UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 2005.
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 at least the past 90 days. Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as
described in Rule 12b-2 of the Exchange Act). Yes X No
Indicate by check mark whether the registrant is a shell company (as described
in Rule 12b-2 of the Exchange Act). Yes X No
As of August 31, 2005, the registrant had 249,077,173 common shares
outstanding.
BIOMET, INC.
CONTENTS
Pages
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets 1-2
Consolidated Statements of Income 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements 5-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-9
Item 3. Quantitative and Qualitative Disclosure about
Market Risks 10
Item 4. Controls and Procedures 10
Part II. Other Information 11-12
Signatures 12
Index to Exhibits 13
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIOMET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
at August 31, 2005 and May 31, 2005
(in thousands)
ASSETS
August 31, May 31,
2005 2005
---------- -------
(Unaudited)
Current assets:
Cash and cash equivalents $ 124,393 $ 104,706
Investments 7,978 10,962
Accounts and notes receivable, net 455,821 479,745
Inventories 471,659 469,791
Deferred income taxes 73,607 72,732
Prepaid expenses and other 37,017 35,980
--------- ---------
Total current assets 1,170,475 1,173,916
--------- ---------
Property, plant and equipment, at cost 583,039 574,398
Less, Accumulated depreciation 256,219 251,511
--------- ---------
Property, plant and equipment, net 326,820 322,887
--------- ---------
Investments 61,252 61,406
Goodwill 432,255 435,621
Intangible assets, net 85,772 87,835
Other assets 15,830 14,912
--------- ---------
Total assets $2,092,404 $2,096,577
========= =========
The accompanying notes are a part of the consolidated financial statements.
BIOMET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
at August 31, 2005 and May 31, 2005
(in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
August 31, May 31,
2005 2005
---------- -------
(Unaudited)
Current liabilities:
Short-term borrowings $ 286,036 $ 282,193
Accounts payable 55,067 57,021
Accrued income taxes 36,390 9,725
Accrued wages and commissions 53,450 62,171
Other accrued expenses 87,432 90,281
--------- ---------
Total current liabilities 518,375 501,391
Long-term liabilities:
Deferred income taxes 29,819 31,255
--------- ---------
Total liabilities 548,194 532,646
--------- ---------
Contingencies
Shareholders' equity:
Common shares 190,235 188,162
Additional paid-in capital 67,760 67,613
Retained earnings 1,288,268 1,284,905
Accumulated other comprehensive income (2,053) 23,251
--------- ---------
Total shareholders' equity 1,544,210 1,563,931
--------- ---------
Total liabilities and shareholders' equity $2,092,404 $2,096,577
========= =========
The accompanying notes are a part of the consolidated financial statements.
BIOMET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
for the three months ended August 31, 2005 and 2004
(Unaudited, in thousands, except per share data)
2005 2004
---- ----
Net sales $484,903 $438,160
Cost of sales 134,495 125,972
------- -------
Gross profit 350,408 312,188
Selling, general and administrative expenses 178,182 160,460
Research and development expense 20,816 18,476
In-process research and development -- 26,020
------- -------
Operating income 151,410 107,232
Other income (expense), net 558 (728)
------- -------
Income before income taxes 151,968 106,504
Provision for income taxes 51,669 46,071
------- -------
Net income $100,299 $ 60,433
======= =======
Earnings per share:
Basic $.40 $.24
==== ====
Diluted $.40 $.24
==== ====
Shares used in the computation of earnings per share:
Basic 249,582 253,856
======= =======
Diluted 250,656 255,950
======= =======
Cash dividends per common share $.25 $.20
==== ====
The accompanying notes are a part of the consolidated financial statements.
BIOMET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the three months ended August 31, 2005 and 2004
(Unaudited, in thousands)
2005 2004
---- ----
Cash flows from (used in) operating activities:
Net income $100,299 $ 60,433
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation 15,277 14,044
Amortization 2,236 1,521
Write off of in-process research and development -- 26,020
Gain (loss) on sale of investments, net (47) 282
Deferred income taxes (1,425) (2,671)
Changes in current assets and liabilities,
excluding effects of acquisitions:
Accounts and notes receivable, net 15,276 30,871
Inventories (15,201) (7,755)
Prepaid expenses (4,547) (5,341)
Accounts payable 3,034 (3,777)
Accrued income taxes 23,633 19,452
Other current liabilities (6,705) (14,179)
------- -------
Net cash from operating activities 131,830 118,900
------- -------
Cash flows from (used in) investing activities:
Proceeds from sales and maturities of investments 11,854 8,602
Purchases of investments (8,454) (8,616)
Capital expenditures (25,984) (18,616)
Acquisitions, net of cash acquired -- (266,229)
Other 247 (2,357)
------- -------
Net cash used in investing activities (22,337) (287,216)
------- -------
Cash flows from (used in) financing activities:
Increase in short-term borrowings, net 6,823 201,770
Issuance of common shares 2,798 6,312
Cash dividends (62,473) (50,872)
Purchase of common shares (35,447) (64,985)
------- ------
Net cash from (used in) financing activities (88,299) 92,225
------- ------
Effect of exchange rate changes on cash (1,507) (1,437)
------- ------
Decrease in cash and cash equivalents 19,687 (77,528)
Cash and cash equivalents, beginning of year 104,706 159,243
------- -------
Cash and cash equivalents, end of period $124,393 $ 81,715
======= =======
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 U.S. generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and notes required by U.S. generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the three-month
period ended August 31, 2005 are not necessarily indicative of the results that
may be expected for the fiscal year ending May 31, 2006. 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, 2005.
The accompanying consolidated balance sheet at May 31, 2005, has been derived
from the audited Consolidated Financial Statements at that date, but does not
include all disclosures required by U.S. generally accepted accounting
principles.
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
three months ended August 31, 2005 and 2004:
2005 2004
---- ----
(in thousands)
Reconstructive Products $323,815 $282,482
Fixation Devices 64,179 62,713
Spinal Products 55,326 52,909
Other Products 41,583 40,056
------- -------
Total $484,903 $438,160
======= =======
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 three months ended August 31, 2005 and 2004 would have been
as follows:
2005 2004
---- ----
Net income as reported (in thousands) $100,299 $ 60,433
Deduct: Total stock-based employee
compensation expense determined
under the fair value method for
all awards net of related tax
effects (in thousands) 2,149 1,533
------- -------
Pro forma net income (in thousands) $ 98,150 $ 58,900
======= =======
Earning per share:
Basic, as reported $0.40 $0.24
==== ====
Basic, pro forma $0.39 $0.23
==== ====
Diluted, as reported $0.40 $0.24
==== ====
Diluted, pro forma $0.39 $0.23
==== ====
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment", which
is a revision to SFAS No. 123, "Accounting for Stock Based Compensation". SFAS
123(R) requires all share-based payments to employees, including stock options,
to be expensed based on their fair values over the required award service
period. Although it is difficult to predict the exact impact the adoption of
SFAS 123(R) will have on the Company's consolidated earnings due to the number
of variables involved, we believe the above pro forma disclosures provide an
appropriate indicator of the level of expense that may be recognized upon
adoption of the statement. The SEC has amended the compliance dates of SFAS
123(R) requiring adoption in the first fiscal year beginning after June 15,
2005. The Company intends to adopt SFAS 123(R) on June 1, 2006.
NOTE 2: COMPREHENSIVE INCOME.
Other comprehensive income (loss) includes foreign currency translation
adjustments and unrealized appreciation of available-for-sale securities,
net of taxes. Other comprehensive income (loss) for the three months
ended August 31, 2005 and 2004 was $(25,304,000) and $1,462,000,
respectively. Total comprehensive income combines reported net income
and other comprehensive income (loss). Total comprehensive income for
the three months ended August 31, 2005 and 2004 was $74,995,000 and
$61,895,000, respectively.
NOTE 3: INVENTORIES.
Inventories at August 31, 2005 and May 31, 2005 are as follows:
August 31, May 31,
2005 2005
------------ -------
(in thousands)
Raw materials $ 50,329 $ 50,676
Work-in-process 55,842 56,610
Finished goods 206,512 200,041
Consigned distributor 158,976 162,464
------- -------
$471,659 $469,791
======= =======
NOTE 4: COMMON SHARES.
During the three months ended August 31, 2005, the Company issued 155,864
Common Shares upon the exercise of outstanding stock options for proceeds
aggregating $2,798,000. Purchases of Common Shares pursuant to the Common
Share Repurchase Programs aggregated 957,400 shares for $35,447,000 during
the three months ended August 31, 2005.
NOTE 5: EARNINGS PER SHARE.
Earnings per common share amounts ("basic EPS") are computed by dividing net
income by the weighted average number of common shares outstanding and excludes
any potential dilution. Earnings per common share amounts assuming dilution
("diluted EPS") are computed by reflecting potential dilution from the
exercise of stock options.
NOTE 6: INCOME TAXES.
The difference between the reported provision for income taxes and a provision
computed by applying the federal statutory rate to pre-tax accounting income is
primarily attributable to state income taxes, tax benefits relating to
operations in Puerto Rico, tax-exempt income, tax credits and the in-process
research and development which is not tax affected.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AS OF August 31, 2005
The Company's cash and investments increased $16,549,000 to $193,623,000 at
August 31, 2005. This increase resulted from positive cash flow from
operations offset by the $62,473,000 dividend paid during this quarter and
the $35,447,000 used to purchase shares during this quarter pursuant to the
Company's share repurchase programs.
Cash flows provided by operating activities were $131,830,000 for the first
three months of fiscal 2006 compared to $118,900,000 in 2005. The primary
sources of fiscal year 2006 cash flows from operating activities were net
income, depreciation, a decrease in accounts receivable and an increase in
accrued income taxes. The primary use was an increase in inventories.
Accounts receivable normally decreases in Europe during the summer months
as sales decrease slightly due to the vacation period, but cash receipts
continue. Accrued income taxes increased during the quarter due to the
first quarter tax estimates being due after the quarter end. Inventories
increased primarily as a result of new product introductions (specifically
in Europe for the Oxford and Vanguard Knee Systems and the Company's new
bone cement products). Accounts and notes receivable and inventory balances
decreased during the three month period by $8.6 million and $13.3 million,
respectively, due to currency exchange rates.
Cash flows used in investing activities were $22,337,000 for the first three
months of fiscal 2006 compared to $287,216,000 in 2005. The primary use of
cash flows from investing activities in fiscal 2006 was capital expenditures.
The Company continues to upgrade its instruments used in various international
markets and to support the new implant systems being launched. In addition,
3i is currently expanding its manufacturing facilities in Florida.
Cash flows used in financing activities were $88,299,000 for the first three
months of fiscal 2006 compared to source of $92,225,000 in 2005. The primary
uses were the cash dividend paid and the share repurchase programs. In July
2005, the Company's Board of Directors declared a cash dividend of twenty five
cents ($0.25) per share payable to shareholders of record at the close of
business on July 15, 2005. Over the last eleven quarters, the Company has
used $877,000,000 to purchase its common stock.
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 THREE MONTHS ENDED AUGUST 31, 2005
AS COMPARED TO THE THREE MONTHS ENDED AUGUST 31, 2004
Net sales increased 11% to $484,903,000 for the first quarter ended August 31,
2005, from $438,160,000 for the same period last year. Excluding the positive
impact of foreign currency, net sales growth for the first quarter was 10%.
The Company's U.S.-based revenue increased 7% to $317,326,000 during the first
quarter of fiscal 2006, while foreign sales increased 18% to $167,577,000.
Excluding the positive foreign exchange adjustment, foreign revenue increased
16%. The Company's worldwide sales of reconstructive products during the first
quarter of fiscal 2006 were $323,815,000, representing a 15% increase compared
to the first quarter of last year. This increase came through balanced growth
in all of the reconstructive product categories. Sales of fixation products
were $64,179,000 for the first quarter of fiscal 2006, representing a 2%
increase as compared to the same period in fiscal 2005. Sales of spinal
products were $55,326,000 for the first quarter of fiscal 2006, representing
a 5% increase as compared to the same period in fiscal 2005. 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.
During the fourth quarter of last year and the first quarter of this year,
EBI has introduced several new products in both the internal fixation and
spinal implant markets that we believe will have a positive impact on sales
in the future. In addition, during the first quarter, the Company announced
the appointment of Bart Doedens, M.D. as the new president of EBI's operations
following the resignation of James R. Pastena. EBI's fixation, spinal
stimulation and softgoods and bracing products have continued to underperform
management's expectations and it is hoped that Dr. Doedens will provide the
leadership necessary to improve EBI's performance in these markets. The
Company's sales of other products totaled $41,583,000, representing a 4%
increase over the first quarter of fiscal year 2005.
Cost of sales decreased as a percentage of net sales to 27.7%, for the first
quarter of fiscal 2006 from 28.7% during the same period last year. After
adjusting for last year's impact of inventory step-up relating to acquisitions,
cost of sales as a percentage of net sales increased from 27.2%. This increase
was primarily a result of higher growth rates in foreign sales, where gross
margins are lower, versus domestic sales. Selling, general and administrative
expenses, as a percentage of net sales, increased to 36.7% compared to 36.6%
for the first quarter last year. Research and development expenditures
increased 13% during the first quarter to $20,816,000 reflecting the Company's
continued emphasis on new product introductions. Operating income increased
41% from $107,232,000 for the first quarter of fiscal 2005, to $151,410,000
for the first quarter of fiscal 2006. After adjusting operating income for
prior year's acquisition related expenses of $33,022,000, operating income
increased 8%. Other income increased from $(728,000) last year to $558,000
this year. Other income has been positively impacted by an increase in cash
available for investments and an increase in interest rates. The effective
income tax rate decreased to 34.0% for the first quarter of fiscal year 2006
from 43.3% last year primarily as a result of the write-off of in-process
research and development last year not being tax affected.
These factors resulted in a 66% increase in net income to $100,299,000 for the
first quarter of fiscal 2006 as compared to $60,433,000 for the same period in
fiscal 2005, while basic and diluted earnings per share increased 67%, from
$0.24 to $0.40 for the periods presented. Before acquisition related expenses
last year, net income increased by 10%, while basic and diluted earnings per
share increased 11% for the periods presented.
Item 3. Quantitative and Qualitative Disclosures about Market Risks.
There have been no material changes from the information provided in the
Company's Annual Report on Form 10-K for the year ended May 31, 2005.
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 first quarter of fiscal 2006,
there were no changes in internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(c) Stock Repurchases
As of August 31, 2005, the Company had two publicly-announced share repurchase
programs outstanding. The first, announced March 22, 2005, approved the
purchase of shares up to $100 million in open market or privately negotiated
transactions expiring March 21, 2006. The second, announced June 30, 2005,
approved the purchase of 2,500,000 shares to be automatically purchased in equal
installments over a twelve-month period expiring June 29, 2006. 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
------ ------------ ---------- ---------------- ----------------------
June 1-30 None $ -- None $78,031,085
July 1-31 727,400 36.92 727,400 2,310,000 shares and
$58,049,629
August 1-31 230,000 37.36 230,000 2,080,000 shares and
$58,049,629
--------- ----- --------- --------------------
Total 957,400 37.02 957,400 2,080,000 shares and
$58,049,629
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Shareholders of the Company was held on September 23,
2005. At the Annual Meeting:
1. The following persons were elected as Directors of the Company for a
three-year term expiring in 2008.
Name Votes For Votes Withheld
---- --------- --------------
C. Scott Harrison, M.D. 211,225,212 9,334,357
Sandra A. Lamb 216,518,600 4,040,969
Niles L. Noblitt 212,811,357 7,748,212
Kenneth V. Miller 214,054,484 6,505,085
Marilyn Tucker Quayle 213,972,260 6,587,309
The following directors will continue in office until their term expires at
the 2006 Annual Meeting of shareholders: Dane A. Miller, Ph. D.; Jerry L.
Ferguson; Thomas F. Kearns, Jr.; and Daniel P. Hann.
The following directors will continue in office until their term expires at
the 2007 Annual meeting of shareholders: M. Ray Harroff; Jerry L. Miller;
Charles E. Niemier; and L. Gene Tanner.
2. The amendment to the Biomet, Inc. 1998 Qualified and Non-Qualified Stock
Option Plan to increase by 5,000,000 Common Shares the number of Common Shares
available for grant under the Plan was ratified by the shareholders as follows:
Votes For - 163,221,320; Votes Against - 778,825; and Abstentions and Broker
Non-Votes - 1,337,968.
3. The appointment of Ernst & Young LLP as independent accountants for the
Company for the fiscal year ending May 31, 2006 was ratified by the
shareholders, as follows: Votes For - 218,442,776; Votes Against -
778,825; and Abstentions and Broker Non-Votes - 1,337,968.
Item 6. Exhibits and Reports on Form 8-K
(a) 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: 10/10/2005 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
Exhibits. Descriptions.
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.
32.1 Written Statement of Chief Executive Officer and
Chief Financial Officer Pursuant to Sections 906
of the Sarbanes-Oxley Act of 2002.