UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 2001.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________.
Commission file Number 0-12515.
BIOMET, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1418342
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
56 East Bell Drive, Warsaw, Indiana 46582
(Address of principal executive offices)
(219) 267-6639
(Registrant's telephone number, including area code)
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 X No
As of February 28, 2001, the registrant had 178,943,519 common shares
outstanding.
BIOMET, INC.
CONTENTS
Pages
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets 1-2
Consolidated Statements of Income 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements 5-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-10
Item 3. Quantitative and Qualitative Disclosure about
Market Risks 10
Part II. Other Information 11
Signatures 12
Index to Exhibits 13
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIOMET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
at February 28, 2001 and May 31, 2000
(in thousands)
ASSETS
February 28, May 31,
2001 2000
------------ -------
(Unaudited)
Current assets:
Cash and cash equivalents $ 203,173 $ 213,606
Investments 12,857 34,129
Accounts and notes receivable, net 304,392 249,792
Inventories 271,221 240,162
Deferred income taxes 32,801 25,811
Prepaid expenses and other 31,423 26,128
--------- ---------
Total current assets 855,867 789,628
--------- ---------
Property, plant and equipment, at cost 324,666 299,294
Less, Accumulated depreciation 137,566 116,037
--------- ---------
Property, plant and equipment, net 187,100 183,257
--------- ---------
Investments 195,193 159,533
Intangible assets, net 10,675 9,100
Excess acquisition costs over fair value
of acquired net assets, net 142,311 60,654
Other assets 16,961 16,276
--------- ---------
Total assets $1,408,107 $1,218,448
========= =========
The accompanying notes are a part of the consolidated financial statements.
BIOMET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
at February 28, 2001 and May 31, 2000
(in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
February 28, May 31,
2001 2000
------------ -------
(Unaudited)
Current liabilities:
Short-term borrowings $ 71,967 $ 70,546
Accounts payable 20,916 25,612
Accrued income taxes 13,898 17,288
Accrued wages and commissions 29,730 24,224
Other accrued expenses 84,628 43,773
--------- ---------
Total current liabilities 221,139 181,443
Long-term liabilities:
Deferred federal income taxes 7,409 5,386
Other liabilities 425 423
--------- ---------
Total liabilities 228,973 187,252
--------- ---------
Minority interest 92,625 87,873
--------- ---------
Contingencies (Note 8)
Shareholders' equity:
Common shares 101,557 85,086
Additional paid-in capital 41,451 41,451
Retained earnings 985,447 866,011
Accumulated other comprehensive loss (41,946) (49,225)
--------- ---------
Total shareholders' equity 1,086,509 943,323
--------- ---------
Total liabilities and shareholders' equity $1,408,107 $1,218,448
========= =========
The accompanying notes are a part of the consolidated financial statements.
BIOMET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
for the nine and three month periods ended February 28, 2001
and February 29, 2000
(Unaudited, in thousands, except per share data)
Nine Months Ended Three Months Ended
----------------- ------------------
2001 2000 2001 2000
---- ---- ---- ----
Net sales $739,992 $670,366 $266,276 $232,910
Cost of sales 211,571 203,256 74,155 70,393
------- ------- ------- -------
Gross profit 528,421 467,110 192,121 162,517
Selling, general and
administrative expenses 267,089 236,807 96,975 83,792
Research and development expense 31,533 29,534 11,374 10,959
Special charge 26,100 11,700 26,100 2,700
------- ------- ------- -------
Operating income 203,699 189,069 57,672 65,066
Other income, net 14,107 11,923 3,926 4,895
------- ------- ------- -------
Income before income taxes
and minority interest 217,806 200,992 61,598 69,961
Provision for income taxes 74,624 73,129 21,112 25,317
------- ------- ------- -------
Income before minority interest 143,182 127,863 40,486 44,644
Minority interest 4,752 4,713 2,281 1,452
------- ------- ------- -------
Net income $138,430 $123,150 $ 38,205 $ 43,192
======= ======= ======= =======
Earnings per share:
Basic $.78 $.70 $.21 $.24
==== ==== ==== ====
Diluted $.77 $.69 $.21 $.24
==== ==== ==== ====
Shares used in the computation
of earnings per share:
Basic 178,422 175,736 178,830 176,951
======= ======= ======= =======
Diluted 180,374 178,540 181,020 179,248
======= ======= ======= =======
Cash dividends per common share $.11 $.09 $ -- $ --
==== ==== ==== ====
The accompanying notes are a part of the consolidated financial statements.
BIOMET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the nine months ended February 28, 2001 and February 29, 2000
(Unaudited, in thousands)
2001 2000
---- ----
Cash flows from (used in) operating activities:
Net income $138,430 $123,150
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation 22,704 20,306
Amortization 9,094 6,467
Gain on sale of investments, net (1,783) (723)
Minority interest 4,752 4,713
Deferred federal income taxes (583) (272)
Changes in current assets and liabilities,
excluding effects of acquisitions:
Accounts and notes receivable, net (29,348) (24,194)
Inventories (26,704) (25,459)
Prepaid expenses and other (11,323) (6,179)
Accounts payable (5,478) 674
Accrued income taxes (5,943) 24,253
Accrued wages and commissions 4,179 61
Other accrued expenses 33,224 (58,660)
------- ------
Net cash from operating activities 131,221 64,137
------- ------
Cash flows from (used in) investing activities:
Proceeds from sales and maturities of investments 41,481 19,401
Purchases of investments (54,177) (28,608)
Capital expenditures (25,255) (26,635)
Acquisitions, net of cash acquired (90,602) (18,142)
Other (2,766) (1,001)
------- ------
Net cash used in investing activities (131,319) (54,985)
------- ------
Cash flows from (used in) financing activities:
Increase (decrease) in short-term borrowings, net (12,788) 24,980
Issuance of common shares 16,471 9,913
Cash dividends (18,993) (16,468)
------- ------
Net cash from (used in) financing activities (15,310) 18,425
------- ------
Effect of exchange rate changes on cash 4,975 (3,456)
------- ------
Increase (decrease) in cash and cash equivalents (10,433) 24,121
Cash and cash equivalents, beginning of year 213,606 132,081
------- -------
Cash and cash equivalents, end of period $203,173 $156,202
======= =======
The accompanying notes are a part of the consolidated financial statements.
BIOMET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION.
The accompanying consolidated financial statements include the accounts of
Biomet, Inc. and its subsidiaries (individually and collectively referred to as
the "Company"). The unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the nine-month period
ended February 28, 2001 are not necessarily indicative of the results that may
be expected for the fiscal year ending May 31, 2001. For further information,
refer to the consolidated financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2000.
The accompanying consolidated balance sheet at May 31, 2000, has been derived
from the audited Consolidated Financial Statements at that date, but does not
include all disclosures required by generally accepted accounting principles.
The Company has one reportable segment, musculoskeletal products, which includes
designing, manufacturing and marketing of reconstructive products, fixation
devices, spinal products and other products. Other products consist primarily
of Arthrotek's arthroscopy products, AOA's softgood products, general
instruments and operating room supplies. The Company manages its business
segment primarily on a geographic basis. These geographic markets are comprised
of the United States, Europe and other. Other geographic markets include
Canada, South America, Mexico, Japan and the Pacific Rim.
Net sales of musculoskeletal products by product category are as follows for the
nine and three months ended February 28, 2001 and February 29, 2000:
Nine Months Ended Three Months Ended
----------------- ------------------
2001 2000 2001 2000
---- ---- ---- ----
(in thousands)
Reconstructive $446,548 $422,738 $158,655 $146,828
Fixation 147,304 131,563 52,549 46,200
Spinal products 62,230 38,571 26,429 13,452
Other 83,910 77,494 28,643 26,430
------- ------- ------- -------
$739,992 $670,366 $266,276 $232,910
======= ======= ======= =======
NOTE 2: COMPREHENSIVE INCOME.
Other comprehensive income includes foreign currency translation adjustments
and unrealized appreciation of available-for-sale securities, net of taxes.
Other comprehensive income (loss) for the three months ended February 28, 2001
and February 29, 2000 was $21,280,000 and $(13,438,000), respectively. Other
comprehensive income (loss) for the nine months ended February 28, 2001 and
February 29, 2000 was $7,279,000 and $(17,451,000), respectively. Total
comprehensive income combines reported net income and other comprehensive
income. Total comprehensive income for the three months ended February 28, 2001
and February 29, 2000 was $59,485,000 and $29,754,000, respectively. Total
comprehensive income for the nine months ended February 28, 2001 and February
29, 2000 was $145,709,000 and $105,699,000, respectively.
NOTE 3: INVENTORIES.
Inventories at February 28, 2001 and May 31, 2000 are as follows:
February 28, May 31,
2001 2000
------------ -------
(in thousands)
Raw materials $ 28,109 $ 28,511
Work-in-process 31,641 28,962
Finished goods 108,695 101,307
Consigned inventory 102,776 81,382
------- -------
$271,221 $240,162
======= =======
NOTE 4: COMMON SHARES.
During the nine months ended February 28, 2001, the Company issued 1,290,292
Common Shares upon the exercise of outstanding stock options for proceeds
aggregating $16,471,000. On July 6, 2000, the Company announced a three-for-two
stock split payable August 8, 2000 to shareholders of record July 18, 2000. All
information on the number of common shares and all per share data for the
previous year have been restated for this stock split.
NOTE 5: EARNINGS PER SHARE.
Earnings per common share amounts ("basic EPS") are computed by dividing net
income by the weighted average number of common shares outstanding and excludes
any potential dilution. Earnings per common share amounts assuming dilution
("diluted EPS") are computed by reflecting potential dilution from the
exercise of stock options.
NOTE 6: INCOME TAXES.
The difference between the reported provision for income taxes and a provision
computed by applying the federal statutory rate to pre-tax accounting income is
primarily attributable to state income taxes, tax benefits relating to
operations in Puerto Rico, tax-exempt income and tax credits.
NOTE 7: ACQUISITIONS.
On September 25, 2000, the Company through its EBI subsidiary acquired
Biolectron, Inc. for $90 million in cash. Biolectron's products principally
address the spinal fusion, fracture healing and arthroscopy market segments.
The Company accounted for this acquisition as a purchase. Management has not
completed its final analysis of the allocation of the purchase price, but
anticipates that the average life expectancy of these intangibles will be
approximately 18 years.
NOTE 8: CONTINGENCIES.
On January 18, 2001, the United States Court of Appeals for the Federal Circuit
(the "Federal Circuit") reinstated a $20 million punitive damages award against
the Company given to Raymond G. Tronzo by the United States District Court for
the Southern District of Florida (the "District Court") while affirming the
compensatory damage award of $520. In its decision in this matter, the District
Court had reduced the punitive damage award to $52,000. The Federal Circuit's
decision was based principally on procedural grounds, and concluded a finding
that a relationship of 38,000 to 1 between the punitive award and the
compensatory award was legally permissible. On March 28, 2001, the Federal
Circuit denied the Company's combined petition for panel rehearing and petition
for rehearing en banc. The Company believes this result conflicts with
controlling law, including decisions of the United States Supreme Court.
Accordingly, the Company is seeking review of this case by the United States
Supreme Court. It is important to note that this decision does not affect the
ongoing sales of any of Biomet's product lines. The Company has recorded a
one-time special charge during this quarter of $26.1 million in connection with
these damage awards which includes interest and related expenses.
There are various other claims, lawsuits, disputes with third parties,
investigations and pending actions involving various allegations against the
Company incident to the operation of its business, principally product liability
and intellectual property cases. Each of these matters is subject to various
uncertainties, and it is possible that some of these matters may be resolved
unfavorably to the Company. The Company establishes accruals for losses that
are deemed to be probable and subject to reasonable estimate. Based on the
advice of counsel to the Company in these matters, management believes that the
ultimate outcome of these matters and any liabilities in excess of amounts
provided will not have a material adverse impact on the Company's consolidated
financial position or on its future business operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ACQUISITION
As discussed in Note 7 of the Notes to Consolidated Financial Statements, on
September 25, 2000, the Company acquired Biolectron, Inc. for $90 million in
cash. The Company accounted for this acquisition as a purchase and the
operating results of Biolectron, Inc. have been consolidated from the date of
acquisition.
FINANCIAL CONDITION AS OF FEBRUARY 28, 2001
The Company's cash and investments increased $3,955,000 to $411,223,000 at
February 28, 2001, which includes the $18,993,000 cash dividend paid during the
first quarter and the $102,700,000 paid for acquisitions and debt payoff from
the acquired companies.
Cash flows provided by operating activities were $131,221,000 for the first nine
months of fiscal 2001 compared to $64,137,000 in 2000. Net income plus
depreciation and amortization and an increase in other accrued expenses were
the principal sources of cash from operating activities, offset by increases in
accounts receivable, inventories and prepaid expenses and other assets.
Cash flows used in investing activities were $131,319,000 for the first nine
months of fiscal 2001 compared to a use of $54,985,000 in 2000. The primary use
of cash flows for investing activities were purchases of investments, purchases
of capital equipment and business acquisitions offset by sales and maturities of
investments.
Cash flows used in financing activities were $15,310,000 for the first nine
months of fiscal 2001 compared to a source of $18,425,000 in 2000. The primary
use of cash flows from financing activities was the cash dividend paid in the
first quarter and debt payoff from acquired companies while the primary source
of cash flows from financing activities was from cash receipts from stock option
exercises.
Currently available funds, together with anticipated cash flows generated from
future operations, are believed to be adequate to cover the Company's
anticipated cash requirements, including capital expenditures, research and
development costs and potential business acquisitions.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED FEBRUARY 28, 2001
AS COMPARED TO THE NINE MONTHS ENDED FEBRUARY 29, 2000
Net sales increased 10% to $739,992,000 for the nine-month period ended February
28, 2001, from $670,366,000 for the same period last year. Excluding the
impact of foreign currency and discontinued products, which reduced the first
nine months sales by $26 million and $6.7 million, respectively, net sales
increased 15% during the first nine months of fiscal year 2001. The
discontinued product line, which did not meaningfully contribute to the
Company's operating income, is associated with the Company's 3i division and its
June 1, 2000 termination of a distribution agreement with W. L. Gore &
Associates. The product line represented regenerative and non-regenerative
membranes utilized in dental reconstructive procedures. The Company's
U.S.-based revenue increased 16% to $518,191,000 during the first nine months,
while foreign sales decreased 1.2% to $221,801,000. Excluding the negative
foreign exchange adjustment and discontinued products, domestic sales increased
17%, while foreign sales in local currencies increased 12%. Biomet's worldwide
sales of reconstructive products during the first nine months of fiscal 2001
were $446,548,000, representing a 6% increase compared to the first nine months
of last year. This increase was primarily a result of Biomet's continued
penetration of the reconstructive device market led by revision products, the
Repicci Unicondylar Knee, the Ascent Total Knee System and 3i's dental
reconstructive implants. Sales of fixation products were $147,304,000 for the
first nine months of fiscal 2001, representing an 12% increase as compared to
the same period in 2000. Sales of spinal products were $62,230,000 for the
first nine months of fiscal 2001, representing a 61% increase as compared to the
same period in 2000. Sales of spinal hardware contributed to this increase.
Increases in both fixation and spinal products were positively influenced by the
acquisition of Biolectron in September of this fiscal year. The Company's sales
of other products totaled $83,910,000, representing an 8% increase over the
first nine months of fiscal year 2000, primarily as a result of increased sales
of AOA's softgood products and Arthrotek's arthroscopy products.
Cost of sales decreased as a percentage of net sales to 28.6% for the first nine
months of fiscal 2001 from 30.3% last year primarily as a result of increased
sales of higher margin products, increased in-house manufacturing efficiencies
and improved margins realized through acquisitions of international
distributors. Excluding the $26.1 million special charge for the Tronzo
litigation this quarter and the $11.7 million special charge for acquisition
related expenses and litigation matters during last year, selling, general and
administrative expenses as a percentage of net sales increased slightly from
35.3% for the first nine months of last year to 36.1% for the current nine
month period. This increase in the percentage is a result of goodwill
amortization from the purchase of Biolectron, setting up direct distribution in
Japan and acquisitions of international distributors. Research and development
expenditures increased during the first nine months to $31,533,000 reflecting
the Company's continued emphasis on new product introductions. Operating income
increased 8% (14% excluding special charges) to $203,699,000 for the first nine
months of fiscal 2001. Other income increased 18% resulting from the increase
in the Company's investable cash and higher investment yields. The effective
income tax rate decreased to 34.3% for the first nine months of fiscal year 2001
from 36.4% last year primarily as a result of certain operating unit
realignments both in the United States and internationally and as a result of
U.S. pretax income growing at a higher rate than international pretax income
where tax rates are higher.
These factors resulted in a 12% increase in net income (19% excluding special
charges) to $138,430,000 for the first nine months of fiscal 2001 from
$123,150,000 as compared to the same period in fiscal 2000. Basic earnings per
share increased 11% (18% excluding special charges), from $.70 to $.78 for the
periods presented, while diluted earnings per share increased 12% (18% excluding
special charges), from $.69 to $.77 for the periods presented.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED FEBRUARY 28, 2001
AS COMPARED TO THE THREE MONTHS ENDED FEBRUARY 29, 2000
Net sales increased 14% to $266,276,000 for the second quarter of fiscal 2001,
as compared to $232,910,000 for the same period last year. Excluding the impact
of foreign currency and discontinued products, which reduced the second quarter
sales by $8 million and $2.3 million, respectively, net sales increased 19%
during the first nine months of fiscal year 2001. Operating income decreased
11% (increased 24% excluding special charges) from $65,066,000 for the second
quarter of fiscal 2000, to $57,672,000 for the second quarter of fiscal 2001.
During the second quarter, net income decreased 12% (increased 23% excluding
special charges) to $38,205,000 as compared to $43,192,000 for the same period
last year. Basic and diluted earnings per share decreased 12% (increased 24%
excluding special charges), from $.24 last year to $.21 this year for the
periods presented. The business factors resulting in these changes and relevant
trends affecting the Company's business during the periods in question are
comparable to those described in the preceding discussion for the nine-month
period.
NEW ACCOUNTING STANDARDS
Staff Accounting Bulletin No 101, "Revenue Recognition in Financial Statements"
(SAB 101), provides guidance in applying generally accepted accounting
principles to selected revenue recognition issues in financial statements. In
June 2000, the SEC issued SAB 101B, an amendment to SAB 101 which delays the
implementation of SAB 101 until no later than the fourth quarter of fiscal years
beginning after December 15, 1999. This pronouncement is not expected to have a
material impact on the Company's financial position or results of operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risks.
There have been no material changes from the information provided in the
Company's Annual Report on Form 10-K for the year ended May 31, 2000.
PART II. OTHER INFORMATION
Item 1: Legal Proceedings.
On January 18, 2001, the United States Court of Appeals for the Federal Circuit
(the "Federal Circuit") reinstated a $20 million punitive damages award against
the Company given to Raymond G. Tronzo by the United States District Court for
the Southern District of Florida (the "District Court") while affirming the
compensatory damage award of $520. In its decision in this matter, the District
Court had reduced the punitive damage award to $52,000. The Federal Circuit's
decision was based principally on procedural grounds, and concluded a finding
that a relationship of 38,000 to 1 between the punitive award and the
compensatory award was legally permissible. On March 28, 2001, the Federal
Circuit denied the Company's combined petition for panel rehearing and petition
for rehearing en banc. The Company believes this result conflicts with
controlling law, including decisions of the United States Supreme Court.
Accordingly, the Company is seeking review of this case by the United States
Supreme Court. It is important to note that this decision does not affect the
ongoing sales of any of Biomet's product lines. The Company has recorded a
one-time special charge during this quarter of $26.1 million in connection with
these damage awards which includes interest and related expenses.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. See Index to Exhibits.
(b) Reports on Form 8-K.
None.
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.
BIOMET, INC.
- ------------
(Registrant)
DATE: 4/16/2001 BY: /s/ GREGORY D. HARTMAN
--------- -------------------------
Gregory D. Hartman
Senior Vice President - Finance and Treasurer
(Principal Financial Officer)
(Signing on behalf of the Registrant
and as Principal Financial Officer)
BIOMET, INC.
FORM 10-Q
INDEX TO EXHIBITS
Sequential
Number Assigned Numbering System
in Regulation S-K Page Number
Item 601 Description of Exhibit of Exhibit
- ----------------- -------------------------------- ----------------
(2) No exhibit.
(4) 4.1 Specimen certificate for Common
Shares. (Incorporated by reference
to Exhibit 4.1 to the registrant's
Report on Form 10-K for the fiscal
year ended May 31, 1985).
4.2 Rights Agreement between Biomet,
Inc. and Lake City Bank, as Rights
Agent, dated as of December 2, 1989.
(Incorporated by reference to Exhibit
4 to Biomet, Inc. Form 8-K Current Report
dated December 22, 1989, File No. 0-12515).
(10) No exhibit.
(11) No exhibit.
(15) No exhibit.
(18) No exhibit.
(19) No exhibit.
(22) No exhibit.
(23) No exhibit.
(24) No exhibit.
(99) No exhibit.