVENUES AND OPERATIONS
Product revenues by major geographic area are summarized below (in thousands):
| United | Other | |||||||||||||||||||
| States | Europe | Asia Pacific | Foreign | Total | ||||||||||||||||
Three months ended June 30, 2009
|
$ | 127,086 | $ | 23,035 | $ | 7,935 | $ | 7,669 | $ | 165,725 | ||||||||||
Three months ended June 30, 2008
|
115,754 | 25,937 | 6,142 | 9,365 | 157,198 | |||||||||||||||
Six months ended June 30, 2009
|
249,671 | 46,429 | 15,129 | 15,446 | 326,675 | |||||||||||||||
Six months ended June 30, 2008
|
229,129 | 52,599 | 13,361 | 18,117 | 313,206 | |||||||||||||||
For the six months ended June 30, 2009, revenues from customers outside the United States totaled
$77.0 million, or 24% of total revenues, of which approximately 60% were from European customers.
Revenues from customers outside the United States included $59.4 million of revenues generated in
foreign currencies. For the six months ended June 30, 2008, revenues from customers outside the
United States totaled $84.1 million, or 27% of total revenues, of which approximately 63% were from
European customers. Revenues from customers outside the United States included $60.4 million of
revenues generated in foreign currencies. Because we have operations based in Europe and we
generate revenues and incur operating expenses in euros, British pounds, Swiss francs, Canadian
dollars, Australian dollars, New Zealand dollars, Mexican pesos, and the Japanese yen, we
experience currency exchange risk with respect to those foreign currency denominated revenues or
expenses. We currently do not hedge our exposure to foreign currency risk. Accordingly,
fluctuations of the dollar against these other currencies could negatively affect future gross
margins and operating margins. We will continue to assess the potential effects that changes in
foreign currency exchange rates could have on our business. If we believe this potential impact
presents a significant risk to our business, we may enter into derivative financial instruments to
mitigate this risk.
Additionally, we generate significant revenues outside the United States, a portion of which are
U.S. dollar-denominated transactions conducted with customers who generate revenue in currencies
other than the U.S. dollar. As a result, currency fluctuations between the U.S. dollar and the
currencies in which those customers do business may have an impact on the demand for our products
in foreign countries.
Local economic conditions, regulatory or political considerations, the effectiveness of our sales
representatives and distributors, local competition and changes in local medical practice all may
combine to affect our sales into markets outside the United States.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Marketable Securities
We had cash and cash equivalents totaling approximately $138.7 million and $183.5 million at June
30, 2009 and December 31, 2008, respectively.
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Cash Flows
| Six Months Ended June 30, | ||||||||
| 2009 | 2008 | |||||||
| (in thousands) | ||||||||
Net cash provided by operating activities |
$ | 67,825 | $ | 18,371 | ||||
Net cash used in investing activities |
(12,410 | ) | (6,136 | ) | ||||
Net cash (used in) provided by financing activities |
(104,220 | ) | 4,729 | |||||
Effect of exchange rate fluctuations on cash |
3,976 | 3,035 | ||||||
Net increase in cash and cash equivalents |
$ | (44,829 | ) | $ | 19,999 | |||
Cash Flows Provided by Operating Activities
We have generated positive operating cash flows on an annual basis, including $72.6 million for the
year ended December 31, 2008 and $67.8 million for the six months ended June 30, 2009, resulting
from net income and non-cash add-backs, partially offset by deferred tax benefit and changes in
working capital items.
Cash provided by operations has recently been, and is expected to continue to be our primary means
of funding existing operations and capital expenditures. Despite comparable net incomes for the six
months ended June 30, 2009 and June 30, 2008, operating cash flows increased in 2009 as a result of
improved collections of accounts receivable, usage of prepaid expenses, particularly prepaid income
taxes, reductions in inventory and other working capital adjustments.
Cash Flows (Used in) Provided by Investing and Financing Activities
Our principal use of funds during the six months ended June 30, 2009 was $44.8 million used to
repurchase the liability component of the 2010 Notes and repayment of $60.0 million of our senior
credit facility. These Notes had a face value amount of $50.8 million, and their purchase will
result in overall reduced net interest costs. Other uses in the period included $8.3 million in
capital expenditures and $4.1 million of payments related to previous business acquisitions
Working Capital
At June 30, 2009 and December 31, 2008, working capital was $206.4 million and $322.6 million,
respectively. The decrease in working capital is primarily related to the inclusion of our 2010
Notes in current liabilities due to their maturity date.
Convertible Debt and Senior Secured Revolving Credit Facility
We pay interest each June 1 and December 1 on our $114.2 million senior convertible notes due June
2010 (“2010 Notes”) at an annual rate of 2.75% and on our $165 million senior convertible notes due
June 2012 (“2012 Notes” and, collectively with the “2010 Notes”, the “Notes”) at an annual rate of
2.375%.
The Notes are senior, unsecured obligations of Integra, and are convertible into cash and, if
applicable, shares of our common stock based on an initial conversion rate, subject to adjustment,
of 15.0917 shares per $1,000 principal amount of notes for the 2010 Notes and 15.3935 shares per
$1,000 principal amount of notes for the 2012 Notes (which represents an initial conversion price
of approximately $66.26 per share and approximately $64.96 per share for the 2010 Notes and the
2012 Notes, respectively.) We expect to satisfy any conversion of the Notes with cash up to the
principal amount of the applicable series of Notes pursuant to the net share settlement mechanism
set forth in the applicable indenture and, with respect to any excess conversion value, with shares
of our common stock. The Notes are convertible only in the following circumstances: (1) if the
closing sale price of our common stock exceeds 130% of the conversion price during a period as
defined in the indenture; (2) if the average trading price per $1,000 principal amount of the Notes
is less than or equal to 97% of the average conversion value of the Notes during a period as
defined in the indenture; (3) at any time on or after December 15, 2009 (in connection with the
2010 Notes) or anytime after December 15, 2011 (in connection with the 2012 Notes); or (4) if
specified corporate transactions occur. The issue price of the Notes was equal to their face
amount, which is also the amount holders are entitled to receive at maturity if the Notes are not
converted. As of June 30, 2009, the 2010 Notes are classified as current due to their maturity
date. However, none of these conditions existed and, as a result, the entire balance of the 2012
Notes is classified as long-term.
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The Notes, under the terms of the private placement agreement, are guaranteed fully by Integra
LifeSciences Corporation, a subsidiary of Integra. The 2010 Notes will rank equal in right of
payment to the 2012 Notes. The Notes will be Integra’s direct senior unsecured obligations and will
rank equal in right of payment to all of our existing and future unsecured and unsubordinated
indebtedness.
In connection with the issuance of the Notes, we entered into call transactions and warrant
transactions, primarily with affiliates of the initial purchasers of the Notes (the “hedge
participants”), in connection with each series of Notes. The cost of the call transactions to us
was approximately $46.8 million. We received approximately $21.7 million of proceeds from the
warrant transactions. The call transactions involved our purchasing call options from the hedge
participants, and the warrant transactions involved us selling call options to the hedge
participants with a higher strike price than the purchased call options.
The initial strike price of the call transactions is (1) for the 2010 Notes, approximately $66.26
per share of Common Stock, and (2) for the 2012 Notes, approximately $64.96, in each case subject
to anti-dilution adjustments substantially similar to those in the Notes. The initial strike price
of the warrant transactions is (i) for the 2010 Notes, approximately $77.96 per share of Common
Stock and (ii) for the 2012 Notes, approximately $90.95, in each case subject to customary
anti-dilution adjustments.
In March 2009, we repurchased $32.1 million principal amount of the 2010 Notes and recognized a
gain of $1.2 million. Total cash paid for this repurchase was $29.5 million of which $28.0 million
related to repayment of the liability component of the Notes and $1.5 million for payment of
accreted interest. In June 2009, we repurchased $18.7 million principal amount of the 2010 Notes
and recognized a loss of $0.1 million. Total cash paid for this repurchase was $18.0 million of
which $16.8 million related to repayment of the liability component of the Notes and $1.2 million
for payment of accreted interest. The bond hedge contracts were terminated on a pro-rata basis and
the number of options was adjusted to reflect the number of convertible securities outstanding that
together have a total principal amount of $114.2 million. In separate transactions, we amended the
warrant transactions to reduce the number of warrants outstanding to reflect such number of
convertible securities outstanding.
We may from time to time seek to retire or purchase additional outstanding Notes through cash
purchases and/or exchanges for equity securities, in open market purchases, privately negotiated
transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market
conditions, our liquidity requirements, contractual restrictions and other factors. Under certain
circumstances, the call options associated with any repurchased Notes may terminate early, but only
with respect to the number of Notes that cease to be outstanding. The amounts involved may be
material.
As of June 30, 2009 we had $200 million of outstanding borrowings under our credit facility at a
weighted average rate of 1.32%. We used a portion of the proceeds to repay all of the remaining
2008 Notes totaling approximately $119.4 million in the second quarter of 2008 and $3.3 million of
related accrued and contingent interest during March 2008. On July 28, 2008 and October 30, 2008,
we borrowed $80.0 million and $60.0 million, respectively, to fund the acquisition of Theken and
for other general corporate purposes. During June 2009, we repaid $60.0 million of our outstanding
borrowings. We consider $40.0 million of such outstanding amounts to be short-term in nature based
on its current intent and ability to repay this borrowing. If additional borrowings are made in
connection with, for instance, future acquisitions, such activities could impact the timing of when
we intend to repay amounts under this credit facility, which expires in December, 2011. We believe
that our cash and available borrowings under the senior secured revolving credit facility are
sufficient to finance our operations, capital expenditures and potential acquisition-related
earn-out payments in the near term.
Share Repurchase Plan
In October 2007, our Board of Directors adopted a program that authorized us to repurchase shares
of our common stock for an aggregate purchase price not to exceed $75.0 million through
December 31, 2008. On October 30, 2008, our Board of Directors terminated the repurchase
authorization it adopted in October 2007 and authorized us to repurchase shares of our common stock
for an aggregate purchase price not to exceed $75.0 million through December 31, 2010. Shares may
be purchased either in the open market or in privately negotiated transactions. We did not
repurchase any shares of our common stock in 2008 or during the first six months of 2009 under
either of these programs.
Dividend Policy
We have not paid any cash dividends on our common stock since our formation. Our credit facility
limits the amount of dividends that we may pay. Any future determinations to pay cash dividends on
our common stock will be at the discretion of our Board of Directors and will depend upon our
financial condition, results of operations, cash flows and other factors deemed relevant by the
Board of
Directors.
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Capital Resources
We believe that our cash and available borrowings under the senior secured revolving credit
facility are sufficient to finance our operations and capital expenditures, and potential
acquisition-related earn-out payments in the near term based on our current intent. We regularly
borrow under the credit facility and make payments with respect thereto and consider $40.0 million
of such outstanding amounts to be short-term in nature. See “Convertible Debt and Senior Secured
Revolving Credit Facility” for a description of the material terms of our credit facility.
Contractual Obligations and Commitments
As of June 30, 2009, we were obligated to pay the following amounts under various agreements:
| 1-3 | More | |||||||||||||||||||
| Less than | Years | 3-5 | than | |||||||||||||||||
| Total | 1 Year | (in millions) | Years | 5 years | ||||||||||||||||
Convertible Securities |
$ | 279.2 | $ | 114.2 | $ | 165.0 | $ | — | $ | — | ||||||||||
Revolving Credit Facility (1) |
200.0 | 40.0 | 160.0 | — | — | |||||||||||||||
Interest on Convertible Securities |
14.9 | 3.5 | 11.4 | — | — | |||||||||||||||
Employment Agreements (2) |
5.5 | 3.1 | 2.4 | — | — | |||||||||||||||
Operating Leases |
33.2 | 7.4 | 8.7 | 6.9 | 10.2 | |||||||||||||||
Purchase Obligations |
10.4 | 1.4 | 9.0 | — | — | |||||||||||||||
Warranty Obligations |
0.7 | 0.7 | — | — | — | |||||||||||||||
Pension Contributions |
0.4 | 0.4 | — | — | — | |||||||||||||||
Total |
$ | 544.3 | $ | 170.7 | $ | 356.5 | $ | 6.9 | $ | 10.2 | ||||||||||
| (1) | We regularly borrow and make payment each month against the credit facility and consider
$40.0 million of such outstanding amounts to be short-term in nature based on our current
intent and ability. If additional borrowings are made in connection with, for instance, future
acquisitions, this could impact the timing of when we intend to repay amounts under this
credit facility which expires in December 2011. |
|
| (2) | Amounts shown under Employment Agreements do not include executive compensation or
compensation resulting from a change in control relating to our executive officers. |
Excluded from the contractual obligations table is the liability for unrecognized tax benefits
totaling $11.6 million. This liability for unrecognized tax benefits has been excluded because we
cannot make a reliable estimate of the period in which the unrecognized tax benefits will be
realized.
In addition, the terms of the purchase agreements executed in connection with certain acquisitions
we closed in the last several years require us to make payments to the sellers of those businesses
based on the performance of such businesses after the acquisition. The purchase adjustments could
require payments up to a total of approximately $122.0 million in 2009 and 2010, the actual amounts
to depend primarily on the revenues attributable to the Theken Spine, LLC acquisition.
OTHER MATTERS
Critical Accounting Estimates
The
critical accounting estimates included in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2008 have
not materially changed. Certain of these estimates, such as the
valuation of identifiable intangible assets, have been affected by
lower revenues and profitability than had been originally
anticipated. Such valuations have accordingly become more sensitive
to factors such as prevailing interest rates and assumptions about
market royalty rates.
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Recently Adopted Accounting Standards
Effective January 1, 2009, we adopted Financial Accounting Standards Board (“FASB”) Staff Position
No. APB 14-1, Accounting for Convertible Debt Instruments that May be Settled in Cash Upon
Conversion (Including Partial Cash Settlement) (“FSP APB 14-1”).
FSP APB 14-1 requires that the liability and equity components of convertible debt instruments that
may be settled in cash upon conversion (including partial cash settlement) be separately accounted
for in a manner that reflects an issuer’s nonconvertible debt borrowing rate. FSP APB 14-1 is
effective for financial statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. FSP APB 14-1 is effective for our $330.0 million, of
which $279.2 million remains outstanding, aggregate principal amount of our senior convertible
notes due June 2010 and June 2012 with an annual rate of 2.75% and 2.375%, respectively, (the “2010
Notes” and the “2012 Notes,” respectively), and the $119.5 million exchanged portion of our
contingent convertible subordinated notes due March 2008 with an annual rate of 2.5% (the “2008
Notes”) and requires retrospective application for all periods presented. FSP APB 14-1 requires the
issuer of convertible debt instruments with cash settlement features to separately account for the
liability. As of the date of issuance for the 2010 Notes and the 2012 Notes, and the date of
modification for the 2008 Notes (collectively, the “Covered Notes”), the result of the impact of
FSP APB 14-1 for each of the Covered Notes is as follows (in millions):
| 2008 | 2010 | 2012 | ||||||||||
| Notes | Notes | Notes | ||||||||||
Date impacted by FSP APB 14-1 |
September 2006 | June 2007 | June 2007 | |||||||||
Total Amount |
$ | 119.5 | $ | 165.0 | $ | 165.0 | ||||||
Liability Component |
103.0 | 142.2 | 122.5 | |||||||||
Equity Component |
11.6 | 16.0 | 29.9 | |||||||||
Deferred Tax Component |
4.9 | 6.8 | 12.6 | |||||||||
The
liability component was recognized at the present value of its cash flows discounted using discount
rates of 9.70%, 6.47% and 6.81%, our borrowing rate at the date of exchange of the 2008 Notes and
the dates of the issuance of the 2010 Notes and the 2012 Notes, respectively, for a similar debt
instrument without the conversion feature. For additional information, see Note 5, “Debt.”
FSP APB 14-1 also requires an accretion of the resultant debt discount over the expected life of
the Covered Notes, which is March, 2008 to June, 2012.
For the three months ended June 30, 2009, the additional pre-tax non-cash interest expense
recognized in the condensed consolidated income statement was $2.9 million. Accumulated
amortization related to the debt discount was $19.0 million and $11.5 million as of June 30, 2009
and December 31, 2008, respectively. The pre-tax increase in non-cash interest expense on our
condensed consolidated statements of income to be recognized through 2012, the latest maturity date
of the Notes, is as follows (in millions):
| 2009 | 2010 | 2011 | 2012 | |||||||||||||
Pre-tax increase in non-cash interest expense |
$ | 10.3 | $ | 7.8 | $ | 6.7 | $ | 2.9 | ||||||||
Effective January 1, 2009, we adopted FASB Staff Position No. EITF 03-6-1, Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP
03-6-1”). In FSP 03-6-1, unvested share-based payment awards that contain rights to receive
nonforfeitable dividends or dividend equivalents (whether paid or unpaid) are participating
securities, and thus, should be included in the two-class method of computing earnings per share
(“EPS”). The adoption of this standard did not have a material impact on our disclosure of EPS. See
Note 9, “Net Income Per Share.”
Effective January 1, 2009, we adopted FASB Statement No. 141(R), Business Combinations (“Statement
141(R)”), a replacement of FASB Statement No. 141. Statement 141(R) changes the practice for
accounting for business combinations, such as requiring that we (1) expense transaction costs as
incurred, rather than capitalizing them as part of the purchase price; (2) record contingent
consideration arrangements and pre-acquisition contingencies, such as legal issues, at fair value
at the acquisition date, with subsequent changes in fair value recorded in the income statement;
(3) capitalize the fair value of acquired research and development assets separately from goodwill,
whereas we previously determined the acquisition-date fair value and then immediately charged the
value to expense; and (4) limit the conditions under which restructuring expenses can be accrued in
the opening balance sheet of a target to only those where the requirements in FASB Statement No.
146, Accounting for Costs Associated with Exit or Disposal Activities, would
have been met at the acquisition date. Additionally, Statement 141(R) provides that, upon initially
obtaining control, an acquirer shall recognize 100 percent of the fair values of acquired assets,
including goodwill, and assumed liabilities, with only limited exceptions, even if the acquirer has
not acquired 100 percent of its target. The implementation of Statement 141(R) could result in an
increase or decrease in future selling, general and administrative and other operating expenses,
depending upon the extent of our acquisition related activities going forward. No business
combination transactions occurred during the three months ended June 30, 2009. The adoption of this
standard did not have a material impact on our financial condition and results of operations.
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In April 2008, the FASB issued FASB Staff Position No. FAS 142-3, Determination of the Useful Life
of Intangible Assets (“FAS 142-3”). FAS 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset under Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (“SFAS 142”). The intent of FAS 142-3 is to improve the consistency between the
useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows
used to measure the fair value of the asset under SFAS 141(R), and other generally accepted
accounting principles. FAS 142-3 is effective for fiscal years beginning after December 15, 2008.
The adoption of this standard did not have a material impact on our financial condition and results
of operations.
We adopted FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”),
on January 1, 2009, which delayed the effective date of Statement of Financial Accounting Standards
No. 157, Fair Value Measurements (“SFAS 157”), for all non-financial assets and non-financial
liabilities, except for items that are recognized or disclosed at fair value on a recurring basis
(at least annually). The adoption of this standard did not have a material impact on our financial
condition and results of operations.
We adopted FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities
(“FAS 161”), which is effective January 1, 2009. FAS 161 requires enhanced disclosures about
derivative instruments and hedging activities to allow for a better understanding of their effects
on an entity’s financial position, financial performance, and cash flows. Among other things, FAS
161 requires disclosure of the fair values of derivative instruments and associated gains and
losses in a tabular format. Since FAS 161 requires only additional disclosures about our
derivatives and hedging activities, the adoption of FAS 161 does not affect our financial position
or results of operations.
In June 2008, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 07-05, Determining
Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock (“EITF 07-05”).
EITF 07-05 mandates a two-step process for evaluating whether an equity-linked financial instrument
or embedded feature is indexed to the entity’s own stock, for the purposes of applying the
Paragraph 11(a) scope of exception in FASB Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities. Equity instruments that a company issues that contain a strike price
adjustment feature, upon the adoption of EITF 07-05, may no longer being considered indexed to the
company’s own stock. Accordingly, adoption of EITF 07-05 may change the current classification
(from equity to liability) and the related accounting for such equity instruments outstanding at
that date. EITF 07-05 is effective for fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years. We are currently evaluating the impact the adoption of EITF
07-05 will have on its financial statement presentation and disclosures.
In May 2009, the FASB issued and we adopted SFAS No. 165, Subsequent Events (“SFAS 165”). SFAS 165
establishes general standards of accounting for and disclosure of events that occur after the
balance sheet date but before the financial statements are issued. SFAS 165 requires disclosure of
the date through which an entity has evaluated subsequent events and the basis for that date. That
is, whether the date represents the date the financial statements were issued or were available to
be issued. SFAS 165 is effective in the first interim period ending after June 15, 2009. The
adoption of this standard did not have a material impact on our financial condition and results of
operations.
Recently Issued Accounting Standards
In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, The Hierarchy of
Generally Accepted Accounting Principles (“SFAS 162”). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the preparation of
financial statements of nongovernmental entities that are presented in conformity with GAAP in the
U.S. Any effect of applying the provisions of SFAS 162 shall be reported as a change in accounting
principle in accordance with Statement of Financial Accounting Standards No. 154, Accounting
Changes and Error Corrections. SFAS 162 is effective 60 days following approval by the Securities
and Exchange Commission of the Public Company Accounting Oversight Board amendments to AU
Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting
Principles. We do not anticipate that the adoption of SFAS 162 will have a material impact on our
financial statements.
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In June 2009, the FASB issued SFAS 168, The FASB Accounting Standards Codification™ and the
Hierarchy of Generally Accepted Accounting Principles (“SFAS 168”). When effective, SFAS 168 will
become the single official source of authoritative, nongovernmental U.S. generally accepted
accounting principles. SFAS 168 will be effective for interim and annual periods ending after
September 15, 2009. We are required to report using SFAS 168 for the quarter ended September 30,
2009. We do not anticipate reporting under SFAS 168 to have a material impact on our financial
statements.
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to various market risks, including changes in foreign currency exchange rates and
interest rates that could adversely affect our results of operations and financial condition. To
manage the volatility relating to these typical business exposures, we may enter into various
derivative transactions when appropriate. We do not hold or issue derivative instruments for
trading or other speculative purposes.
Foreign Currency Exchange Rate Risk
A discussion of foreign currency exchange risks is provided under the caption “International
Product Revenues and Operations” under “Management’s Discussion and Analysis of Financial Condition
and Results of Operations.”
Interest Rate Risk — Senior Secured Credit Facility
We are exposed to the risk of interest rate fluctuations on the interest paid under the terms of
our senior secured credit facility. Based on our outstanding borrowings as of June 30, 2009, a
hypothetical 100 basis point movement in interest rates applicable to this credit facility would
increase or decrease interest expense by approximately $2.0 million on an annual basis.
| ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance
that information required to be disclosed in our Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms and that such information is accumulated and communicated to our
management, including our principal executive officer and principal financial officer, as
appropriate, to allow for timely decisions regarding required disclosure. Disclosure controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures. Management has
designed our disclosure controls and procedures to provide reasonable assurance of achieving the
desired control objectives.
As required by Exchange Act Rule 13a-15(b), we have carried out an evaluation, under the
supervision and with the participation of our management, including our principal executive officer
and principal financial officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as of June 30, 2009. Based upon this evaluation, our principal executive
officer and principal financial officer concluded that our disclosure controls and procedures were
effective as of June 30, 2009 to provide such reasonable assurance.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2009 that have
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
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PART II. OTHER INFORMATION
| ITEM 1. | LEGAL PROCEEDINGS |
Various lawsuits, claims and proceedings are pending or have been settled by us. The most
significant of those are described below.
In May 2006, Codman & Shurtleff, Inc., a subsidiary of Johnson & Johnson, commenced an action in
the United States District Court for the District of New Jersey for declaratory judgment against
the Company with respect to United States Patent No. 5,997,895 (the “‘895 Patent”) held by the
Company. The Company’s ‘895 Patent describes dural repair technology related to the Company’s
DuraGen® family of duraplasty products.
The action sought declaratory relief that Codman’s DURAFORM® product does not infringe the
Company’s ‘895 Patent and that the Company’s ‘895 Patent is invalid and unenforceable. The Company
filed a counterclaim seeking a judgment that Codman’s DURAFORM® product infringes the ‘895 Patent.
In August 2009, the parties settled the litigation for an immaterial amount and entered into
covenants not to sue and mutual releases.
In addition to these matters, we are subject to various claims, lawsuits and proceedings in the
ordinary course of our business, including claims by current or former employees, distributors and
competitors and with respect to our products. In the opinion of management, such claims are either
adequately covered by insurance or otherwise indemnified, or are not expected, individually or in
the aggregate, to result in a material adverse effect on our financial condition. However, it is
possible that our results of operations, financial position and cash flows in a particular period
could be materially affected by these contingencies.
| ITEM 1A. | RISK FACTORS |
The Risk Factors included in our Annual Report on Form 10-K for the fiscal year ended December 31,
2008 (as modified by the subsequent Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 2009) have not materially changed other than the modifications to the risk factors as set
forth below.
Our future financial results could be adversely affected by impairments or other charges.
Since we have grown through acquisitions, we had $211.8 million of goodwill and $50.0 million of
indefinite-lived intangible assets as of June 30, 2009. Under Statement of Financial Accounting
Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” we are required to test both
goodwill and indefinite-lived intangible assets for impairment on an annual basis based upon a fair
value approach, rather than amortizing them over time. We are also required to test goodwill and
indefinite-lived intangible assets for impairment between annual tests if an event occurs such as a
significant decline in revenues or cash flows for certain products, or we experience a significant
change in discount rates used in the calculations of discounted cash flow, or circumstances change
that would more likely than not reduce our enterprise fair value below its book value. If such a
decline, rate change or circumstance were to materialize, we may record an impairment of these
intangible assets that could be material to the financial statements. See “Management’s Discussion
and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates” of
this report.
SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” requires that we
assess the impairment of our long-lived assets, including definite-lived intangible assets,
whenever events or changes in circumstances indicate that the carrying value may not be recoverable
as measured by the sum of the expected future undiscounted cash flows. As of June 30, 2009, we had
$167.4 million of other intangible assets.
The value of medical device businesses is often volatile, and the assumptions
underlying our estimates made in connection with our assessments under SFAS No. 142 or 144 may
change as a result of that volatility or other factors outside our control and may result in
impairment charges. The amount of any such impairment charges under SFAS No. 142 or 144 could be
significant and could have a material adverse effect on our reported financial results for the
period in which the charge is taken and could have an adverse effect on the market price of our
securities, including the notes and the common stock into which they may be converted.
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To market our products under development we will first need to obtain regulatory approval. Further, if we fail to comply with the extensive governmental regulations that affect our business, we could be subject to penalties and could be precluded from marketing our products.
As a manufacturer and marketer of medical devices, we are subject to extensive regulation by the FDA and the Center for Medicare Services of the U.S. Department of Health and Human Services and other federal governmental agencies and, in some jurisdictions, by state and foreign governmental authorities. These regulations govern the introduction of new medical devices, the observance of certain standards with respect to the design, manufacture, testing, labeling, promotion and sales of the devices, the maintenance of certain records, the ability to track devices, the reporting of potential product defects, the import and export of devices and other matters. We are facing an increasing amount of scrutiny and compliance costs as more states are implementing regulations governing medical devices, pharmaceuticals and/or biologics which affect many of our products. As a result, we are implementing additional procedures, controls and tracking and reporting processes, as well as paying additional permit and license fees, where required.
Our products under development are subject to FDA approval or clearance prior to marketing for commercial use. The process of obtaining necessary FDA approvals or clearances can take years and is expensive and uncertain. The FDA has announced that it is reviewing the 510(k) Premarket Notification process, and there may be requirements for more extensive testing and/or clinical trials required for products cleared to market under the 510(k) process. The FDA may also require the more extensive PMA process for certain products. Our inability to obtain required regulatory approval on a timely or acceptable basis could harm our business. Further, approval or clearance may place substantial restrictions on the indications for which the product may be marketed or to whom it may be marketed, warnings that may be required to accompany the product or additional restrictions placed on the sale and/or use of the product. Further studies, including clinical trials and FDA approvals, may be required to gain approval for the use of a product for clinical indications other than those for which the product was initially approved or cleared or for significant changes to the product. These studies could take years to complete and could be expensive, and there is no guarantee that the results will convince the FDA to approve or clear the additional indication. Any negative outcome in our clinical trials, including as a result of any interim analysis which we may do with respect to our clinical trials from time to time, could adversely affect our ability to launch new products, which could affect our sales. In addition, for products with an approved PMA, the FDA requires annual reports and may require post-approval surveillance programs and/or studies to monitor the products’ safety and effectiveness. Results of post-approval programs may limit or expand the further marketing of the product. We are also seeing third-party intermediaries require clinical trial data for products cleared through the 510(k) process in order to continue reimbursement coverage. These clinical trials could take years to complete and be expensive and there is no guarantee that the FDA will approve the additional indications for use. If the FDA does not approve the additional indications for use, this could affect our ability to obtain reimbursement for these products and adversely affect our ability to compete against alternative products or technologies, which could affect our sales.
Another risk of application to the FDA relates to the regulatory classification of new products or proposed new uses for existing products. In the filing of each application, we make a judgment about the appropriate form and content of the application. If the FDA disagrees with our judgment in any particular case and, for example, requires us to file a PMA application rather than allowing us to market for approved uses while we seek broader approvals or requires extensive additional clinical data, the time and expense required to obtain the required approval might be significantly increased or approval might not be granted.
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Approved products are subject to continuing FDA requirements relating to quality control and quality assurance, maintenance of records, reporting of adverse events and product recalls, documentation, and labeling and promotion of medical devices. For example, some of our orthobiologics products are subject to FDA and certain state regulations regarding human cells, tissues, and cellular or tissue-based products, which include requirements for establishment registration and listing, donor eligibility, current good tissue practices, labeling, adverse-event reporting, and inspection and enforcement. Some states have their own tissue banking regulation. We are licensed or have permits as a tissue bank in California, Florida, New York and Maryland. In addition, tissue banks may undergo voluntary accreditation by the American Association of Tissue Banks, or the AATB. The AATB has issued operating standards for tissue banking. Compliance with these standards is a requirement in order to become a licensed tissue bank.
The FDA and foreign regulatory authorities require that our products be manufactured according to rigorous standards. These and future regulatory requirements could significantly increase our production or purchasing costs and could even prevent us from making or obtaining our products in amounts sufficient to meet market demand. If we or a third-party manufacturer change our approved manufacturing process, the FDA may require a new approval before that process may be used. Failure to develop our manufacturing capability could mean that, even if we were to develop promising new products, we might not be able to produce them profitably, as a result of delays and additional capital investment costs. Manufacturing facilities, both international and domestic, are also subject to inspections by or under the authority of the FDA. In addition, failure to comply with applicable regulatory requirements could subject us to enforcement action, including product seizures, recalls, withdrawal of clearances or approvals, restrictions on or injunctions against marketing our product or products based on our technology, cessation of operations and civil and criminal penalties.
We are also subject to the regulatory requirements of countries outside the U.S. where we do business. For example, under the European Union Medical Device Directive, all medical devices must meet the Medical Device Directive standards and receive CE Mark Certification prior to marketing in the European Union. CE Mark Certification requires a comprehensive Quality System program, comprehensive technical documentation and data on the product, which a “Notified Body” in Europe reviews. In addition, we must be certified to the ISO 13485:2003 Quality System standards and maintain this certification in order to market our products in the European Union, Canada, Japan, Latin America, Asia-Pacific and most other countries outside the U.S. As a result of an amendment to Japan’s Pharmaceutical Affairs Law that went into effect on April 1, 2005, new regulations and requirements exist for obtaining approval of medical devices, including new requirements governing the conduct of clinical trials, the manufacturing of products and the distribution of products in Japan. Significant resources may be needed to comply with the extensive auditing of and requests for documentation relating to all manufacturing facilities of our company and our vendors by the Pharmaceutical Medical Device Agency and the Ministry of Health, Labor and Welfare in Japan to comply with the amendment to the Pharmaceutical Affairs Law. These new regulations may affect our ability to obtain approvals of new products for sale in Japan. Additionally, the European Union as well as many other countries outside the U.S. have or may be considering implementing new or amended medical device regulations that require extensive documentation, including clinical trial data, as well as may require audits of our manufacturing facilities. There are also associated fees with these new regulations. These regulations are required for all new products and re-registration of our medical devices.
Our products that contain human derived tissue, including those containing de-mineralized bone matrices, are not medical devices in the European Union as defined in the Medical Device Directive (93/42/EC). They are also not medicinal products as defined in Directive 2001/83/EC. Today, regulations, if applicable, are different from one EU member state to the next. Due to the absence of a harmonized regulatory framework and the proposed regulation for advanced therapy medicinal products in the EU, as well as for other countries, the approval process for human derived cell or tissue based medical products may be extensive, lengthy, expensive, and unpredictable. Among others, some of our orthobiologics products are subject to European Union member states’ regulations that govern the donation, procurement, testing, coding, traceability, processing, preservation, storage, and distribution of human tissues and cells and cellular or tissue-based products. These European Union member states’ regulations include requirements for registration, listing, labeling, adverse-event reporting, and inspection and enforcement. Some EU member states have their own tissue banking regulations.
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| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
In October 2008, our Board of Directors adopted a new program that authorizes us to repurchase
shares of our common stock for an aggregate purchase price not to exceed $75 million through
December 31, 2010. Shares may be repurchased either in the open market or in privately negotiated
transactions.
There were no such repurchases of our common stock during the quarter ended June 30, 2009 under
this program.
| ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
Our Annual Meeting of Stockholders was held on May 20, 2009 and in connection therewith, management
solicited proxies pursuant to Regulation 14A under the Exchange Act. An aggregate of 28,143,464
shares of our common stock was outstanding and entitled to vote at the meeting. At the meeting the
following matters (not including ordinary procedural matters) were submitted to a vote of the
holders of the common stock, with the results indicated below:
1. Election of directors to serve until the 2010 Annual Meeting. The following persons were
elected. All were management’s nominees for election, and all were serving as directors. There was
no solicitation in opposition to such nominees. The tabulation of votes was as follows:
| Nominee | For | Against | Abstain | |||||||||
Thomas J. Baltimore, Jr. |
19,437,983 | 6,960,616 | 22,131 | |||||||||
Keith Bradley |
19,183,680 | 7,218,162 | 18,889 | |||||||||
Richard E. Caruso |
14,577,867 | 11,823,876 | 18,989 | |||||||||
Stuart M. Essig |
20,312,551 | 6,089,017 | 19,163 | |||||||||
Neal Moszkowski |
19,041,403 | 7,356,816 | 22,510 | |||||||||
Raymond G. Murphy |
26,247,217 | 151,067 | 22,447 | |||||||||
Christian S. Schade |
20,561,813 | 5,836,683 | 22,237 | |||||||||
James M. Sullivan |
15,059,091 | 11,339,311 | 22,332 | |||||||||
Anne M. VanLent |
20,571,498 | 5,830,218 | 19,015 | |||||||||
2. Ratification of independent registered public accounting firm. The appointment of
PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for the
2009 fiscal year was ratified. The tabulation of votes was as follows:
| For | Against | Abstentions | ||
26,088,817
|
299,309 | 32,608 |
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Table of Contents
| ITEM 6. | EXHIBITS |
| 10.1 | Form of Restricted Stock Agreement for Non-Employee Directors (Incorporated by reference to Exhibit
10.1 to the Company’s Current Report on Form 8-K filed on April 13, 2009) |
|||
| 10.2 | 2009-1 Amendment to Employment Agreement, dated as of April 13, 2009, to the Second Amended and
Restated Employment Agreement, between the Company and Mr. Essig, which is filed as Exhibit 10.1 to
the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 filed on
November 9, 2004, and previously amended by Amendment 2006-1, which is filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on December 22, 2006, Amendment 2008-1, which is filed as
Exhibit 10.12(c) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007
filed on May 16, 2008 and Amendment 2008-2, which is filed as Exhibit 10.7 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2008 filed on August 11, 2008 (Incorporated by
reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on April 13, 2009) |
|||
| 10.3 | Form of Restricted Stock Agreement for Mr. Essig for 2009 (Incorporated by reference to Exhibit 10.3
to the Company’s Current Report on Form 8-K filed on April 13, 2009) |
|||
| 10.4 | 2009-1 Amendment to Employment Agreement, dated as of April 13, 2009, to Mr. Carlozzi’s Amended and
Restated 2005 Employment Agreement, between the Company and Mr. Carlozzi, which is filed as Exhibit
10.17 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 filed on March
15, 2006, and previously amended by Amendment 2008-1 filed as Exhibit 10.16(b) to the Company’s
Annual Report on Form 10-K for the year ended December 31, 2007 filed on May 16, 2008 and Amendment
2008-2, filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on December 24, 2008
(Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on April
13, 2009) |
|||
| 10.5 | 2009-1 Amendment to Employment Agreement, dated as of April 13, 2009, to Mr. Henneman’s Amended and
Restated 2005 Employment Agreement between the Company and Mr. Henneman, which is filed as Exhibit
10.16 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 filed on March
15, 2006, and previously amended by Amendment 2008-1 filed as Exhibit 10.15(b) to the Company’s
Annual Report on Form 10-K for the year ended December 31, 2007 filed on May 16, 2008 and Amendment
2008-2, filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on December 24, 2008
(Incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on April
13, 2009) |
|||
| 10.6 | Form of Restricted Stock Agreement for 2008 and 2009 for Messrs. Carlozzi and Henneman (Incorporated
by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on April 13, 2009) |
|||
| *31.1 | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|||
| *31.2 | Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|||
| *32.1 | Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|||
| *32.2 | Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| * | Filed herewith |
37
Table of Contents
SIGNATURES
Pursuant to the requirements 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.
| INTEGRA LIFESCIENCES HOLDINGS | ||||
| CORPORATION | ||||
Date: August 6, 2009
|
/s/ Stuart M. Essig
|
|||
| President and Chief Executive Officer | ||||
Date: August 6, 2009
|
/s/ John B. Henneman, III
|
|||
| Executive Vice President, Finance and Administration, and Chief Financial Officer |
38
Table of Contents
Exhibits
| 10.1 | Form of Restricted Stock Agreement for Non-Employee Directors (Incorporated by reference to Exhibit
10.1 to the Company’s Current Report on Form 8-K filed on April 13, 2009) |
|||
| 10.2 | 2009-1 Amendment to Employment Agreement, dated as of April 13, 2009, to the Second Amended and
Restated Employment Agreement, between the Company and Mr. Essig, which is filed as Exhibit 10.1 to
the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 filed on
November 9, 2004, and previously amended by Amendment 2006-1, which is filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on December 22, 2006, Amendment 2008-1, which is filed as
Exhibit 10.12(c) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007
filed on May 16, 2008 and Amendment 2008-2, which is filed as Exhibit 10.7 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2008 filed on August 11, 2008 (Incorporated by
reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on April 13, 2009) |
|||
| 10.3 | Form of Restricted Stock Agreement for Mr. Essig for 2009 (Incorporated by reference to Exhibit 10.3
to the Company’s Current Report on Form 8-K filed on April 13, 2009) |
|||
| 10.4 | 2009-1 Amendment to Employment Agreement, dated as of April 13, 2009, to Mr. Carlozzi’s Amended and
Restated 2005 Employment Agreement, between the Company and Mr. Carlozzi, which is filed as Exhibit
10.17 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 filed on March
15, 2006, and previously amended by Amendment 2008-1 filed as Exhibit 10.16(b) to the Company’s
Annual Report on Form 10-K for the year ended December 31, 2007 filed on May 16, 2008 and Amendment
2008-2, filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on December 24, 2008
(Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on April
13, 2009) |
|||
| 10.5 | 2009-1 Amendment to Employment Agreement, dated as of April 13, 2009, to Mr. Henneman’s Amended and
Restated 2005 Employment Agreement between the Company and Mr. Henneman, which is filed as Exhibit
10.16 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 filed on March
15, 2006, and previously amended by Amendment 2008-1 filed as Exhibit 10.15(b) to the Company’s
Annual Report on Form 10-K for the year ended December 31, 2007 filed on May 16, 2008 and Amendment
2008-2, filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on December 24, 2008
(Incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on April
13, 2009) |
|||
| 10.6 | Form of Restricted Stock Agreement for 2008 and 2009 for Messrs. Carlozzi and Henneman (Incorporated
by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on April 13, 2009) |
|||
| *31.1 | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|||
| *31.2 | Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|||
| *32.1 | Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|||
| *32.2 | Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| * | Filed herewith |
39
Exhibit 31.1
Certification of Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Stuart M. Essig, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Integra LifeSciences Holdings
Corporation; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13 a-15(e):
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and we have: |
| (a) | designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared; |
| (b) | designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting
principles; |
| (c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such evaluation;
and |
| (d) | disclosed in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the
audit committee of registrant’s board of directors (or persons performing the equivalent
functions): |
| (a) | all significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect
the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | any fraud, whether or not material, that involves management or other employees who have
a significant role in the registrant’s internal control over financial reporting. |
Date: August 6, 2009
|
/s/ Stuart M. Essig
|
|||
| President and Chief Executive Officer |
Exhibit 31.2
Certification of Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, John B. Henneman, III, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Integra LifeSciences Holdings
Corporation; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13 a-15(e):
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and we have: |
| (a) | designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared; |
| (b) | designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting
principles; |
| (c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such evaluation;
and |
| (d) | disclosed in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the
audit committee of registrant’s board of directors (or persons performing the equivalent
functions): |
| (a) | all significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect
the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | any fraud, whether or not material, that involves management or other employees who have
a significant role in the registrant’s internal control over financial reporting. |
Date: August 6, 2009
|
/s/ John B. Henneman, III
|
|||
| Executive Vice President, Finance and Administration, and Chief Financial Officer |
Exhibit 32.1
Certification of Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
I, Stuart M. Essig, Chief Executive Officer and Director of Integra LifeSciences Holdings
Corporation (the “Company”), hereby certify that, to my knowledge:
| 1. | The Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2009 (the
“Report”) fully complies with the requirement of Section 13(a) or Section 15(d), as
applicable, of the Securities Exchange Act of 1934, as amended; and |
| 2. | The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company. |
Date: August 6, 2009
|
/s/ Stuart M. Essig
|
|||
| President and Chief Executive Officer |
Exhibit 32.2
Certification of Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
I, John B. Henneman, III, Executive Vice President Finance and Administration and Chief Financial
Officer of Integra LifeSciences Holdings Corporation (the “Company”), hereby certify that, to my
knowledge:
| 1. | The Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2009 (the
“Report”) fully complies with the requirement of Section 13(a) or Section 15(d), as
applicable, of the Securities Exchange Act of 1934, as amended; and |
| 2. | The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company. |
Date: August 6, 2009
|
/s/ John B. Henneman, III
|
|||
| Executive Vice President, Finance and Administration, and Chief Financial Officer |