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 August 31, 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 August 31, 2001, the registrant had 269,621,807 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 8-9
Item 3. Quantitative and Qualitative Disclosure about
Market Risks 9
Part II. Other Information 10
Signatures 11
Index to Exhibits 12
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIOMET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
at August 31, 2001 and May 31, 2001
(in thousands)
ASSETS
August 31, May 31,
2001 2001
---------- -------
Current assets:
Cash and cash equivalents $ 254,784 $ 235,091
Investments 39,629 52,627
Accounts and notes receivable, net 319,139 324,848
Inventories 291,283 277,601
Deferred and refundable income taxes 50,046 48,982
Prepaid expenses and other 25,780 29,230
--------- ---------
Total current assets 980,661 968,379
--------- ---------
Property, plant and equipment, at cost 336,199 325,890
Less, Accumulated depreciation 147,031 140,139
--------- ---------
Property, plant and equipment, net 189,168 185,751
--------- ---------
Investments 190,925 175,430
Intangible assets, net 8,204 8,848
Excess acquisition costs over fair value
of acquired net assets, net 132,299 134,835
Other assets 17,456 16,068
--------- ---------
Total assets $1,518,713 $1,489,311
========= =========
The accompanying notes are a part of the consolidated financial statements.
BIOMET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
at August 31, 2001 and May 31, 2001
(in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
August 31, May 31,
2001 2001
---------- -------
Current liabilities:
Short-term borrowings $ 60,111 $ 62,734
Accounts payable 21,954 21,008
Accrued income taxes 36,145 31,085
Accrued wages and commissions 28,395 33,030
Accrued litigation 26,100 26,100
Other accrued expenses 60,040 67,865
--------- ---------
Total current liabilities 232,745 241,822
Long-term liabilities:
Deferred federal income taxes 6,354 5,783
Other liabilities 403 423
--------- ---------
Total liabilities 239,502 248,028
--------- ---------
Minority interest 96,025 95,097
--------- ---------
Contingencies (Note 7)
Shareholders' equity:
Common shares 113,774 108,918
Additional paid-in capital 48,732 48,732
Retained earnings 1,076,309 1,044,564
Accumulated other comprehensive loss (55,629) (56,028)
--------- ---------
Total shareholders' equity 1,183,186 1,146,186
--------- ---------
Total liabilities and shareholders' equity $1,518,713 $1,489,311
========= =========
The accompanying notes are a part of the consolidated financial statements.
BIOMET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
for the three months ended August 31, 2001 and 2000
(in thousands, except per share amounts)
2001 2000
---- ----
Net sales $272,022 $231,133
Cost of sales 77,392 68,167
------- -------
Gross profit 194,630 162,966
Selling, general and
administrative expenses 101,316 82,934
Research and development expense 11,668 9,864
------- -------
Operating income 81,646 70,168
Other income, net 4,564 5,470
------- -------
Income before income taxes
and minority interest 86,210 75,638
Provision for income taxes 29,269 25,950
------- -------
Income before minority interest 56,941 49,688
Minority interest 928 1,261
------- -------
Net income $ 56,013 $ 48,427
======= =======
Earnings per share:
Basic $ .21 $ .18
==== ====
Diluted $ .21 $ .18
==== ====
Shares used in the computation of earnings per share:
Basic 269,459 266,955
======= =======
Diluted 272,668 269,862
======= =======
Cash dividends per common share $ .09 $ .07
==== ====
The accompanying notes are a part of the consolidated financial statements.
BIOMET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the three months ended August 31, 2001 and 2000
(in thousands)
2001 2000
---- ----
Cash flows from (used in) operating activities:
Net income $ 56,013 $ 48,427
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation 7,922 7,262
Amortization 2,897 1,854
Gain on sale of investments, net (4) (244)
Minority interest 928 1,261
Deferred federal income taxes (1,155) (90)
Changes in current assets and liabilities,
excluding effects of acquisitions:
Accounts and notes receivable, net 5,293 5,624
Inventories (14,710) (8,508)
Prepaid expenses and other 2,450 (3,221)
Accounts payable 903 (6,944)
Accrued income taxes 5,033 11,590
Accrued wages and commissions (4,635) (1,905)
Other accrued expenses (7,115) (2,077)
------- ------
Net cash from operating activities 53,820 53,029
------- ------
Cash flows from (used in) investing activities:
Proceeds from sales and maturities of investments 38,980 24,645
Purchases of investments (39,566) (20,512)
Capital expenditures (11,960) (8,621)
Other (1,011) (839)
------- ------
Net cash used in investing activities (13,557) (5,327)
------- ------
Cash flows from (used in) financing activities:
Increase (decrease)in short-term borrowings, net (2,098) 4,016
Issuance of common shares 4,856 7,184
Cash dividends (24,268) (18,993)
------- ------
Net cash used in financing activities (21,510) (7,793)
------- ------
Effect of exchange rate changes on cash 940 754
------- ------
Increase in cash and cash equivalents 19,693 40,663
Cash and cash equivalents, beginning of year 235,091 213,606
------- -------
Cash and cash equivalents, end of period $254,784 $254,269
======= =======
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 three-month period
ended August 31, 2001 are not necessarily indicative of the results that may be
expected for the fiscal year ending May 31, 2002. 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, 2001.
The accompanying consolidated balance sheet at May 31, 2001, 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 operates in one business 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, EBI's softgoods and bracing
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
three months ended August 31:
2001 2000
---- ----
(in thousands)
Reconstructive $161,172 $142,092
Fixation 53,646 46,531
Spinal products 27,459 14,109
Other 29,745 28,401
------- -------
$272,022 $231,133
======= =======
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 for the three months ended August 31, 2001 and 2000
was $399 and $2,426, respectively. Total comprehensive income combines
reported net income and other comprehensive income. Total comprehensive
income for the three months ended August 31, 2001 and 2000 was $56,412 and
$50,853, respectively.
NOTE 3: INVENTORIES.
Inventories at August 31, 2001 and May 31, 2001 are as follows:
August 31, May 31,
2001 2001
---------- -------
(in thousands)
Raw materials $ 34,951 $ 32,024
Work-in-process 34,075 31,082
Finished goods 111,015 108,704
Consigned 111,242 105,791
------- -------
$291,283 $277,601
======= =======
NOTE 4: COMMON SHARES.
During the three months ended August 31, 2001, the Company issued 498,094 Common
Shares upon the exercise of outstanding stock options for proceeds aggregating
$4,855,512. On July 9, 2001, the Company announced a three-for-two stock split
payable August 6, 2001 to shareholders of record July 30, 2001. 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: 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. 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 the third quarter of fiscal 2001 of $26.1 million in connection with
the damage award, 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.
NOTE 8: RECENT ACCOUNTING PRONOUNCEMENTS:
In June of 2001 the Financial Accounting Standards Board (FASB) approved the
issuance of Statement 141, "Business Combinations", and Statement 142,
"Goodwill and Other Intangible Assets". FASB Statement 141, among other
things, requires that all business combinations be accounted for using the
purchase method; use of the pooling-of-interest method is prohibited. The
provisions of FASB Statement 141 will apply to all business combinations
initiated after June 30, 2001. FASB Statement 142, among other things,
requires that goodwill not be amortized but should be tested for impairment
at least annually. The Company will adopt these two statements in the first
quarter of fiscal 2003. The Company has not assessed the effect that the
adoption of FASB Statement 142 will have on its financial position or
results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AS OF AUGUST 31, 2001
The Company's cash and investments increased $22,190,000 to $485,338,000 at
August 31, 2001, despite the $24,268,000 cash dividend paid during the first
quarter.
Cash flows provided by operating activities were $53,820,000 for the first
three months of fiscal 2002 compared to $53,029,000 in 2001. The primary
sources of fiscal year 2002 cash flows from operating activities were net
income, a decrease in accounts receivable and an increase in accrued income
taxes. Accrued income taxes increased in the first quarter because there
is no federal tax estimate due in the first quarter. The primary use was an
increase in inventory. Inventories increased from new product introductions
and a buildup of inventory associated with the Company's establishment of
its direct operations in Japan.
Cash flows used in investing activities were $13,557,000 for the first three
months of fiscal 2002 compared to a use of $5,327,000 in 2001. The primary
use of cash flows from investing activities were purchases of investments
and capital equipment offset by sales and maturities of investments.
Cash flows used in financing activities were $21,510,000 for the first three
months of fiscal 2002 compared to a use of $7,793,000 in 2001. The primary
use of cash flows from financing activities was the cash dividend paid in
the first quarter while the primary source of cash flows from financing
activities was from exercise of common stock options by Team Members. In
July 2001, the Company's Board of Directors declared a cash dividend of
nine cents ($.09) per share payable to shareholders of record at the close
of business on July 30, 2001.
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 litigation settlements, if any.
OTHER MATTERS
The Company and all of its Team Members were deeply saddened by the recent
tragedies that occurred in New York City, Washington, D.C. and Pennsylvania
on September 11, 2001. Our heartfelt condolences are extended to the
families and friends of the victims of these senseless events. Following
these tragedies, the Company has not experienced a disruption in its sales,
orders or any other matters affecting the Company's business. Moreover, at
this point in time, management does not anticipate a material adverse impact
on its results of operations or financial position as a result of the tragedies.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED AUGUST 31, 2001
AS COMPARED TO THE THREE MONTHS ENDED AUGUST 31, 2000
Net sales increased 18% to $272,022,000 for the three-month period ended August
31, 2001, from $231,133,000 for the same period last year. Excluding the impact
of foreign currency and discontinued products, which reduced first quarter sales
by $4.8 million and $2.8 million, respectively, net sales increased 21% during
the first quarter of fiscal year 2002. The Company's U.S.-based revenue
increased 26% to $199,202,000 during the first three months of fiscal 2002,
while foreign sales increased .2% to $72,820,000. Excluding the negative foreign
exchange adjustment and discontinued products, foreign sales in local currencies
increased 11%. Biomet's worldwide sales of reconstructive products during the
first three months of fiscal 2002 were $161,172,000, representing a 13% increase
compared to the first three months of last year. This increase was primarily
a result of Biomet's continued penetration of the reconstructive device market
led by total hip revision products, the M2aTM Taper Metal-on-Metal Hip, the
Repicci IITM Unicondylar Knee, the AscentTM Total Knee System and bone cements
and accessories. Sales of fixation products were $53,646,000 for the first
three months of fiscal 2002, representing a 15% increase as compared to the same
period in 2001. Sales of spinal products were $27,459,000 for the first three
months of fiscal 2002, representing a 95% increase as compared to the same
period in 2001. 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 last fiscal year. The Company's
sales of other products totaled $29,745,000, representing a 5% increase over
the first three months of fiscal year 2001, primarily as a result of increased
sales of softgoods and bracing and arthroscopy products offset by the loss of
internationally distributed products. The sale of many of the Company's
musculoskeletal products are elective surgery-related and accordingly are
influenced by seasonal factors, as the number of elective orthopedic procedures
decline during the summer months and the holiday season.
Cost of sales decreased as a percentage of net sales to 28.5% for the first
three months of fiscal 2002 from 29.5% last year primarily as a result of
increased sales of higher margin products and increased in-house manufacturing
efficiencies. Selling, general and administrative expenses as a percentage of
net sales increased to 37.2% compared to 35.9% for the first quarter last year.
This increase in the percentage is a result of the Biolectron acquisition and
ongoing investments in the Company's global sales capabilities. Research and
development expenditures increased during the first three months to
$11,668,000 reflecting the Company's continued emphasis on new product
introductions. Operating income rose 16% from $70,168,000 for the first
three months of fiscal 2001, to $81,646,000 for the first three months of
fiscal 2002. Other income decreased 17% resulting from the lower interest
rates available on investable cash. The effective income tax rate decreased to
34.0% for the first quarter of fiscal year 2002 from 34.3% last year primarily
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 16% increase in net income to $56,013,000 for the
first three months of fiscal 2002 as compared to $48,427,000 for the same
period in fiscal 2001. Basic and diluted earnings per share earnings
increased 17%, from $.18 to $.21 for the periods presented.
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, 2001.
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. 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 the third quarter of fiscal 2001 of $26.1 million in connection with
the damage award, which includes interest and related expenses.
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Shareholders of the Company was held on September 29,
2001.
At the Annual Meeting:
1. The following persons were elected as Directors of the Company for a
three-year term expiring in 2004.
Name Votes For Votes Withheld
M. Ray Harroff 234,971,469 2,089,296
Jerry L. Miller 234,123,148 2,787,616
Charles E. Niemier 235,117,155 1,943,610
Prof. Dr. Bernhard Scheuble 235,072,789 2,122,975
The following directors will continue in office until their term expires at the
2002 Annual Meeting of shareholders: C. Scott Harrison, M.D.; Niles L. Noblitt;
Kenneth V. Miller; L. Gene Tanner; and Marilyn Tucker Quayle.
The following directors will continue in office until their term expires at the
2003 Annual Meeting of shareholders: Dane A. Miller, Jerry L. Ferguson, Thomas
F. Kearns, Jr., and Daniel P. Hann.
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: 10/12/2001 BY: /s/ GREGORY D. HARTMAN
---------- -------------------------
Gregory D. Hartman
Senior Vice President - Finance
(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.