Orthofix Medical Inc. - Quarter Report: 2009 September (Form 10-Q)

 

 

UNITED STATES
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

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 0-19961

ORTHOFIX INTERNATIONAL N.V.

(Exact name of registrant as specified in its charter)

Netherlands Antilles		N/A
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
7 Abraham de Veerstraat
Curaçao
Netherlands Antilles		N/A
(Address of principal executive offices)		(Zip Code)

599-9-4658525

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 o		Accelerated filer þ		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

As of November 1, 2009, 17,135,398 shares of common stock were issued and outstanding.

 

 

Table of Contents

PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements			3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3. Quantitative and Qualitative Disclosures About Market Risk			37
Item 4. Controls and Procedures			38
PART II OTHER INFORMATION
Item 1. Legal Proceedings			39
Item 1A. Risk Factors			42
Item 6. Exhibits			43
SIGNATURES			48
Exhibit 10.17
Exhibit 10.37
Exhibit 10.39
Exhibit 10.41
Exhibit 10.42
Exhibit 10.44
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

Forward-Looking Statements

This Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, which relate to our business and financial outlook and which are based on our current beliefs, assumptions, expectations, estimates, forecasts and projections. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “intends,” “predicts,” “potential” or “continue” or other comparable terminology. These forward-looking statements are not guarantees of our future performance and involve risks, uncertainties, estimates and assumptions that are difficult to predict. Therefore, our actual outcomes and results may differ materially from those expressed in these forward-looking statements. You should not place undue reliance on any of these forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any such statement to reflect new information, the occurrence of future events or circumstances or otherwise.

Factors that could cause actual results to differ materially from those indicated by the forward-looking statements or that could contribute to such differences include, but are not limited to, risks relating to the expected sales of products, including recently launched products, unanticipated expenditures, changing relationships with customers, suppliers, strategic partners and lenders, unfavorable results in litigation matters, risks relating to the protection of intellectual property, changes to the reimbursement policies of third parties, changes to and interpretation of governmental regulation of medical devices, the impact of competitive products, changes to the competitive environment, the acceptance of new products in the market, conditions of the orthopedic industry and the economy, currency or interest rate fluctuations, corporate development and marketing development activities, including acquisitions and divestitures, unexpected costs or operating unit performance related to recent acquisitions, unexpected difficulties meeting covenants under our senior secured bank credit facility and the other risks described under Item 1A — “Business — Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 and Part II, Item 1A — “Risk Factors” in this Form 10-Q.

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

ORTHOFIX INTERNATIONAL N.V.
CONDENSED CONSOLIDATED BALANCE SHEETS

		September 30,				December 31,
(US Dollars, in thousands except share data)		2009				2008
		(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	6,800			$	14,594
Restricted cash			13,218				10,998
Trade accounts receivable, less allowance for doubtful accounts of $7,329 and $6,473 at September 30, 2009 and December 31, 2008, respectively			127,359				110,720
Inventories, net			101,016				91,185
Deferred income taxes			20,497				17,543
Prepaid expenses and other current assets			34,426				29,610
Total current assets			303,316				274,650
Investments, at cost			345				2,095
Property, plant and equipment, net			37,559				32,660
Patents and other intangible assets, net			49,304				53,546
Goodwill			185,208				182,581
Deferred taxes and other long-term assets			13,046				15,683
Total assets		$	588,778			$	561,215
Liabilities and shareholders’ equity
Current liabilities:
Bank borrowings		$	3,689			$	1,907
Current portion of long-term debt			3,336				3,329
Trade accounts payable			27,188				23,865
Other current liabilities			61,540				45,894
Total current liabilities			95,753				74,995
Long-term debt			255,049				277,533
Deferred income taxes			3,252				4,509
Other long-term liabilities			7,436				2,117
Total liabilities			361,490				359,154
Contingencies (Note 19)
Shareholders’ equity:
Common shares $0.10 par value; 50,000,000 shares authorized; 17,130,798 and 17,103,142 issued and outstanding as of September 30, 2009 and December 31, 2008, respectively			1,713				1,710
Additional paid-in capital			174,288				167,818
Retained earnings			44,658				29,647
Accumulated other comprehensive income			6,629				2,886
Total shareholders’ equity			227,288				202,061
Total liabilities and shareholders’ equity		$	588,778			$	561,215

The accompanying notes form an integral part of these condensed consolidated financial statements.

ORTHOFIX INTERNATIONAL N.V.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

		Three Months Ended								Nine Months Ended
(Unaudited, US Dollars, in thousands except share and per share data)		2009				2008				2009				2008
Net sales		$	135,098			$	129,301			$	401,618			$	387,372
Cost of sales			31,985				47,998				101,700				117,284
Gross profit			103,113				81,303				299,918				270,088
Operating expenses
Sales and marketing			55,012				50,210				162,547				153,652
General and administrative			20,819				19,293				64,694				60,252
Research and development			7,863				6,447				25,837				19,400
Amortization of intangible assets			1,668				5,347				4,944				15,220
Impairment of goodwill and certain intangible assets			—				289,523				—				289,523
Gain on sale of Pain Care® operations			—				—				—				(1,570	)
			85,362				370,820				258,022				536,477
Operating income (loss)			17,751				(289,517	)			41,896				(266,389	)
Other income (expense), net
Interest expense, net			(6,437	)			(4,249	)			(18,385	)			(13,708	)
Loss on refinancing of senior secured term loan			—				(5,735	)			—				(5,735	)
Unrealized non-cash gain (loss) on interest rate swap			(229	)			—				1,046				—
Other expense, net			(688	)			(3,822	)			(586	)			(2,737	)
			(7,354	)			(13,806	)			(17,925	)			(22,180	)
Income (loss) before income taxes			10,397				(303,323	)			23,971				(288,569	)
Income tax benefit (expense)			(4,209	)			66,072				(8,960	)			60,732
Net income (loss)		$	6,188			$	(237,251	)		$	15,011			$	(227,837	)
Net income (loss) per common share — basic		$	0.36			$	(13.87	)		$	0.88			$	(13.33	)
Net income (loss) per common share — diluted		$	0.36			$	(13.87	)		$	0.87			$	(13.33	)
Weighted average number of common shares — basic			17,130,247				17,101,718				17,113,891				17,093,133
Weighted average number of common shares — diluted			17,215,567				17,101,718				17,174,416				17,093,133

The accompanying notes form an integral part of these condensed consolidated financial statements.

ORTHOFIX INTERNATIONAL N.V.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

(Unaudited, US Dollars, in thousands)		2009				2008
Cash flows from operating activities:
Net income (loss)		$	15,011			$	(227,837	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization			16,064				22,707
Amortization of debt costs			199				868
Provision for doubtful accounts			5,138				4,585
Provision for inventory obsolescence			6,769				13,708
Loss on refinancing of senior secured term loan			—				3,660
Impairment of goodwill and certain intangible assets			—				289,523
Impairment of investments held at cost			—				1,500
Deferred taxes			(2,015	)			(76,861	)
Share-based compensation			7,877				7,855
Minority interest			28				—
Amortization of step up of fair value in inventory			—				365
Gain on sale of Pain Care® operations			—				(1,570	)
Other			(159	)			3,062
Change in operating assets and liabilities:
Restricted cash			(2,141	)			(352	)
Accounts receivable			(18,357	)			(13,805	)
Inventories			(12,832	)			(19,498	)
Prepaid expenses and other current assets			(4,415	)			(5,250	)
Accounts payable			2,314				2,500
Current liabilities			14,743				(2,739	)
Net cash provided by operating activities			28,224				2,421
Cash flows from investing activities:
Capital expenditures			(16,073	)			(15,831	)
Proceeds from sale of investments held at cost			1,711				766
Proceeds from sale of Pain Care® operations			—				5,980
Net cash used in investing activities			(14,362	)			(9,085	)
Cash flows from financing activities:
Net proceeds from issuance of common shares			7				1,734
Repayments of long-term debt			(22,477	)			(6,223	)
Proceeds from (repayments of) bank borrowings, net			1,581				(2,377	)
Payment of refinancing fees			—				(283	)
Cash payment for purchase of minority interest in subsidiary			(1,143	)			(501	)
Tax benefit on non-qualified stock options			2				22
Net cash used in financing activities			(22,030	)			(7,628	)
Effect of exchange rate changes on cash			374				(486	)
Net decrease in cash and cash equivalents			(7,794	)			(14,778	)
Cash and cash equivalents at the beginning of the year			14,594				25,064
Cash and cash equivalents at the end of the period		$	6,800			$	10,286

The accompanying notes form an integral part of these condensed consolidated financial statements.

ORTHFIX INTERNATIONAL N.V.
NOTES TO THE CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: BUSINESS

Orthofix International N.V. (the “Company”) is a multinational corporation principally involved in the design, development, manufacture, marketing and distribution of medical equipment, principally for the Orthopedics products market. The Company is comprised of four reportable segments: Domestic, Spinal Implants & Biologics, Breg and International. See Note 13 for a description of each segment.

NOTE 2: BASIS OF PRESENTATION

The accompanying unaudited Condensed 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. Pursuant to these rules and regulations, certain information and note disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States, have been condensed or omitted. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. The balance sheet at December 31, 2008 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. For further information, refer to the Consolidated Financial Statements and Notes thereto of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

NOTE 3: RECENTLY ISSUED ACCOUNTING STANDARDS

In January 2009, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 808 — Collaborative Arrangements (“ASC 808”) (formerly known as Emerging Issues Task Force (“EITF”) 07-1 “Accounting for Collaborative Arrangements”). ASC 808 provides information related to the classification of the payments between participants, the appropriate income statement presentation, as well as disclosures related to certain collaborative arrangements. The adoption of ASC 808 did not have a material impact on the Company’s results of operations or financial position, as the Company had applied this guidance since there was no prevailing authority previously.

In January 2009, the Company adopted ASC Subtopic 810-10 (“ASC 810-10”) (formerly known as Statement of Financial Accounting Standards (“SFAS”) No. 160, “Non-controlling Interests in Consolidated Financial Statements, an Amendment of ARB 51”). ASC 810-10 establishes accounting and reporting standards pertaining to ownership interest in subsidiaries held by parties other than the parent, the amount of net income attributable to the parent and to the non-controlling interest, changes in a parent’s ownership interest, and the valuation of any retained non-controlling equity investment when a subsidiary is deconsolidated. ASC 810-10 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. ASC 810-10 and its adoption changed the method in which the Company accounted for a minority interest acquisition during the first quarter of 2009. It also requires the excess purchase price over the minority interest liability (at the time of the acquisition) to be recorded as a capital transaction. The disclosure requirements of ASC 810-10 did not have an impact on the Company’s financial reporting as the remaining minority interest liability is immaterial.

In May 2009, the FASB issued ASC Topic 855 — Subsequent Events (“ASC 855”) (formerly known as SFAS No. 165, “Subsequent Events”). ASC 855 provides authoritative accounting literature for a topic that was previously addressed only in auditing literature (AICPA AU Section 560, Subsequent Events). The guidance in ASC 855 is largely similar to the current guidance in the auditing literature with some exceptions that are not intended to result in significant changes in practice. Three modifications to the subsequent events guidance in AU Section 560 are: 1) to name the two types of subsequent events either as recognized subsequent events (currently referred to in practice as Type I subsequent events) or non-recognized subsequent events (currently referred to in practice as Type II subsequent events), 2) to modify the definition of subsequent events to refer to events or transactions that occur after the balance sheet date, but before the financial statements are issued for public entities and 3) to require entities to disclose the date through which an entity has evaluated subsequent events and the basis for that date. ASC 855 is effective for interim or annual financial periods ending after June 15, 2009. In accordance with the provisions of ASC 855, the Company has evaluated all subsequent events that occurred through November 6, 2009, the date the financial statements were issued. Refer to Note 20 for disclosures related to the Company’s subsequent events.

NOTE 4: SHARE-BASED COMPENSATION

All share-based compensation costs are measured at the grant date, based on the estimated fair value of the award, and are recognized as expense in the statement of operations over the requisite service period. Commencing in June 2007, the Company offered restricted shares in addition to stock options as a form of share-based compensation.

The following table shows the detail of share-based compensation by line item in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2009 and 2008:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(US$ in thousands)		2009				2008				2009				2008
Cost of sales		$	166			$	—			$	505			$	116
Sales and marketing			625				579				2,290				1,353
General and administrative			1,632				2,433				4,656				5,793
Research and development			138				186				426				593
Total		$	2,561			$	3,198			$	7,877			$	7,855

There are no performance requirements for share-based compensation awarded to employees.

NOTE 5: RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform to the 2009 presentation. The reclassifications have no effect on previously reported net loss or shareholders’ equity.

NOTE 6: INVENTORIES

Inventories are valued at the lower of cost or estimated net realizable value, after provision for excess or obsolete items. Cost is determined on a weighted-average basis, which approximates the FIFO method. The valuation of work-in-process, finished products, field inventory and consignment inventory includes the cost of materials, labor and production. Field inventory represents immediately saleable finished products inventory that is in the possession of the Company’s direct sales representatives and independent distributors.

Inventories were as follows:

		September 30,				December 31,
(US$ in thousands)		2009				2008
Raw materials		$	9,847			$	9,314
Work-in-process			7,341				8,829
Finished products			64,224				57,151
Field inventory			16,198				13,633
Consignment inventory			27,529				23,426
			125,139				112,353
Less reserve for obsolescence			(24,123	)			(21,168	)
		$	101,016			$	91,185

NOTE 7: GOODWILL

The changes in the carrying value of goodwill by reportable segment for the period ended September 30, 2009 are as follows:

						Spinal Implants
(US$ in thousands)		Domestic				& Biologics				Breg				International				Total
At December 31, 2008		$	31,793			$	9,367			$	99,295			$	42,126			$	182,581
Foreign currency			—				—				—				2,627				2,627
At September 30, 2009		$	31,793			$	9,367			$	99,295			$	44,753			$	185,208

NOTE 8: PATENTS AND OTHER INTANGIBLE ASSETS

		September 30,				December 31,
(US$ in thousands)		2009				2008
Cost
Patents and developed technologies		$	26,853			$	25,602
Trademarks — definite lived (subject to amortization)			119				105
Trademarks — indefinite lived (not subject to amortization)			23,502				23,382
Distribution networks			44,586				44,586
			95,060				93,675
Accumulated amortization
Patents and developed technologies			(15,589	)			(13,194	)
Trademarks — definite lived (subject to amortization)			(106	)			(105	)
Distribution networks			(30,061	)			(26,830	)
Patents and other intangible assets, net		$	49,304			$	53,546

Amortization expense for intangible assets is estimated to be approximately $1.5 million for the remainder of 2009 and $5.9 million, $5.9 million, $4.6 million, $1.5 million and $6.4 million for the periods ending December 31, 2010, 2011, 2012, 2013, and thereafter, respectively.

NOTE 9: BANK BORROWINGS

		September 30,				December 31,
(US$ in thousands)		2009				2008
Borrowings under line of credit		$	3,689			$	1,907

The weighted average interest rates on borrowings under lines of credit as of September 30, 2009 and December 31, 2008 were 4.93% and 5.86%, respectively.

Borrowings under lines of credit consist of borrowings in Euros. The Company had unused available lines of credit of 4.8 million Euros ($7.0 million) and 5.2 million Euros ($7.3 million) at September 30, 2009 and December 31, 2008, respectively, in its Italian line of credit, which gives the Company the option to borrow amounts in Italy at rates which are determined at the time of borrowing. This line of credit is unsecured.

NOTE 10: LONG-TERM DEBT

		September 30,				December 31,
(US$ in thousands)		2009				2008
Long-term obligations		$	258,225			$	280,700
Other loans			160				162
			258,385				280,862
Less current portion			(3,336	)			(3,329	)
		$	255,049			$	277,533

On September 22, 2006 the Company’s wholly-owned US holding company subsidiary, Orthofix Holdings, Inc. (“Orthofix Holdings”), entered into a senior secured credit facility with a syndicate of financial institutions to finance the acquisition of Blackstone Medical Inc. (“Blackstone”). Certain terms of the senior secured credit facility were amended September 29, 2008. The senior secured credit facility provides for (1) a seven-year amortizing term loan facility of $330.0 million and (2) a six-year revolving credit facility of $45.0 million. As of September 30, 2009, the Company had no amounts outstanding under the revolving credit facility and $258.2 million outstanding under the term loan facility. Obligations under the senior secured credit facility can have a floating interest rate of the London Inter-Bank Offered Rate (“LIBOR”) plus a margin, with a LIBOR floor of 3.0%, or prime rate plus a margin. As of September 30, 2009, the entire term loan obligation of $258.2 million is at the prime rate plus a margin of 3.50%. The effective interest rates on the senior secured credit facility, including the impact of an interest rate swap (see Note 17), as of September 30, 2009 and December 31, 2008 were 9.0% and 8.4%, respectively.

Each of the domestic subsidiaries of the Company (which includes Orthofix Inc., Breg Inc., and Blackstone) and Colgate Medical Limited and Victory Medical Limited (wholly-owned financing subsidiaries of the Company) has guaranteed the obligations of Orthofix Holdings under the senior secured credit facility. The obligations of the subsidiaries under their guarantees are secured by the pledges of their respective assets.

Certain subsidiaries of the Company have restrictions on their ability to pay dividends or make intercompany loan advances pursuant to the Company’s senior secured credit facility. The net assets of Orthofix Holdings and its subsidiaries are restricted for distributions to the parent company. Domestic subsidiaries of the Company, as parties to the credit agreement, have access to these net assets for operational purposes. The amount of restricted net assets of Orthofix Holdings and its subsidiaries as of September 30, 2009 is $130.8 million compared to $111.3 million at December 31, 2008. In addition, the senior secured credit facility restricts the Company and subsidiaries that are not parties to the credit facility from access to cash held by Colgate Medical Limited and its subsidiaries. All credit party subsidiaries have access to this cash for operational and debt repayment purposes. The amount of restricted cash of the Company as of September 30, 2009 is $13.2 million compared to $11.0 million at December 31, 2008.

Weighted average interest rates on current maturities of long-term obligations as of September 30, 2009 and December 31, 2008 were 9.0% and 8.4%, respectively.

NOTE 11: COMMON SHARES

During the nine month period ended September 30, 2009, there were 27,656 shares of common stock issued upon the vesting of restricted stock and the exercise of outstanding stock options.

NOTE 12: COMPREHENSIVE INCOME (LOSS)

Accumulated other comprehensive income is comprised of foreign currency translation adjustments and the effective portion of the gain (loss) for the Company’s cross-currency swap which is designated and accounted for as a cash flow hedge (refer to Note 17). The components of and changes in accumulated other comprehensive income are as follows:

		Foreign Currency				Fair Value				Accumulated Other
		Translation				of Cross -				Comprehensive
(US$ in thousands)		Adjustments				Currency Swap				Income/(Loss)
Balance at December 31, 2008		$	(211	)		$	3,097			$	2,886
Unrealized loss on cross-currency swap, net of tax of $(943)			—				(2,426	)			(2,426	)
Foreign currency translation adjustment			6,169				—				6,169
Balance at September 30, 2009		$	5,958			$	671			$	6,629

Comprehensive income (loss) is comprised of the following components:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(US$ in thousands)		2009				2008				2009				2008
Net income (loss)		$	6,188			$	(237,251	)		$	15,011			$	(227,837	)
Other comprehensive income (loss):
Unrealized gain (loss) on derivative instrument(s), net of tax			159				(1,997	)			(2,426	)			(76	)
Foreign currency translation adjustment			948				(5,953	)			6,169				(5,782	)
Total comprehensive income (loss)		$	7,295			$	(245,201	)		$	18,754			$	(233,695	)

NOTE 13: BUSINESS SEGMENT INFORMATION

The Company’s segment information is prepared on the same basis that the Company’s management reviews the financial information for operational decision making purposes. The Company is comprised of the following segments:

Domestic

Domestic (“Domestic”) consists of the operations of Orthofix Inc. within the United States. Domestic designs, manufactures and distributes stimulation, orthopedic and biologics products. Domestic uses both direct and distributor sales representatives to sell Spine and Orthopedic products to hospitals, doctors and other healthcare providers in the United States market.

Spinal Implants & Biologics

Spinal Implants & Biologics (“Spinal Implants & Biologics”) consists of Blackstone and its two subsidiaries, Blackstone GmbH and Goldstone GmbH. Spinal Implants and Biologics specializes in the design, development and marketing of spinal implant and related human cellular and tissue based products (“HCT/P products”, often referred to as Biologic products). Spinal Implants & Biologics distributes its products through a network of domestic and international distributors, sales representatives and affiliates.

Breg

Breg, Inc. (“Breg”), based in Vista, California, designs, manufactures, and distributes orthopedic products for post-operative reconstruction and rehabilitative patient use and sells its products through a network of domestic and international distributors, sales representatives and affiliates.

International

International (“International”) consists of international operations located in Europe, Mexico, Brazil and Puerto Rico, as well as independent distributors located outside the United States. International uses both direct and distributor sales representatives to sell Spine, Orthopedics, Sports Medicine, Vascular and Other products to hospitals, doctors, and other healthcare providers.

Group Activities

Group activities are comprised of the operating expenses of Orthofix International N.V. and its US holding company subsidiary, Orthofix Holdings, Inc.

The following tables below present information by reportable segment for the three and nine months ended September 30:

For the three month period ended September 30:

		External Sales								Intersegment Sales
(US$ in thousands)		2009				2008				2009				2008
Domestic		$	52,222			$	47,065			$	1,145			$	1,552
Spinal Implants & Biologics			28,017				25,338				291				349
Breg			23,724				22,377				1,138				1,392
International			31,135				34,521				7,214				6,240
Total		$	135,098			$	129,301			$	9,788			$	9,533

For the nine month period ended September 30:

		External Sales								Intersegment Sales
(US$ in thousands)		2009				2008				2009				2008
Domestic		$	155,654			$	138,397			$	4,853			$	4,856
Spinal Implants & Biologics			86,562				81,093				1,965				2,938
Breg			70,175				66,341				4,031				4,048
International			89,227				101,541				17,641				19,673
Total		$	401,618			$	387,372			$	28,490			$	31,515

The following table presents operating income (loss) by segment for the three and nine months ended September 30:

		Three Months Ended								Nine Months Ended
Operating Income (Loss)		September 30,								September 30,
(US$ in thousands)		2009				2008				2009				2008
Domestic		$	16,505			$	17,155			$	51,011			$	47,235
Spinal Implants & Biologics (1)(2)(3)			(2,430	)			(309,201	)			(16,898	)			(319,993	)
Breg			3,210				2,206				9,227				9,273
International			5,066				4,741				12,516				14,451
Group Activities			(4,350	)			(4,309	)			(14,507	)			(16,525	)
Eliminations			(250	)			(109	)			547				(830	)
Total		$	17,751			$	(289,517	)		$	41,896			$	(266,389	)

The following tables present sales by market sector for the three months ended September 30, 2009 and 2008:

		Sales by Market Sector
		for the three month period ended September 30, 2009
						Spinal
						Implants &
(US$ in thousands)		Domestic				Biologics				Breg				International				Total
Spine		$	39,609			$	28,017			$	—			$	510			$	68,136
Orthopedics			12,613				—				—				20,637				33,250
Sports Medicine			—				—				23,724				940				24,664
Vascular			—				—				—				3,904				3,904
Other			—				—				—				5,144				5,144
Total		$	52,222			$	28,017			$	23,724			$	31,135			$	135,098

		Sales by Market Sector
		for the three month period ended September 30, 2008
						Spinal
						Implants &
(US$ in thousands)		Domestic				Biologics				Breg				International				Total
Spine		$	35,340			$	25,338			$	—			$	640			$	61,318
Orthopedics			11,725				—				—				22,099				33,824
Sports Medicine			—				—				22,377				1,323				23,700
Vascular			—				—				—				4,274				4,274
Other			—				—				—				6,185				6,185
Total		$	47,065			$	25,338			$	22,377			$	34,521			$	129,301

The following tables present sales by market sector for the nine months ended September 30, 2009 and 2008:

		Sales by Market Sector
		for the nine month period ended September 30, 2009
						Spinal
						Implants &
(US$ in thousands)		Domestic				Biologics				Breg				International				Total
Spine		$	117,034			$	86,562			$	—			$	1,399			$	204,995
Orthopedics			38,620				—				—				56,848				95,468
Sports Medicine			—				—				70,175				3,194				73,369
Vascular			—				—				—				12,574				12,574
Other			—				—				—				15,212				15,212
Total		$	155,654			$	86,562			$	70,175			$	89,227			$	401,618

		Sales by Market Sector
		for the nine month period ended September 30, 2008
						Spinal
						Implants &
(US$ in thousands)		Domestic				Biologics				Breg				International				Total
Spine		$	104,143			$	81,093			$	—			$	1,252			$	186,488
Orthopedics			34,254				—				—				62,665				96,919
Sports Medicine			—				—				66,341				3,871				70,212
Vascular			—				—				—				13,391				13,391
Other			—				—				—				20,362				20,362
Total		$	138,397			$	81,093			$	66,341			$	101,541			$	387,372

NOTE 14: RESTRUCTURING CHARGES

In the fourth quarter of 2008, as part of the Company’s strategic plan to strengthen the business, the Company initiated a restructuring plan to improve operations and reduce costs at Blackstone. The plan involves the consolidation of substantially all of Blackstone’s current operations in Wayne, NJ and Springfield, MA into the same facility housing its spine stimulation and US orthopedics business in the Dallas, TX area. The Company plans to complete the restructuring and consolidation by the second quarter of 2010, at which time the Company anticipates a total restructuring expense of $3.6 million. During the three and nine months ended September 30, 2009, the Company recorded net restructuring charges of $0.6 million and $3.6 million, respectively, which were primarily related to severance costs and accelerated depreciation costs related to shortening lives of assets which will be disposed. These restructuring costs are recorded in general and administrative expense and are classified in the Spinal Implants & Biologics segment.

The following table presents changes in the restructuring liability, which is included within Other Current Liabilities in the Company’s condensed consolidated balance sheets as of September 30, 2009 and December 31, 2008:

						Assets
(US$ in thousands)		Severance				Abandoned				Total
Balance at December 31, 2008		$	548			$	—			$	548
Charges			2,565				1,020				3,585
Cash Payments			(1,018	)			—				(1,018	)
Non-cash Items			—				(1,020	)			(1,020	)
Balance at September 30, 2009		$	2,095			$	—			$	2,095

NOTE 15: INCOME TAXES

The reported year to date tax provision as a percentage of income before income taxes was 37.4%. The principal factors affecting the Company’s tax rate are the Company’s mix of earnings among various tax jurisdictions and a benefit related to a restructuring of the Company’s European operations in 2006 to optimize the Company’s supply chain. This benefit, which results in ongoing tax efficiencies is partially offset by current period losses in certain foreign jurisdictions for which the Company does not currently provide a tax benefit.

As of September 30, 2009, the Company’s gross unrecognized tax benefit was $1.2 million. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits within its global operations in income tax expense. As of September 30, 2009, the Company had approximately $0.4 million accrued for interest and penalties. The entire $1.6 million of unrecognized tax benefit would affect the Company’s effective tax rate if recognized. It is possible that the amount of unrecognized tax benefits may decrease by $0.5 million over the next twelve months due to the potential settlement of tax examinations.

The Company is subject to tax examinations in all major taxing jurisdictions in which it operates. The Company files a consolidated income tax return in the US federal jurisdiction and numerous consolidated and separate income tax returns in many state and foreign jurisdictions. The statute of limitations with respect to US federal tax filings is closed for years prior to December 31, 2004. The statute of limitations for the various US state tax filings is closed in most instances for years prior to December 31, 2006. The Company is currently under examination by the Internal Revenue Service (“IRS”) for the tax years ended December 31, 2005 and December 31, 2006. All issues raised to date by the IRS are reflected in the current unrecognized tax benefits. There are certain US state tax statutes open for years from 1997 forward due to current examinations. The statutes of limitations with respect to the major foreign tax filing jurisdictions are generally closed for years prior to December 31, 2004.

NOTE 16: EARNINGS PER SHARE

For the three and nine months ended September 30, 2009, there were no adjustments to net income (loss) for purposes of calculating basic and diluted net income (loss) per common share. The following table is a reconciliation of the weighted average shares used in the basic and diluted net income (loss) per common share computations.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Weighted average common shares-basic			17,130,247				17,101,718				17,113,891				17,093,133
Effect of dilutive securities			85,320				—				60,525				—
Weighted average common shares-diluted			17,215,567				17,101,718				17,174,416				17,093,133

For the three and nine months ended September 30, 2009, the Company did not include 2,953,381 and 3,252,174 options, respectively, in the diluted shares outstanding calculation because their inclusion would have been anti-dilutive or because their exercise price exceeded the average market price of the Company’s common stock during the period.

No adjustment has been made in the three and nine months ended September 30, 2008 for any common stock equivalents because their effects would be anti-dilutive. For the three and nine month periods ended September 30, 2008, potentially dilutive shares totaled 4,638 and 37,496, respectively.

NOTE 17: DERIVATIVE INSTRUMENTS

In 2006, the Company entered into a cross-currency swap agreement to manage its foreign currency exposure related to a portion of the Company’s intercompany receivable of a US dollar functional currency subsidiary that is denominated in Euro. The derivative instrument, a ten-year fully amortizable agreement with a notional amount of $63.0 million, is scheduled to expire on December 30, 2016. The instrument is designated as a cash flow hedge. The amount outstanding under the agreement as of September 30, 2009 and December 31, 2008 is $56.7 million. Under the agreement, the Company pays Euro and receives US dollars based on scheduled cash flows in the agreement. The Company recognized an unrealized gain (loss) on the change in fair value of this swap arrangement of $0.2 million and $(2.4) million, net of tax, within other comprehensive income in the three and nine months ended September 30, 2009, respectively. The Company recognized an unrealized gain (loss) on the change in fair value of this swap arrangement of $(1.0) million and $0.2 million, net of tax, within other comprehensive loss in the three and nine months ended September 30, 2008, respectively.

In June 2008, the Company entered into a three-year fully amortizable interest rate swap agreement (the “Swap”) with a notional amount of $150.0 million and an expiration date of June 30, 2011. During the second and third quarters of 2008, the interest rate Swap was accounted for as a cash flow hedge, and changes in its value were recorded as part of accumulated other comprehensive income on the balance sheet. Due to declining interest rates and a LIBOR floor in the Company’s amended credit facility, the Swap was no longer deemed highly effective. Therefore, during the fourth quarter of 2008, the Company recognized in earnings an unrealized, non-cash loss of approximately $8.0 million which resulted from changes in the fair value of the Company’s interest rate Swap. Cash flow accounting is no longer applied and mark-to-market adjustments are required to be reported in current earnings through the expiration of the Swap in June 2011. For the three and nine months ended September 30, 2009, the Company recorded an unrealized gain (loss) of $(0.2) million and $1.0 million, respectively, in other income (expense), net on the statement of operations. The Company recognized an unrealized loss on the change in fair value of this swap arrangement of $(1.0) million and $(0.3) million, net of tax, for the three and nine months ended September 30, 2008, respectively, within other comprehensive loss. The Swap continues to provide an economic hedge against fluctuating interest rate exposure on the $150.0 million portion of outstanding debt it covers, should the LIBOR interest rate rise above 3.73%.

As required by ASC Topic 815 — Derivatives and Hedging (“ASC 815”) (formerly known as SFAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities”), the tables below disclose the types of derivative instruments the Company owns, the classifications and fair values of these instruments within the balance sheet, and the amount of gain (loss) recognized in other comprehensive income (loss) (“OCI”) or income (loss).

		Fair value:						Amount of gain
		favorable						(loss) recognized
(US$ in thousands)		(unfavorable)				Balance sheet location		in OCI
As of September 30, 2009
Cross-currency swap		$	(5,879	)		Other long-term liabilities		$	(2,426	)
Interest rate swap		$	(6,929	)		Other current liabilities		$	—
As of September 30, 2008
Cross-currency swap		$	(1,751	)		Other long-term liabilities		$	200
Interest rate swap		$	(424	)		Other current liabilities		$	(276	)

(US$ in thousands)		For the three months ended								For the nine months ended
Amount of gain (loss)		September 30,								September 30,
recognized in income (loss)		2009				2008				2009				2008
Interest rate swap		$	(229	)		$	—			$	1,046			$	—

NOTE 18: FAIR VALUE MEASUREMENTS

The Company adopted the accounting guidance for fair value measurements on January 1, 2008. Fair value is defined as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Non-financial assets and liabilities of the Company measured at fair value include any long-lived assets or equity method investments that are impaired in a currently reported period. The authoritative guidance also describes three levels of inputs that may be used to measure fair value:

		Level 1 — quoted prices in active markets for identical assets and liabilities
		Level 2 — observable inputs other than quoted prices in active markets for identical assets and liabilities
		Level 3 — unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions

As of September 30, 2009, the Company held certain items that are required to be measured at fair value on a recurring basis. These included cash equivalents, restricted cash, accounts receivable, short-term bank borrowings, accounts payable, long-term secured debt, an interest rate derivative contract, and a cross currency derivative contract. Cash equivalents consist of short-term, highly liquid, income-producing investments, all of which have original maturities of 90 days or less, including money market funds. Restricted cash, accounts receivable, short-term bank borrowings and accounts payable approximate fair value due to the short-term maturities of these instruments. The Company’s long-term secured debt carries a floating rate of interest and therefore, the carrying value is considered to approximate the fair value. The derivative instruments are related to the Company’s interest rate and foreign currency hedges.

The Company’s interest rate derivative instrument also consists of an over-the-counter (“OTC”) swap contract. The inputs used to determine the fair value of this contract are obtained in quoted public markets. Therefore, the Company has categorized the swap contract as Level 2. The Company also considers counterparty credit risk and its own credit risk in its determination of all estimated fair values. The Company has consistently applied these valuation techniques in all periods presented.

The Company’s cross currency derivative instrument consists of an OTC contract, which is not traded on a public exchange. The fair value of the swap contract is determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. Therefore, the Company has categorized the swap contract as a Level 2 derivative financial instrument. The Company also considers counterparty credit risk and its own credit risk in its determination of all estimated fair values. The Company has consistently applied these valuation techniques in all periods presented.

The fair value of the Company’s financial assets and liabilities on a recurring basis were as follows:

		Balance
		September 30,
(US$ in thousands)		2009				Level 1				Level 2				Level 3
Derivative Financial Instruments(1)
Cash Flow Hedges
Interest rate hedge		$	(6,929	)		$	—			$	(6,929	)		$	—
Cross currency hedge		$	(5,879	)		$	—			$	(5,879	)		$	—

NOTE 19: CONTINGENCIES

Litigation

On or about July 23, 2007, our subsidiary, Blackstone received a subpoena issued by the Department of Health and Human Services, Office of Inspector General, under the authority of the federal healthcare anti-kickback and false claims statutes. The subpoena seeks documents for the period January 1, 2000 through July 31, 2006, which is prior to Blackstone’s acquisition by the Company. The Company believes that the subpoena concerns the compensation of physician consultants and related matters. On September 17, 2007, the Company submitted a claim for indemnification from the escrow fund established in connection with the agreement and plan of merger between the Company, New Era Medical Corp. and Blackstone, dated as of August 4, 2006 (the “Blackstone Merger Agreement”), for any losses to us resulting from this matter. (The Company’s indemnification rights under the Blackstone Merger Agreement are described further below). The Company was subsequently notified by legal counsel for the former shareholders that the representative of the former shareholders of Blackstone has objected to the indemnification claim and intends to contest it in accordance with the terms of the Blackstone Merger Agreement.

On or about January 7, 2008, the Company received a federal grand jury subpoena from the United States Attorney’s Office for the District of Massachusetts. The subpoena seeks documents from the Company for the period January 1, 2000 through July 15, 2007. The Company believes that the subpoena concerns the compensation of physician consultants and related matters, and further believes that it is associated with the Department of Health and Human Services, Office of Inspector General’s investigation of such matters. On September 18, 2008, the Company submitted a claim for indemnification from the escrow fund established in connection with the Blackstone Merger Agreement for any losses to the Company resulting from this matter. On or about April 29, 2009, counsel for the Company received a HIPAA subpoena issued by the US Department of Justice. The subpoena seeks documents from the Company for the period January 1, 2000 through July 15, 2007. The Company believes that the subpoena concerns the compensation of physician consultants and related matters, and further believes that it is associated with the Department of Health and Human Services, Office of Inspector General’s investigation of such matters, as well as the January 7, 2008 federal grand jury subpoena. On or about June 15, 2009, Orthofix, Inc., and Blackstone, executed an agreement with the United States Attorney’s Office for the District of Massachusetts (the “Tolling Agreement”) extending an agreement tolling the statute of limitations applicable to any criminal, civil, or administrative proceedings that the government might later initiate. The Tolling Agreement extended the period tolling the statute of limitations to include the period from December 1, 2008 through and including December 31, 2009.

On or about December 5, 2008, the Company obtained a copy of a qui tam complaint filed by Susan Hutcheson and Philip Brown against Blackstone and the Company in the US District Court for the District of Massachusetts. A qui tam action is a civil lawsuit brought by an individual for an alleged violation of a federal statute, in which the US Department of Justice has the right to intervene and take over the prosecution of the lawsuit at its option. On November 21, 2008, the US Department of Justice filed a notice of non-intervention in the case. The complaint was served on Blackstone on or about March 24, 2009. Counsel for the plaintiffs filed an amended complaint on June 4, 2009. The amended complaint sets forth a cause of action against Blackstone under the False Claims Act for alleged inappropriate payments and other items of value conferred on physician consultants; Orthofix is not named as a defendant in the amended complaint. The Company believes that this lawsuit is related to the matters described above involving the Department of Health and Human Services, Office of the Inspector General, and the United States Attorney’s Office for the District of Massachusetts. The Company intends to defend vigorously against this lawsuit. On September 18, 2008, after being informed of the existence of the lawsuit by representatives of the US Department of Justice and prior to the unsealing of the complaint (which was unsealed by the court on or about November 24, 2008), the Company submitted a claim for indemnification from the escrow fund established in connection with the Blackstone Merger Agreement for any losses to us resulting from this matter.

On or about September 27, 2007, Blackstone received a federal grand jury subpoena issued by the United States Attorney’s Office for the District of Nevada (“USAO-Nevada subpoena”). The subpoena seeks documents for the period from January 1999 to the date of issuance of the subpoena. The Company believes that the subpoena concerns payments or gifts made by Blackstone to certain physicians. On February 29, 2008, Blackstone received a Civil Investigative Demand (“CID”) from the Massachusetts Attorney General’s Office, Public Protection and Advocacy Bureau, Healthcare Division. The Company believes that the CID seeks documents concerning Blackstone’s financial relationships with certain physicians and related matters for the period from March 2004 through the date of issuance of the CID. The Ohio Attorney General’s Office, Health Care Fraud Section has issued a criminal subpoena, dated August 8, 2008, to Orthofix, Inc. (the “Ohio AG subpoena”). The Ohio AG subpoena seeks documents for the period from January 1, 2000 through the date of issuance of the subpoena. The Company believes that the Ohio AG subpoena arises from a government investigation that concerns the compensation of physician consultants and related matters. On September 18, 2008, the Company submitted a claim for indemnification from the escrow fund established in connection with the Blackstone Merger Agreement for any losses to us resulting from the USAO-Nevada subpoena, the Massachusetts CID and the Ohio AG subpoena.

By order entered on January 4, 2007, the United States District Court for the Eastern District of Arkansas unsealed a qui tam complaint captioned Thomas v. Chan, et al., 4:06-cv-00465-JLH, filed against Dr. Patrick Chan, Blackstone and other defendants including another device manufacturer. The amended complaint in the Thomas action alleges causes of action under the False Claims Act for alleged inappropriate payments and other items of value conferred on Dr. Chan and another provider. The Company believes that Blackstone has meritorious defenses to the claims alleged and the Company intends to defend vigorously against this lawsuit. On September 17, 2007, the Company submitted a claim for indemnification from the escrow fund established in connection with the Blackstone Merger Agreement for any losses to us resulting from this matter. The Company was subsequently notified by legal counsel for the former shareholders that the representative of the former shareholders of Blackstone has objected to the indemnification claim and intends to contest it in accordance with the terms of the Blackstone Merger Agreement.

Under the Blackstone Merger Agreement, the former shareholders of Blackstone have agreed to indemnify the Company for breaches of representations and warranties under the agreement as well as certain other specified matters. These post-closing indemnification obligations of the former Blackstone shareholders are limited to a cumulative aggregate amount of $66.6 million. At closing, an escrow fund was established pursuant to the terms of the Blackstone Merger Agreement to fund timely submitted indemnification claims. The initial amount of the escrow fund was $50.0 million. As of September 30, 2009, the escrow fund, which has subsequently accrued interest, contained $54.0 million. The Company is also entitled to seek direct personal recourse against certain principal shareholders of Blackstone after all monies on deposit in the escrow fund have been paid out or released or are the subject of pending or unresolved indemnification claims but only for a period of six years from the closing date of the Merger and only up to an amount equal to $66.6 million less indemnification claims previously paid.

In addition to the foregoing claims, the Company has submitted claims for indemnification from the escrow fund for losses that have resulted or may result from certain civil actions filed against Blackstone as well as certain claims against Blackstone alleging rights to payments for Blackstone stock options not reflected in Blackstone’s corporate ledger at the time of Blackstone’s acquisition by the Company, or that the shares or stock options subject to those claims were improperly diluted by Blackstone. To date, the representative of the former shareholders of Blackstone has not objected to approximately $1.5 million in such claims from the escrow fund, with certain claims remaining pending.

The Company is unable to predict the outcome of each of the escrow claims described above in the preceding paragraphs or to estimate the amount, if any, that may ultimately be returned to the Company from the escrow fund and there can be no assurance that losses to the Company from these matters will not exceed the amount of the escrow fund. Expenses incurred by the Company relating to the above matters are recorded as an escrow receivable in the Company’s financial statements to the extent the Company believes, among other things, that collection of the claims is reasonably assured. Expenditures related to such matters for which the Company believes collection is doubtful are recognized in earnings when incurred. As of September 30, 2009 and December 31, 2008, included in Prepaid Expenses and Other Current Assets is approximately $13.3 million and $8.3 million, respectively, of escrow receivable balances related to the Blackstone matters described above. These amounts include, among other things, attorneys’ fees and costs related to the government investigations manifested by the subpoenas described above, the stock option-related claims described above, and costs related to the qui-tam action described above. As described above, some of these reimbursement claims are being contested by the representative of the former shareholders of Blackstone. To mitigate the risk that some reimbursement claims will not be collected, the Company records a reserve against the escrow receivable during the period in which reimbursement claims are recognized.

On or about April 10, 2009, the Company received a HIPAA subpoena (“HIPAA subpoena”) issued by the US Attorney’s Office for the District of Massachusetts. The subpoena seeks documents for the period January 1, 1995 through the date of the subpoena. The Company believes that the subpoena concerns the classification and marketing of its bone growth stimulators and related matters. On or about September 21, 2009, the Company received an additional HIPAA subpoena issued by the U.S. Attorney’s Office for the District Of Massachusetts in connection with this investigation. The subpoena seeks additional documents pertaining to the investigation for the period January 1, 1995 through the date of the subpoena. The Company intends to cooperate with the government’s requests. The Company is unable to predict what actions, if any, might be taken by the government or what impact, if any, the outcome of this matter might have on the Company’s consolidated financial position, results of operations or cash flows.

On or about April 14, 2009, the Company obtained a copy of a qui tam complaint filed by Jeffrey J. Bierman in the US District Court for the District of Massachusetts against Orthofix, Inc., the Company, and other companies that have allegedly manufactured bone growth stimulation devices, including Orthologic Corp., DJO Incorporated, Reable Therapeutics, Inc., the Blackstone Group, L.P., Biomet, Inc., EBI, L.P., EBI Holdings, Inc., EBI Medical Systems, Inc., Bioelectron, Inc., LBV Acquisition, Inc., and Smith & Nephew, Inc. By order entered on March 24, 2009, the court unsealed the case. The amended complaint alleges various causes of action under the federal False Claims Act and state and city false claims acts premised on the contention that the defendants improperly promoted the sale, as opposed to the rental, of bone growth stimulation devices. The amended complaint also includes claims against the defendants for, among other things, allegedly misleading physicians and purportedly causing them to file false claims and for allegedly violating the Anti-kickback Act by providing free products to physicians, waiving patients’ insurance co-payments, and providing inducements to independent sales agents to generate business. The Company believes that this lawsuit is related to the matter described above involving the HIPAA subpoena. The Company and Orthofix, Inc. were served on or about September 8, 2009, and intend to defend vigorously against this lawsuit.

On or about July 2, 2009, the Company obtained a copy of a qui tam complaint filed by Marcus Laughlin that is pending in the US District Court for the District of Massachusetts against the Company. This complaint has been consolidated with the complaint described in the immediately preceding paragraph, and was unsealed on June 30, 2009. The complaint alleges violations of the False Claims Act, fraudulent billing, illegal kickbacks and wrongful termination based on allegations that the Company promoted the sale rather than the rental of bone growth stimulation devices, systematically overcharged for these products, provided physicians kickbacks in the form of free units, referral fees, and fitting fees, and that the defendant and its competitors discussed together strategies to encourage higher government pricing for the products. The complaint also alleges that TRICARE has been reimbursing the Company for its Cervical Stim^® product without approval to do so. An amended complaint alleges conspiracy and violations of the Sherman Anti-Trust Act in connection with the same alleged conduct. The Company was served with the complaint on or about September 9, 2009 and intends to defend vigorously against this lawsuit.

Effective October 29, 2007, Blackstone entered into a settlement agreement of a patent infringement lawsuit brought by certain affiliates of Medtronic Sofamor Danek USA Inc. In that lawsuit, the Medtronic plaintiffs had alleged that they were the exclusive licensees of certain US patents and that Blackstone’s making, selling, offering for sale, and using its Blackstone Anterior Cervical Plate, 3º Anterior Cervical Plate, Hallmark Anterior Cervical Plate and Construx Mini PEEK VBR System products within the United States willfully infringed the subject patents. Blackstone denied infringement and asserted that the Patents were invalid. The settlement agreement is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows. On July 20, 2007, the Company submitted a claim for indemnification from the escrow fund established in connection with the Blackstone Merger Agreement for any losses to us resulting from this matter. The Company was subsequently notified by legal counsel of the former shareholders that the representative of the former shareholders of Blackstone has objected to the indemnification claim and intends to contest it in accordance with the terms of the Blackstone Merger Agreement.

The Company cannot predict the outcome of any proceedings or claims made against the Company or its subsidiaries described in the preceding paragraphs and there can be no assurance that the ultimate resolution of any claim will not have a material adverse impact on our consolidated financial position, results of operations, or cash flows.

In addition to the foregoing, in the normal course of our business, the Company is involved in various lawsuits from time to time and may be subject to certain other contingencies.

NOTE 20: SUBSEQUENT EVENT

As further described in Note 19, as of September 30, 2009 and December 31, 2008, included in Prepaid Expenses and Other Current Assets is approximately $13.3 million and $8.3 million, respectively, of escrow receivable balances related to the Blackstone matters described above. During October 2009, the Company received approximately $1.0 million of proceeds from the escrow fund that was established as part of the Blackstone acquisition. These proceeds represent a portion of the escrow claims that had been previously submitted by the Company.

ORTHOFIX INTERNATIONAL N.V.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis addresses our liquidity, financial condition, and the results of our operations for the three and nine months ended September 30, 2009 compared to our results of operations for the three and nine months ended September 30, 2008. These discussions should be read in conjunction with our historical consolidated financial statements and related notes thereto and the other financial information included in this Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

General Overview

We are a diversified orthopedic products company offering a broad line of surgical and non-surgical products for the Spine, Orthopedics, Sports Medicine and Vascular market sectors. Our products are designed to address the lifelong bone-and-joint health needs of patients of all ages, helping them achieve a more active and mobile lifestyle. We design, develop, manufacture, market and distribute medical equipment used principally by musculoskeletal medical specialists for orthopedic applications. Our main products are invasive and minimally invasive spinal implant products and related human cellular and tissue based products (“HCT/P products”), non-invasive bone growth stimulation products used to enhance the success rate of spinal fusions and to treat non-union fractures, external and internal fixation devices used in fracture treatment, limb lengthening and bone reconstruction; and bracing products used for ligament injury prevention, pain management and protection of surgical repair to promote faster healing. Our products also include a device for enhancing venous circulation, cold therapy, bone cement and devices for removal of bone cement used to fix artificial implants and airway management products used in anesthesia applications.

We believe the keys to reaching our publicly stated financial goals for 2009 are primarily related to improvements in the operating performance of the Spinal Implants & Biologics segment, including:

•

An acceleration in the growth of revenue,

•

An increase of the gross profit margin, and

•

A reduction in operating expenses as a percentage of net sales

We expect the acceleration of revenue growth will be driven by the introduction of a number of key new products in 2009, including the Trinity^® Evolution™ allograft, the Firebird™ pedicle screw system, the PILLAR SA interbody device, and the Ascent LE posterior cervical spine system. As of September 30, 2009, each of these new products had been introduced to the market and was contributing to the year-over-year net sales growth reported by the Company.

Our gross profit margin is expected to increase as a result of the introduction of the key new products indicated above, primarily Trinity^® Evolution™. We recognize a 100% gross profit margin from the marketing fees earned from the sales of this allograft, compared to approximately 50% gross profit margin on our previous Trinity^® product. This is due to the fact that we are not required to purchase inventory of Trinity^® Evolution™, whereas, previously, we were required to purchase inventory of the old Trinity^® product and record the associated cost of sales.

Our operating expenses are expected to decrease as a percentage of net sales as we leverage our operating infrastructure against the expected increase in net sales noted above. Additionally, we initiated a reorganization and consolidation plan, during the fourth quarter of 2008, to reduce operating expenses by eliminating redundancies and increasing operating efficiency. This plan includes the consolidation of operations in our Springfield, MA and Wayne, NJ locations into the Company’s operations in the Dallas, TX area. For a further discussion about this reorganization and consolidation plan, please refer to the explanation provided in our General and Administrative Expense section of this Management Discussion and Analysis.

We have administrative and training facilities in the United States and Italy and manufacturing facilities in the United States, the United Kingdom, Italy and Mexico. We directly distribute our products in the United States, the United Kingdom, Italy, Germany, Switzerland, Austria, France, Belgium, Mexico, Brazil, and Puerto Rico. In several of these and other markets, we also distribute our products through independent distributors.

Our condensed consolidated financial statements include the financial results of the Company and its wholly-owned and majority-owned subsidiaries and entities over which we have control. All intercompany accounts and transactions are eliminated in consolidation.

Our reporting currency is the United States Dollar. All balance sheet accounts, except shareholders’ equity, are translated at period-end exchange rates, and revenue and expense items are translated at weighted average rates of exchange prevailing during the period. Gains and losses resulting from foreign currency transactions are included in other income (expense), net on the statements of operations. Gains and losses resulting from the translation of foreign currency net assets are recorded in the accumulated other comprehensive income component of shareholders’ equity.

Our financial condition, results of operations and cash flows are not significantly impacted by seasonality trends. However, sales associated with products for elective procedures appear to be influenced by the somewhat lower level of such procedures performed in the late summer. Certain of the Breg bracing products experience greater demand in the fall and winter corresponding with high school and college football schedules and winter sports. In addition, we do not believe our operations will be significantly affected by inflation. However, in the ordinary course of business, we are exposed to the impact of changes in interest rates and foreign currency fluctuations. Our objective is to limit the impact of such movements on earnings and cash flows. In order to achieve this objective, we seek to balance non-dollar income and expenditures. During the nine months ended September 30, 2009 and all of 2008, we have used a derivative instrument to hedge certain foreign currency fluctuation exposures. During the nine months ended September 30, 2009 and the second half of 2008, we have used a derivative instrument to hedge certain interest rate exposure on LIBOR-based borrowings. See Item 3 — “Quantitative and Qualitative Disclosures About Market Risk.”

We manage our operations as four business segments: Domestic, Spinal Implants & Biologics, Breg, and International. Domestic consists of operations of our subsidiary Orthofix Inc. Spinal Implants and Biologics consist of our Blackstone subsidiary and its domestic and international operations. Breg consists of Breg Inc.’s operations and domestic and international distributors. International consists of operations which are located in the rest of the world as well as independent export distribution operations. Group Activities are comprised of the operating expenses and identifiable assets of Orthofix International N.V. and its US holding company subsidiary, Orthofix Holdings, Inc.

Segment and Market Sector Revenues

The following tables display net sales by business segment and net sales by market sector. We maintain our records and account for net sales, costs of sales and expenses by business segment. We provide net sales by market sector for information purposes only.

Business Segment:

		Three Months Ended September 30,
		2009								2008
						Percent of								Percent of
						Total Net								Total Net
(US$ in thousands)		Net Sales				Sales				Net Sales				Sales				Growth
Domestic		$	52,222				39	%		$	47,065				36	%			11	%
Spinal Implants & Biologics			28,017				21	%			25,338				20	%			11	%
Breg			23,724				17	%			22,377				17	%			6	%
International			31,135				23	%			34,521				27	%			-10	%
Total		$	135,098				100	%		$	129,301				100	%			4	%

		Nine Months Ended September 30,
		2009								2008
						Percent of								Percent of
						Total Net								Total Net
(US$ in thousands)		Net Sales				Sales				Net Sales				Sales				Growth
Domestic		$	155,654				39	%		$	138,397				36	%			12	%
Spinal Implants & Biologics			86,562				22	%			81,093				21	%			7	%
Breg			70,175				17	%			66,341				17	%			6	%
International			89,227				22	%			101,541				26	%			-12	%
Total		$	401,618				100	%		$	387,372				100	%			4	%

Market Sector:

		Three Months Ended September 30,
		2009								2008
						Percent								Percent
						of Total								of Total								Constant
		Net				Net				Net				Net				Reported				Currency
(US$ in thousands)		Sales				Sales				Sales				Sales				Growth				Growth
Spine		$	68,136				50	%		$	61,318				48	%			11	%			11	%
Orthopedics			33,250				25	%			33,824				26	%			-2	%			6	%
Sports Medicine			24,664				18	%			23,700				18	%			4	%			5	%
Vascular			3,904				3	%			4,274				3	%			-9	%			-5	%
Other			5,144				4	%			6,185				5	%			-17	%			-5	%
Total		$	135,098				100	%		$	129,301				100	%			4	%			7	%

		Nine Months Ended September 30,
		2009								2008
						Percent								Percent
						of Total								of Total								Constant
		Net				Net				Net				Net				Reported				Currency
(US$ in thousands)		Sales				Sales				Sales				Sales				Growth				Growth
Spine		$	204,995				51	%		$	186,488				48	%			10	%			10	%
Orthopedics			95,468				24	%			96,919				25	%			-1	%			8	%
Sports Medicine			73,369				18	%			70,212				18	%			4	%			5	%
Vascular			12,574				3	%			13,391				4	%			-6	%			-1	%
Other			15,212				4	%			20,362				5	%			-25	%			-9	%
Total		$	401,618				100	%		$	387,372				100	%			4	%			7	%

The following table presents certain items from our Condensed Consolidated Statements of Operations as a percent of total net sales for the periods indicated:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
		(%)				(%)				(%)				(%)
Net sales			100				100				100				100
Cost of sales			24				37				25				30
Gross profit (1)			76				63				75				70
Operating expenses:
Sales and marketing			41				39				41				40
General and administrative			15				15				16				15
Research and development			6				5				7				5
Amortization of intangible assets			1				4				1				4
Gain on sale of Pain Care® operations			—				—				—				—
Impairment of goodwill and intangible assets			—				224				—				75
Total operating income (loss)			13				(224	)			10				(69	)
Net income (loss)			5				(184	)			4				(59	)

Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008

Net sales increased 4% to $135.1 million in the third quarter of 2009 compared to $129.3 million for the same period last year. The impact of foreign currency decreased sales by $3.6 million during the third quarter of 2009 when compared to the third quarter of 2008.

Sales by Business Segment:

Net sales in Domestic increased to $52.2 million in the third quarter of 2009 compared to $47.1 million for the same period last year, an increase of 11%. Domestic’s net sales represented 39% and 36% of total net sales during the third quarter of 2009 and 2008, respectively. The increase in Domestic’s net sales was partially the result of a 12% increase in sales in our Spine market sector, which was mainly driven by increased sales of our Spinal-Stim^® and Cervical-Stim^® products. The increase in Domestic’s net sales was also attributable to an 8% increase in our Orthopedics market sector which included a 14% increase in sales of Physio-Stim^® products and a 16% increase in sales of our external fixation products as compared to the same period in the prior year. Partially offsetting these sales increases was a decrease of 29% in the sales of our biologics products as a result of our replacement of the Trinity^® product line with Trinity^® Evolution™. Although biologics sales decreased, the quantity of product sold increased in the third quarter of 2009 compared to the third quarter of 2008 because, under the terms of the agreement, we recognized marketing fees of 70% of the end-user sales price of Trinity^® Evolution™ compared to 100% of the end-user sales price of Trinity^®. During the three months ended September 30, 2009, Domestic generated $0.6 million in revenues of Trinity^® Evolution™.

Domestic Sales by Market Sector:

		Net Sales for the
		Three Months Ended September 30,
(US$ in thousands)		2009				2008				Growth
Spine		$	39,609			$	35,340				12	%
Orthopedics			12,613				11,725				8	%
Total		$	52,222			$	47,065				11	%