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 November 30, 2004.
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)
(574) 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 November 30, 2004, the registrant had 252,677,803 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 5-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-12
Item 3. Quantitative and Qualitative Disclosure about
Market Risks 13
Item 4. Controls and Procedures 13
Part II. Other Information 14
Signatures 15
Index to Exhibits 16
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIOMET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
at November 30, 2004 and May 31, 2004
(in thousands)
ASSETS
November 30, May 31,
2004 2004
----------- -------
(Unaudited)
Current assets:
Cash and cash equivalents $ 99,518 $ 159,243
Investments 10,907 10,030
Accounts and notes receivable, net 476,574 465,949
Inventories 446,711 389,391
Deferred income taxes 85,748 69,379
Prepaid expenses and other 29,674 21,877
--------- ---------
Total current assets 1,149,132 1,115,869
--------- ---------
Property, plant and equipment, at cost 527,423 466,460
Less, Accumulated depreciation 228,626 197,634
--------- ---------
Property, plant and equipment, net 298,797 268,826
--------- ---------
Investments 63,880 66,339
Goodwill, net 439,335 266,860
Intangible assets, net 90,335 53,571
Other assets 16,261 16,232
--------- ---------
Total assets $2,057,740 $1,787,697
========= =========
The accompanying notes are a part of the consolidated financial statements.
BIOMET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
at November 30, 2004 and May 31, 2004
(in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
November 30, May 31,
2004 2004
----------- -------
(Unaudited)
Current liabilities:
Short-term borrowings $ 324,676 $ 109,654
Accounts payable 55,548 55,365
Accrued income taxes 10,013 18,940
Accrued wages and commissions 50,707 51,288
Other accrued expenses 104,558 78,155
--------- ---------
Total current liabilities 545,502 313,402
Long-term liabilities:
Deferred income taxes 34,981 26,085
--------- ---------
Total liabilities 580,483 339,487
--------- ---------
Contingencies (Note 9)
Shareholders' equity:
Common shares 178,585 167,301
Additional paid-in capital 60,720 60,344
Retained earnings 1,217,538 1,218,682
Accumulated other comprehensive income 20,414 1,883
--------- ---------
Total shareholders' equity 1,477,257 1,448,210
--------- ---------
Total liabilities and shareholders' equity $2,057,740 $1,787,697
========= =========
The accompanying notes are a part of the consolidated financial statements.
BIOMET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
for the six and three month periods ended November 30, 2004 and 2003
(Unaudited, in thousands, except per share data)
Six Months Ended Three Months Ended
---------------- ------------------
2004 2003 2004 2003
---- ---- ---- ----
Net sales $ 894,834 $ 757,880 $456,674 $387,561
Cost of sales 257,087 214,408 131,115 108,790
--------- --------- ------- -------
Gross profit 637,747 543,472 325,559 278,771
Selling, general and
administrative expenses 326,765 269,061 166,305 136,664
Research and development expense 38,082 30,558 19,606 15,810
In-process research and development 26,020 -- -- --
--------- --------- ------- -------
Operating income 246,880 243,853 139,648 126,297
Other income, net (484) 6,690 244 3,669
--------- --------- ------- -------
Income before income taxes and
minority interest 246,396 250,543 139,892 129,966
Provision for income taxes 94,764 87,229 48,693 45,250
--------- --------- ------- -------
Income before minority interest 151,632 163,314 91,911 84,716
Minority interest -- 4,144 -- 2,024
--------- --------- ------- -------
Net income $ 151,632 $ 159,170 $ 91,199 $ 82,692
========= ========= ======= =======
Earnings per share:
Basic $.60 $.62 $.36 $.32
==== ==== ==== ====
Diluted $.59 $.62 $.36 $.32
==== ==== ==== ====
Shares used in the computation
of earnings per share:
Basic 253,403 256,325 252,944 255,797
======= ======= ======= =======
Diluted 255,586 257,904 255,225 257,599
======= ======= ======= =======
Cash dividends per common share $.20 $.15 $ -- $ --
==== ==== ==== ====
The accompanying notes are a part of the consolidated financial statements.
BIOMET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the six months ended November 30, 2004 and 2003
(Unaudited, in thousands)
2004 2003
---- ----
Cash flows from (used in) operating activities:
Net income $151,632 $159,170
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation 28,969 24,036
Amortization 3,290 1,512
Write off of in-process research and development 26,020 --
Loss (Gain) on sale of investments, net 223 (692)
Minority interest -- 4,144
Deferred income taxes (6,684) (1,103)
Changes in current assets and liabilities:
Accounts and notes receivable, net 7,724 (16,819)
Inventories (19,005) (9,799)
Accounts payable (3,868) (7,089)
Accrued income taxes (7,985) (2,620)
Other (1,133) (1,425)
------- -------
Net cash from operating activities 179,183 149,315
------- -------
Cash flows from (used in) investing activities:
Proceeds from sales and maturities of investments 24,692 68,981
Purchases of investments (22,284) (77,237)
Capital expenditures (43,511) (24,618)
Acquisitions, net of cash acquired (266,229) --
Other (3,131) (1,878)
------- ------
Net cash used in investing activities (310,463) (34,752)
------- ------
Cash flows from (used in) financing activities:
Increase in short-term borrowings, net 209,385 6,877
Issuance of common shares 12,766 13,323
Cash dividends (50,872) (38,604)
Purchase of common shares (103,990) (78,703)
------- ------
Net cash from (used in) financing activities 67,289 (97,107)
------- ------
Effect of exchange rate changes on cash 4,266 (1,366)
------- ------
Increase (decrease) in cash and cash equivalents (59,725) 16,090
Cash and cash equivalents, beginning of year 159,243 225,650
------- -------
Cash and cash equivalents, end of period $ 99,518 $241,740
======= =======
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 accounting principles generally accepted in the
United States 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 accounting principles generally
accepted in the United States 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 six-month period ended November 30, 2004 are not necessarily
indicative of the results that may be expected for the fiscal year ending
May 31, 2005. 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, 2004.
The accompanying consolidated balance sheet at May 31, 2004, has been derived
from the audited Consolidated Financial Statements at that date, but does not
include all disclosures required by accounting principles generally accepted
in the United States.
The Company operates in one business segment, musculoskeletal products, which
includes the designing, manufacturing and marketing of reconstructive products,
fixation devices, spinal products and other products. Other products consist
primarily of EBI's softgoods and bracing products, Arthrotek's arthroscopy
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 the Rest of World. Major markets
included in the Rest of World geographic market are Canada, South America,
Mexico, Japan and the Pacific Rim.
Net sales of musculoskeletal products by product category are as follows for the
six and three month periods ended November 30, 2004 and 2003:
Six Months Ended Three Months Ended
----------------- ------------------
2004 2003 2004 2003
---- ---- ---- ----
(in thousands)
Reconstructive $583,867 $485,522 $301,385 $252,083
Fixation 123,041 122,428 60,328 60,295
Spinal products 106,141 76,946 53,232 38,979
Other 81,785 72,984 41,729 36,204
------- ------- ------- -------
$894,834 $757,880 $456,674 $387,561
======= ======= ======= =======
As permitted by SFAS No. 123, the Company accounts for its employee stock
options using the intrinsic value method. Accordingly, no compensation expense
is recognized for the employee stock-based compensation plans. If compensation
expense for the Company's employee stock options had been determined based on
the fair value method of accounting, pro forma net income and diluted earnings
per share for the six and three month periods ended November 30, 2004 and 2003
would have been as follows:
Six Months Ended Three Months Ended
----------------- ------------------
2004 2003 2004 2003
---- ---- ---- ----
Net income as reported (in thousands) $151,632 $159,170 $ 91,199 $ 82,692
Deduct: Total stock-based employee
compensation expense determined
under the fair value method for
all awards net of related tax
effects (in thousands) 3,034 2,563 1,501 1,281
------- ------- ------- -------
Pro forma net income (in thousands) $148,598 $156,607 $ 89,698 $ 81,411
======= ======= ======= =======
Earning per share:
Basic, as reported $0.60 $0.62 $0.36 $0.32
==== ==== ==== ====
Basic, pro forma $0.59 $0.61 $0.35 $0.32
==== ==== ==== ====
Diluted, as reported $0.59 $0.62 $0.36 $0.32
==== ==== ==== ====
Diluted, pro forma $0.58 $0.61 $0.35 $0.32
==== ==== ==== ====
On December 16, 2004, the FASB finalized SFAS No. 123R "Share-Based Payment,"
which will be effective for interim or annual reporting periods beginning after
June 15, 2005. The new standard will require us to expense stock options and
the FASB believes the use of a binomial lattice model for option valuation is
capable of more fully reflecting certain characteristics of employee share
options. The Company has begun a process to analyze how the utilization of a
binomial lattice model could impact the valuation of our options. The effect
of expensing stock options on our results of operations using the Black-Scholes
model is presented in the table above.
NOTE 2: BUSINESS COMBINATION.
On June 18, 2004, the Company, through its EBI subsidiary, acquired Interpore
International, Inc. (Interpore) for $270.5 million in cash. The primary reason
for making the Interpore acquisition was to broaden the product portfolio the
Company offers in the spinal market. The Company accounted for this acquisition
as a purchase, and the operating results of Interpore have been consolidated
from the date of acquisition. Interpore's respective assets and liabilities
have been recorded at their estimated fair values in the Company's financial
statements, with the excess purchase price being allocated to goodwill.
The Company completed its initial purchase price allocation in accordance with
U.S. generally accepted accounting principles. The process included interviews
with Interpore management, review of the economic and competitive environment
in which Interpore operates and examination of assets, including historical
performance and future prospects. The purchase price allocation was based on
information currently available to the Company, and expectations and
assumptions deemed reasonable to the Company's management. No assurances can
be given, however, that the underlying assumptions used to estimate expected
technology based product revenue, development costs or profitability, or the
events associated with such technology, will occur as projected.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed in the acquisition:
As of
June 16, 2004
-------------
Current assets $ 60,316
Property, plant and equipment 9,307
Intangible assets not subject to amortization:
Trademarks and trade names 1,260
Intangible assets subject to amortization:
Trademarks and trade names 2,270
Developed technology 16,180
Distribution and sales agreements 11,440
License agreements 3,450
In-process research and development 26,020
Other assets 83
Goodwill 169,596
-------
Total assets acquired 299,922
-------
Deferred taxes 14,512
Other current liabilities 14,909
-------
Total liabilities assumed 29,421
-------
Net assets acquired $270,501
=======
The $26,020,000 assigned to in-process research and development was written off
as of the acquisition date. The weighted average amortization period for
amortizable intangibles is 10 years. No amount of goodwill is expected to be
deductable for tax purposes. Pro forma financial information reflecting this
acquisition has not been presented as it is not materially different from the
Company's historical results.
NOTE 3: 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 November 30, 2004
and 2003 was $17,069,000 and $9,884,000, respectively. Other comprehensive
income for the six months ended November 30, 2004 and 2003 was $18,531,000
and $12,483,000, respectively. Total comprehensive income combines reported
net income and other comprehensive income. Total comprehensive income for the
three months ended November 30, 2004 and 2003 was $108,268,000 and $92,576,000,
respectively. Total comprehensive income for the six months ended November 30,
2004 and 2003 was $170,163,000 and $171,653,000, respectively.
NOTE 4: INVENTORIES.
Inventories at November 30, 2004 and May 31, 2004 are as follows:
November 30, May 31,
2004 2004
------------ -------
(in thousands)
Raw materials $ 43,352 $ 34,075
Work-in-process 50,267 43,187
Finished goods 189,007 163,299
Consigned inventory 164,085 148,830
------- -------
$446,711 $389,391
======= =======
NOTE 5: DEBT.
In connection with the Interpore acquisition, the Company entered into a 36
month revolving credit facility in the amount of $200 million. Interest is
payable at LIBOR plus 0.5%. At November 30, 2004, $200 million was outstanding
and the interest rate was 2.68%.
NOTE 6: COMMON SHARES.
During the six months ended November 30, 2004, the Company issued 743,908
Common Shares upon the exercise of outstanding stock options for proceeds
aggregating $12,766,000. Purchases of Common Shares pursuant to the Common
Share Repurchase Programs aggregated 2,328,400 shares for $103,990,000 during
the six months ended November 30, 2004.
NOTE 7: 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 8: 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, tax credits and the write-off of
in-process research and development which is not tax affected.
NOTE 9: CONTINGENCIES.
On October 3, 2002, a complaint was filed against the Company by Spinal
Concepts, Inc. ("Spinal Concepts") alleging that certain U.S. Patents owned
by Spinal Concepts are infringed by the VueLock(R) Anterior Cervical Plate
System manufactured by EBI, L.P. ("EBI"). On June 28, 2004, the Company's
subsidiary, Cross Medical Products Inc., filed suit against Spinal Concepts
alleging that Spinal Concepts' InCompass(R), Pathfinder(TM) and Speedlink(TM)
products infringe U.S. Patent Nos. 5,466,237, 5,474,555 and 5,624,442, all
of which are owned by Cross Medical. On July 14, 2004, the Company's
subsidiary, EBI, also filed suit against Spinal Concepts alleging that an
instrument sold with Spinal Concepts' AcuFix(TM) cervical plate infringes
U.S. Patent No. 6,599,290 owned by EBI. On December 23, 2004, the Company
and Spinal Concepts executed a global Settlement Agreement amicably resolving
all three lawsuits between the Companies. The essential terms of the
settlement include an exchange of paid-up cross licenses to all patents at
issue, an exchange of covenants not to sue on any products that were at
issue, and a payment of $1 million to Spinal Concepts. Stipulations of
dismissal are in the process of being filed and management considers this
matter concluded.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AS OF November 30, 2004
The Company's cash and investments decreased $61,307,000 to $174,305,000 at
November 30, 2004. This decrease resulted from the $50,872,000 dividend paid
during the first quarter, the $103,990,000 used to purchase shares during the
first six months pursuant to the Company's share repurchase programs and the
acquisition of Interpore during the first quarter, offset by positive cash flow
from operations and an increase in short term borrowings.
Cash flows provided by operating activities were $179,183,000 for the first six
months of fiscal 2005 compared to $149,315,000 in 2004. The primary sources of
fiscal year 2005 cash flows from operating activities were net income,
depreciation and the write-off of in-process research and development at the
acquisition date of Interpore. The primary use was an increase in inventory.
Inventories increased from new product introductions, specifically new knee
systems introduced in the US and Europe. Accounts and notes receivable and
inventory balances were increased during the six month period by $5.7 million
and $12.8 million, respectively, due to currency exchange rates.
Cash flows used in investing activities were $310,463,000 for the first six
months of fiscal 2005 compared to $34,752,000 in 2004. The primary use of cash
flows from investing activities were the acquisition of Interpore and capital
expenditures. (see Footnote 2 in the Notes to Consolidated Financial Statements)
Cash flows from financing activities were $67,289,000 for the first six months
of fiscal 2005 compared to a use of $97,107,000 in 2004. The primary source of
cash flows from financing activities was the 36 month revolving credit facility
in the amount of $200 million used for the Interpore acquisition. The primary
uses were the cash dividend paid and the share repurchase programs. In July
2004, the Company's Board of Directors declared a cash dividend of twenty cents
($0.20) per share payable to shareholders of record at the close of business on
July 16, 2004.
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 share repurchases.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED NOVEMBER 30, 2004
AS COMPARED TO THE SIX MONTHS ENDED NOVEMBER 30, 2003
Net sales increased 18% to $894,834,000 for the six months ended November 30,
2004, from $757,880,000 for the same period last year. This sales growth
includes a positive impact from foreign currency of $16.6 million and additional
sales from the acquisition of Interpore of $27.4 million, leaving net sales
growth for the six months in local currencies at 12%. The Company's U.S.-based
revenue increased 17% to $605,310,000 during the first six months of fiscal
2005, while foreign sales increased 20% to $289,524,000. The Interpore
acquisition added $21.8 million to U.S.-based revenue and $5.6 million to
foreign revenue. The Company's worldwide sales of reconstructive products
during the first six months of fiscal 2005 were $583,867,000, representing a
20% increase compared to the first six months of last year. Sales of fixation
products were $123,041,000 for the first six months fiscal 2005, representing
a 1% increase as compared to the same period in 2004. Sales of spinal products
were $106,141,000 for the first six months of fiscal 2005, representing a 38%
increase as compared to the same period in 2004. The increase was primarily a
result of the Interpore acquisition and strong growth in EBI's spinal implants
and orthobiological products. Fixation and spinal product sales have been
negatively impacted by the combination of the Interpore and EBI sales forces,
and at the same time the integration of Biomet's internal fixation sales force
into EBI's fixation sales force. The Company expects this negative impact to
continue during the next quarter. The Company's sales of other products
totaled $81,785,000, representing a 12% increase over the first six months of
fiscal year 2004.
Cost of sales increased as a percentage of net sales to 28.7% for the first
six months of fiscal 2005 from 28.3% for the same period last year. The
current period impact of inventory step-up relating to acquisitions was 1.6%.
This 1.6% increase was offset by a decrease of 1.2% in the percentage primarily
as result of higher growth rates in domestic sales, where gross margins are
higher, versus foreign sales. Selling, general and administrative expenses,
as a percentage of net sales, increased to 36.5% compared to 35.5% for the
first six months last year. This increase is a result of Interpore's
traditionally higher selling, general and administrative expenses (0.3%),
increased bad debt expense for EBI's domestic insurance receivables (0.4%) and
continued expansion and consolidation of EBI's direct sales force. Research
and development expenditures increased 25% during the first six months to
$38,082,000 reflecting the Company's continued emphasis on new product
introductions and Interpore's traditionally higher expenditures on research
and development (7%). In-process research and development expense relates
to the acquired in-process research and development related to the Interpore
acquisition, which was written off at the acquisition date. Operating
income increased 1% from $243,853,000 for the first six months of fiscal
2004, to $246,880,000 for the first six months of fiscal 2005. The affect on
operating income for the previously discussed acquisition related expenses was
a reduction of $40,424,000. Other income decreased from $6,690,000 last year
to $(484,000) this year. Other income has been negatively impacted by a
reduction in cash available for investments and an increase in short term debt,
due to acquisitions. In addition, over the last twelve quarters, the Company
has used $705,897,000 to purchase its common stock. The effective income tax
rate increased to 38.5% for the first six months of fiscal year 2005 from
34.8% last year primarily as a result of write-off of in-process research
and development not being tax affected.
These factors resulted in a 5% decrease in net income from $159,170,000 to
$151,632,000, a 3% decrease in basic earnings per share from $0.62 to $0.60
and a 5% decrease in diluted earnings per share from $0.62 to $0.59 for the
periods presented. The affect of acquisition related expenses as discussed
in the preceding paragraph, net of tax, on net income, basic earnings per
share and diluted earnings per share was to decrease them by $35,421,000,
$0.14 per share and $0.14 per share, respectively.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED NOVEMBER 30, 2004
AS COMPARED TO THE THREE MONTHS ENDED NOVEMBER 30, 2003
Net sales increased 18% to $456,674,000 for the second quarter ended November
30, 2004, from $387,561,000 for the same period last year. This sales growth
includes a positive impact from foreign currency of $9.6 million and additional
sales from the acquisition of Interpore of $13.7 million, leaving net sales
growth for the quarter in local currencies at 12%. The Company's U.S.-based
revenue increased 17% to $309,006,000 during the second quarter of fiscal 2005,
while foreign sales increased 20% to $147,668,000. The Interpore acquisition
added $10.4 million to U.S.-based revenue and $3.3 million to foreign revenue.
The Company's worldwide sales of reconstructive products during the second
quarter of fiscal 2005 were $301,385,000, representing a 20% increase compared
to the second quarter of last year. Sales of fixation products were
$60,328,000 for the second quarter fiscal 2005, representing a slight increase
as compared to the same period in 2004. Sales of spinal products were
$53,232,000 for the second quarter of fiscal 2005, representing a 37% increase
as compared to the same period in 2004. The increase was primarily a result
of the Interpore acquisition and strong growth in EBI's spinal implants and
orthobiological products. Fixation and spinal product sales have been
negatively impacted by the combination of the Interpore and EBI sales forces,
and at the same time the integration of Biomet's internal fixation sales force
into EBI's fixation sales force. The Company expects this negative impact
to continue during the next quarter. The Company's sales of other products
totaled $41,729,000, representing a 15% increase over the second quarter of
fiscal year 2004.
Cost of sales increased as a percentage of net sales to 28.7% for the second
quarter of fiscal 2005 from 28.1% for the same period last year. The current
period impact of inventory step-up relating to acquisitions was 1.6%. This
1.6% increase was offset by a decrease of 1% in the percentage primarily as a
result of higher growth rates in domestic sales, where gross margins are
higher, versus foreign sales. Selling, general and administrative expenses, as
a percentage of net sales, increased to 36.4% compared to 35.3% for the second
quarter last year. This increase is a result of Interpore's traditionally
higher selling, general and administrative expenses (0.2%), increased bad debt
expense for EBI's domestic insurance receivables (0.8%) and continued expansion
and consolidation of EBI's direct sales force. Research and development
expenditures increased 24% during the second quarter to $19,606,000 reflecting
the Company's continued emphasis on new product introductions and Interpore's
traditionally higher expenditures on research and development (7%). Operating
income increased 11% from $126,297,000 for the second quarter of fiscal 2004,
to $139,648,000 for the second quarter of fiscal 2005. The affect on operating
income for the previously discussed acquisition related expenses was a
reduction of $7,402,000. Other income decreased from $3,669,000 last year to
$244,000 this year. Other income has been negatively impacted by a reduction
in cash available for investments and an increase in short term debt, due to
acquisitions and common stock repurchases. The effective income tax rate
remained relatively flat at 34.8%.
These factors resulted in a 10% increase in net income to $91,199,000 for the
second quarter of fiscal 2005 as compared to $82,692,000 for the same period
in fiscal 2004, while basic and diluted earnings per share increased 13%, from
$0.32 to $0.36 for the periods presented. The affect of acquisition related
expenses as discussed in the preceding paragraph, net of tax, on net income,
basic earnings per share and diluted earnings per share was to decrease them
by $4,831,000, $0.02 per share and $0.02 per share, respectively.
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, 2004.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures. As of the end of the
period covered by this report, the Company carried out an evaluation, under
the supervision and with the participation of its management, including the
Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the Company's disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934).
Based on this evaluation, the Company's Chief Executive Officer and Chief
Financial Officer have concluded that the Company's disclosure controls and
procedures are effective in timely notification to them of information the
Company is required to disclose in its periodic SEC filings and in ensuring
that this information is recorded, processed summarized and reported within
the time periods specified in the SEC's rules and regulations.
(b) Changes in Internal Control. During the second quarter of fiscal 2005
covered by this report, there have been no significant changes in internal
control over financial reporting that have materially affected, or were
reasonably likely to materially affect, our internal control over financial
reporting.
PART II. OTHER INFORMATION
Item 1: Legal Proceedings.
On October 3, 2002, a complaint was filed against the Company by Spinal
Concepts, Inc. ("Spinal Concepts") alleging that certain U.S. Patents owned
by Spinal Concepts are infringed by the VueLock(R) Anterior Cervical Plate
System manufactured by EBI, L.P. ("EBI"). On June 28, 2004, the Company's
subsidiary, Cross Medical Products Inc., filed suit against Spinal Concepts
alleging that Spinal Concepts' InCompass(R), Pathfinder(TM) and Speedlink(TM)
products infringe U.S. Patent Nos. 5,466,237, 5,474,555 and 5,624,442, all
of which are owned by Cross Medical. On July 14, 2004, the Company's
subsidiary, EBI, also filed suit against Spinal Concepts alleging that an
instrument sold with Spinal Concepts' AcuFix(TM) cervical plate infringes
U.S. Patent No. 6,599,290 owned by EBI. On December 23, 2004, the Company
and Spinal Concepts executed a global Settlement Agreement amicably resolving
all three lawsuits between the Companies. The essential terms of the
settlement include an exchange of paid-up cross licenses to all patents at
issue, an exchange of covenants not to sue on any products that were at
issue, and a payment of $1 million to Spinal Concepts. Stipulations of
dismissal are in the process of being filed and management considers this
matter concluded.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
As of November 30, 2004, the Company had two publicly-announced share repurchase
programs outstanding. The first, announced July 1, 2004, approved the
purchase of 2,500,000 shares to be automatically purchased in equal
installments over a twelve-month period expiring July 1, 2005. The second,
also announced July 1, 2004, approved the purchase of shares up to $100 million
in open market or privately negotiated transactions. Information on shares
repurchased in the most recently completed quarter is as follows:
Total Number Maximum Number of
of Shares Shares (or Approximate
Total Number Average Purchased as Dollar Value) that May
of shares Price Paid Part of Publicly Yet be Purchased
Period Purchased Per Share Announced Plans Under the Plans
- ------ ------------ ---------- ---------------- ----------------------
September 1-30 252,000 $47.14 252,000 1,756,000 shares
and $64,414,746
October 1-31 331,000 45.60 331,000 1,504,000 shares
and $60,945,118
November 1-30 252,000 47.75 252,000 1,252,000 shares
and $60,945,118
------- ----- ------- -----------------
835,000 46.71 835,000 1,252,000 shares
and $60,945,118
Item 6. Exhibits.
See Index to Exhibits.
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.
------------
DATE: 1/10/2005 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
Number Assigned
in Regulation
S-K Item 601 Description 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 16, 1999. (Incorporated by reference to
Exhibit 4.01 to Biomet, Inc. Form 8-K Current
Report dated December 16, 1999, Commission File
No. 0-12515), as amended September 1, 2002 to
change rights agent to American Stock Transfer
& Trust Company.
(10) No Exhibit.
(11) No exhibit
(15) No exhibit.
(18) No exhibit.
(19) No exhibit.
(22) No exhibit.
(23) No exhibit.
(24) No exhibit.
(31) 31.1 Certification of Chief Exectuive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
(32) 32.1 Written Statement of Chief Executive Officer and
Chief Financial Officer Pursuant to Sections 906 of the
Sarbanes-Oxley Act of 2002.