item 14 controls procedures within 90 day period prior date filing annual report form 10k performed evaluation supervision participation companys management including chief executive officer chief financial officer effectiveness design operation companys disclosure controls procedures based evaluation companys management including chief executive officer chief financial officer concluded companys disclosure controls procedures effective date evaluation significant changes companys internal controls functions could significantly affect internal controls since date evaluation part iv item 15item 14 principal accountant fees services provide information responsive item 14 regarding principal accountant fees services definitive proxy statement amendment annual report later 120 days end fiscal year covered annual report either case caption principal accountant fees services possibly elsewhere therein information incorporated item 14 reference part iv item 15item 14 principal accountant fees services provide information responsive item 14 regarding principal accountant fees services definitive proxy statement amendment annual report later 120 days end fiscal year covered annual report either case caption principal accountant fees services possibly elsewhere therein information incorporated item 14 reference part iv item 15item 14 principal accountant fees services provide information responsive item 14 regarding principal accountant fees services definitive proxy statement amendment annual report later 120 days end fiscal year covered annual report either case caption “principal accountant fees services” possibly elsewhere therein information incorporated item 14 reference part iv item 15item 14 principal accountant fees services provide information responsive item 14 regarding principal accountant fees services definitive proxy statement amendment annual report later 120 days end fiscal year covered annual report either case caption “principal accountant fees services” possibly elsewhere therein information incorporated item 14 reference part iv item 15item 14 principal accountant fees services provide information responsive item 14 regarding principal accountant fees services definitive proxy statement amendment annual report later 120 days end fiscal year covered annual report either case caption “principal accountant fees services” possibly elsewhere therein information incorporated item 14 reference part iv item 15item 14 principal accountant fees services provide information responsive item 14 regarding principal accountant fees services definitive proxy statement amendment annual report later 120 days end fiscal year covered annual report either case caption “principal accountant fees services” possibly elsewhere therein information incorporated item 14 reference part iv item 15item 14 principal accountant fees services provide information responsive item 14 regarding principal accountant fees services definitive proxy statement amendment annual report later 120 days end fiscal year covered annual report either case caption “principal accountant fees services” possibly elsewhere therein information incorporated item 14 reference part iv item 15item 14 principal accountant fees services provide information responsive item 14 regarding principal accountant fees services definitive proxy statement amendment annual report later 120 days end fiscal year covered annual report either case caption “principal accountant fees services” possibly elsewhere therein information incorporated item 14 reference part iv item 15item 14 principal accountant fees services provide information responsive item 14 regarding principal accountant fees services definitive proxy statement amendment annual report later 120 days end fiscal year covered annual report either case caption “principal accountant fees services” possibly elsewhere therein information incorporated item 14 reference part iv item 15item 14 principal accountant fees services provide information responsive item 14 regarding principal accountant fees services definitive proxy statement amendment annual report later 120 days end fiscal year covered annual report either case caption “principal accountant fees services” possibly elsewhere therein information incorporated item 14 reference part iv item 15item 14 principal accountant fees services provide information responsive item 14 regarding principal accountant fees services definitive proxy statement amendment annual report later 120 days end fiscal year covered annual report either case caption “principal accountant fees services” possibly elsewhere therein information incorporated item 14 reference part iv item 15item 14 principal accountant fees services provide information responsive item 14 regarding principal accountant fees services definitive proxy statement amendment annual report later 120 days end fiscal year covered annual report either case caption “principal accountant fees services” possibly elsewhere therein information incorporated item 14 reference part iv item 15item 14 principal accountant fees services provide information responsive item 14 regarding principal accountant fees services definitive proxy statement amendment annual report later 120 days end fiscal year covered annual report either case caption “principal accountant fees services” possibly elsewhere therein information incorporated item 14 reference part iv item 15item 14 principal accountant fees services provide information responsive item 14 regarding principal accountant fees services definitive proxy statement amendment annual report later 120 days end fiscal year covered annual report either case caption “principal accountant fees services” possibly elsewhere therein information incorporated item 14 reference part iv item 15item 14 principal accountant fees services provide information responsive item 14 regarding principal accountant fees services definitive proxy statement amendment annual report later 120 days end fiscal year covered annual report either case caption “principal accountant fees services” possibly elsewhere therein information incorporated item 14 reference part iv item 15item 14 principal accountant fees services provide information responsive item 14 regarding principal accountant fees services definitive proxy statement amendment annual report later 120 days end fiscal year covered annual report either case caption “principal accountant fees services” possibly elsewhere therein information incorporated item 14 reference part iv item 15item 14 principal accountant fees services provide information responsive item 14 regarding principal accountant fees services definitive proxy statement amendment annual report later 120 days end fiscal year covered annual report either case caption “principal accountant fees services” possibly elsewhere therein information incorporated item 14 reference part iv item 15item 14 principal accountant fees services provide information responsive item 14 regarding principal accountant fees services definitive proxy statement amendment annual report later 120 days end fiscal year covered annual report either case caption principal accountant fees services possibly elsewhere therein information incorporated item 14 reference orthofix international nv part iv item 15 item 7 managements discussion analysis financial condition results operations following read conjunction forwardlooking statements combined consolidated financial statements notes thereto appearing elsewhere form 10k following table presents certain items statements operations percentage net sales periods indicated 1 includes 299 million nonrecurring income tax related ebi litigation 2000 represented 23 net sales 2000 description ebi litigation please see item 3 legal proceedings general design develop manufacture market distribute medical equipment used principally musculoskeletal medical specialists orthopedic applications main products external internal fixation devices used fracture treatment limb lengthening bone reconstruction noninvasive stimulation products used enhance success rate spinal fusions treat nonunion fractures products also include devices removal bone cement used fix artificial implants ultrasonic treatment musculoskeletal pain bracing products bone substitute compound also produce device enhancing venous circulation administrative training facilities united states united kingdom italy manufacturing facilities united states united kingdom italy seychelles directly distribute products united states united kingdom ireland italy germany switzerland austria france belgium mexico brazil markets also distribute products independent distributors revenues generally derived two primary sources sales orthopedic nonorthopedic products sales orthopedic products including orthopedic devices 31 stimulation products 45 vascular products 12 accounted 88 total net sales 2002 sales nonorthopedic products including vascular products laryngeal mask product accounted 12 total net sales 2002 keep books records account net sales costs expenses accordance geographic origination products following table displays net sales origination net intercompany eliminations three recent fiscal years ended december 31 geographic origination financial condition results operations cash flows significantly impacted seasonality trends addition believe operations significantly affected inflation fluctuations interest rates although current lower interest rates negatively affect interest income earned cash equivalents balances 2002 see item 7aitem 7 managements discussion analysis financial condition results operations following discussion analysis addresses results operations based upon consolidated financial statements included herein prepared accordance accounting principles generally accepted united states discussion read conjunction forwardlooking statements companys consolidated financial statements notes thereto appearing elsewhere form 10k discussion analysis also addresses liquidity financial condition matters general diversified orthopedic products company offering broad line minimally invasive surgical well nonsurgical products spine reconstruction trauma market sectors products designed address lifelong boneandjoint health needs patients ages helping achieve active mobile lifestyle design develop manufacture market distribute medical equipment used principally musculoskeletal medical specialists orthopedic applications main products external internal fixation devices used fracture treatment limb lengthening bone reconstruction noninvasive stimulation products used enhance success rate spinal fusions treat nonunion fractures bracing products used ligament injury prevention pain management protection surgical repair promote faster healing products also include device enhancing venous circulation cold therapy pain management products bone cement devices removal bone cement used fix artificial implants bone substitute compound airway management products administrative training facilities united states united kingdom italy manufacturing facilities united states united kingdom italy mexico seychelles directly distribute products united states united kingdom ireland italy germany switzerland austria france belgium mexico brazil puerto rico several markets also distribute products independent distributors consolidated financial statements include financial results company wholly owned majority owned subsidiaries entities control intercompany accounts transactions eliminated consolidation equity method accounting used significant influence significant operating decisions hold control equity method original investments recorded cost adjusted share undistributed earnings losses companies material intercompany transactions profits associated equity investees eliminated consolidation reporting currency united states dollar balance sheet accounts except shareholders equity translated yearend exchange rates revenue expense items translated weighted average rates exchange prevailing year gains losses resulting foreign currency transactions included income expense gains losses resulting translation foreign currency financial statements recorded accumulated comprehensive income loss component shareholders equity financial condition results operations cash flows significantly impacted seasonality trends addition believe operations significantly affected inflation however ordinary course business exposed impact changes interest rates foreign currency fluctuations objective limit impact movements earnings cash flows order achieve objective seek balance nondollar income expenditures year used derivative instruments hedge interest rate fluctuation exposure ordinarily use derivative instruments hedge foreign exchange exposure see item 7aitem 7 managements discussion analysis financial condition results operations consolidated financial statements notes thereto included elsewhere form 10k consolidated financial statements prepared accordance accounting principles generally accepted united states us gaap 1 net income 2005 includes 374 million income tax related kci settlement item 7 managements discussion analysis financial condition results operations following discussion analysis addresses results operations based upon consolidated financial statements included herein prepared accordance accounting principles generally accepted united states discussion read conjunction forwardlooking statements consolidated financial statements notes thereto appearing elsewhere form 10k discussion analysis also addresses liquidity financial condition matters general diversified orthopedic products company offering broad line minimally invasive surgical well nonsurgical products spine reconstruction trauma market sectors products designed address lifelong boneandjoint health needs patients ages helping achieve active mobile lifestyle design develop manufacture market distribute medical equipment used principally musculoskeletal medical specialists orthopedic applications main products noninvasive stimulation products used enhance success rate spinal fusions treat nonunion fractures external internal fixation devices used fracture treatment limb lengthening bone reconstruction bracing products used ligament injury prevention pain management protection surgical repairs promote faster healing products also include device enhancing venous circulation cold therapy pain management products bone cement devices removal bone cement used fix artificial implants bone substitute compound airway management products administrative training facilities united states united kingdom italy manufacturing facilities united states united kingdom italy mexico seychelles directly distribute products united states united kingdom ireland italy germany switzerland austria france belgium mexico brazil puerto rico several markets also distribute products independent distributors consolidated financial statements include financial results company whollyowned majorityowned subsidiaries entities control intercompany accounts transactions eliminated consolidation equity method accounting used significant influence significant operating decisions hold control equity method original investments recorded cost adjusted share undistributed earnings losses companies material intercompany transactions profits eliminated consolidation reporting currency united states dollar balance sheet accounts except shareholders equity translated yearend exchange rates revenue expense items translated weighted average rates exchange prevailing year gains losses resulting foreign currency transactions included income expense gains losses resulting translation foreign currency financial statements recorded accumulated comprehensive income loss component shareholders equity financial condition results operations cash flows significantly impacted seasonality trends addition believe operations significantly affected inflation however ordinary course business exposed impact changes interest rates foreign currency fluctuations objective limit impact movements earnings cash flows order achieve objective seek balance nondollar income expenditures year used derivative instruments hedge interest rate foreign currency fluctuation exposures see item 7aitem 7 management’s discussion analysis financial condition results operations following discussion analysis addresses results operations based upon consolidated financial statements included herein prepared accordance accounting principles generally accepted united states discussion read conjunction “forwardlooking statements” consolidated financial statements notes thereto appearing elsewhere form 10k discussion analysis also addresses liquidity financial condition matters general diversified orthopedic products company offering broad line surgical nonsurgical products spine orthopedics sports medicine vascular market sectors products designed address lifelong boneandjoint health needs patients ages helping achieve active mobile lifestyle design develop manufacture market distribute medical equipment used principally musculoskeletal medical specialists orthopedic applications main products invasive minimally invasive spinal implant products related biologics noninvasive bone growth stimulation products used enhance success rate spinal fusions treat nonunion fractures external internal fixation devices used fracture treatment limb lengthening bone reconstruction bracing products used ligament injury prevention pain management protection surgical repair promote faster healing products also include device enhancing venous circulation cold therapy pain management products bone cement devices removal bone cement used fix artificial implants airway management products used anesthesia applications administrative training facilities united states italy manufacturing facilities united states united kingdom italy mexico directly distribute products united states united kingdom italy germany switzerland austria france belgium mexico brazil puerto rico several markets also distribute products independent distributors consolidated financial statements include financial results company whollyowned majorityowned subsidiaries entities control intercompany accounts transactions eliminated consolidation reporting currency united states dollar balance sheet accounts except shareholders’ equity translated yearend exchange rates revenue expense items translated weighted average rates exchange prevailing year gains losses resulting foreign currency transactions included income expense gains losses resulting translation foreign currency financial statements recorded accumulated comprehensive income loss component shareholders’ equity financial condition results operations cash flows significantly impacted seasonality trends addition believe operations significantly affected inflation however ordinary course business exposed impact changes interest rates foreign currency fluctuations objective limit impact movements earnings cash flows order achieve objective seek balance nondollar income expenditures year used derivative instruments hedge foreign currency fluctuation exposures see item 7aitem 7 management’s discussion analysis financial condition results operations following discussion analysis addresses results operations based upon consolidated financial statements included herein prepared accordance accounting principles generally accepted united states discussion read conjunction “forwardlooking statements” consolidated financial statements notes thereto appearing elsewhere form 10k discussion analysis also addresses liquidity financial condition matters general diversified orthopedic products company offering broad line surgical nonsurgical products spine orthopedics sports medicine vascular market sectors products designed address lifelong boneandjoint health needs patients ages helping achieve active mobile lifestyle design develop manufacture market distribute medical equipment used principally musculoskeletal medical specialists orthopedic applications main products invasive minimally invasive spinal implant products related human cellular tissue based products “hctp products” noninvasive bone growth stimulation products used enhance success rate spinal fusions treat nonunion fractures external internal fixation devices used fracture treatment limb lengthening bone reconstruction bracing products used ligament injury prevention pain management protection surgical repair promote faster healing products also include device enhancing venous circulation cold therapy pain management products bone cement devices removal bone cement used fix artificial implants airway management products used anesthesia applications administrative training facilities united states italy manufacturing facilities united states united kingdom italy mexico directly distribute products united states united kingdom italy germany switzerland austria france belgium mexico brazil puerto rico several markets also distribute products independent distributors consolidated financial statements include financial results company whollyowned majorityowned subsidiaries entities control intercompany accounts transactions eliminated consolidation reporting currency united states dollar balance sheet accounts except shareholders’ equity translated yearend exchange rates revenue expense items translated weighted average rates exchange prevailing year gains losses resulting foreign currency transactions included income expense gains losses resulting translation foreign currency financial statements recorded accumulated comprehensive income component shareholders’ equity financial condition results operations cash flows significantly impacted seasonality trends however sales associated products elective procedures appear influenced somewhat lower level procedures performed late summer certain breg® bracing products experience greater demand fall winter corresponding high school college football schedules winter sports addition believe operations significantly affected inflation however ordinary course business exposed impact changes interest rates foreign currency fluctuations objective limit impact movements earnings cash flows order achieve objective seek balance nondollar income expenditures year used derivative instruments hedge foreign currency fluctuation exposures see item 7aitem 7 management’s discussion analysis financial condition results operations following discussion analysis addresses results operations based upon consolidated financial statements included herein prepared accordance accounting principles generally accepted united states discussion read conjunction “forwardlooking statements” consolidated financial statements notes thereto appearing elsewhere form 10k discussion analysis also addresses liquidity financial condition matters general diversified orthopedic products company offering broad line surgical nonsurgical products spine orthopedics sports medicine vascular market sectors products designed address lifelong boneandjoint health needs patients ages helping achieve active mobile lifestyle design develop manufacture market distribute medical equipment used principally musculoskeletal medical specialists orthopedic applications main products invasive minimally invasive spinal implant products related human cellular tissue based products “hctp products” noninvasive bone growth stimulation products used enhance success rate spinal fusions treat nonunion fractures external internal fixation devices used fracture treatment limb lengthening bone reconstruction bracing products used ligament injury prevention pain management protection surgical repair promote faster healing products also include device enhancing venous circulation cold therapy pain management products bone cement devices removal bone cement used fix artificial implants airway management products used anesthesia applications administrative training facilities united states italy manufacturing facilities united states united kingdom italy mexico directly distribute products united states united kingdom italy germany switzerland austria france belgium mexico brazil puerto rico several markets also distribute products independent distributors consolidated financial statements include financial results company whollyowned majorityowned subsidiaries entities control intercompany accounts transactions eliminated consolidation reporting currency united states dollar balance sheet accounts except shareholders’ equity translated yearend exchange rates revenue expense items translated weighted average rates exchange prevailing year gains losses resulting foreign currency transactions included income expense gains losses resulting translation foreign currency financial statements recorded accumulated comprehensive income component shareholders’ equity financial condition results operations cash flows significantly impacted seasonality trends however sales associated products elective procedures appear influenced somewhat lower level procedures performed late summer certain bregr bracing products experience greater demand fall winter corresponding high school college football schedules winter sports addition believe operations significantly affected inflation however ordinary course business exposed impact changes interest rates foreign currency fluctuations objective limit impact movements earnings cash flows order achieve objective seek balance nondollar denominated income expenditures year used derivative instruments hedge foreign currency fluctuation exposures see item 7aitem 7 management’s discussion analysis financial condition results operations following discussion analysis addresses results operations based upon consolidated financial statements included herein prepared accordance us gaap discussion read conjunction “forwardlooking statements” consolidated financial statements notes thereto appearing elsewhere form 10k discussion analysis also addresses liquidity financial condition matters general diversified orthopedic products company offering broad line surgical nonsurgical products spine orthopedics sports medicine vascular market sectors products designed address lifelong boneandjoint health needs patients ages helping achieve active mobile lifestyle design develop manufacture market distribute medical equipment used principally musculoskeletal medical specialists orthopedic applications main products invasive minimally invasive spinal implant products related human cellular tissue based products “hctp products” noninvasive bone growth stimulation products used enhance success rate spinal fusions treat nonunion fractures external internal fixation devices used fracture treatment limb lengthening bone reconstruction bracing products used ligament injury prevention pain management protection surgical repair promote faster healing products also include device enhancing venous circulation cold therapy bone cement devices removal bone cement used fix artificial implants airway management products used anesthesia applications 2009 publicly stated financial goals primarily related improvements operating performance spinal implants biologics segment including · acceleration growth revenue · increase gross profit margin · reduction operating expenses percentage net sales acceleration revenue growth driven introduction number key new products 2009 including trinity® evolution™ allograft firebird™ pedicle screw system pillar™ sa interbody device ascent® le posterior cervical spine system gross profit margin increased result introduction key new products indicated primarily trinity® evolution™ record 70 sales price trinity® evolution™ allograft versus recording 100 sales price old trinity® product recognize 100 gross profit margin marketing fees earned sales allograft compared approximately 50 gross profit margin previous trinity® product due fact required purchase inventory trinity® evolution™ whereas previously required purchase inventory old trinity® product record associated cost sales operating expenses decreased percentage net sales leveraged operating infrastructure increase net sales noted additionally initiated reorganization consolidation plan fourth quarter 2008 reduce operating expenses eliminating redundancies increasing operating efficiency plan includes consolidation operations springfield wayne nj locations company’s operations dallas tx area discussion reorganization consolidation plan please refer explanation provided liquidity capital resources section management discussion analysis administrative training facilities us italy manufacturing facilities us united kingdom italy mexico directly distribute products us united kingdom italy germany switzerland austria france belgium mexico brazil puerto rico several markets also distribute products independent distributors consolidated financial statements include financial results company whollyowned majorityowned subsidiaries entities control intercompany accounts transactions eliminated consolidation reporting currency us dollar balance sheet accounts except shareholders’ equity translated yearend exchange rates revenue expense items translated weighted average rates exchange prevailing year gains losses resulting foreign currency transactions included income expense gains losses resulting translation foreign currency financial statements recorded accumulated comprehensive income component shareholders’ equity financial condition results operations cash flows significantly impacted seasonality trends however sales associated products elective procedures appear influenced somewhat lower level procedures performed late summer certain breg® bracing products experience greater demand fall winter corresponding high school college football schedules winter sports addition believe operations significantly affected inflation however ordinary course business exposed impact changes interest rates foreign currency fluctuations objective limit impact movements earnings cash flows order achieve objective seek balance nondollar denominated income expenditures year used derivative instruments hedge foreign currency fluctuation exposures see item 7aitem 7 management’s discussion analysis financial condition results operations following discussion analysis addresses results operations based upon consolidated financial statements included herein prepared accordance us gaap discussion read conjunction “forwardlooking statements” consolidated financial statements notes thereto appearing elsewhere form 10k discussion analysis also addresses liquidity financial condition matters general diversified global medical device company focused developing delivering innovative repair regenerative solutions spine orthopedic markets along offering portfolio noninvasive products treat variety sports medicine related conditions order minimize pain restore mobility products designed address lifelong boneandjoint health needs patients ages helping achieve active mobile lifestyle design develop manufacture market distribute medical equipment used principally musculoskeletal medical specialists orthopedic applications main products invasive minimally invasive spinal implant products related human cellular tissue based products “hctp products” noninvasive regenerative stimulation products used enhance bone growth success rate spinal fusions treat nonunion fractures external internal fixation devices used fracture repair limb lengthening bone reconstruction bracing products used ligament injury prevention pain management protection surgical repair promote faster healing products also include cold therapy bone cement devices removal bone cement used fix artificial implants 2011 results financial condition include following items significance · overall orthopedics revenue grew 11 167 million dollars 2011 compared 2010 spine revenues includes stimulation declined 21 million 2011 1 versus 2010 decrease primarily result 7 decrease sales spine stimulation products 2011 partially offset 7 increase revenues spine implants biologics additionally sports medicine revenue increased 8 included 47 million incremental sales additional billing capability added february 2011 · decrease gross profit margin 767 2010 76 2011 primarily result increased pricing pressures us spinal implants sports medicine markets unfavorable product geographical sales mix negative impact change foreign currency rates · increase operating expenses percentage net sales compared prior period primarily result resolution three outstanding us government matters year operating expenses lower 2011 versus 2010 excluding expenses along removing gain associated vascular divesture 2010 please refer explanation provided liquidity capital resources section management discussion analysis administrative training facilities us italy manufacturing facilities us united kingdom italy mexico directly distribute products us united kingdom italy germany switzerland austria france belgium brazil puerto rico several markets also distribute products independent distributors consolidated financial statements include financial results company whollyowned majorityowned subsidiaries entities control intercompany accounts transactions eliminated consolidation reporting currency us dollar balance sheet accounts except shareholders’ equity translated yearend exchange rates revenue expense items translated weighted average rates exchange prevailing year gains losses resulting foreign currency transactions included income expense gains losses resulting translation foreign currency financial statements recorded accumulated comprehensive income component shareholders’ equity financial condition results operations cash flows significantly impacted seasonality trends however sales associated products elective procedures appear influenced somewhat lower level procedures performed late summer certain breg ® bracing products experience greater demand fall winter corresponding high school college football schedules winter sports addition believe operations significantly affected inflation however ordinary course business exposed impact changes interest rates foreign currency fluctuations objective limit impact movements earnings cash flows order achieve objective seek balance nondollar denominated income expenditures year used derivative instruments hedge foreign currency fluctuation exposures see item 7aitem 7 management’s discussion analysis financial condition results operations following discussion analysis addresses results operations based upon consolidated financial statements included herein prepared accordance us gaap discussion read conjunction “forwardlooking statements” consolidated financial statements notes thereto appearing elsewhere form 10k discussion analysis also addresses liquidity financial condition matters general diversified global medical device company focused developing delivering innovative repair regenerative solutions spine orthopedic markets products designed address lifelong boneandjoint health needs patients ages helping achieve active mobile lifestyle design develop manufacture market distribute medical equipment used principally musculoskeletal medical specialists orthopedic applications main products invasive minimally invasive spinal implant products related human cellular tissue based products “hctp products” noninvasive regenerative stimulation products used enhance bone growth success rate spinal fusions treat nonunion fractures external internal fixation devices used fracture repair limb lengthening bone reconstruction products also include bone cement devices removal bone cement used fix artificial implants 2012 results financial condition include following items significance • spine revenues includes spine regenerative stimulation increased 77 million 2012 3 versus 2011 led spine regenerative biologics spine regenerative stimulation orthopedics revenue decreased 9 155 million dollars 2012 compared 2011 foreign currency accounted 6 decrease rest due 2 decrease sales external fixation partially offset 8 increase revenues orthopedic regenerative biologics • increase gross profit margin 803 2011 813 2012 primarily result operational efficiency initiatives favorable product geographical sales mix • decrease operating expenses percentage net sales compared prior period primarily result reduction charges related us government resolutions please refer explanation provided liquidity capital resources section management discussion analysis administrative training facilities us brazil italy manufacturing facilities us united kingdom italy spine gbu directly distributes products us orthopedics gbu directly distributes products us united kingdom italy germany switzerland austria france belgium brazil puerto rico several markets also distribute products independent distributors consolidated financial statements include financial results company whollyowned majorityowned subsidiaries entities control intercompany accounts transactions eliminated consolidation reporting currency us dollar balance sheet accounts except shareholders’ equity translated yearend exchange rates revenue expense items translated weighted average rates exchange prevailing year gains losses resulting foreign currency transactions included income expense gains losses resulting translation foreign currency financial statements recorded accumulated comprehensive income component shareholders’ equity financial condition results operations cash flows significantly impacted seasonality trends however sales associated products elective procedures appear influenced somewhat lower level procedures performed late summer addition believe operations significantly affected inflation however ordinary course business exposed impact changes interest rates foreign currency fluctuations objective limit impact movements earnings cash flows order achieve objective seek balance nondollar denominated income expenditures year used derivative instruments hedge foreign currency fluctuation exposures see item 7aitem 7 management’s discussion analysis financial condition results operations discussed item 8 “financial statements supplementary data notes consolidated financial statements note 2 restatement consolidated financial statements” restated previously issued audited consolidated financial statements fiscal years ended december 31 2012 2011 unaudited condensed consolidated financial statements quarters within 2012 2011 first quarter 2013 accordingly management’s discussion analysis financial condition results operations set forth reflects effects restatement following discussion analysis addresses results operations based upon consolidated financial statements included herein prepared accordance gaap discussion read conjunction “forwardlooking statements” consolidated financial statements notes thereto appearing elsewhere form 10k discussion analysis also addresses liquidity financial condition matters restatement previously issued consolidated financial statements described herein form 10k reflects restatement consolidated financial statements years ended december 31 2012 december 31 2011 restatement original form 10k year ended december 31 2012 reflected amended form 10k filed march 24 2014 corrected errors principally related accounting revenue recognition sales distributors accounting inventory reserves accounting royalties management’s discussion analysis financial condition results operations gives effect restatement adjustments years ended december 31 2012 december 31 2011 information regarding matters leading restatement related findings respect disclosure controls procedures internal control financial reporting see part ii item 9a “controls procedures” form 10k conjunction audit committee review described explanatory note form 10k management concluded errors existed company’s previously issued consolidated financial statements respect fiscal years ended december 31 2012 2011 2010 2009 2008 2007 fiscal quarter ended march 31 2013 reaching conclusions company considered information obtained independent review including emails data interviews current former employees indicated existence extracontractual terms arrangements onset sale concessions agreed subsequent initial sale extended payment terms return exchange rights sales distributors respect certain transactions including certain seniorlevel personnel involved ii time sales collection reasonably assured iii certain amounts previously characterized commissions paid related parties applicable customer company assessed information derived independent review making determinations respect accounting adjustments reflected restated consolidated financial statements contained form 10k determinations consistent findings independent review addition matters subject independent review certain adjustments identified management including revisions inventory reserves royalties made consolidated financial statements connection restatement set forth detail restatement company’s consolidated financial statements included form 10k decreased net sales 147 million 282 million 2012 2011 respectively decreased net income continuing operations 89 million 145 million 2012 2011 respectively general diversified global medical device company focused developing delivering innovative repair regenerative solutions spine orthopedic markets products designed address lifelong boneandjoint health needs patients ages helping achieve active mobile lifestyle design develop manufacture market distribute medical equipment used principally musculoskeletal medical specialists orthopedic applications main products invasive minimally invasive spinal implant products related human cellular tissue based products “hctp products” noninvasive regenerative stimulation products used enhance bone growth success rate spinal fusions treat nonunion fractures external internal fixation devices used fracture repair limb lengthening bone reconstruction products also include bone cement devices removal bone cement used fix artificial implants 2013 results financial condition include following items significance • biostim revenues decreased 340 million 1479 million 187 compared 2012 includes spine regenerative stimulation decreased 288 million 19 2013 compared 2012 well regenerative stimulation orthopedics decreased 52 million 23 2013 compared 2012 • decrease gross profit margin 780 2012 745 2013 primarily result increased costs primarily associated inventory reserves salaries • increase operating expenses percentage net sales compared prior period primarily result significant costs incurred legal professional services connection audit committee’s investigation led restatement 2012 2011 consolidated financial statements well impairment goodwill 192 million 2012 administrative training facilities us brazil united kingdom france germany puerto rico italy manufacturing facilities us italy directly distribute products us united kingdom italy germany switzerland austria france belgium brazil australia puerto rico several markets also distribute products independent distributors consolidated financial statements include financial results company wholly owned majorityowned subsidiaries entities control intercompany accounts transactions eliminated consolidation reporting currency us dollar balance sheet accounts except shareholders’ equity translated yearend exchange rates revenue expense items translated weighted average rates exchange prevailing year gains losses resulting foreign currency transactions included income expense gains losses resulting translation foreign currency financial statements recorded accumulated comprehensive income component shareholders’ equity financial condition results operations cash flows significantly impacted seasonality trends however sales associated products elective procedures appear influenced somewhat lower level procedures performed late summer addition believe operations significantly affected inflation however ordinary course business exposed impact changes interest rates foreign currency fluctuations objective limit impact movements earnings cash flows order achieve objective seek balance nondollar denominated income expenditures year used derivative instruments hedge foreign currency fluctuation exposures see item 7aitem 7 management’s discussion analysis financial condition results operations following discussion analysis financial condition result operations read conjunction “forwardlooking statements” consolidated financial statements notes thereto appearing elsewhere annual report executive summary global medical device company focused musculoskeletal healing products valueadded services headquartered lewisville texas four strategic business units “sbus” also reporting segments biostim extremity fixation spine fixation biologics products distributed sales representatives distributors 60 countries notable highlights accomplishments 2017 include following • net sales 4338 million increase 59 reported basis 55 constant currency basis net sales increased sbus • net income continuing operations 73 million increase 1085 prior year • nongaap net margin internal metric define gross profit less sales marketing expense 1424 million increase 13 prior year results operations following table presents certain items consolidated statements operations percent net sales net sales strategic business unit following table presents net sales includes product sales marketing service fees sbu biostim manufactures distributes provides support services market leading devices enhance bone fusion biostim uses distributors sales representatives sell devices hospitals healthcare providers patients 2017 compared 2016 net sales increased 93 million 53 • increased continue leverage engagement expansive sales force positive north american spine society “nass” coverage recommendation launch next generation products stim track 2016 compared 2015 net sales increased 116 million 70 • increased order counts expanding customer base number unique physicians prescribed products increased 2016 approximately 5 • order cash process improvements implemented within past 18 months increased overall percentage collect orders resulting increase collections thirdparty payors approximately 9 compared prior year extremity fixation extremity fixation offers products solutions allow physicians successfully treat variety orthopedic conditions unrelated spine extremity fixation distributes products globally network distributors sales representatives sell orthopedic products hospitals healthcare providers 2017 compared 2016 net sales increased 06 million 05 • growth us uk largely due continued adoption tlhex product line • increase 15 million attributable favorable impact foreign currency translation • partially offset decrease 36 million related extremity fixation restructuring consists divestiture noncore business uk reduction sales brazil puerto rico convert direct sales model use stocking distributors • additionally offset decrease cash collections specific international stocking distributors whose revenue recognized upon cash receipt 2016 compared 2015 net sales increased 66 million 69 • includes negative impact foreign currency translation 26 million 2016 constant currency basis net sales increased 92 million 96 • increase cash collections approximately 18 2016 distributors whose revenue recognized upon cash receipt • growth us due onboarding new distributors continued adoption tlhex product line grew approximately 50 us compared prior year spine fixation spine fixation designs develops markets broad portfolio implant products used surgical procedures spine fixation distributes products globally network distributors sales representatives sell spine products hospitals healthcare providers 2017 compared 2016 net sales increased 93 million 128 • increase 206 us sales due addition new distributor partners last several quarters uptake recent product introductions including ptc family product lines cetra improved legacy distributor engagement • despite strong performance certain locations australia yearoveryear international sales decreased largely due decrease order volumes international stocking distributors 2016 compared 2015 net sales decreased 30 million 40 • exclusion large national hospital group purchasing organization second quarter 2016 • loss several key surgeon customers early 2016 • decrease cash collections approximately 6 2016 distributors whose revenue recognized upon cash receipt • partially offset revenue additional distributors added 2016 biologics provides portfolio regenerative products tissue forms allow physicians successfully treat variety spinal orthopedic conditions biologics markets tissues hospitals healthcare providers primarily us network employed independent sales representatives 2017 compared 2016 net sales increased 48 million 83 • increase volume trinity products primarily driven addition new distributors past year • benefit improving performance national distribution partner reacquisition national hospital contract 2016 compared 2015 net sales decreased 19 million 32 • growing number competitors stem cell allograft market associated 24 reduction average selling price products • exclusion large national hospital group purchasing organization second quarter 2016 • partially offset increase total number independent distributors 2016 gross profit nongaap net margin 2017 compared 2016 nongaap net margin internal metric define gross profit less sales marketing expense increased 18 million • gross profit increased 189 million largely driven increase net sales sbus gross margin remained relatively flat partially offset increase 02 million expense relating extremity fixation us restructurings • sales marketing expense increased 171 million primarily relating higher commission expenses 2017 relating geographic mix extremity fixation higher commission rates new distributors biologics spine fixation increase compensation costs result increase net sales 2016 compared 2015 nongaap net margin increased 88 million • gross profit increased 120 million increase sales biostim extremity fixation partially offset decrease sales biologics spine fixation improved operating efficiencies absorption fixed costs increase inventory reserves 17 million certain slower moving product lines obsolete inventory portion result planned restructuring brazil • sales marketing expense increased 32 million increase compensation benefits costs including commissions result increase net sales partially offset reduction certain indirect tax liabilities 31 million 2016 also partially offset decrease bad debt expense 23 million related puerto rico following table presents nongaap net margin reporting segment reasons changes nongaap net margin sbu generally consistent information provided gross profit sales marketing expense general administrative expense 2017 compared 2016 general administrative expense decreased less 01 million • decrease 36 million reduction project bluecore expenses project completed 2016 • decrease sharebased compensation expense 35 million largely driven net decrease expense attributable performancebased marketbased awards • core expense reductions savings professional fees 20 million • partially offset increase spending 57 million evaluation strategic investments • offset unfavorable change related legal settlements 35 million largely result favorable commercial litigation settlement received 2016 30 million 2016 compared 2015 general administrative expense decreased 128 million • decreases professional fees 79 million largely associated completion 2016 internal control remediation efforts project bluecore companywide infrastructure initiative improve reliability efficiency systems processes reporting • reduced legal costs 69 million largely due legal settlements incurred prior year commercial legal settlement 2016 whereby received 30 million • moratorium medical device tax 2016 decreased expense 13 million • reduction controllable expenses • overall decrease partially offset increased sharebased compensation expense 81 million including 57 million associated determination 2016 achieving performance criteria related certain performancebased vesting restricted stock awards probable research development expense 2017 compared 2016 research development expense increased 09 million • increase costs associated clinical trials 07 million primarily due invested resources identify potential new indications pemf technology osteoarthritis knee adjunct rotator cuff repair • increase costs largely attributable initiation company’s us restructuring plan 2017 primarily affected corporate shared services resulted increase expense 05 million 2016 compared 2015 research development expense increased 24 million • increased costs associated clinical trials 15 million primarily due invested resources identify potential new clinical indications pemf technology develop next generation bone growth stimulators recently approved fda european commission • 13 million investment made first quarter 2016 expand processing storage capabilities mtf supplier trinity evolution trinity elite tissue forms sec fcpa matters related costs 2017 compared 2016 secfcpa matters related costs decreased 45 million • received favorable insurance settlement 2017 approximately 6 million associated prior costs incurred related sec fcpa matters • pursuant settlement sec investigation fcpa matters brazil agreed retain independent compliance consultant one year review test company’s fcpa compliance program began march 2017 resulted increase expense 18 million 2016 compared 2015 secfcpa matters related costs decreased 71 million • decreased legal fees incurred part two prior financial restatements completed march 2015 related sec investigation expected continue declining future periods • costs incurred 2015 related second two restatements legal costs resulting sec investigation class action complaint charges related us government resolutions recorded 144 million 2016 settlements division enforcement sec related sec’s investigation 1 prior accounting review restatements financial statements 2 allegations improper payments brazil additional information see note 11 consolidated financial statements nonoperating income expense nonoperating income expense largely consists interest income expense transaction gains losses changes foreign currency exchange rates otherthantemporary impairments eneura debt security interest income primarily eneura debt security however discontinued recognizing interest income debt security 2017 foreign exchange gains losses result several foreign subsidiaries holding trade payables receivables currencies notably us dollar functional currency 2017 2016 recorded otherthantemporary impairments eneura debt security 56 million 27 million taxes respectively additional discussion see note 6 note 9 consolidated financial statements item 8 annual report income taxes 2017 effective tax rate decrease effective tax rate year primarily result increase income taxes partially offset charge related recording impact tax act primary factors affecting effective tax rate 2017 follows • charge related recognizing impact tax act • increases unrecognized tax benefits • current period losses jurisdictions currently receive tax benefit december 22 2017 tax act signed law making significant changes internal revenue code changes include limited corporate rate decrease 35 21 effective tax years beginning december 31 2017 transition us international taxation worldwide tax system territorial system onetime transition tax mandatory deemed repatriation cumulative foreign earnings december 31 2017 calculated best estimate impact tax act year end income tax provision accordance understanding tax act guidance available date filing result recorded 83 million additional income tax expense fourth quarter 2017 period legislation enacted provisional amount related remeasurement certain deferred tax assets liabilities based rates expected reverse future 86 million provisional amount related onetime transition tax mandatory deemed repatriation foreign earnings zero also recorded benefit 03 million related income tax liability recorded 2016 related repatriation earnings subsidiary puerto rico 2016 effective tax rate decrease effective tax rate year primarily result increase income taxes primary factors affecting effective tax rate 2016 follows • expenses categorized “charges related us government resolutions” represent settlement payments substantially tax benefit • change estimate relating deductible amount certain compensation expenses • increases unrecognized tax benefits • expiration certain foreign net operating loss carryforwards current period losses jurisdictions currently receive tax benefit liquidity capital resources cash equivalents december 31 2017 812 million compared 396 million december 31 2016 following table presents free cash flow nongaap financial measure calculated subtracting capital expenditures net cash operating activities operating activities cash flows operating activities increased 86 million • increase net income 32 million • net increase 106 million noncash gains losses primarily related deferred income taxes sharebased compensation expense otherthantemporary impairments incurred relating eneura debt security • net decrease 51 million relating changes working capital primarily attributable increases inventory balance result new product introductions increases accounts receivable result increase net sales partially offset decrease current liabilities two primary working capital accounts trade accounts receivable inventory day’s sales receivables 53 days december 31 2017 compared 52 days december 31 2016 inventory turns 11 times december 31 2017 compared 14 times december 31 2016 result increased inventory due new product introductions primarily spine fixation extremity fixation sbus us government resolutions december 2016 submitted offers settlement sec relating 1 prior accounting review restatements financial statements 2 allegations improper payments brazil placed 144 million escrow subsequent distribution sec relating matters january 2017 sec approved offers settlement amounts released sec additional information see note 11 notes consolidated financial statements investing activities cash flows investing activities increased 55 million • decrease capital expenditures 14 million largely result completing project bluecore 2016 • increase due purchase certain inventory intellectual property assets 26 million 2016 increase investment bone biologics inc 10 million 2016 financing activities cash flows financing activities increased 497 million • increase 634 million related share repurchase plan completed 2016 • partially offset decrease net proceeds 133 million issuance common shares • offset debt issuance costs 04 million paid 2017 relation amendment credit agreement credit facilities august 31 2015 entered credit agreement provided five year 125 million secured revolving credit facility december 8 2017 amended credit agreement jpmorgan administrative agent certain lenders party thereto primary provision amendment among things add subsidiary orthofix international bv borrower guarantor loan party addition two subsidiaries orthofix limited orthofix ii bv also added guarantors loan parties borrowings credit agreement may used among things working capital general corporate purposes including share repurchases permitted acquisitions permitted payments dividends distributions december 31 2017 made borrowings credit facility additional information regarding credit facility see note 8 notes consolidated financial statements contained herein borrowings unused available line credit €58 million 70 million 61 million december 31 2017 2016 respectively italian line credit unsecured line credit provides us option borrow amounts italy rates determined time borrowing unremitted foreign earnings current intention indefinitely reinvest substantially unremitted foreign earnings residing outside curaçao first quarter 2017 changed intention related unremitted foreign earnings seychelles subsidiary tax impact minimal entity incorporated curaçao “foreign earnings” refer us nonus earnings furthermore income sourced us subject us income tax unremitted foreign earnings decreased 3725 million december 31 2016 3357 million december 31 2017 determining additional income tax may payable earnings repatriated practicable contractual obligations following table sets forth contractual obligations december 31 2017 1 inventory purchase commitments thirdparty manufacturers due uncertainty future purchasing requirements obligations agreements included preceding table amount committed december 31 2017 due 2018 2 may required make payments related uncertain tax positions however unable reliably estimate timing cash settlement respective taxing authorities accordingly unrecognized tax benefits including interest penalties 278 million december 31 2017 excluded contractual obligations table information see note 17 notes consolidated financial statements contained herein offbalance sheet arrangements december 31 2017 offbalance sheet arrangements reasonably likely current future effect financial condition changes financial condition revenues expenses results operations cash flows liquidity capital expenditures capital resources material investors critical accounting estimates discussion operating results based upon consolidated financial statements accompanying notes preparation statements requires us make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amount revenues expenses reporting period ongoing basis evaluate estimates based historical experience various assumptions management believe reasonable circumstances point time actual results may differ significantly times estimates believe estimates described critical preparing consolidated financial statements reviewed critical accounting estimates audit committee board directors revenue recognition process recognizing revenue involves significant assumptions judgments certain revenue streams revenue recognition policies “critical accounting estimates” changes assumptions used develop estimates could materially affect key financial measures including net sales gross margin nongaap net margin operating income net income revenue derived thirdparty payors including commercial insurance carriers health maintenance organizations preferred provider organizations governmental payors medicare connection sale stimulation products recognize revenue stimulation product fitted accepted patient applicable documents required thirdparty payor obtained amounts paid thirdparty payors generally based fixed allowable reimbursement rates revenues recorded expected preauthorized reimbursement rates net contractual allowances adjustments certain billings subject review thirdparty payors may subject adjustment revenue derived distributor agreements recognize revenue product delivered end customer “sellthrough method” reliable information distributors sell product end customers use cash collection distributors basis revenue recognition sellthrough method sell distributors consider whether match related cost sales expense revenue recognize expense upon shipment making assessment consider financial viability distributors based creditworthiness determine collectability amounts sufficient realize costs products shipped reasonably assured time shipment distributors instances distributor determined financially viable defer costs sales revenue recognized january 1 2018 company adopt accounting standards update “asu” 201409 revenue contracts customers additional information regarding impact asu 201409 see note 1 notes consolidated financial statements contained herein subheading “recently issued accounting standards” allowance doubtful accounts contractual allowances process estimating ultimate collection accounts receivable involves significant assumptions judgments historical collections writeoffs payor reimbursement experience integral parts estimation process related reserves doubtful accounts establishment contractual allowances accounts receivable analyzed quarterly basis assess adequacy reserves doubtful accounts contractual allowances revisions allowances doubtful accounts estimates recorded adjustment bad debt expense within sales marketing expenses revisions contractual allowances recorded adjustment net sales estimates periodically tested actual collection experience believe allowance doubtful accounts sufficient cover customer credit risks however 10 change allowance doubtful accounts december 31 2017 would result increase decrease sales marketing expense 08 million additionally believe estimate establish contractual allowances sufficient cover customer credit risks however 10 change reserve contractual allowances december 31 2017 would result increase decrease net sales 06 million allowance doubtful accounts estimation contractual allowances “critical accounting estimates” changes assumptions used develop estimates could materially affect key financial measures including net sales gross margin nongaap net margin operating income net income trade accounts receivable inventory allowances reserves excess slow moving obsolete inventory calculated difference cost inventory market value based assumptions judgments new product launch periods overall product life cycles forecasted demand market conditions event decrease demand products higher incidence inventory obsolescence could required increase inventory reserves would increase cost sales decrease gross profit inventory allowance “critical accounting estimate” changes assumptions used develop estimate could materially affect key financial measures including gross profit nongaap net margin operating income net income inventory regularly evaluate exposure inventory writedowns conditions assumptions used determining market value change additional inventory adjustments future may necessary goodwill test goodwill least annually impairment annual tests indicators potential impairment exist indicators include among others declines sales earnings cash flows development material adverse change business climate assessing goodwill impairment involves high degree judgment due estimates assumptions used believe estimates assumptions involved impairment assessment critical significant changes estimates assumptions could materially affect key financial measures including net income fourth quarter 2017 performed qualitative assessment annual goodwill impairment analysis result impairment charge qualitative analysis considered relevant factors specific reporting units including macroeconomic conditions industry market considerations overall financial performance relevant entityspecific events fourth quarter 2016 performed quantitative impairment analysis result impairment charge fair value measurements fair value defined price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date fair value eneura debt security based upon significant unobservable inputs including use discounted cash flows model requiring us develop assumptions one significant unobservable inputs used fair value measurement eneura debt security discount rate holding inputs constant increase discount rate 5 would result decrease fair value debt security 11 million whereas decrease discount rate 5 would result increase fair value debt security 10 million required determine whether decline fair value cost basis eneura debt security temporary making determination consider intentions hold sell security whether likely required sell security recovery amortized cost basis best estimate amount ultimately expect collect security estimated amount expect collect based upon significant unobservable inputs requiring us develop assumptions including probability holding security maturity converting security equity fair value measurements “critical accounting estimate” changes assumptions used develop estimate could materially affect key financial measures litigation contingent liabilities time parties targets lawsuits investigations proceedings including product liability personal injury patent intellectual property health safety employment healthcare regulatory matters handled defended ordinary course business lawsuits investigations proceedings could involve substantial number claims could also adverse impact reputation customer base although maintain various liability insurance programs liabilities could result lawsuits investigations proceedings selfinsured significant portion liabilities accrue claims probable liability incurred amount reasonably estimated assessments whether loss probable reasonable possibility whether loss range loss reasonably estimable often involve series complex judgments future events among factors consider assessment nature existing legal proceedings investigations claims asserted possible damages loss contingency reasonably estimable progress matter existing law precedent opinions views legal counsel advisers involvement us government agencies proceedings experience similar matters experience companies facts available us time assessment intend respond responded proceeding investigation claim assessment factors may change time individual proceedings investigations claims progress matters currently able reasonably estimate range reasonably possible loss factors contributed determination include following damages sought indeterminate investigation manifested filed civil criminal complaint ii matters early stages iii matters involve novel unsettled legal theories large uncertain number actual potential cases parties andor iv discussions government parties matters may expected ultimately resolved negotiation settlement reached point believe reasonable estimate loss range loss made instances believe considerable uncertainty regarding timing ultimate resolution matters including possible eventual loss fine penalty business impact changes facts circumstances associated claim could material impact results operations cash flows period reserve estimates revised believe insurance coverage reserves sufficient cover currently estimated exposures cannot give assurance incur liabilities excess recorded reserves present insurance coverage litigation contingent liabilities “critical accounting estimates” changes assumptions used develop estimates could materially affect key financial measures including operating income net income tax matters subsidiaries taxed rates applicable within respective jurisdictions income tax expense effective tax rate deferred tax assets deferred tax liabilities vary according jurisdiction profits arise certain subsidiaries sell products directly subsidiaries provide administrative marketing support services subsidiaries intercompany sales support services involve subsidiaries operating jurisdictions differing tax rates tax authorities jurisdictions may challenge treatments residency criteria transfer pricing provisions aspects respective tax laws could affect composite tax rate provisions sometimes engage transactions tax consequences may subject uncertainty account uncertain tax positions accordance applicable accounting guidance requires significant judgment assessing estimated tax consequences transaction evaluate tax position taken expected taken tax return determining weight available evidence indicates likely evaluation technical merits tax position sustained audit including resolution related appeals litigation processes measure tax benefit largest amount 50 likely realized upon ultimate settlement reevaluate income tax positions periodically consider factors changes facts circumstances changes interpretations tax law effectively settled issues audit new audit activity change recognition measurement would result recognition tax benefit additional charge tax provision establish valuation allowance measuring deferred tax assets likely certain deferred tax assets realized foreseeable future process requires significant judgment must project current tax liability estimate deferred tax assets liabilities future periods including net operating loss tax credit carry forwards assessing need valuation allowance consider recent operating results availability taxable income carryback years future reversals taxable temporary differences future taxable income projections exclusive reversing temporary differences prudent feasible tax planning strategies december 22 2017 staff accounting bulletin 118 “sab 118” issued address application us gaap situations registrant necessary information available prepared analyzed including computations reasonable detail complete accounting certain income tax effects tax act accordance sab 118 determine 86 million deferred tax expense recorded connection remeasurement certain deferred tax assets liabilities zero transition tax mandatory deemed repatriation foreign earnings provisional amount reasonable estimate december 31 2017 additional work necessary detailed analysis deferred tax assets liabilities historical foreign earnings well potential correlative adjustments subsequent adjustment amounts recorded current tax expense quarter 2018 analysis complete tax matters “critical accounting estimates” changes assumptions used develop estimates could materially affect key financial measures including net income sharebased compensation determining appropriate fair value model calculating fair value employee stock awards requires estimates judgments sharebased compensation “critical accounting estimate” changes assumptions used develop estimates fair value requisite service period could materially affect key financial measures including gross profit nongaap net margin operating income net income use blackscholes valuation model calculate fair value servicebased stock options value recognized expense service period net actual forfeitures expected term options granted estimated based number factors including vesting expiration terms award historical employee exercise behavior options currently outstanding options exercised expired historical volatility common stock employee’s average length service riskfree interest rate determined based upon constant us treasury security rate contractual life approximates expected term option award estimate expected volatility based historical volatility stock use monte carlo valuation methodology calculate fair value marketbased stock options stock units value recognized expense requisite service period adjusted forfeitures occur monte carlo methodology use estimate fair value marketbased options incorporates possibility market condition may satisfied fair value performancebased restricted stock awards stock units calculated based upon closing stock price date grant value recognized expense derived requisite service period beginning period deemed probable vest vesting probability assessed based upon forecasted earnings financial results requires significant judgment nongaap financial measures believe providing nongaap financial measures exclude certain items provides investors greater transparency information used senior management financial operational decisionmaking believe important provide investors nongaap metrics senior management uses supplement information regarding performance underlying trends business operations order facilitate comparisons historical operating results internally evaluate effectiveness operating strategies disclosure nongaap financial measures also facilitates comparisons underlying operating performance companies industry also supplement gaap results nongaap financial measures nongaap financial measures used annual report may limitations analytical tools considered isolation replacement gaap financial measures limitations associated use nongaap financial measures exclude items reflect economic cost material effect cash flows similarly certain noncash expenses equity compensation expense directly impact cash flows part total compensation costs accounted gaap constant currency constant currency nongaap measure calculated using foreign currency rates comparable prioryear period present net sales comparable rates constant currency presented numerous gaap measures commonly used management analyze net sales without impact changes foreign currency rates nongaap net margin nongaap net margin internal metric define gross profit less sales marketing expense nongaap net margin primary metric used chief operating decision maker managing business free cash flow free cash flow nongaap financial measure calculated subtracting capital expenditures net cash operating activities free cash flow important indicator much cash generated used normal business operations including capital expenditures management uses free cash flow measure progress capital efficiency cash flow initiatives item 7aitem 7 management’s discussion analysis financial condition results operations following discussion analysis financial condition result operations read conjunction “forwardlooking statements” consolidated financial statements notes thereto appearing elsewhere annual report executive summary global medical device company focused musculoskeletal products therapies headquartered lewisville texas four reporting segments bone growth therapies formerly referred biostim spinal implants formerly referred spine fixation biologics orthofix extremities formerly referred extremity fixation products distributed sales representatives distributors 70 countries notable highlights accomplishments 2018 include following • net sales 4530 million increase 44 reported basis 39 constant currency basis • net income continuing operations 138 million increase 894 prior year • nongaap net margin internal metric define gross profit less sales marketing expense 1509 million increase 59 prior year results operations following table presents certain items consolidated statements income percent net sales net sales reporting segment following table presents net sales includes product sales marketing service fees reporting segment bone growth therapies bone growth therapies manufactures distributes provides support services market leading devices enhance bone fusion bone growth therapies uses distributors sales representatives sell devices hospitals healthcare providers patients 2018 compared 2017 net sales increased 94 million 50 • increase primarily driven execution commercial strategies continued leverage recently launched next generation products supported stim track mobile application 2017 compared 2016 net sales increased 93 million 53 • increased continue leverage engagement expansive sales force positive north american spine society “nass” coverage recommendation launch next generation products stim track spinal implants spinal implants designs develops markets broad portfolio implant products used surgical procedures spine spinal implants distributes products globally network distributors sales representatives sell spine products hospitals healthcare providers 2018 compared 2017 net sales increased 97 million 118 • increase 87 million driven international sales m6 artificial discs subsequent acquisition spinal kinetics closed second quarter 2018 • increase 34 us sales due annualized sales new distributor partners added 2017 uptake recent product introductions • decrease legacy international sales primarily result disruption distribution australian german subsidiaries 2017 compared 2016 net sales increased 93 million 128 • increase 206 us sales due addition new distributor partners last several quarters uptake recent product introductions including ptc family product lines cetra improved legacy distributor engagement • despite strong performance certain locations australia yearoveryear international sales decreased largely due decrease order volumes international stocking distributors biologics provides portfolio regenerative products tissue forms allow physicians successfully treat variety spinal orthopedic conditions biologics markets tissues hospitals healthcare providers primarily us network employed independent sales representatives 2018 compared 2017 net sales decreased 30 million 48 • decrease 61 primarily driven contractual reduction first quarter 2018 amount receive marketing service fees trinity tissues mtf biologics “mtf” • volume trinity tissues increased 33 partially offset low singledigit pricing pressure market 2017 compared 2016 net sales increased 48 million 83 • increase volume trinity products primarily driven addition new distributors prior year • benefit improving performance national distribution partner reactivation national hospital contract orthofix extremities orthofix extremities offers products solutions allow physicians successfully treat variety orthopedic conditions unrelated spine orthofix extremities distributes products globally network distributors sales representatives sell orthopedic products hospitals healthcare providers 2018 compared 2017 net sales increased 32 million 31 • increase largely due change foreign currency exchange rates positive impact net sales 23 million • increase 14 million within us due continued distribution expansion adoption truelok products • increase international sales 28 million excluding impact changes foreign currency exchange rates due continued expansion distributors growth european subsidiaries • partially offset expected decrease 33 million brazil result orthofix extremities restructuring 2017 compared 2016 net sales increased 06 million 05 • growth us uk largely due continued adoption tlhex product line • increase 15 million attributable favorable impact foreign currency translation • partially offset decrease 36 million related orthofix extremities restructuring consisted divestiture noncore business uk reduction sales brazil puerto rico converted direct sales model use stocking distributors • additionally offset decrease cash collections specific international stocking distributors whose revenue recognized upon cash receipt gross profit nongaap net margin 2018 compared 2017 nongaap net margin internal metric define gross profit less sales marketing expense increased 85 million • gross profit increased 156 million primarily due growth net sales gross margin improving slightly 786 2017 787 2018 partially offset addition spinal kinetics acquisitionrelated inventory fair market value adjustments 14 million within spinal implants reporting segment • sales marketing expense increased 72 million primarily due increase net sales marketing expenses percentage net sales improving slightly 454 net sales 2018 compared 457 2017 compared 2016 nongaap net margin increased 18 million • gross profit increased 189 million largely driven increase net sales reporting segments gross margin remained relatively flat partially offset increase 02 million expense relating orthofix extremities us restructurings • sales marketing expense increased 171 million primarily relating higher commission expenses 2017 relating geographic mix orthofix extremities higher commission rates new distributors biologics spinal implants increase compensation costs result increase net sales following table presents nongaap net margin reporting segment reasons changes nongaap net margin reporting segment generally consistent information provided gross profit sales marketing expense general administrative expense 2018 compared 2017 general administrative expense increased 126 million • increase 63 million expenses associated strategic investments due diligence integration efforts connection spinal kinetics acquisition expenditures related domestication • increase sharebased compensation expense 55 million largely related increases expense attributable performancebased marketbased awards change timing annual grants executives key personnel • increase 18 million associated legal judgments settlements including previous sec fcpa matters largely result receipt favorable insurance settlement 2017 approximately 61 million associated prior costs incurred • increase 09 million relating amortization acquired intangibles associated spinal kinetics acquisition • partially offset decreases certain compensationrelated costs including bonus incentives benefits 2017 compared 2016 general administrative expense decreased 45 million • received favorable insurance settlement 2017 approximately 61 million associated prior costs incurred related sec fcpa matters • decrease 36 million reduction project bluecore expenses project completed 2016 • decrease sharebased compensation expense 35 million largely driven net decrease expense attributable performancebased marketbased awards • core expense reductions savings professional fees 20 million • partially offset increase spending 57 million evaluation strategic investments • offset unfavorable change related legal settlements 35 million largely result favorable commercial litigation settlement received 2016 30 million • pursuant settlement sec investigation fcpa matters brazil agreed retain independent compliance consultant one year review test company’s fcpa compliance program began march 2017 resulted increase expense 18 million research development expense 2018 compared 2017 research development expense increased 35 million • increase research development costs largely attributable spinal kinetics acquisition regulatory efforts associated us food drug administration “fda” premarket approval m6 artificial cervical disc 2017 compared 2016 research development expense increased 09 million • increase costs associated clinical trials 07 million primarily due invested resources identify potential new indications pemf technology osteoarthritis knee adjunct rotator cuff repair • increase costs largely attributable initiation company’s us restructuring plan 2017 primarily affected corporate shared services resulted increase expense 05 million changes fair value contingent consideration 2018 compared 2017 fair value contingent consideration increased 31 million • changes relate fair value potential future milestone payments 600 million cash associated spinal kinetics acquisition additional information see note 3 notes consolidated financial statements charges related us government resolutions 2017 compared 2016 recorded 144 million 2016 settlements division enforcement sec related sec’s investigation 1 prior accounting review restatements financial statements 2 allegations improper payments brazil additional information see note 13 notes consolidated financial statements nonoperating income expense nonoperating income expense largely consists interest income expense transaction gains losses changes foreign currency exchange rates changes fair value related equity holdings bone biologics inc “bone biologics” otherthantemporary impairments eneura debt security interest income 2016 primarily eneura debt security however discontinued recognizing interest income debt security 2017 foreign exchange gains losses primarily result several foreign subsidiaries holding trade intercompany payables receivables currencies notably us dollar functional currency 2018 compared 2017 income expense net decreased 24 million • decrease 53 million associated changes foreign currency rates recorded noncash remeasurement loss 33 million 2018 compared gain 19 million 2017 • decrease 31 million impairments changes fair value relating equity holdings warrants bone biologics common stock • partially offset increase 56 million associated otherthantemporary impairment eneura debt security 2017 recur 2018 2017 compared 2016 income expense net decreased 12 million • decrease 29 million associated otherthantemporary impairments eneura debt security recorded impairments 56 million 27 million taxes 2017 2016 respectively • partially offset increase 20 million associated changes foreign currency rates recorded noncash remeasurement gain 19 million 2017 compared loss less 01 million 2016 income taxes 2018 effective tax rate decrease effective tax rate year primarily result decrease income taxes reduction us statutory tax rate 35 21 2017 charge recording impact tax cuts jobs act “tax act” recur 2018 primary factors affecting effective tax rate 2018 follows • current period losses jurisdictions currently receive tax benefit • state taxes foreign income taxed differing rates • benefits deductible equity compensation excess financial statement impact december 22 2017 tax act signed law making significant changes internal revenue code changes include limited corporate rate decrease 35 21 effective tax years beginning december 31 2017 transition us international taxation worldwide tax system territorial system onetime transition tax mandatory deemed repatriation cumulative foreign earnings december 31 2017 calculated best estimate impact tax act 2017 year end income tax provision accordance understanding tax act guidance available date filing result recorded 83 million additional income tax expense fourth quarter 2017 period legislation enacted provisional amount related remeasurement certain deferred tax assets liabilities based rates expected reverse future 86 million provisional amount related onetime transition tax mandatory deemed repatriation foreign earnings zero also recorded benefit 03 million related income tax liability recorded 2016 related repatriation earnings subsidiary puerto rico finalized accounting tax act resulted additional benefit 06 million first quarter 2018 minimal adjustments fourth quarter 2017 effective tax rate decrease effective tax rate year primarily result increase income taxes partially offset charge related recording impact tax act primary factors affecting effective tax rate 2017 follows • charge related recognizing impact tax act • increases unrecognized tax benefits • current period losses jurisdictons currently receive tax benefit liquidity capital resources cash equivalents restricted cash december 31 2018 722 million compared 812 million december 31 2017 following table presents free cash flow nongaap financial measure calculated subtracting capital expenditures net cash operating activities operating activities cash flows operating activities increased 109 million • increase net income 76 million • net decrease 212 million noncash gains losses primarily related deferred income taxes sharebased compensation expense otherthantemporary impairment incurred relating eneura debt security 2017 loss valuation investments bone biologics 2018 • net increase 246 million relating changes working capital primarily attributable changes inventories result improved inventory management initiatives put place 2017 2018 two primary working capital accounts trade accounts receivable inventory day’s sales receivables 63 days december 31 2018 compared 53 days december 31 2017 increase largely attributable adoption accounting standards update “asu” 201409 2018 inventory turns 13 times december 31 2018 compared 11 times december 31 2017 primarily resulting improved inventory management initatives put place 2017 2018 adoption asu 201618 statement cash flows topic 230 restricted cash november 2016 financial accounting standards board “fasb” issued asu 201618 reduces diversity classification presentation restricted cash including transfers cash restricted cash statement cash flows adopted standard january 1 2018 using retrospective transition approach adoption asu resulted increase net cash operating activities 25 million year ended december 31 2018 decrease net cash operating activities 144 million year ended december 31 2017 investing activities cash flows investing activities decreased 445 million • decrease 443 million associated cash paid relation spinal kinetics acquisition net cash acquired closed april 30 2018 • decrease 09 million associated acquisition certain intangible assets transactions former distributors 2018 • decrease 05 million due additional investment bone biologics 2018 • decrease 05 million due proceeds received 2017 upon maturity certain timebased deposits • partially offset reduction capital expenditures 17 million financing activities cash flows financing activities decreased 05 million • decrease net proceeds 03 million issuance common shares • decrease 02 million related payment debt issuance costs financing activities credit facilities august 31 2015 entered credit agreement jpmorgan chase bank na “jpmorgan” administrative agent certain lenders party thereto provided five year 125 million secured revolving credit facility december 8 2017 amended credit agreement jpmorgan primary provision amendment among things add subsidiary orthofix international bv borrower guarantor loan party addition two subsidiaries orthofix limited orthofix ii bv also added guarantors loan parties july 31 2018 amended restated credit agreement jpmorgan lenders party thereto pursuant first amended restated credit agreement “amended credit agreement” amended credit agreement substantially previous credit agreement except certain amendments among things effectuate domestication company curaçao company delaware corporation ii limit pledge company domestic subsidiary company equity interests respective first tier foreign subsidiaries 65 voting interests foreign subsidiaries iii limit guarantee joint several obligations subsidiary guarantor foreign subsidiary foreign subsidiary guarantors providing guarantees jointly severally obligated obligations foreign subsidiaries iv limit secured obligations secured collateral provided subsidiary guarantors foreign subsidiaries secured obligations foreign subsidiaries borrowings amended credit agreement may used among things working capital general corporate purposes including share repurchases permitted acquisitions permitted payments dividends distributions december 31 2018 made borrowings credit facility additional information regarding credit facility see note 10 notes consolidated financial statements item 8 annual report borrowings unused available line credit €58 million 67 million 70 million december 31 2018 2017 respectively italian line credit unsecured line credit provides us option borrow amounts italy rates determined time borrowing information regarding contingencies see note 13 notes consolidated financial statements item 8 annual report spinal kinetics acquisition contingent consideration spinal kinetics acquisition agreed pay aggregate 450 million cash subject certain adjustments upon closing plus milestone payments future 600 million cash closed acquisition april 30 2018 paid 450 million cash adjusted certain items due close cash hand milestone payments include 150 million fda grants approval spinal kinetics’ m6c artificial cervical disc “fda milestone” ii revenuebased milestone payments 450 million connection future sales m6c artificial cervical disc m6l artificial lumbar disc fair value contingent consideration arrangement december 31 2018 286 million however actual amount ultimately paid could higher lower fair value contingent consideration approximately 136 million liability included within current liabilities 150 million included within longterm liabilities additional discussion matter see note 3 notes consolidated financial statements february 6 2019 obtained fda approval m6c artificial cervical disc patients suffering cervical disease degeneration approval triggered payment obligation 150 million contingent consideration attributable spinal kinetics purchase price accrued liability 136 million within current liabilities december 31 2018 related milestone payment paid 150 million fda milestone payment february 14 2019 cash hand debt security 2015 loaned 150 million eneura privately held medical technology company developing devices treatment migraines pursuant convertible promissory note “eneura note” eneura note accrues interest 80 mature march 4 2019 interest due eneura note matures security collateralized eneura’s intellectual property event default nonpayment currently expect collect complete principal interest march 4 2019 negotiations eneura possibly extend andor modify terms eneura note significant changes term eneura note including extending due date could material impact fair value security additional discussion matter see note 8 notes consolidated financial statements unremitted foreign earnings prior domestication entity incorporated curaçao “foreign earnings” referred us nonus earnings result domestication income sourced outside us considered unremitted foreign earnings unremitted foreign earnings decreased 3357 million december 31 2017 504 million december 31 2018 substantial decrease due elimination us accumulated earnings impacts result domestication result 2017 tax act current year earnings deemed repatriated investment foreign subsidiaries continues indefinite nature however may periodically repatriate portion earnings extent incur additional tax liability contractual obligations following table sets forth contractual obligations december 31 2018 1 inventory purchase commitments thirdparty manufacturers due uncertainty future purchasing requirements obligations agreements included preceding table amount committed december 31 2018 due 2019 2 result obtaining fda approval m6c artificial cervical disc february 6 2019 required make 150 million payment 2019 related achievement fda milestone paid february 14 2019 addition may required make additional revenuebased milestone payments 450 million connection future sales m6c artificial cervical disc m6l artificial lumbar disc however unable reliably estimate timing cash settlement related revenuebased milestone payments 3 may required make payments related uncertain tax positions however unable reliably estimate timing cash settlement respective taxing authorities accordingly unrecognized tax benefits including interest penalties 281 million december 31 2018 excluded contractual obligations table information see note 19 notes consolidated financial statements item 8 annual report offbalance sheet arrangements december 31 2018 offbalance sheet arrangements reasonably likely current future effect financial condition changes financial condition revenues expenses results operations cash flows liquidity capital expenditures capital resources material investors addition consider backlog firm orders material critical accounting estimates discussion operating results based upon consolidated financial statements accompanying notes preparation statements requires us make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amount revenues expenses reporting period ongoing basis evaluate estimates based historical experience various assumptions management believe reasonable circumstances point time actual results may differ significantly times estimates believe estimates described critical preparing consolidated financial statements reviewed critical accounting estimates audit committee board directors revenue recognition process recognizing revenue involves significant assumptions judgments certain revenue streams revenue recognition policies “critical accounting estimates” changes assumptions used develop estimates could materially affect key financial measures including net sales gross margin nongaap net margin operating income net income bone growth therapies revenue largely attributable us comprised thirdparty payor transactions wholesale revenue derived thirdparty payors including commercial insurance carriers health maintenance organizations preferred provider organizations governmental payors medicare connection sale stimulation products recognize revenue stimulation product fitted accepted patient applicable documents required thirdparty payor obtained amounts paid thirdparty payors generally based fixed allowable reimbursement rates revenues recorded expected preauthorized reimbursement rates net contractual allowances adjustments certain billings subject review thirdparty payors may subject adjustment wholesale revenue related sale bone growth stimulators directly physicians healthcare providers wholesale revenues recognized upon shipment receipt confirming purchase order customer obtains control promised goods biologics revenue largely attributable us primarily related collaborative arrangement mtf exclusive global marketing rights receive marketing fees mtf based products distributed mtf considered principal arrangements therefore recognize marketing service fees net basis upon shipment product customer orthofix extremities spinal implants products distributed worldwide us sales largely comprised commercial revenue international sales derived commercial sales stocking distributor arrangements commercial revenue largely related sale spinal implants orthofix extremities products hospital customers commercial revenues recognized products utilized confirming purchase order received hospital stocking distributors purchase products resell directly customers hospitals revenue derived stocking distributor agreements prior adoption asu 201409 revenue contracts customers “topic 606” ie periods presented prior january 1 2018 recognized revenue product delivered end customer “sellthrough method” reliable information distributors sold product end customers used cash collection distributors basis revenue recognition sellthrough method additionally sold distributors considered whether match related cost sales expense revenue recognize expense upon shipment making assessment considered financial viability distributors based creditworthiness determine collectability amounts sufficient realize costs products shipped reasonably assured time shipment distributors instances distributor determined financially viable deferred costs sales revenue recognized subsequent adoption topic 606 effective january 1 2018 revenue derived stocking distributor arrangements recognize revenue upon shipment receipt confirming purchase order distributor obtains control promised goods transaction price estimated based upon historical collection experience stocking distributor derive estimate analyze twelve months historical invoices stocking distributor subsequent collections invoices period 24 months subsequent invoice date percentage specific stocking distributor used calculate transaction price cost sales also recorded upon transfer control product customer company’s performance obligation satisfied allowance doubtful accounts contractual allowances process estimating ultimate collection accounts receivable involves significant assumptions judgments historical collections writeoffs payor reimbursement experience integral parts estimation process related reserves doubtful accounts establishment contractual allowances accounts receivable analyzed quarterly basis assess adequacy reserves doubtful accounts contractual allowances revisions allowances doubtful accounts estimates recorded adjustment bad debt expense within sales marketing expenses revisions contractual allowances recorded adjustment net sales estimates periodically tested actual collection experience believe allowance doubtful accounts sufficient cover customer credit risks however 10 change allowance doubtful accounts december 31 2018 would result increase decrease sales marketing expense 07 million additionally believe estimate establish contractual allowances sufficient cover customer credit risks however 10 change reserve contractual allowances december 31 2018 would result increase decrease net sales 06 million allowance doubtful accounts estimation contractual allowances “critical accounting estimates” changes assumptions used develop estimates could materially affect key financial measures including net sales gross margin nongaap net margin operating income net income trade accounts receivable inventory allowances reserves excess slow moving obsolete inventory calculated difference cost inventory market value based assumptions judgments new product launch periods overall product life cycles forecasted demand market conditions event decrease demand products higher incidence inventory obsolescence could required increase inventory reserves would increase cost sales decrease gross profit inventory allowance “critical accounting estimate” changes assumptions used develop estimate could materially affect key financial measures including gross profit nongaap net margin operating income net income inventory regularly evaluate exposure inventory writedowns conditions assumptions used determining market value change additional inventory adjustments future may necessary valuation intangible assets intangible assets comprised primarily patents acquired developed technology licensing arrangements trademarks inprocess research development “iprd” make significant judgments relation valuation intangible assets resulting business combinations asset acquisitions intangible assets acquired business combination used iprd activities considered indefinite lives completeion abandonment associated project upon reaching end revelant project either amortize acquired iprd estimated useful life expense acquired iprd project unsuccessful future alternative use significant judgment required related forecasting future operating results within discounted cash flow valuation models determine valuation intangible assets key assumptions include anticipated useful lives acquired intangibles projected cash flows associated intangible asset estimated probability success acquired iprd projects projected growth rates discount rates possible significant changes plans assumptions may affect recoverability assets could potentially result impairment goodwill represents excess cost fair value net assets acquired business combinations determination value goodwill intangible assets arising business combinations requires extensive use accounting estimates judgments allocate purchase price fair value net tangible intangible assets acquired test goodwill least annually impairment annual tests indicators potential impairment exist indicators include among others declines sales earnings cash flows development material adverse change business climate assessing goodwill impairment involves high degree judgment due estimates assumptions used believe estimates assumptions involved impairment assessment critical significant changes estimates assumptions could materially affect key financial measures including net income fourth quarters 2018 2017 performed qualitative assessments annual goodwill impairment analysis result impairment charge qualitative analysis considered relevant factors specific reporting units including macroeconomic conditions industry market considerations overall financial performance relevant entityspecific events fourth quarter 2016 performed quantitative impairment analysis result impairment charge fair value measurements fair value defined price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date two significant items recorded fair value eneura debt security contingent consideration attributable spinal kinetics acquisition fair value eneura debt security based upon significant unobservable inputs including use discounted cash flows model requiring us develop assumptions significant unobservable inputs used fair value measurement eneura debt security estimated likelihood conversion equity discount rate holding inputs constant decrease assumption likelihood conversion equity 10 would result increase fair value debt security 19 million required determine whether decline fair value cost basis eneura debt security temporary making determination consider intentions hold sell security whether likely required sell security recovery amortized cost basis best estimate amount ultimately expect collect security estimated amount expect collect based upon significant unobservable inputs requiring us develop assumptions including probability holding security maturity converting security equity contingent consideration consists potential future milestone payments 600 million cash associated spinal kinetics acquisition must achieved within five years acquisition date paid milestone payments include 150 million meeting fda milestone ii revenuebased milestone payments 450 million connection future sales m6c artificial cervical disc m6l artificial lumbar disc estimate fair value contingent consideration attributable fda milestone using probabilityweighted discounted cash flow model fair value based significant inputs observable market key assumptions including estimation probability timing obtaining fda approval m6c artificial cervical disc discount rate applied significant changes assumptions could result significantly higher lower fair value holding inputs constant increase estimate probability fda approval december 31 2018 5 would resulted increase fair value contingent consideration 07 million whereas decrease estimate probability fda approval 5 would resulted decrease fair value contingent consideration 07 million february 6 2019 obtained fda approval triggering payment obligation 150 million contingent consideration attributable spinal kinetics purchase price company estimated fair value potential future revenuebased milestone payments using monte carlo simulation fair value measurement based significant inputs unobservable market key assumptions including forecasted future revenues spinal kinetics discount rate applied assumptions potential volatility forecasted revenue significant changes assumptions could result significantly higher lower fair value holding inputs constant increase forecasted future revenues 5 would resulted increase fair value contingent consideration 18 million whereas decrease forecasted future revenues 5 would resulted decrease fair value contingent consideration 17 million fair value measurements “critical accounting estimate” changes assumptions used develop estimate could materially affect key financial measures litigation contingent liabilities time parties targets lawsuits investigations proceedings including product liability personal injury patent intellectual property health safety employment healthcare regulatory matters handled defended ordinary course business lawsuits investigations proceedings could involve substantial number claims could also adverse impact reputation customer base although maintain various liability insurance programs liabilities could result lawsuits investigations proceedings selfinsured significant portion liabilities accrue claims probable liability incurred amount reasonably estimated assessments whether loss probable reasonable possibility whether loss range loss reasonably estimable often involve series complex judgments future events among factors consider assessment nature existing legal proceedings investigations claims asserted possible damages loss contingency reasonably estimable progress matter existing law precedent opinions views legal counsel advisers involvement us government agencies proceedings experience similar matters experience companies facts available us time assessment intend respond responded proceeding investigation claim assessment factors may change time individual proceedings investigations claims progress matters currently able reasonably estimate range reasonably possible loss factors contributed determination include following damages sought indeterminate investigation manifested filed civil criminal complaint ii matters early stages iii matters involve novel unsettled legal theories large uncertain number actual potential cases parties andor iv discussions government parties matters may expected ultimately resolved negotiation settlement reached point believe reasonable estimate loss range loss made instances believe considerable uncertainty regarding timing ultimate resolution matters including possible eventual loss fine penalty business impact changes facts circumstances associated claim could material impact results operations cash flows period reserve estimates recorded revised believe insurance coverage reserves sufficient cover currently estimated exposures cannot give assurance incur liabilities excess recorded reserves present insurance coverage litigation contingent liabilities “critical accounting estimates” changes assumptions used develop estimates could materially affect key financial measures including operating income net income tax matters subsidiaries taxed rates applicable within respective jurisdictions income tax expense effective tax rate deferred tax assets deferred tax liabilities vary according jurisdiction profits arise certain subsidiaries sell products directly subsidiaries provide administrative marketing support services subsidiaries intercompany sales support services involve subsidiaries operating jurisdictions differing tax rates tax authorities jurisdictions may challenge treatments residency criteria transfer pricing provisions aspects respective tax laws could affect composite tax rate provisions sometimes engage transactions tax consequences may subject uncertainty account uncertain tax positions accordance applicable accounting guidance requires significant judgment assessing estimated tax consequences transaction evaluate tax position taken expected taken tax return determining weight available evidence indicates likely evaluation technical merits tax position sustained audit including resolution related appeals litigation processes measure tax benefit largest amount 50 likely realized upon ultimate settlement reevaluate income tax positions periodically consider factors changes facts circumstances changes interpretations tax law effectively settled issues audit new audit activity change recognition measurement would result recognition tax benefit additional charge tax provision establish valuation allowance measuring deferred tax assets likely certain deferred tax assets realized foreseeable future process requires significant judgment must project current tax liability estimate deferred tax assets liabilities future periods including net operating loss tax credit carry forwards assessing need valuation allowance consider recent operating results availability taxable income carryback years future reversals taxable temporary differences future taxable income projections exclusive reversing temporary differences prudent feasible tax planning strategies december 22 2017 staff accounting bulletin 118 “sab 118” issued address application us gaap situations registrant necessary information available prepared analyzed including computations reasonable detail complete accounting certain income tax effects tax act accordance sab 118 recorded 86 million deferred tax expense connection remeasurement certain deferred tax assets liabilities zero transition tax mandatory deemed repatriation foreign earnings provisional amount reasonable estimate december 31 2017 additional work performed 2018 including detailed analysis deferred tax assets liabilities historical foreign earnings well potential correlative adjustments result recorded 06 million tax benefit first quarter 2018 us treasury continues promulgate proposed temporary final regulations regarding application tax act future adjustments result application tax law changes relected quarter guidance issued tax matters “critical accounting estimates” changes assumptions used develop estimates could materially affect key financial measures including net income sharebased compensation determining appropriate fair value model calculating fair value employee stock awards requires estimates judgments sharebased compensation “critical accounting estimate” changes assumptions used develop estimates fair value requisite service period could materially affect key financial measures including gross profit nongaap net margin operating income net income use blackscholes valuation model calculate fair value servicebased stock options value recognized expense service period net actual forfeitures expected term options granted estimated based number factors including vesting expiration terms award historical employee exercise behavior options currently outstanding options exercised expired historical volatility common stock employee’s average length service riskfree interest rate determined based upon constant us treasury security rate contractual life approximates expected term option award estimate expected volatility based historical volatility stock use monte carlo valuation methodology calculate fair value marketbased stock options stock units value recognized expense requisite service period adjusted forfeitures occur monte carlo methodology use estimate fair value marketbased options incorporates possibility market condition may satisfied fair value performancebased restricted stock awards stock units calculated based upon closing stock price date grant value recognized expense derived requisite service period beginning period deemed probable vest vesting probability assessed based upon forecasted earnings financial results requires significant judgment nongaap financial measures believe providing nongaap financial measures exclude certain items provides investors greater transparency information used senior management financial operational decisionmaking believe important provide investors nongaap metrics senior management uses supplement information regarding performance underlying trends business operations order facilitate comparisons historical operating results internally evaluate effectiveness operating strategies disclosure nongaap financial measures also facilitates comparisons underlying operating performance companies industry also supplement gaap results nongaap financial measures nongaap financial measures used annual report may limitations analytical tools considered isolation replacement gaap financial measures limitations associated use nongaap financial measures exclude items reflect economic cost material effect cash flows similarly certain noncash expenses equity compensation expense directly impact cash flows part total compensation costs accounted gaap constant currency constant currency nongaap measure calculated using foreign currency rates comparable prioryear period present net sales comparable rates constant currency presented numerous gaap measures commonly used management analyze net sales without impact changes foreign currency rates nongaap net margin nongaap net margin internal metric define gross profit less sales marketing expense nongaap net margin primary metric used chief operating decision maker managing business free cash flow free cash flow nongaap financial measure calculated subtracting capital expenditures net cash operating activities free cash flow important indicator much cash generated used normal business operations including capital expenditures management uses free cash flow measure progress capital efficiency cash flow initiatives item 7aitem 7 management’s discussion analysis financial condition results operations following discussion analysis financial condition result operations read conjunction “forwardlooking statements” consolidated financial statements notes thereto appearing elsewhere annual report discussion analysis focused 2019 2018 financial results including comparisons yearoveryear performance years discussion analysis 2017 fiscal year specifically well yearoveryear comparison 2018 financial performance 2017 located part ii item 7 management’s discussion analysis financial condition results operations annual report form 10k fiscal year ended december 31 2018 filed sec february 25 2019 available website wwworthofixcom sec’s website wwwsecgov executive summary global medical device company focused musculoskeletal products therapies headquartered lewisville texas two reporting segments global spine global extremities products distributed sales representatives distributors 70 countries notable highlights accomplishments 2019 include following • net sales 4600 million increase 15 reported basis 25 constant currency basis • increase biologics net sales 97 compared prior year believe 1 marketshare position within us cellular allogaft segment per smarttrak following product category’s strong performance 2019 • net loss 285 million decrease 423 million prior year primarily driven increases acquisitionrelated amortization remeasurement sales marketing expenses • obtained approval february 2019 us food drug administration “fda” m6c artificial cervical disc acquired spinal kinetics inc “spinal kinetics” achieved 41 million net sales us following approval • changed reporting segments global spine global extremities optimize structure better serve surgeon customers • successful transition chief executive officer global spine president positions results operations following table presents certain items consolidated statements operations percent net sales net sales reporting segment following table provides net sales major product category reporting segment global spine global spine offers following products categories bone growth therapies manufactures distributes sells provides support services market leading devices enhance bone fusion bone growth therapies uses distributors sales representatives sell devices provide associated services hospitals healthcare providers patients spinal implants designs develops markets broad portfolio motion preservation fixation implant products used surgical procedures spine spinal implants distributes products globally network distributors sales representatives sell spine products hospitals healthcare providers biologics provides portfolio regenerative products tissue forms allow physicians successfully treat variety spinal orthopedic conditions biologics markets tissues hospitals healthcare providers primarily us network employed independent sales representatives 2019 compared 2018 net sales increased 106 million 31 • bone growth therapies net sales increased 19 million 10 primarily driven 28 increase order volume year partially offset customer sales mix product mix changes • spinal implants net sales increased 29 million 31 primarily driven increase 76 million motion preservation net sales includes full 12 months sales 2019 compared eight months prior year due acquisition spinal kinetics 2018 launch us market april 2019 following fda approval m6c artificial cervical disc increase partially offset decrease legacy spine fixation sales 47 million primarily resulting disruptions us distribution channel upgrade legacy sales force new highpotential sales partners • biologics net sales increased 58 million 97 primarily due distribution added last year volume increased related trinity tissues 124 partially offset low singledigit price decline well contractual reduction marketing services fee receive mtf biologics became effective first quarter 2018 global extremities global extremities offers products solutions allow physicians successfully treat variety orthopedic conditions unrelated spine global extremities distributes products globally network distributors sales representatives sell orthopedic products hospitals healthcare providers 2019 compared 2018 net sales decreased 37 million 35 • decrease 41 due changes foreign currency exchange rates negative impact net sales • increase 04 largely attributed variability timing orders international stocking distributors growth global directsales markets gross profit 2019 compared 2018 gross profit increased 29 million 08 • primarily due growth net sales partially offset gross margin decreasing 787 2018 781 2019 • increase 07 million attributable decrease acquisitionrelated inventory fair market value adjustments spinal kinetics sales marketing expense 2019 compared 2018 sales marketing expense increased 181 million • increase largely attributable increases headcount training education costs increased marketing efforts support growth launch m6c artificial cervical disc us • increases relate higher variable compensation rates global spine segment support growth general administrative expense 2019 compared 2018 general administrative expense increased 24 million • increase 99 million attributable succession transition charges including acceleration certain sharebased compensation expense relating reitrment transition termination certain named executive officers targeted restructuring activities • partially offset decrease 39 million associated strategic investments largely due diligence integration costs related acquisition spinal kinetics expenses associated change jurisdiction organization curaçao state delaware “domestication” 2018 • offset decrease 41 million certain compensation expenses sharebased compensation expense excluding impact succession transition charges research development expense 2019 compared 2018 research development expense increased 14 million • increase largely attributable spinal kinetics acquisition regulatory efforts associated fda premarket approval m6 artificial cervical disc obtained february 2019 • increase 10 million related costs comply recent medical device reporting regulations european union acquisitionrelated amortization remeasurement 2019 compared 2018 acquisitionrelated amortization remeasurement increased 299 million • increase 261 million related remeasurement contingent milestone payments associated spinal kinetics acquisition become due upon achievement certain revenue targets upon fda approval m6c artificial certvical disc occurred first quarter 2019 • fair value associated contingent revenuebased milestones increased significantly 2019 largely attributable initial success observed launch m6c artificial cervical disc us market longterm forecasts net sales indicate greater likelihood achieving contingent revenuebased milestones • increase 38 million related amortization intangible assets acquired business combinations asset acquisitions amount 29 million increase attributable spinal kinetics acquisition includes amortization acquired inprocess research development costs following achievement fda milestone nonoperating expense nonoperating income expense largely consists interest income expense transaction gains losses changes foreign currency exchange rates changes fair value related equity holdings bone biologics inc “bone biologics” otherthantemporary impairments debt security eneura inc “eneura” settled octber 25 2019 foreign exchange gains losses primarily result several foreign subsidiaries holding trade intercompany payables receivables currencies notably us dollar functional currency 2019 compared 2018 expense net increased 18 million • increase 65 million associated otherthantemporary impairment eneura debt security settled 2019 • partially offset net decrease 31 million relating impairment changes fair value equity holdings warrants bone biologics 2018 recur 2019 • partially offset decrease 19 million associated changes foreign currency rates recorded noncash remeasurement loss 14 million 2019 compared loss 33 million 2018 income taxes 2019 effective tax rate decrease effective tax rate year primarily result decrease income taxes full year benefit domestication completed 2018 statute expirations effective settlement uncertain tax positions offset nondeductible executive compensation nondeductible increase contingent consideration primary factors affecting tax rate 2019 follows • nondeductible increases fair value contingent consideration • statute expirations effective settlement uncertain tax positions • executive compensation deductible result tax act • state taxes foreign income taxed differing rates 2018 effective tax rate decrease effective tax rate year primarily result decrease income taxes reduction us statutory tax rate 35 21 2017 charge recording impact tax cuts jobs act “tax act” recur 2018 primary factors affecting tax rate 2018 follows • current period losses jurisdictions currently receive tax benefit • state taxes foreign income taxed differing rates • benefits deductible equity compensation excess financial statement impact segment review conjunction change reporting segments 2019 also changed performance measure used evaluate segment performance nongaap net margin internal metric defined gross profit less sales marketing expense ebitda compared prior year ebitda decreased 446 million largely driven fluctuations discussed primarily attributable changes acquisitionrelated amortization remeasurement sales marketing expense following table reconciles ebitda income loss income taxes liquidity capital resources cash equivalents restricted cash december 31 2019 704 million compared 722 million december 31 2018 following table presents free cash flow nongaap financial measure calculated subtracting capital expenditures net cash operating activities operating activities cash flows operating activities decreased 179 million • decrease net income 423 million • net increase 468 million noncash gains losses primarily related changes fair value contingent consideration depreciation amortization sharebased compensation expense deferred income taxes • net decrease 224 million relating changes working capital primarily attributable changes inventories trade accounts receivable two primary working capital accounts trade accounts receivable inventory day’s sales receivables 66 days december 31 2019 compared 59 days december 31 2018 largely due delay payment certain third party payors inventory turns 12 times december 31 2019 compared 13 times december 31 2018 primarily resulting increases inventory instruments 2019 support certain product launches investing activities cash flows investing activities increased 381 million • increase 443 million associated cash paid relation spinal kinetics acquisition 2018 net cash acquired • increase 40 million related settlement eneura debt security 2019 • increase 09 million associated acquisition certain intangible assets transactions former distributors additional investment 05 million bone biologics 2018 • partially offset 64 million associated cash paid relation acquisition certain assets options medical llc one former distributors 2019 • offset increase capital expenditures 53 million compared prior year largely relating buildup instruments support new product launches launch m6c artificial cervical disc us financing activities cash flows financing activities decreased 137 million • decrease 137 million associated payment fda milestone associated spinal kinetics acquisition 2019 represents acquisitiondate fair value attributable fda milestone liability originally recognized • decrease 14 million associated debt issuance costs largely attributable costs incurred 2019 associated second amended restated credit agreement “amended credit agreement” • decrease 04 million attributable principal payments made 2019 relating finance lease 09 million attributable financing cash flows primarily relate deferred payments made association acquisition certain intangible assets transactions former distributors • partially offset increase net proceeds 27 million issuance common shares credit facilities october 25 2019 entered second amended restated credit agreement “amended credit agreement” provides five year 300 million secured revolving credit facility amended credit agreement maturity date october 25 2024 amends restates previous 125 million secured revolving credit facility borrowings amended credit agreement may used among things working capital general corporate purposes including share repurchases permitted acquisitions permitted payments dividends distributions december 31 2019 made borrowings amended credit agreement additional information regarding credit facility see note 10 notes consolidated financial statements item 8 annual report borrowings unused available line credit €55 million 62 million 63 million december 31 2019 2018 respectively italian line credit unsecured line credit provides us option borrow amounts italy rates determined time borrowing information regarding contingencies see note 12 notes consolidated financial statements item 8 annual report spinal kinetics acquisition contingent consideration part consideration spinal kinetics acquisition agreed milestone payments future 600 million cash one milestone payment 150 million upon fda approval spinal kinetics’ m6c artificial cervical disc “fda milestone” first quarter 2019 obtained fda approval m6c artificial cervical disc patients suffering cervical disease degeneration fda milestone payment triggered paid 150 million fda milestone payment february 14 2019 cash hand remaining two milestones comprised revenuebased milestone payments 450 million connection future sales m6c artificial cervical disc m6l artificial lumbar disc fair value contingent consideration arrangement december 31 2019 427 million however actual amount ultimately paid could higher lower fair value contingent consideration december 31 2019 classified 147 million liability attributable revenuebased milestones within current liabilities expect pay one revenuebased milestones next twelve months remaining 280 million within longterm liabilities additional discussion matter see note 12 notes consolidated financial statements item 8 annual report fitbone asset acquisition february 3 2020 entered asset purchase agreement “purchase agreement” wittenstein se “wittenstein” privatelyheld germanbased company acquire assets associated fitbone intramedullary lengthening system limb lengthening femur tibia bones terms purchase agreement consideration acquired assets pay 18 million cash consideration enter manufacturing supply contract wittenstein acquisition anticipated close end first quarter 2020 subject customary closing conditions debt security october 2019 held debt security eneura privately held medical technology company developing devices treatment migraines debt security originally set mature march 4 2019 march 1 2019 entered amended restated senior secured promissory note eneura “restructured debt security” restructure debt security extended maturity date earlier march 4 2022 ii effective date change control iii effective date initial public offering eneura consideration extension eneura issued us warrant purchase common stock “warrant” exercisable 001 per share ten year contractual term third quarter 2019 engaged negotiations eneura settle restructured debt security october 25 2019 settled restructured debt security 40 million cash payment agreed transfer warrant eneura prior settlement determined restructured debt security warrant impaired adjusted carrying value restructured debt security 40 million settlement value recording net otherthantemporary impairment 65 million expense net includes reclassification related unrealized gains included accumulated comprehensive income loss 52 million brazil 2018 federal prosecution service rio de janeiro representatives brazilian antitrust authority inspected offices 30 companies including company’s office são paulo part investigation tender irregularities medical device industry authorities obtained court order affecting company’s companies’ local bank accounts resulting freezing company’s cash april 3 2019 appeal regarding freezing local bank accounts heard brazil federal court appeals rio de janeiro court ordered unfreezing cash approximately 25 million returned without restrictions april 2019 balance reclassified restricted cash equivalents december 31 2019 september 2019 relation ongoing legal dispute former brazilian distributor approximately 07 million cash brazil frozen upon request satisfy judgment although appealing judgment cash reclassified restricted cash additional discussion regarding matters see note 12 notes consolidated financial statements item 8 annual report unremitted foreign earnings prior domestication entity incorporated curaçao “foreign earnings” referred us nonus earnings result domestication income sourced outside us considered unremitted foreign earnings unremitted foreign earnings decreased 504 million december 31 2018 492 million december 31 2019 due currency translation result 2017 tax act current year earnings deemed repatriated investment foreign subsidiaries continues indefinite nature however may periodically repatriate portion earnings extent incur significant additional tax liability contractual obligations following table sets forth contractual obligations december 31 2019 1 associated acquisition spinal kinetics may required make conditional revenuebased milestone payments 450 million connection future sales m6c artificial cervical disc m6l artificial lumbar disc expect make 150 million payment related contingent milestones 2020 300 million payment 2021 however timing cash settlement could vary estimates accordingly contingent payments excluded contractual obligations table information regarding contingent payments see note 11 notes consolidated financial statements item 8 annual report 2 may required make payments related uncertain tax positions however unable reliably estimate timing cash settlement respective taxing authorities accordingly unrecognized tax benefits including interest penalties 235 million december 31 2019 excluded contractual obligations table information see note 19 notes consolidated financial statements item 8 annual report offbalance sheet arrangements december 31 2019 offbalance sheet arrangements reasonably likely current future effect financial condition changes financial condition revenues expenses results operations cash flows liquidity capital expenditures capital resources material investors addition consider backlog firm orders material critical accounting estimates discussion operating results based upon consolidated financial statements accompanying notes preparation statements requires us make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amount revenues expenses reporting period ongoing basis evaluate estimates based historical experience various assumptions management believe reasonable circumstances point time actual results may differ significantly times estimates believe estimates described critical preparing consolidated financial statements reviewed critical accounting estimates audit committee board directors revenue recognition process recognizing revenue involves significant assumptions judgments certain revenue streams revenue recognition policies “critical accounting estimates” changes assumptions used develop estimates could materially affect key financial measures including net sales gross margin operating income ebitda net income bone growth therapies revenue largely attributable us comprised thirdparty payor transactions wholesale revenue derived thirdparty payors including commercial insurance carriers health maintenance organizations preferred provider organizations governmental payors medicare connection sale stimulation products recognize revenue stimulation product fitted accepted patient applicable documents required thirdparty payor obtained amounts paid thirdparty payors generally based fixed allowable reimbursement rates revenues recorded expected preauthorized reimbursement rates net contractual allowances adjustments certain billings subject review thirdparty payors may subject adjustment wholesale revenue related sale bone growth stimulators directly physicians healthcare providers wholesale revenues recognized upon shipment receipt confirming purchase order customer obtains control promised goods biologics revenue largely attributable us primarily related collaborative arrangement mtf exclusive global marketing rights receive marketing fees mtf based products distributed mtf considered principal arrangements therefore recognize marketing service fees net basis upon shipment product customer spinal implants global extremities products distributed worldwide us sales largely comprised commercial revenue international sales derived commercial sales stocking distributor arrangements commercial revenue largely related sale spinal implants global extremities products hospital customers commercial revenues recognized products utilized confirming purchase order received hospital stocking distributors purchase products resell directly customers hospitals revenue derived stocking distributor agreements prior adoption asu 201409 revenue contracts customers “topic 606” ie periods presented prior january 1 2018 recognized revenue product delivered end customer “sellthrough method” reliable information distributors sold product end customers used cash collection distributors basis revenue recognition sellthrough method additionally sold distributors considered whether match related cost sales expense revenue recognize expense upon shipment making assessment considered financial viability distributors based creditworthiness determine collectability amounts sufficient realize costs products shipped reasonably assured time shipment distributors instances distributor determined financially viable deferred costs sales revenue recognized subsequent adoption topic 606 effective january 1 2018 revenue derived stocking distributor arrangements recognize revenue upon shipment receipt confirming purchase order distributor obtains control promised goods transaction price estimated based upon historical collection experience stocking distributor derive estimate analyze twelve months historical invoices stocking distributor subsequent collections invoices period 24 months subsequent invoice date percentage specific stocking distributor used calculate transaction price cost sales also recorded upon transfer control product customer company’s performance obligation satisfied allowance doubtful accounts contractual allowances process estimating ultimate collection accounts receivable involves significant assumptions judgments historical collections writeoffs payor reimbursement experience integral parts estimation process related reserves doubtful accounts establishment contractual allowances accounts receivable analyzed quarterly basis assess adequacy reserves doubtful accounts contractual allowances revisions allowances doubtful accounts estimates recorded adjustment bad debt expense within sales marketing expenses revisions contractual allowances recorded adjustment net sales estimates periodically tested actual collection experience believe allowance doubtful accounts sufficient cover customer credit risks however 10 change allowance doubtful accounts december 31 2019 would result increase decrease sales marketing expense 04 million additionally believe estimate establish contractual allowances sufficient cover customer credit risks however 10 change reserve contractual allowances december 31 2019 would result increase decrease net sales 06 million allowance doubtful accounts estimation contractual allowances “critical accounting estimates” changes assumptions used develop estimates could materially affect key financial measures including net sales gross margin operating income ebitda net income trade accounts receivable inventory allowances reserves excess slow moving obsolete inventory calculated difference cost inventory market value based assumptions judgments new product launch periods overall product life cycles forecasted demand market conditions event decrease demand products excess product production higher incidence inventory obsolescence could required increase inventory reserves would increase cost sales decrease gross profit regularly evaluate exposure inventory writedowns conditions assumptions used determining market value forecasted demand change additional inventory adjustments future may necessary inventory allowance “critical accounting estimate” changes assumptions used develop estimate could materially affect key financial measures including gross profit operating income ebitda net income inventory valuation intangible assets intangible assets comprised primarily patents acquired developed technology licensing arrangements trademarks inprocess research development “iprd” make significant judgments relation valuation intangible assets resulting business combinations asset acquisitions intangible assets acquired business combination used iprd activities considered indefinite lives completeion abandonment associated project upon reaching end revelant project either amortize acquired iprd estimated useful life expense acquired iprd project unsuccessful future alternative use significant judgment required related forecasting future operating results within discounted cash flow valuation models determine valuation intangible assets key assumptions include anticipated useful lives acquired intangibles projected cash flows associated intangible asset estimated probability success acquired iprd projects projected growth rates discount rates possible significant changes plans assumptions may affect recoverability assets could potentially result impairment valuation intangible assets “critical accounting estimate” changes assumptions used develop estimates could materially affect key financial measures including operating income ebitda net income intangible assets net goodwill represents excess cost fair value net assets acquired business combinations determination value goodwill intangible assets arising business combinations requires extensive use accounting estimates judgments allocate purchase price fair value net tangible intangible assets acquired test goodwill least annually impairment annual tests indicators potential impairment exist indicators include among others declines sales earnings cash flows development material adverse change business climate assessing goodwill impairment involves high degree judgment due estimates assumptions used believe estimates assumptions involved impairment assessment critical significant changes estimates assumptions could materially affect key financial measures including operating income ebitda net income connection change reporting segments occurred first quarter 2019 performed quantitative assessment goodwill immediately prior subsequently following change reporting segments analysis result impairment addition net carrying value goodwill previously reported prior reporting segments bone growth therapies ii spinal implants iii biologics consolidated included within global spine reporting segment fourth quarters 2019 2018 performed qualitative assessments annual goodwill impairment analysis result impairment charge qualitative analysis considered relevant factors specific reporting units including macroeconomic conditions industry market considerations overall financial performance relevant entityspecific events fair value measurements fair value defined price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date two significant items recorded fair value include contingent consideration attributable spinal kinetics acquisition ii eneura debt security prior restructuring settlement 2019 contingent consideration consists potential future milestone payments 600 million cash associated spinal kinetics acquisition must achieved within five years acquisition date paid milestone payments include 150 million meeting fda milestone ii revenuebased milestone payments 450 million connection future sales m6c artificial cervical disc m6l artificial lumbar disc fda milestone achieved paid february 2019 prior attainment 2019 estimated fair value fda milestone using probabilityweighted discounted cash flow model fair value based significant inputs observable market key assumptions including estimation probability fda approval m6c artificial cervical disc timing approval discount rate applied significant changes assumptions could resulted significantly higher lower fair value prior obtaining fda approval estimate fair value potential future revenuebased milestone payments using monte carlo simulation fair value measurement based significant inputs unobservable market key assumptions including forecasted future revenues spinal kinetics discount rate applied assumptions potential volatility forecasted revenue significant changes assumptions could result significantly higher lower fair value holding inputs constant increase forecasted future revenues 5 would resulted increase fair value contingent consideration 03 million whereas decrease forecasted future revenues 5 would resulted decrease fair value contingent consideration 04 million prior restructuring settlement 2019 40 million fair value eneura debt security based upon significant unobservable inputs including use discounted cash flows model requiring us develop assumptions significant unobservable inputs used fair value measurement eneura debt security estimates related timing likelihood conversion result change control event timing likelihood repayment applicable discount rate required determine whether decline fair value debt security basis otherthantemporary making determination considered intentions hold sell security whether likely would required sell security recovery amortized cost basis best estimate amount ultimately expected collect security estimated amount expected collect based upon significant unobservable inputs requiring us develop assumptions fair value measurements “critical accounting estimate” changes assumptions used develop estimate could materially affect key financial measures including operating income ebitda net income litigation contingent liabilities time parties targets lawsuits investigations proceedings including product liability personal injury patent intellectual property health safety employment healthcare regulatory matters handled defended ordinary course business lawsuits investigations proceedings could involve substantial number claims could also adverse impact reputation customer base although maintain various liability insurance programs liabilities could result lawsuits investigations proceedings selfinsured significant portion liabilities accrue claims probable liability incurred amount reasonably estimated assessments whether loss probable reasonable possibility whether loss range loss reasonably estimable often involve series complex judgments future events among factors consider assessment nature existing legal proceedings investigations claims asserted possible damages loss contingency reasonably estimable progress matter existing law precedent opinions views legal counsel advisers involvement us government agencies proceedings experience similar matters experience companies facts available us time assessment intend respond responded proceeding investigation claim assessment factors may change time individual proceedings investigations claims progress matters currently able reasonably estimate range reasonably possible loss factors contributed determination include following damages sought indeterminate investigation manifested filed civil criminal complaint ii matters early stages iii matters involve novel unsettled legal theories large uncertain number actual potential cases parties andor iv discussions government parties matters may expected ultimately resolved negotiation settlement reached point believe reasonable estimate loss range loss made instances believe considerable uncertainty regarding timing ultimate resolution matters including possible eventual loss fine penalty business impact changes facts circumstances associated claim could material impact results operations cash flows period reserve estimates recorded revised believe insurance coverage reserves sufficient cover currently estimated exposures cannot give assurance incur liabilities excess recorded reserves present insurance coverage litigation contingent liabilities “critical accounting estimates” changes assumptions used develop estimates could materially affect key financial measures including operating income ebitda net income tax matters subsidiaries taxed rates applicable within respective jurisdictions income tax expense effective tax rate deferred tax assets deferred tax liabilities vary according jurisdiction profits arise certain subsidiaries sell products directly subsidiaries provide administrative marketing support services subsidiaries intercompany sales support services involve subsidiaries operating jurisdictions differing tax rates tax authorities jurisdictions may challenge treatments residency criteria transfer pricing provisions aspects respective tax laws could affect composite tax rate provisions sometimes engage transactions tax consequences may subject uncertainty account uncertain tax positions accordance applicable accounting guidance requires significant judgment assessing estimated tax consequences transaction evaluate tax position taken expected taken tax return determining weight available evidence indicates likely evaluation technical merits tax position sustained audit including resolution related appeals litigation processes measure tax benefit largest amount 50 likely realized upon ultimate settlement reevaluate income tax positions periodically consider factors changes facts circumstances changes interpretations tax law effectively settled issues audit new audit activity change recognition measurement would result recognition tax benefit additional charge tax provision could material impact financial statements establish valuation allowance measuring deferred tax assets likely certain deferred tax assets realized foreseeable future process requires significant judgment must project current tax liability estimate deferred tax assets liabilities future periods including net operating loss tax credit carry forwards assessing need valuation allowance consider recent operating results availability taxable income carryback years future reversals taxable temporary differences future taxable income projections exclusive reversing temporary differences prudent feasible tax planning strategies tax matters “critical accounting estimates” changes assumptions used develop estimates could materially affect key financial measures including net income sharebased compensation determining appropriate fair value model calculating fair value employee stock awards requires estimates judgments sharebased compensation “critical accounting estimate” changes assumptions used develop estimates fair value requisite service period could materially affect key financial measures including gross profit operating income ebitda net income use blackscholes valuation model calculate fair value servicebased stock options value recognized expense service period net actual forfeitures expected term options granted estimated based number factors including vesting expiration terms award historical employee exercise behavior options currently outstanding options exercised expired historical volatility common stock employee’s average length service riskfree interest rate determined based upon constant us treasury security rate contractual life approximates expected term option award estimate expected volatility based historical volatility stock use monte carlo valuation methodology calculate fair value marketbased stock options stock units value recognized expense requisite service period adjusted forfeitures occur monte carlo methodology use estimate fair value marketbased options incorporates possibility market condition may satisfied fair value performancebased restricted stock awards stock units calculated based upon closing stock price date grant value recognized expense derived requisite service period beginning period deemed probable vest vesting probability assessed based upon forecasted earnings financial results requires significant judgment nongaap financial measures believe providing nongaap financial measures exclude certain items provides investors greater transparency information used senior management financial operational decisionmaking believe important provide investors nongaap metrics senior management uses supplement information regarding performance underlying trends business operations order facilitate comparisons historical operating results internally evaluate effectiveness operating strategies disclosure nongaap financial measures also facilitates comparisons underlying operating performance companies industry also supplement gaap results nongaap financial measures nongaap financial measures used annual report may limitations analytical tools considered isolation replacement gaap financial measures limitations associated use nongaap financial measures exclude items reflect economic cost material effect cash flows similarly certain noncash expenses equity compensation expense directly impact cash flows part total compensation costs accounted gaap constant currency constant currency nongaap measure calculated using foreign currency rates comparable prioryear period present net sales comparable rates constant currency presented numerous gaap measures commonly used management analyze net sales without impact changes foreign currency rates ebitda defined earnings interest income expense net income taxes depreciation amortization ebitda primary metric used chief operating decision maker managing business free cash flow free cash flow nongaap financial measure calculated subtracting capital expenditures net cash operating activities free cash flow important indicator much cash generated used normal business operations including capital expenditures management uses free cash flow measure progress capital efficiency cash flow initiatives item 7aitem 7 management’s discussion analysis financial condition results operations following discussion analysis addresses results operations based upon consolidated financial statements included herein prepared accordance us gaap discussion read conjunction “forwardlooking statements” consolidated financial statements notes thereto appearing elsewhere form 10k discussion analysis also addresses liquidity financial condition matters general diversified orthopedic products company offering broad line surgical nonsurgical products spine orthopedics sports medicine products market sectors products designed address lifelong boneandjoint health needs patients ages helping achieve active mobile lifestyle design develop manufacture market distribute medical equipment used principally musculoskeletal medical specialists orthopedic applications main products invasive minimally invasive spinal implant products related human cellular tissue based products “hctp products” noninvasive bone growth stimulation products used enhance success rate spinal fusions treat nonunion fractures external internal fixation devices used fracture treatment limb lengthening bone reconstruction bracing products used ligament injury prevention pain management protection surgical repair promote faster healing products also include cold therapy bone cement devices removal bone cement used fix artificial implants 2010 results financial condition include following items significance • increase revenue driven introduction number key new products launched 2009 including trinity® evolution™ allograft firebird™ pedicle screw system pillar™ sa interbody device ascent® le posterior cervical spine system • increase gross profit margin driven full year sales key new products indicated primarily trinity® evolution™ record 70 sales price trinity® evolution™ allograft versus recording 100 sales price previous trinity® product recognize 100 gross profit margin marketing fees earned sales allograft compared approximately 50 gross profit margin previous trinity® product due fact required purchase inventory trinity® evolution™ whereas previously required purchase inventory previous trinity® product record associated cost sales previous trinity® product sold end second quarter 2009 • decrease operating expenses percentage net sales continue leverage operating infrastructure increase net sales noted 2008 initiated reorganization consolidation plan reduce operating expenses eliminating redundancies increasing operating efficiency plan included consolidation springfield wayne nj locations operations dallas tx area discussion reorganization consolidation plan please refer explanation provided liquidity capital resources section management discussion analysis administrative training facilities us italy manufacturing facilities us united kingdom italy mexico directly distribute products us united kingdom italy germany switzerland austria france belgium brazil puerto rico several markets also distribute products independent distributors consolidated financial statements include financial results company whollyowned majorityowned subsidiaries entities control intercompany accounts transactions eliminated consolidation reporting currency us dollar balance sheet accounts except shareholders’ equity translated yearend exchange rates revenue expense items translated weighted average rates exchange prevailing year gains losses resulting foreign currency transactions included income expense gains losses resulting translation foreign currency financial statements recorded accumulated comprehensive income component shareholders’ equity financial condition results operations cash flows significantly impacted seasonality trends however sales associated products elective procedures appear influenced somewhat lower level procedures performed late summer certain breg® bracing products experience greater demand fall winter corresponding high school college football schedules winter sports addition believe operations significantly affected inflation however ordinary course business exposed impact changes interest rates foreign currency fluctuations objective limit impact movements earnings cash flows order achieve objective seek balance nondollar denominated income expenditures year used derivative instruments hedge foreign currency fluctuation exposures see item 7aitem 7 management’s discussion analysis financial condition results operations following discussion analysis addresses results operations based upon consolidated financial statements included herein prepared accordance us gaap discussion read conjunction “forwardlooking statements” consolidated financial statements notes thereto appearing elsewhere form 10k discussion analysis also addresses liquidity financial condition matters general diversified global medical device company focused improving patients’ lives providing superior reconstructive regenerative orthopedic spine solutions physicians worldwide headquartered lewisville tx company four strategic business units include biostim biologics extremity fixation spine fixation orthofix products widely distributed via company’s sales representatives distributors subsidiaries addition orthofix collaborating research development activities leading clinical organizations musculoskeletal transplant foundation texas scottish rite hospital children administrative training facilities us italy brazil united kingdom france germany puerto rico manufacturing facilities us italy directly distribute products us italy united kingdom germany switzerland austria france brazil australia puerto rico several markets also distribute products independent distributors consolidated financial statements include financial results company wholly owned majorityowned subsidiaries entities control intercompany accounts transactions eliminated consolidation reporting currency us dollar balance sheet accounts except shareholders’ equity translated yearend exchange rates revenue expense items translated weighted average rates exchange prevailing year gains losses resulting foreign currency transactions including generated intercompany operations included income expense gains losses resulting translation foreign currency financial statements recorded accumulated comprehensive income component shareholders’ equity financial condition results operations cash flows significantly impacted seasonality trends however sales associated products elective procedures appear influenced somewhat lower level procedures performed late summer addition believe operations significantly affected inflation however ordinary course business exposed impact changes interest rates foreign currency fluctuations objective limit impact movements earnings cash flows order achieve objective seek balance nondollar denominated income expenditures year used derivative instruments hedge foreign currency fluctuation exposures see item 7aitem 7 management’s discussion analysis financial condition results operations following discussion analysis addresses results operations based upon consolidated financial statements included herein prepared accordance united states generally accepted accounting principles “us gaap” discussion read conjunction “forwardlooking statements” consolidated financial statements notes thereto appearing elsewhere form 10k discussion analysis also addresses liquidity financial condition matters general diversified global medical device company focused improving patients’ lives providing superior reconstructive regenerative orthopedic spine solutions physicians worldwide headquartered lewisville tx company four strategic business units “sbus” include biostim biologics extremity fixation spine fixation orthofix products widely distributed via company’s sales representatives distributors subsidiaries addition orthofix collaborating research development activities leading clinical organizations musculoskeletal transplant foundation “mtf” texas scottish rite hospital children administrative training facilities us italy brazil uk france germany puerto rico manufacturing facilities us italy directly distribute products us italy uk germany austria france brazil puerto rico several markets also distribute products independent distributors reporting currency us dollar balance sheet accounts except shareholders’ equity translated yearend exchange rates revenue expense items translated weighted average exchange rates prevailing year gains losses resulting foreign currency transactions including generated intercompany operations included income expense gains losses resulting translation foreign currency financial statements recorded accumulated comprehensive income component shareholders’ equity financial condition results operations cash flows impacted seasonality trends revenue associated elective procedures tends higher later year lower beginning year addition believe operations significantly affected inflation however ordinary course business exposed impact changes interest rates foreign currency fluctuations objective limit impact movements earnings cash flows order achieve objective seek balance nondollar denominated income expenditures year used crosscurrency swap hedge foreign currency fluctuation exposures exposure changes interest rates minimal currently outstanding balance credit agreement see item 7aitem 7 management’s discussion analysis financial condition results operations following discussion analysis financial condition result operations read conjunction “forwardlooking statements” consolidated financial statements notes thereto appearing elsewhere form 10k executive summary diversified global medical device company focused improving patients’ lives providing superior reconstructive regenerative orthopedic spine solutions physicians worldwide headquartered lewisville texas four strategic business units “sbus” also reporting segments biostim biologics extremity fixation spine fixation products distributed sales representatives distributors 70 countries corporate objectives include leveraging significantly expanded distribution footprint sbus new product pipelines extremity fixation spine fixation businesses accelerate growth sbus additionally intend increase utilization biostim products estimate currently prescribed one third patients label benefit use believe north american spine society’s “nass” positive coverage recommendation along recently launched next generation spinal stimulation cervical stimulation devices help patients gain access proven therapy notable highlights accomplishments 2016 include following • net sales 4098 million increase 34 reported basis 40 constant currency basis specifically grew biostim largest profitable sbu extremity fixation market growth rates • net margin nongaap financial measure calculated subtracting sales marketing expense gross profit 1406 million increase 66 prior year net income continuing operations 35 million increase 58 million prior year • received us fda european union ce mark approval next generation spinal cervical stimulation devices • completed 75 million share repurchase program • completed project bluecore positions us explore execute strategic opportunities • initiated planned restructuring primarily affects extremity fixation sbu streamline costs improve operational performance wind noncore business • exiting era heavy investment rebuilt infrastructure robust compliance program strong financial controls results operations following table presents certain items consolidated statements operations percent net sales net sales strategic business unit following table presents net sales includes product sales marketing service fees sbu biostim manufactures distributes provides support services market leading devices enhance bone fusion biostim uses distributors sales representatives sell devices hospitals doctors healthcare providers patients 2016 compared 2015 net sales increased 116 million 70 • increased order counts expanding customer base number unique physicians prescribed products increased 2016 approximately 5 • order cash process improvements implemented within past 18 months increased overall percentage collect orders resulting increase collections thirdparty payors approximately 9 compared prior year 2015 compared 2014 net sales increased 103 million 66 due additional market penetration direct distributor sales channels 2015 biologics provides portfolio regenerative products tissue forms allow physicians successfully treat variety spinal orthopedic conditions biologics markets tissues primarily us network distributors independent sales representatives supply hospitals doctors healthcare providers 2016 compared 2015 net sales decreased 19 million 32 • growing number competitors stem cell allograft market associated 24 reduction average selling price products • exclusion large national hospital group purchasing organization second quarter 2016 • partially offset increase total number independent distributors 2016 2015 compared 2014 net sales increased 40 million 71 • increase total number independent distributors 2015 • increased sales existing distributors 2015 • partially offset anticipated competitive pricing pressures resulting 36 reduction average selling price extremity fixation extremity fixation offers products solutions allow physicians successfully treat variety orthopedic conditions unrelated spine extremity fixation distributes products globally network distributors sales representatives sell orthopedic products hospitals doctors health providers 2016 compared 2015 net sales increased 66 million 69 • includes negative impact foreign currency translation 26 million 2016 constant currency basis net sales increased 92 million 96 • increase cash collections approximately 18 2016 distributors whose revenue recognized upon cash receipt • growth us due onboarding new distributors continued adoption tlhex product line grew approximately 50 us compared prior year 2015 compared 2014 net sales decreased 136 million 124 • includes negative impact foreign currency translation 147 million 2015 constant currency basis net sales increased 11 million 10 due increased demand products • partially offset impact macroeconomic challenges certain markets spine fixation spine fixation specializes design development marketing broad portfolio implant products used surgical procedures spine fixation distributes products globally network distributors sales representatives sell spine products hospitals doctors healthcare providers 2016 compared 2015 net sales decreased 30 million 40 • exclusion large national hospital group purchasing organization second quarter 2016 • loss several key surgeon customers early 2016 • decrease cash collections approximately 6 2016 distributors whose revenue recognized upon cash receipt • partially offset revenue additional distributors added 2016 2015 compared 2014 net sales decreased 64 million 78 • shortterm negative impact reorganization us sales force late 2014 • decrease cash collections 2015 distributors whose revenue recognized upon cash receipt • partially offset revenue additional distributors added 2015 part sales force rebuilding expansion initiatives net margin 2016 compared 2015 net margin increased 88 million • gross profit increased 120 million increase sales biostim extremity fixation partially offset decrease sales biologics spine fixation improved operating efficiencies absorption fixed costs increase inventory reserves 17 million certain slower moving product lines obsolete inventory portion result planned restructuring brazil • sales marketing expense increased 32 million increase compensation benefits costs including commissions result increase net sales partially offset reduction certain indirect tax liabilities 31 million 2016 also partially offset decrease bad debt expense 23 million related puerto rico 2015 compared 2014 net margin decreased 49 million • gross profit increased 66 million increase sales mix biostim biologics sbus higher margins relative sbus improved inventory management operating efficiencies • sales marketing expense increased 115 million increase sales fieldbased training personnel part rebuilding expansion sales organization sales commission quota overachievement certain territories resulting increased compensation costs including commissions approximately 68 million increase bad debt expense 24 million 20 million related puerto rico following table presents net margin reporting segment reasons changes net margin sbu generally consistent information provided gross profit sales marketing expense general administrative expense 2016 compared 2015 general administrative expense decreased 128 million • decreases professional fees 79 million largely associated completion 2016 internal control remediation efforts project bluecore companywide infrastructure initiative improve reliability efficiency systems processes reporting • reduced legal costs 69 million largely due legal settlements incurred prior year commercial legal settlement 2016 whereby received 30 million • moratorium medical device tax 2016 decreased expense 13 million • reduction controllable expenses • overall decrease partially offset increased sharebased compensation expense 81 million including 57 million associated determination 2016 achieving performance criteria related certain performancebased vesting restricted stock awards probable 2015 compared 2014 general administrative expense increased 81 million • legal settlements totaling 53 million 2015 • increased spending 16 million associated strengthening infrastructure part project bluecore • increased sharebased compensation expense 15 million • increased professional fees personnel costs part internal controls remediation efforts • overall decrease partially offset impact changes foreign exchange rates research development expense 2016 compared 2015 research development expense increased 24 million • increased costs associated clinical trials 15 million primarily due invested resources identify potential new clinical indications pemf technology develop next generation bone growth stimulators recently approved fda european commission • 13 million investment made first quarter 2016 expand processing storage capabilities mtf supplier trinity evolution trinity elite tissue forms 2015 compared 2014 research development expense increased 14 million due primarily increased consulting fees clinical trial costs invested resources identify potential new clinical indications pemf technology new product developments spine fixation extremity fixation restatements related costs 2016 compared 2015 restatements related costs decreased 71 million • decreased legal fees incurred part two prior financial restatements completed march 2015 related sec investigation expected continue declining future periods • costs incurred 2015 related second two restatements legal costs resulting sec investigation class action complaint 2015 compared 2014 restatements related costs decreased 65 million due decreased consulting fees relating two prior financial restatements resulting sec investigation securities class action complaint charges related us government resolutions recorded 144 million 2016 settlements division enforcement sec related sec’s investigation 1 prior accounting review restatements financial statements 2 allegations improper payments brazil additional information see note 12 consolidated financial statements nonoperating income expense nonoperating income expense largely consists interest income expense transaction gains losses changes foreign currency exchange rates otherthantemporary impairments eneura debt security interest income primarily eneura debt security foreign exchange gains losses result several foreign subsidiaries holding trade payables receivables currencies notably us dollar functional currency 2016 recorded otherthantemporary impairment eneura debt security 27 million additional discussion see note 10 consolidated financial statements item 8 report income taxes 2016 effective tax rate decrease effective tax rate year primarily result increase income taxes primary factors affecting effective tax rate 2016 follows • expenses categorized “charges related us government resolutions” represent settlement payments substantially tax benefit • change estimate relating deductible amount certain compensation expenses • increases unrecognized tax benefits • expiration certain foreign net operating loss carryforwards current period losses jurisdictions currently receive tax benefit 2015 effective tax rate primary factors affecting effective tax rate 2015 follows • expiration certain foreign net operating loss carryforwards current period losses jurisdictions currently receive tax benefit • mix earnings among tax jurisdictions • recording valuation allowance net deferred tax assets puerto rico liquidity capital resources cash equivalents december 31 2016 396 million compared 637 million december 31 2015 following table presents free cash flow nongaap financial measure calculated subtracting capital expenditures net cash operating activities operating activities cash flows operating activities increased 11 million • increase net income 59 million • net increase 218 million noncash gains losses primarily related increases deferred income taxes sharebased compensation expense • overall increase partially offset decrease 266 million relating funding us government resolutions discussed changes working capital accounts primarily attributable changes inventories prepaid expenses current assets trade accounts payable current liabilities two primary working capital accounts trade accounts receivable inventory day’s sales receivables 52 days december 31 2016 compared 55 days december 31 2015 inventory turns 14 times december 31 2016 compared 15 times december 31 2015 us government resolutions december 2016 submitted offers settlement sec relating 1 prior accounting review restatements financial statements 2 allegations improper payments brazil placed 144 million escrow subsequent distribution sec relating matters january 2017 sec approved offers settlement amounts released sec additional information see note 12 notes consolidated financial statements investing activities cash flows investing activities increased 164 million • purchase eneura debt security 153 million 2015 • decrease capital expenditures 96 million largely result completing project bluecore 2017 expect capital expenditures range 13 million 16 million • overall increase partially offset proceeds 48 million sale assets 2015 • overall increase also partially offset purchase certain inventory intellectual property assets 26 million 2016 increase investment bone biologics inc 10 million 2016 infrastructure initiative 2014 initiated “project bluecore” multiyear companywide process systems improvement initiative improve reliability efficiency systems processes reporting well drive overhead expenses project bluecore numerous work streams primarily focused around reimplementing oracle erp system worldwide improving financial controls reporting streamlining order cash processes collections optimizing supply chain cost reductions field inventory visibility among upgrades project completed 2016 following reimplementation oracle erp platform us italy life project spent approximately 275 million amount approximately 186 million capitalized financing activities cash flows financing activities decreased 708 million • repurchases common stock share repurchase plan authorized board directors 2016 repurchased approximately 15 million shares 634 million compared repurchase 03 million shares 116 million 2015 • removal restricted cash requirement associated credit facility 2015 resulted decrease cash flows financing activities 344 million compared 2015 • overall decrease partially offset increase net proceeds 136 million issuance common shares payments 18 million debt issuance costs 2015 associated credit facility credit facilities august 31 2015 entered five year 125 million secured revolving credit facility december 31 2016 made borrowings credit facility additional information regarding credit facility see note 8 notes consolidated financial statements contained herein borrowings unused available line credit €58 million 61 million 63 million december 31 2016 2015 respectively italian line credit unsecured line credit provides us option borrow amounts italy rates determined time borrowing share repurchase plan august 2015 board directors authorized share repurchase plan authorizing purchase 75 million common stock september 2017 completed share repurchase plan fourth quarter 2016 life plan repurchased 1838672 shares common stock 750 million average purchase price 4079 unremitted foreign earnings 2016 changed intention related unremitted earnings puerto rico subsidiary certain united kingdom subsidiaries result change intention recorded 13 million income tax expense remitted unremitted earnings subsidiaries current intention indefinitely reinvest substantially unremitted foreign earnings residing outside curaçao entity incorporated curaçao “foreign earnings” refer us nonus earnings furthermore income sourced us subject us income tax unremitted foreign earnings increased 1846 million december 31 2015 1989 million december 31 2016 determining additional income tax may payable earnings repatriated practicable contractual obligations following table sets forth contractual obligations december 31 2016 1 inventory purchase commitments thirdparty manufacturers due uncertainty future purchasing requirements obligations agreements included preceding table amount committed december 31 2016 due 2017 2 may required make payments related uncertain tax positions however unable reliably estimate timing cash settlement respective taxing authorities accordingly unrecognized tax benefits including interest penalties 214 million december 31 2016 excluded contractual obligations table information see note 18 notes consolidated financial statements contained herein offbalance sheet arrangements december 31 2016 offbalance sheet arrangements reasonably likely current future effect financial condition changes financial condition revenues expenses results operations cash flows liquidity capital expenditures capital resources material investors critical accounting estimates discussion operating results based upon consolidated financial statements accompanying notes preparation statements requires us make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amount revenues expenses reporting period ongoing basis evaluate estimates based historical experience various assumptions management believe reasonable circumstances point time actual results may differ significantly times estimates believe estimates described critical preparing consolidated financial statements reviewed critical accounting estimates audit committee board directors revenue recognition process recognizing revenue involves significant assumptions judgments certain revenue streams revenue recognition policies “critical accounting estimates” changes assumptions used develop estimates could materially affect key financial measures including net sales gross margin net margin operating income net income revenue derived thirdparty payors including commercial insurance carriers health maintenance organizations preferred provider organizations governmental payors medicare connection sale stimulation products recognize revenue stimulation product placed accepted patient perfunctory documents required thirdparty payor obtained amounts paid thirdparty payors generally based fixed allowable reimbursement rates revenues recorded expected preauthorized reimbursement rates net contractual allowances adjustments certain billings subject review thirdparty payors may subject adjustment revenue derived distributor agreements recognize revenue product delivered end customer “sellthrough method” reliable information distributors sell product end customers use cash collection distributors basis revenue recognition sellthrough method sell distributors consider whether match related cost sales expense revenue recognize expense upon shipment making assessment consider financial viability distributors based creditworthiness determine collectability amounts sufficient realize costs products shipped reasonably assured time shipment distributors instances distributor determined financially viable defer costs sales revenue recognized allowance doubtful accounts contractual allowances process estimating ultimate collection accounts receivable involves significant assumptions judgments historical collections writeoffs payor reimbursement experience integral parts estimation process related reserves doubtful accounts establishment contractual allowances accounts receivable analyzed quarterly basis assess adequacy reserves doubtful accounts contractual allowances revisions allowances doubtful accounts estimates recorded adjustment bad debt expense within sales marketing expenses revisions contractual allowances recorded adjustment net sales estimates periodically tested actual collection experience believe allowance doubtful accounts sufficient cover customer credit risks however 10 change allowance doubtful accounts december 31 2016 would result increase decrease sales marketing expense 08 million additionally believe estimate establish contractual allowances sufficient cover customer credit risks however 10 change reserve contractual allowances december 31 2016 would result increase decrease net sales 07 million allowance doubtful accounts estimation contractual allowances “critical accounting estimates” changes assumptions used develop estimates could materially affect key financial measures including net sales gross margin net margin operating income net income trade accounts receivable inventory allowances reserves excess slow moving obsolete inventory calculated difference cost inventory market based assumptions judgments new product launch periods overall product life cycles forecasted demand market conditions event decrease demand products higher incidence inventory obsolescence could required increase inventory reserves would increase cost sales decrease gross profit inventory allowance “critical accounting estimate” changes assumptions used develop estimate could materially affect key financial measures including gross profit net margin operating income net income inventory regularly evaluate exposure inventory writedowns conditions assumptions used determining market value change additional inventory adjustments future may necessary goodwill test goodwill least annually impairment annual tests indicators potential impairment exist indicators include among others declines sales earnings cash flows development material adverse change business climate assessing goodwill impairment involves high degree judgment due estimates assumptions used believe estimates assumptions involved impairment assessment critical significant changes estimates assumptions could materially affect key financial measures including net income 2016 voluntarily changed annual goodwill testing date end fourth quarter december 31 beginning fourth quarter october 1 believe change method applying accounting principle preferable closely aligns annual impairment testing date current information budgeting strategic planning process provides management additional time complete annual assessment advance yearend reporting change delay accelerate avoid impairment charge change applied retrospectively impracticable retrospective application would require application significant estimates assumptions use hindsight accordingly change applied prospectively fourth quarter 2016 performed quantitative impairment analysis result impairment charge 2015 2014 performed qualitative assessments annual goodwill impairment analysis result impairment charge qualitative analysis considered relevant factors specific reporting units including macroeconomic conditions industry market considerations overall financial performance relevant entityspecific events fair value measurements fair value defined price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date fair value eneura debt security based upon significant unobservable inputs including use discounted cash flows model requiring us develop assumptions one significant unobservable inputs used fair value measurement eneura debt securities discount rate holding inputs constant increase discount rate 5 would result decrease fair value debt security 19 million whereas decrease discount rate 5 would result increase fair value debt security 19 million required determine whether decline fair value cost basis eneura debt security temporary making determination consider intentions hold sell security whether likely required sell security recovery amortized cost basis best estimate amount ultimately expect collect security estimated amount expect collect based upon significant unobservable inputs requiring us develop assumptions including probability holding security maturity converting security equity fair value measurements “critical accounting estimate” changes assumptions used develop estimate could materially affect key financial measures litigation contingent liabilities time parties targets lawsuits investigations proceedings including product liability personal injury patent intellectual property health safety employment healthcare regulatory matters handled defended ordinary course business lawsuits investigations proceedings could involve substantial number claims could also adverse impact reputation customer base although maintain various liability insurance programs liabilities could result lawsuits investigations proceedings selfinsured significant portion liabilities accrue claims probable liability incurred amount reasonably estimated assessments whether loss probable reasonable possibility whether loss range loss reasonably estimable often involve series complex judgments future events among factors consider assessment nature existing legal proceedings investigations claims asserted possible damages loss contingency reasonably estimable progress matter existing law precedent opinions views legal counsel advisers involvement us government agencies proceedings experience similar matters experience companies facts available us time assessment intend respond responded proceeding investigation claim assessment factors may change time individual proceedings investigations claims progress matters currently able reasonably estimate range reasonably possible loss factors contributed determination include following damages sought indeterminate investigation manifested filed civil criminal complaint ii matters early stages iii matters involve novel unsettled legal theories large uncertain number actual potential cases parties andor iv discussions government parties matters may expected ultimately resolved negotiation settlement reached point believe reasonable estimate loss range loss made instances believe considerable uncertainty regarding timing ultimate resolution matters including possible eventual loss fine penalty business impact changes facts circumstances associated claim could material impact results operations cash flows period reserve estimates revised believe insurance coverage reserves sufficient cover currently estimated exposures cannot give assurance incur liabilities excess recorded reserves present insurance coverage litigation contingent liabilities “critical accounting estimates” changes assumptions used develop estimates could materially affect key financial measures including operating income net income tax matters subsidiaries taxed rates applicable within respective jurisdictions income tax expense effective tax rate deferred tax assets deferred tax liabilities vary according jurisdiction profits arise certain subsidiaries sell products directly subsidiaries provide administrative marketing support services subsidiaries intercompany sales support services involve subsidiaries operating jurisdictions differing tax rates tax authorities jurisdictions may challenge treatments residency criteria transfer pricing provisions aspects respective tax laws could affect composite tax rate provisions sometimes engage transactions tax consequences may subject uncertainty account uncertain tax positions accordance applicable accounting guidance requires significant judgment assessing estimated tax consequences transaction evaluate tax position taken expected taken tax return determining weight available evidence indicates likely evaluation technical merits tax position sustained audit including resolution related appeals litigation processes measure tax benefit largest amount 50 likely realized upon ultimate settlement reevaluate income tax positions periodically consider factors changes facts circumstances changes interpretations tax law effectively settled issues audit new audit activity change recognition measurement would result recognition tax benefit additional charge tax provision establish valuation allowance measuring deferred tax assets likely certain deferred tax assets realized foreseeable future process requires significant judgment must project current tax liability estimate deferred tax assets liabilities future periods including net operating loss tax credit carry forwards assessing need valuation allowance consider recent operating results availability taxable income carryback years future reversals taxable temporary differences future taxable income projections exclusive reversing temporary differences prudent feasible tax planning strategies tax matters “critical accounting estimates” changes assumptions used develop estimates could materially affect key financial measures including net income sharebased compensation determining appropriate fair value model calculating fair value employee stock awards requires estimates judgments sharebased compensation “critical accounting estimate” changes assumptions used develop estimates fair value requisite service period could materially affect key financial measures including gross profit net margin operating income net income use blackscholes valuation model calculate fair value servicebased stock options value recognized expense service period net forfeitures expected term options granted estimated based number factors including vesting expiration terms award historical employee exercise behavior options currently outstanding options exercised expired historical volatility common stock employee’s average length service riskfree interest rate determined based upon constant us treasury security rate contractual life approximates expected term option award estimate expected volatility based historical volatility stock use monte carlo valuation methodology calculate fair value marketbased stock options performance stock units value recognized expense requisite service period adjusted forfeitures occur monte carlo methodology use estimate fair value marketbased options incorporates possibility market condition may satisfied fair value performancebased restricted stock awards stock units calculated based upon closing stock price date grant value recognized expense derived requisite service period beginning period deemed probable vest vesting probability assessed based upon forecasted earnings financial results requires significant judgment nongaap financial measures believe providing nongaap financial measures exclude certain items provides investors greater transparency information used senior management financial operational decisionmaking believe important provide investors nongaap metrics uses supplement information regarding performance underlying trends business operations order facilitate comparisons historical operating results internally evaluate effectiveness operating strategies disclosure nongaap financial measures also facilitates comparisons underlying operating performance companies industry also supplement gaap results nongaap financial measures nongaap financial measures used filing may limitations analytical tools considered isolation replacement gaap financial measures limitations associated use nongaap financial measures exclude items reflect economic cost material effect cash flows similarly certain noncash expenses equity compensation expense directly impact cash flows part total compensation costs accounted gaap constant currency constant currency nongaap measure calculated using foreign currency rates comparable prioryear period present net sales comparable rates constant currency presented numerous gaap measures commonly used management analyze net sales without impact changes foreign currency rates net margin net margin nongaap financial measure calculated subtracting sales marketing expense gross profit net margin primary metric used chief operating decision maker managing business free cash flow free cash flow nongaap financial measure calculated subtracting capital expenditures net cash operating activities free cash flow important indicator much cash generated used normal business operations including capital expenditures management uses free cash flow measure progress capital efficiency cash flow initiatives item 7aitem 7 management’s discussion analysis financial condition results operations following discussion analysis financial condition result operations read conjunction “forwardlooking statements” consolidated financial statements notes thereto appearing elsewhere annual report discussion analysis focused 2020 2019 financial results including comparisons yearoveryear performance years discussion analysis 2018 fiscal year specifically well yearoveryear comparison 2019 financial performance 2018 located part ii item 7 management’s discussion analysis financial condition results operations annual report form 10k fiscal year ended december 31 2019 filed sec february 24 2020 available website wwworthofixcom sec’s website wwwsecgov executive summary global medical device biologics company spine extremities focus headquartered lewisville texas two reporting segments global spine global extremities spine orthopedic extremities products distributed 70 countries via sales representatives distributors notable financial results 2020 include following • net sales 4066 million decrease 116 reported basis 118 constant currency basis • us spinal implants net sales 778 million increase 49 million 67 reported basis • us motion preservation net sales 184 million increase 143 million 3443 reported basis • net cash operating activities 743 million increase 422 million 1319 covid19 update outlook global coronavirus disease 2019 “covid19” pandemic significantly affected patients communities employees business operations pandemic led cancellation deferral elective surgeries procedures within certain hospitals ambulatory surgery centers medical facilities restrictions travel implementation physical distancing measures temporary permanent closure businesses addition broad economic factors resulting pandemic including increased unemployment rates reduced consumer spending affecting patients partners circumstances negatively affected sales products particularly period march 2020 may 2020 elective surgery restrictions pronounced though effects remain ongoing certain geographical areas however remain focused protecting health wellbeing employees partners patients communities operate assuring continuity business operations time future trajectory covid19 pandemic remains uncertain us markets although anticipate vaccines widely distributed future timing efficacy vaccines uncertain given various uncertainties unclear extent lingering slowdowns elective procedures affect business 2021 beyond expect effects covid19 business depend various factors including magnitude length additional case waves ii distribution efficacy public acceptance covid19 vaccines iii comfort level patients returning clinics hospitals iv extent localized elective surgery shutdowns occur v unemployment rate’s effect potential patients lacking medical insurance coverage vi general hospital capacity constraints occurring need treat covid19 patients addition seen effects date risk remains covid19 could material negative effects contractual counterparties leading supply chain disruptions counterparty payment defaults bankruptcies including bankruptcies hospital systems significantly rely revenue elective surgeries results operations following table presents certain items consolidated statements operations percent net sales net sales reporting segment following table provides net sales major product category reporting segment global spine global spine offers following products categories bone growth therapies manufactures distributes sells provides support services market leading devices enhance bone fusion bone growth therapies uses distributors sales representatives sell devices provide associated services hospitals healthcare providers patients spinal implants designs develops markets broad portfolio motion preservation fixation implant products used surgical procedures spine spinal implants distributes products globally network distributors sales representatives sell spine products hospitals healthcare providers biologics provides portfolio regenerative products tissue forms allow physicians successfully treat variety spinal orthopedic conditions biologics markets tissues hospitals healthcare providers primarily us network employed independent sales representatives 2020 compared 2019 net sales decreased 355 million 99 • bone growth therapies net sales decreased 258 million 131 primarily driven disruption caused covid19 led lower order volumes • spinal implants net sales increased 03 million 03 spite disruption caused covid19 motion preservation net sales increased 117 million result increases case volumes active surgeons us market continues adopt m6c artificial cervical disc • biologics net sales decreased 100 million 153 primarily driven lower procedure volumes result disruption caused covid19 continued pricing pressure observed within market global extremities global extremities offers products solutions allow physicians successfully treat variety orthopedic conditions unrelated spine global extremities distributes products globally network distributors sales representatives sell orthopedic products hospitals healthcare providers 2020 compared 2019 net sales decreased 179 million 174 • decrease 187 million primarily result impact covid19 procedure volumes particularly international stocking distributors • partially offset increase 08 million due changes foreign currency exchange rates positive impact net sales 2020 gross profit 2020 compared 2019 gross profit decreased 547 million 152 • decrease primarily due decline net sales lower fixed cost absorption primarily attributable covid19 negative effect elective procedure volumes • decrease also partially due recognition noncash inventory charges products due lower procedure volumes largely result covid19 sales marketing expense 2020 compared 2019 sales marketing expense decreased 192 million • decrease largely attributable reduced commissions result decline net sales partially offset commission support provided direct sales representatives second quarter 2020 • decrease travel entertainment marketing expenses related cancellation several sales events conferences 2020 leveraging virtual trainings events response covid19 pandemic general administrative expense 2020 compared 2019 general administrative expense decreased 177 million • decrease 90 million attributable lower succession transition charges including acceleration certain sharebased compensation expense relating retirement transition termination certain executive officers targeted restructuring activities • decrease 63 million expenses associated lower strategic investments largely due diligence integration costs associated strategic initiatives • decrease 26 million attributable lower legal judgments settlements research development expense 2020 compared 2019 research development expense increased 44 million • increase 28 million related costs comply recent medical device reporting regulations • remaining increase primarily result efforts build internal team support acceleration new product innovation initiative acquisitionrelated amortization remeasurement 2020 compared 2019 acquisitionrelated amortization remeasurement decreased 347 million • decrease 364 million primarily related remeasurement potential future revenuebased milestone payments associated spinal kinetics acquisition become due upon achievement certain revenue targets primarily attributable effects uncertainty covid19 relates estimated likelihood timing potential milestone payments • partially offset increase 17 million related amortization intangible assets acquired business combinations asset acquisitions nonoperating expense nonoperating income expense largely consists interest income expense transaction gains losses changes foreign currency exchange rates changes fair value related equity holdings certain privatelyheld companies credit losses recognized certain convertible debt investments foreign exchange gains losses primarily result several foreign subsidiaries holding trade intercompany payables receivables currencies notably us dollar functional currency 2020 compared 2019 interest expense net increased 24 million • decrease 15 million attributable interest income recognized investment eneura 2019 • increase 08 million associated interest expense incurred outstanding indebtedness secured revolving credit facility income expense net increased 165 million • increase 65 million associated otherthantemporary impairment eneura debt security 2019 prior settlement • increase 53 million associated changes foreign currency exchange rates recorded noncash remeasurement gain 39 million 2020 compared loss 14 million 2019 • increase 47 million attributable funds received us department health human services part provider relief fund included within coronavirus aid relief economic security act “cares act” income taxes 2020 effective tax rate increase effective tax rate year primarily result statute expirations uncertain tax positions reduction contingent consideration offset increase income taxes increases valuation allowance nondeductible executive compensation primary factors affecting tax rate 2020 follows • statute expirations effective settlement uncertain tax positions • valuation allowance recognized certain foreign deferred tax assets • nontaxable decreases fair value contingent consideration • executive compensation deductible result tax act • state tax foreign income taxed differing rates 2019 effective tax rate decrease effective tax rate year primarily result decrease income taxes full year benefit domestication completed 2018 statute expirations effective settlement uncertain tax positions offset nondeductible executive compensation nondeductible increase contingent consideration primary factors affecting tax rate 2019 follows • nondeductible increases fair value contingent consideration • statute expirations effective settlement uncertain tax positions • executive compensation deductible result tax act • state taxes foreign income taxed differing rates segment review business managed two reporting segments global spine global extremities primary metric used managing business segment ebitda described note 16 notes consolidated financial statements contained item 8 annual report following table reconciles ebitda income loss income taxes liquidity capital resources cash equivalents restricted cash december 31 2020 968 million compared 704 million december 31 2019 following table presents free cash flow nongaap financial measure calculated subtracting capital expenditures net cash operating activities operating activities cash flows operating activities increased 422 million • increase net income loss 310 million • net decrease 378 million noncash gains losses largely related changes fair value contingent consideration sharebased compensation expense interest loss valuation investment securities • net increase 491 million relating changes working capital accounts primarily attributable changes accounts receivable 139 million prepayment received medicare medicaid services “cms” accelerated advance payment program inventories current longterm assets liabilities included expiration statute limitations related certain unrecognized tax benefits two primary working capital accounts receivable inventory day’s sales receivables 57 days december 31 2020 compared 66 days december 31 2019 calculated using fourth quarter net sales ending accounts receivable largely due strong collection efforts accounts receivable coupled slight decrease net sales quarter inventory turns remained consistent 12 times december 31 2020 2019 investing activities cash flows investing activities decreased 294 million • decrease 180 million associated cash paid 2020 acquire assets associated fitbone intramedullary lengthening system limb lengthening femur tibia bones • decrease 100 million associated investments neo medical sa form preferred stock convertible loan agreement financing activities cash flows financing activities increased 139 million • increase 137 million associated payment spinal kinetics fda milestone 2019 represented acquisitiondate fair value attributable fda milestone liability originally recognized credit facilities october 25 2019 entered second amended restated credit agreement “amended credit agreement” provides five year 300 million secured revolving credit facility amended credit agreement maturity date october 25 2024 amends restates previous 125 million secured revolving credit facility borrowings amended credit agreement may used among things working capital general corporate purposes including share repurchases permitted acquisitions permitted payments dividends distributions borrowings amended credit agreement may limited based upon ebitda levels recognized preceding 12 months april 2020 precautionary measure increase cash position preserve financial flexibility response uncertainty resulting covid19 pandemic completed borrowing 1000 million secured revolving credit facility repaid 1000 million borrowings third quarter 2020 december 31 2020 outstanding borrowings amended credit agreement additional information regarding credit facility see note 11 notes consolidated financial statements item 8 annual report addition borrowings outstanding €55 million 67 million available line credit italy december 31 2020 unsecured line credit provides us option borrow amounts italy rates determined time borrowing information regarding contingencies see note 13 notes consolidated financial statements item 8 annual report impact covid19 cares act liquidity capital resources april 2020 precautionary measures increase cash position preserve financial flexibility response uncertainty covid19 pandemic completed borrowing 1000 million secured revolving credit facility subsequently repaid full third quarter 2020 ii instituted temporary salary reductions us employees board directors effect two months second quarter 2020 iii suspended 401k match program remainder fiscal year 2020 iv initiated organizational travel restrictions temporary reduction new hiring march 27 2020 cares act signed us federal law provided emergency assistance health care individuals families businesses affected covid19 pandemic april 2020 received 139 million funds cms accelerated advance payment program increase cash flow providers services suppliers impacted covid19 pandemic october 1 2020 president united states signed “continuing appropriations act 2021 extensions act” relaxed previously existing recoupment terms providers suppliers received funds program new terms recoupment delayed one year payment issued first year medicare automatically recoup 25 medicare payments otherwise owed provider supplier 11 months end 11month period recoupment increase 50 another 6 months thus time periods rather receiving full amount payment newly submitted claims outstanding accelerated advance payment balance reduced recoupment amount full balance repaid addition april 2020 automatically received without request 47 million funds us department health human services part provider relief fund upon review qualifying criteria required retain funding primarily relate lost revenues incurrence expenses attributable covid19 determined met criteria retain funds received part cares act permitted defer employer social security payroll tax payments remainder 2020 calendar year 50 taxes deferred december 31 2021 remaining 50 deferred december 31 2022 december 31 2020 deferred 06 million associated program deferred balance subsequently repaid first quarter 2021 given various uncertainties attributable covid19 pandemic remain us markets liquidity may impacted future potential continued decreases elective surgical procedures delays payments customers facility closures reasons related covid19 pandemic date issuance consolidated financial statements extent covid19 likely materially impact liquidity future remains uncertain spinal kinetics acquisition contingent consideration part consideration spinal kinetics acquisition agreed milestone payments future 600 million cash one milestone payment 150 million became due upon fda approval spinal kinetics’ m6c artificial cervical disc “fda milestone” fda milestone achieved paid 2019 remaining milestone payments comprised revenuebased milestone payments 450 million connection future sales acquired artificial discs fair value contingent consideration arrangement december 31 2020 354 million however actual amount ultimately paid could higher lower fair value contingent consideration though greater 450 million december 31 2020 classified 149 million liability attributable revenuebased milestone within current liabilities expect pay one revenuebased milestones next twelve months remaining 205 million within longterm liabilities additional discussion matter see note 12 notes consolidated financial statements item 8 annual report fitbone asset acquisition february 3 2020 entered asset purchase agreement “purchase agreement” wittenstein se “wittenstein” privatelyheld germanbased company acquire assets associated fitbone intramedullary lengthening system limb lengthening femur tibia bones terms purchase agreement consideration acquired assets paid 180 million cash consideration entered contract manufacturing supply agreement “cmsa” wittenstein acquisition completed march 26 2020 treated business combination neo medical investment convertible loan october 1 2020 entered partnership neo medical sa privately held swissbased medtech company “neo medical” includes codevelopment agreement covering parties’ joint development single use instruments cervical spine procedures distribution agreement orthofix exclusively distribute neo medical’s thoracolumbar procedure solutions certain us customer accounts separately also purchased shares neo medical’s preferred stock consideration 50 million entered convertible loan agreement whereby loaned chf 46 million neo medical “convertible loan” value approximately 50 million date issuance loan bears interest 80 interest due semiannually convertible loan matures october 2024 provided change control neo medical occurs prior maturity convertible loan shall become immediately due upon event investments recorded within longterm assets convertible loan may convertible either party shares neo medical’s preferred stock price per share loan converts dependent upon party electing conversion ii neo medical’s price per share recent fundraising activities time conversion specified within agreement brazil september 2019 relation ongoing legal dispute former brazilian distributor approximately 05 million based upon foreign exchange rates december 31 2020 cash brazil frozen upon request satisfy judgment although appealing judgment cash reclassified restricted cash additional discussion regarding matter see note 13 notes consolidated financial statements item 8 annual report related party transaction february 2 2021 entered technology assignment royalty agreement medical device technology company partially owned controlled wife president chief executive officer jon serbousek whereby acquired intellectual property rights certain assets consideration 100 million consideration comprised 10 million paid signing 90 million contingent consideration dependent upon multiple milestones receipt 510k clearance attainment certain net sales targets addition pay royalty 2 4 net sales commencing upon commercialization acquired assets transaction approved audit finance committee audit finance committee directly supervising directing negotiation transaction employees reported directly committee connection negotiations mr serbousek excluded discussions participate negotiation evaluation transaction mr serbousek also excluded administration implementation agreements transactions contemplated thereby discussions disputes counterparty connection agreement transactions contemplated thereby administration implementation thereof oversight development commercialization activities relation acquired technology matters relating relationship us counterparty unremitted foreign earnings prior domestication entity incorporated curaçao “foreign earnings” referred us nonus earnings result domestication income sourced outside us considered unremitted foreign earnings unremitted foreign earnings increased 492 million december 31 2019 537 million december 31 2020 due currency translation result 2017 tax act current year earnings deemed repatriated investment foreign subsidiaries continues indefinite nature however may periodically repatriate portion earnings extent incur significant additional tax liability contractual obligations result operations subject certain contractual obligations material cash requirements material contractual obligations include limited contingent consideration arrangement associated spinal kinetics acquisition ii operating lease finance lease obligations iii uncertain tax positions description contingent consideration arrangements lease obligations uncertain tax positions refer notes 12 9 20 respectively notes consolidated financial statements item 8 annual report offbalance sheet arrangements december 31 2020 offbalance sheet arrangements reasonably likely current future effect financial condition changes financial condition revenues expenses results operations cash flows liquidity capital expenditures capital resources material investors addition consider backlog firm orders material critical accounting estimates discussion operating results based upon consolidated financial statements accompanying notes preparation statements requires us make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amount revenues expenses reporting period ongoing basis evaluate estimates based historical experience various assumptions management believe reasonable circumstances point time actual results may differ significantly times estimates believe estimates described critical preparing consolidated financial statements reviewed critical accounting estimates audit committee board directors revenue recognition process recognizing revenue involves significant assumptions judgments certain revenue streams revenue recognition policies “critical accounting estimates” changes assumptions used develop estimates could materially affect key financial measures including net sales gross margin operating income ebitda net income bone growth therapies revenue largely attributable us comprised thirdparty payor transactions wholesale revenue derived thirdparty payors including commercial insurance carriers health maintenance organizations preferred provider organizations governmental payors medicare connection sale stimulation products recognize revenue stimulation product fitted accepted patient applicable documents required thirdparty payor obtained amounts paid thirdparty payors generally based fixed allowable reimbursement rates revenues recorded expected preauthorized reimbursement rates net contractual allowances adjustments certain billings subject review thirdparty payors may subject adjustment wholesale revenue related sale bone growth stimulators directly physicians healthcare providers wholesale revenues recognized upon shipment receipt confirming purchase order customer obtains control promised goods biologics revenue largely attributable us primarily related collaborative arrangement mtf exclusive global marketing rights receive marketing fees mtf based products distributed mtf considered principal arrangements therefore recognize marketing service fees net basis upon shipment product customer spinal implants global extremities products distributed worldwide us sales largely comprised commercial revenue international sales derived commercial sales stocking distributor arrangements commercial revenue largely related sale spinal implants global extremities products hospital customers commercial revenues recognized products utilized confirming purchase order received hospital stocking distributors purchase products resell directly customers hospitals revenue derived stocking distributor arrangements recognized upon shipment receipt confirming purchase order distributor obtains control promised goods transaction price estimated based upon historical collection experience stocking distributor derive estimate analyze twelve months historical invoices stocking distributor subsequent collections invoices period 24 months subsequent invoice date percentage specific stocking distributor used calculate transaction price cost sales also recorded upon transfer control product customer company’s performance obligation satisfied allowance expected credit losses contractual allowances process estimating ultimate collection accounts receivable involves significant assumptions judgments determination contractual life accounts receivable aging outstanding receivables well historical collections writeoffs payor reimbursement experience estimated contractual lives receivables integral parts estimation process related reserves expected credit losses establishment contractual allowances accounts receivable analyzed quarterly basis assess adequacy reserves expected credit losses contractual allowances revisions allowances expected credit loss estimates recorded adjustment bad debt expense within sales marketing expenses revisions contractual allowances recorded adjustment net sales estimates periodically tested actual collection experience addition analyze receivables geography customer type appropriate developing estimates expected credit losses believe allowance credit losses sufficient cover customer credit risks however 10 change allowance credit losses december 31 2020 would result increase decrease sales marketing expense 05 million additionally believe estimate establish contractual allowances sufficient cover customer credit risks however 10 change reserve contractual allowances december 31 2020 would result increase decrease net sales 05 million allowance credit losses estimation contractual allowances “critical accounting estimates” changes assumptions used develop estimates could materially affect key financial measures including net sales gross margin operating income ebitda net income accounts receivable inventory allowances reserves excess slow moving obsolete inventory calculated difference cost inventory market value based assumptions judgments new product launch periods overall product life cycles forecasted demand market conditions event decrease demand products excess product production higher incidence inventory obsolescence could required increase inventory reserves would increase cost sales decrease gross profit regularly evaluate exposure inventory writedowns conditions assumptions used determining market value forecasted demand change additional inventory adjustments future may necessary inventory allowance “critical accounting estimate” changes assumptions used develop estimate could materially affect key financial measures including gross profit operating income ebitda net income inventory valuation intangible assets intangible assets comprised primarily patents acquired developed technology inprocess research development “iprd” customer relationships trade names trademarks licensing arrangements make significant judgments relation valuation intangible assets resulting business combinations asset acquisitions intangible assets acquired business combination used iprd activities considered indefinite lives completion abandonment associated project upon reaching end relevant project either amortize acquired iprd estimated useful life expense acquired iprd project unsuccessful future alternative use significant judgment required related forecasting future operating results within discounted cash flow valuation models determine valuation intangible assets key assumptions include anticipated useful lives acquired intangibles projected cash flows associated intangible asset estimated probability success acquired iprd projects projected growth rates discount rates possible significant changes plans assumptions may affect recoverability assets could potentially result impairment valuation intangible assets “critical accounting estimate” changes assumptions used develop estimates could materially affect key financial measures including operating income ebitda net income intangible assets net goodwill represents excess cost fair value net assets acquired business combinations determination value goodwill intangible assets arising business combinations requires extensive use accounting estimates judgments allocate purchase price fair value net tangible intangible assets acquired test goodwill least annually impairment annual tests indicators potential impairment exist indicators include among others significant declines sales earnings cash flows development material adverse change business climate assessing goodwill impairment involves high degree judgment due estimates assumptions used believe estimates assumptions involved impairment assessment critical significant changes estimates assumptions could materially affect key financial measures including operating income ebitda net income connection change reporting segments occurred first quarter 2019 performed quantitative assessment goodwill immediately prior subsequently following change reporting segments analysis result impairment addition net carrying value goodwill previously reported prior reporting segments bone growth therapies ii spinal implants iii biologics consolidated included within global spine reporting segment fourth quarters 2020 2019 performed qualitative assessments annual goodwill impairment analysis result impairment charge qualitative analysis considered relevant factors specific reporting units including macroeconomic conditions industry market considerations overall financial performance relevant entityspecific events part qualitative assessment included quantitative factors assess likelihood impairment concluded likely impairment hasn’t occurred fair value measurements fair value defined price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date two significant items recorded fair value include contingent consideration attributable spinal kinetics acquisition ii convertible loan agreement neo medical iii eneura debt security prior restructuring settlement 2019 contingent consideration consists potential future milestone payments 600 million cash associated spinal kinetics acquisition must achieved within five years acquisition date paid milestone payments include 150 million meeting fda milestone ii revenuebased milestone payments 450 million connection future sales m6c artificial cervical disc m6l artificial lumbar disc fda milestone achieved paid february 2019 prior attainment 2019 estimated fair value fda milestone using probabilityweighted discounted cash flow model fair value based significant inputs observable market key assumptions including estimation probability fda approval m6c artificial cervical disc timing approval discount rate applied significant changes assumptions could resulted significantly higher lower fair value prior obtaining fda approval estimate fair value remaining potential future revenuebased milestone payments using monte carlo simulation fair value measurement based significant inputs unobservable market key assumptions including forecasted future net sales motion preservation products discount rates applied assumptions potential volatility forecasted revenue significant changes assumptions could result significantly higher lower fair value holding inputs constant increase forecasted future revenues 5 would resulted increase fair value contingent consideration 19 million whereas decrease forecasted future revenues 5 would resulted decrease fair value contingent consideration 20 million estimate fair value convertible loan agreement neo medical using monte carlo simulations optionpricing models probabilityweighted discounted cash flow model fair value measurement based significant inputs unobservable market significant unobservable inputs including applicable discount rates implied volatility likelihood projected timing repayment conversion projected cash flows support estimated enterprise value neo medical significant changes assumptions could result significantly higher lower fair value holding inputs constant increase assumed cost equity discount rate 2 would resulted decrease fair value convertible loan 09 million whereas decrease cost equity discount rate 2 would resulted increase fair value convertible loan 11 million prior restructuring settlement 2019 40 million fair value eneura debt security based upon significant unobservable inputs including use discounted cash flows model requiring us develop assumptions significant unobservable inputs used fair value measurement eneura debt security estimates related timing likelihood conversion result change control event timing likelihood repayment applicable discount rate required determine whether decline fair value debt security basis otherthantemporary debt security settled prior adoption asu 201613 financial instrumentscredit losses topic 326 measurement credit losses financial instruments making determination considered intentions hold sell security whether likely would required sell security recovery amortized cost basis best estimate amount ultimately expected collect security estimated amount expected collect based upon significant unobservable inputs requiring us develop assumptions fair value measurements “critical accounting estimate” changes assumptions used develop estimate could materially affect key financial measures including operating income ebitda net income litigation contingent liabilities time parties targets lawsuits investigations proceedings including product liability personal injury patent intellectual property health safety employment healthcare regulatory matters handled defended ordinary course business lawsuits investigations proceedings could involve substantial number claims could also adverse impact reputation customer base although maintain various liability insurance programs liabilities could result lawsuits investigations proceedings selfinsured significant portion liabilities accrue claims probable liability incurred amount reasonably estimated assessments whether loss probable reasonable possibility whether loss range loss reasonably estimable often involve series complex judgments future events among factors consider assessment nature existing legal proceedings investigations claims asserted possible damages loss contingency reasonably estimable progress matter existing law precedent opinions views legal counsel advisers involvement us government agencies proceedings experience similar matters experience companies facts available us time assessment intend respond responded proceeding investigation claim assessment factors may change time individual proceedings investigations claims progress matters currently able reasonably estimate range reasonably possible loss factors contributed determination include following damages sought indeterminate investigation manifested filed civil criminal complaint ii matters early stages iii matters involve novel unsettled legal theories large uncertain number actual potential cases parties andor iv discussions government parties matters may expected ultimately resolved negotiation settlement reached point believe reasonable estimate loss range loss made instances believe considerable uncertainty regarding timing ultimate resolution matters including possible eventual loss fine penalty business impact changes facts circumstances associated claim could material impact results operations cash flows period reserve estimates recorded revised believe insurance coverage reserves sufficient cover currently estimated exposures cannot give assurance incur liabilities excess recorded reserves present insurance coverage litigation contingent liabilities “critical accounting estimates” changes assumptions used develop estimates could materially affect key financial measures including operating income ebitda net income tax matters subsidiaries taxed rates applicable within respective jurisdictions income tax expense effective tax rate deferred tax assets deferred tax liabilities vary according jurisdiction profits arise certain subsidiaries sell products directly subsidiaries provide administrative marketing support services subsidiaries intercompany sales support services involve subsidiaries operating jurisdictions differing tax rates tax authorities jurisdictions may challenge treatments residency criteria transfer pricing provisions aspects respective tax laws could affect composite tax rate provisions sometimes engage transactions tax consequences may subject uncertainty account uncertain tax positions accordance applicable accounting guidance requires significant judgment assessing estimated tax consequences transaction evaluate tax position taken expected taken tax return determining weight available evidence indicates likely evaluation technical merits tax position sustained audit including resolution related appeals litigation processes measure tax benefit largest amount 50 likely realized upon ultimate settlement reevaluate income tax positions periodically consider factors changes facts circumstances changes interpretations tax law effectively settled issues audit new audit activity change recognition measurement would result recognition tax benefit additional charge tax provision could material impact financial statements establish valuation allowance measuring deferred tax assets likely certain deferred tax assets realized foreseeable future process requires significant judgment must project current tax liability estimate deferred tax assets liabilities future periods including net operating loss tax credit carry forwards assessing need valuation allowance consider recent operating results availability taxable income carryback years future reversals taxable temporary differences future taxable income projections exclusive reversing temporary differences prudent feasible tax planning strategies tax matters “critical accounting estimates” changes assumptions used develop estimates could materially affect key financial measures including net income sharebased compensation use blackscholes valuation model calculate fair value servicebased stock options value recognized expense service period net actual forfeitures expected term options granted estimated based number factors including vesting expiration terms award historical employee exercise behavior options currently outstanding options exercised expired historical volatility common stock employee’s average length service riskfree interest rate determined based upon constant us treasury security rate contractual life approximates expected term option award estimate expected volatility based historical volatility stock use monte carlo valuation methodology calculate fair value marketbased stock options stock units value recognized expense requisite service period adjusted forfeitures occur monte carlo methodology use estimate fair value marketbased options incorporates possibility market condition may satisfied fair value performancebased restricted stock awards stock units calculated based upon closing stock price date grant value recognized expense derived requisite service period beginning period deemed probable vest vesting probability assessed based upon forecasted earnings financial results requires significant judgment determining appropriate fair value model calculating fair value employee stock awards requires estimates judgments sharebased compensation “critical accounting estimate” changes assumptions used develop estimates fair value requisite service period could materially affect key financial measures including gross profit operating income ebitda net income nongaap financial measures believe providing nongaap financial measures exclude certain items provides investors greater transparency information used senior management financial operational decisionmaking believe important provide investors nongaap metrics senior management uses supplement information regarding performance underlying trends business operations order facilitate comparisons historical operating results internally evaluate effectiveness operating strategies disclosure nongaap financial measures also facilitates comparisons underlying operating performance companies industry also supplement gaap results nongaap financial measures nongaap financial measures used annual report may limitations analytical tools considered isolation replacement gaap financial measures limitations associated use nongaap financial measures exclude items reflect economic cost material effect cash flows similarly certain noncash expenses equity compensation expense directly impact cash flows part total compensation costs accounted gaap constant currency constant currency nongaap measure calculated using foreign currency rates comparable prioryear period present net sales comparable rates constant currency presented numerous gaap measures commonly used management analyze net sales without impact changes foreign currency rates ebitda defined earnings interest income expense net income taxes depreciation amortization ebitda primary metric used chief operating decision maker managing business free cash flow free cash flow nongaap financial measure calculated subtracting capital expenditures net cash operating activities free cash flow important indicator much cash generated used normal business operations including capital expenditures management uses free cash flow measure progress capital efficiency cash flow initiatives item 7aitem 7 managements discussion analysis financial condition results operations following discussion analysis addresses results operations based upon consolidated financial statements included herein prepared accordance accounting principles generally accepted united states discussion read conjunction forwardlooking statements companys consolidated financial statements notes thereto appearing elsewhere form 10k discussion analysis also addresses liquidity financial condition matters general diversified orthopedic products company offering broad line minimally invasive surgical well nonsurgical products spine reconstruction trauma market sectors products designed address lifelong boneandjoint health needs patients ages helping achieve active mobile lifestyle design develop manufacture market distribute medical equipment used principally musculoskeletal medical specialists orthopedic applications main products external internal fixation devices used fracture treatment limb lengthening bone reconstruction noninvasive stimulation products used enhance success rate spinal fusions treat nonunion fractures bracing products used ligament injury prevention pain management protection surgical repair promote faster healing products also include device enhancing venous circulation cold therapy pain management products bone cement devices removal bone cement used fix artificial implants bone substitute compound airway management products administrative training facilities united states united kingdom italy manufacturing facilities united states united kingdom italy mexico seychelles directly distribute products united states united kingdom ireland italy germany switzerland austria france belgium mexico brazil several markets also distribute products independent distributors consolidated financial statements include financial results company wholly owned majority owned subsidiaries entities control intercompany accounts transactions eliminated consolidation equity method accounting used significant influence significant operating decisions hold control equity method original investments recorded cost adjusted share undistributed earnings losses companies material intercompany transactions profits associated equity investees eliminated consolidation reporting currency united states dollar balance sheet accounts except shareholders equity translated yearend exchange rates revenue expense items translated weighted average rates exchange prevailing year gains losses resulting foreign currency transactions included income expense gains losses resulting translation foreign currency financial statements recorded accumulated comprehensive income loss component shareholders equity financial condition results operations cash flows significantly impacted seasonality trends addition believe operations significantly affected inflation however ordinary course business exposed impact changes interest rates foreign currency fluctuations objective limit impact movements earnings cash flows order achieve objective seek balance nondollar income expenditures ordinarily use derivative instruments hedge foreign exchange exposure see item 7a item 7a quantitative qualitative disclosures market risk consolidated financial statements include financial statements company wholly owned majorityowned subsidiaries entities company control intercompany accounts transactions eliminated consolidation equity method accounting used company significant influence significant operating decisions hold control equity method original investments recorded cost adjusted companys share undistributed earnings losses companies material intercompany transactions profits associated equity investees eliminated consolidation results subsidiaries acquired disposed year included consolidated statements operations date acquisition date disposal reporting currency united states dollar balance sheet accounts except shareholders equity translated yearend exchange rates revenue expense items translated weighted average rates exchange prevailing year gains losses resulting foreign currency transactions included income expense gains losses resulting translation foreign currency financial statements recorded accumulated comprehensive income component shareholders equity ordinary course business exposed impact changes interest rates foreign currency fluctuations objective limit impact movements earnings cash flows order achieve objective seek balance nondollar income expenditures ordinarily use derivative instruments hedge foreign exchange exposure critical accounting policies discussion operating results based upon consolidated financial statements accompanying notes consolidated financial statements prepared conformity accounting principles generally accepted united states preparation statements necessarily requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amount revenues expenses reported period estimates assumptions form basis carrying values assets liabilities ongoing basis evaluate estimates including related allowance doubtful accounts sales allowances adjustments inventories investments intangible assets goodwill income taxes litigation contingencies base estimates historical experience various assumptions believe estimates carrying values assets liabilities reasonable actual results may differ estimates reviewed critical accounting policies audit committee board directors revenue recognition bone growth stimulation bracing products recognize revenue product placed accepted patient sales commercial customers including hospitals distributors revenues recognized time shipment derive significant amount revenues united states third party payors including commercial insurance carriers health maintenance organizations preferred provider organizations governmental payors medicare amounts paid thirdparty payors generally based fixed allowable reimbursement rates revenues recorded expected preauthorized reimbursement rates net contractual allowances adjustments billings subject review thirdparty payors may subject adjustment allowance doubtful accounts contractual adjustments judgment management adequate allowances provided doubtful accounts contractual adjustments estimates reviewed quarterly periodically tested actual collection experience estimates always subject adjustment could material inventory allowances write inventory shrinkage obsolescence equal difference cost inventory estimated market value based upon assumptions future demand market conditions assumptions used determining valuations change additional inventory writedown future would necessary goodwill intangible assets adopted provisions sfas 142 goodwill intangible assets effective january 1 2002 ongoing impact goodwill indefinite lived intangible assets longer amortized instead tested least annually impairment performed impairment test goodwill required sfas 142 noted impairment issues carrying value goodwill december 31 2002 tax matters subsidiaries taxed rates applicable within respective jurisdictions composite income tax rate tax provisions deferred tax assets deferred tax liabilities vary according jurisdiction profits arise certain subsidiaries sell products directly subsidiaries provide marketing support services subsidiaries intercompany sales support services involve subsidiaries operating jurisdictions differing tax rates tax authorities jurisdictions may challenge treatments residency criteria transfer pricing provisions aspects respective tax laws could affect composite tax rate provisions 2002 compared 2001 manage operations two geographic business units americas international americas unit covers united states mexico brazil international unit covers rest world plus export operations sales net sales increased 9 1776 million 2002 1624 million 2001 net sales increased 11 adjusted impacts sale device product line formation orthorx joint venture accounted 07 million 20 million sales 2001 respectively net sales americas primarily united states increased 1029 million 2002 compared 940 million 2001 increase 9 americas sales would increased 13 adjusted impacts sale device product line formation orthorx joint venture referenced americas net sales represented 58 total net sales 2002 2001 increase 2002 2001 largely due strong growth net sales orthopedic devices stimulation products well 82 sales increase mexico 93 increase brazil converted distributorships direct sales 2001 net sales international increased 9 747 million 2002 684 million 2001 primary contributors sales increase increased sales orthopedic devices conversion distribution channel distributorship direct sales france germany 2001 increased sales oscar products increased sales laryngeal mask product partially offset slower growth rate sales vascular products substantial activities outside united states subject impact changes foreign exchange rates impact foreign exchange rates sales outside united states increase net sales 15 million 2002 primarily result stronger euro uk sterling us dollar product groups experienced growth sales 2002 sales orthopedic devices grew 11 548 million 2002 492 million 2001 increase primarily due increased sales external internal fixation products increased sales oscar product sales stimulation products grew 11 798 million 2002 717 million 2001 increase principally result higher shipment volume recent approval introduction bone morphogenic proteins bmps begun show market acceptance substitute autograft bone although classified bone growth material yet clinically proven effective highrisk patients participation physicians prescribe stimulation products clinical studies bmps adverse impact stimulation sales growth second half 2002 physicians complete participation bmp clinical studies expect return 2003 historic patterns prescribing stimulation products stimulation products sold almost exclusively united states although attempting expand distribution stimulation products europe mexico sales vascular products grew 4 257 million 2002 248 million 2001 increase principally represented expanded distribution outside united states united states vascular products distributed kendall healthcare products sales kendall healthcare products increased 2 2002 result efforts reduce inventory levels lower levels purchasing approximately 85 sales vascular products classified orthopedic applications 15 classified nonorthopedic applications sales nonorthopedic products increased 3 172 million 2002 167 million 2001 increase primarily due growth sales laryngeal mask product distribute united kingdom ireland italy offset loss sales products sold orthorx following formation orthorx joint venture january 2002 accounted 20 million sales 2001 gross profit companys gross profit increased 11 1328 million 2002 1194 million 2001 primarily due increase 9 net sales increased gross profit margins gross profit percentage net sales increased 748 2002 735 2001 increase gross profit percentage net sales result higher growth rate higher margin stimulation product sales favorable impact additional direct distribution continuing improvement manufacturing efficiencies united states operations sales marketing expenses sales marketing expenses include commissions royalties bad debt provisions generally increase decrease relation sales marketing expenses increased 50 million 644 million 2002 594 million 2001 increase 8 sales increase 9 sales marketing expenses percentage net sales decreased 363 2002 366 2001 addition commissions royalties bad debt provisions generally related sales levels sales expenses increased primarily result adding field sales personnel direct sales force united states united kingdom germany france result converting direct distribution distributorships france germany mexico brazil 2001 marketing expenses increased additional workshops product marketing support additional costs partially offset discontinuance sales marketing costs associated orthorx following formation orthorx joint venture beginning 2002 international sales marketing expenses higher approximately 05 million result stronger euro uk sterling us dollar general administrative expenses general administrative expenses decreased 172 million 184 million 2001 decrease 7 12 million general administrative expenses decreased percentage net sales 97 2002 113 2001 general administrative expenses 2002 2001 included 18 million 27 million legal costs respectively principally relating legal action kinetic concepts inc legal costs associated request subpoena documents received company office inspector general united states department health human services united states department defense partially offset recovery 06 million legal reserves 2002 description legal proceedings party see item 3 legal proceedings offsetting increases general administrative expenses included higher depreciation costs capital investments primarily information technology 07 million unmatched costs associated opening direct operations france mexico 2001 04 million research development expenses research development expenses increased 75 million 2002 70 million 2001 increase 7 05 million decreased slightly percentage net sales 42 2002 43 2001 increase expenses primarily associated higher rd costs support new product development increases study grants clinical studies costs description research development activities see item 1 product development patents licenses amortization intangible assets amortization intangible assets 07 million 2002 compared 41 million 2001 amortization intangible assets 2002 consists principally amortization patents trademarks required statement accounting standards 142 ceased amortization goodwill beginning 2002 amortization goodwill amounted approximately 33 million 2001 see note 7 consolidated financial statements income expense net income expense net expense 24 million 2002 compared income 168000 2001 change due primarily formation orthorx joint venture january 2002 held 46 equity interest december 31 2002 joint venture accounted equity method accounting investments share losses joint venture 21 million 2002 included income expense remainder account balance 2002 net interest income 02 million cash balances borrowings offset foreign exchange losses 05 million primarily currency devaluations mexico brazil certain trade accounts payable billed us dollars income tax expense 2002 2001 effective rate income tax 32 26 respectively excluding effect nonrecurring item tax benefit resulting deduction italy intragroup dividend subsequent purchase remaining 30 minority interest dmo effective rate 2001 would 32 net income net income 2002 259 million 196 per basic share 176 per diluted share compared 210 million 160 per basic share 142 per diluted share 2001 increase net income 24 weighted average number basic common shares outstanding 13196524 13086467 2002 2001 respectively weighted average number diluted common shares outstanding 14685236 14737567 2002 2001 respectively 2001 compared 2000 sales net sales increased 23 1624 million 2001 1318 million 2000 net sales americas primarily united states increased 940 million 2001 compared 720 million 2000 increase 31 americas net sales represented 58 total net sales 2001 55 total net sales 2000 increase 2001 2000 due strong growth net sales stimulation products 145 million well good growth orthopedic devices including additional sales conversion mexico brazil distributorship direct sales 2001 sales orthorx international net sales increased 684 million 2001 compared 598 million 2000 increase 14 increase 2001 2000 due strong growth net sales vascular products av impulse system principally us distributor kendall healthcare products 49 million well good growth orthopedic devices including additional sales conversion france germany distributorship direct sales 2001 sales laryngeal mask united kingdom italy substantial activities outside united states subject impact changes foreign exchange rates impact foreign exchange rates sales outside united states reduce net sales 18 million 2001 primarily result stronger us dollar euro uk sterling italian lira product groups experienced growth sales 2001 companys sales orthopedic products grew 18 492 million 2001 418 million 2000 growth orthopedic products sales primarily due addition direct distribution noted combined sales new orthopedic products orthotrac sales stimulation products grew 26 717 million 2001 571 million 2000 stimulation products sold almost exclusively united states although attempting expand distribution stimulation products europe mexico growth stimulation products generated growth market acceptance product prescribers thirdparty payors growth number spinal fusion procedures performed product used adjunct therapy sales vascular products grew 25 248 million 2001 198 million 2000 product distributed united states kendall healthcare products outside united states expanded distribution product several new markets experienced growth 2001 vascular products continued growth united states expanded distribution notably germany italy japan approximately 85 revenue vascular products classified orthopedic applications 15 classified nonorthopedic sales nonorthopedic products increased 28 167 million 2001 compared 130 million 2000 increase primarily due growth sales laryngeal mask distribute united kingdom italy sales orthorx gross profit companys gross profit increased 24 1194 million 2001 960 million 2000 primarily due increased sales 23 increased gross profit margins gross profit percentage net sales increased 735 2001 728 2000 increase gross profit percentage net sales result higher growth rate higher margin stimulation product sales additional direct distribution improved manufacturing efficiencies united states sales marketing expenses sales marketing expenses include commissions royalties generally increase decrease relation sales marketing expenses increased 124 million 594 million 2001 470 million 2000 increase 26 sales increase 23 sales marketing expenses percentage sales increased 366 net sales 2001 357 2000 americas sales marketing expenses increased primarily due higher staffing costs expand support us sales force costs associated starting new business orthorx international sales marketing expenses increased primarily due costs opening direct operations germany france partially offset reduction expenses resulting appreciation us dollar euro uk sterling italian lira general administrative expenses general administrative expenses increased 184 million 2001 154 million 2000 increase 195 30 million decreased percentage net sales 113 2001 117 2000 general administrative expenses 2001 2000 included 27 million 22 million legal costs respectively principally respect legal action kinetic concepts inc legal costs associated request subpoena documents received office inspector general us department health human services united states department defense description legal proceedings party see item 3 legal proceedings increases general administrative expenses included 09 million opening direct operations germany france mexico 05 million management incentive payments approximately 10 million cost increases research development expenses research development expenses essentially flat 2001 2000 decreased percentage net sales 43 2001 52 2000 january 2002 agreed provide orthopedic research education foundation oref 20 million fund fouryear project titled optimizing bone healing using pemf cleveland clinic foundation description research development activities see item 1 business research development patents licenses amortization intangible assets amortization intangible assets 41 million 2001 compared 40 million 2000 amortization goodwill amounted approximately 35 million 2001 2000 income net income net decreased 168000 2001 399 million 2000 decrease 397 million decrease primarily due gain ebi litigation settlement 2000 approximately 380 million net expenses description ebi litigation see item 3 legal proceedings addition approximately 08 million decrease result lower interest earned cash equivalent balances lower interest rates income tax expense 2001 2000 effective rate income tax 257 259 respectively excluding effect nonrecurring items tax benefit resulting deduction italy intragroup dividend subsequent purchase remaining 30 minority interest dmo effective rate would 32 2001 compared 33 2000 net income net income 2001 210 million 142 per share compared 448 million 320 per share 2000 including 299 million nonrecurring income tax related ebi litigation 2000 excluding nonrecurring item described net income 2001 210 million 142 per share compared 149 million 107 per share 2000 increase net income 41 diluted weighted average number shares common stock outstanding 14737567 13986098 2001 2000 respectively liquidity capital resources cash equivalents 488 million december 31 2002 compared 343 million december 31 2001 increase 145 million net cash provided operating activities increased 293 million 2002 189 million 2001 increase 104 million cash operating activities 2002 provided net income plus adjustment noncash items depreciation amortization provisions totaled 426 million invested 133 million sum working capital resulting net cash provided operating activities 293 million 133 million invested working capital 116 million used accounts receivable 38 million used inventories 32 million contributed current assets increase accounts payable 12 million used reduction current liabilities net cash used investing activities 168 million 2002 compared 146 million 2001 2002 invested 85 million affiliates subsidiaries consisting 30 million funding orthorx joint venture payment 55 million earnout provisions novamedix reduce minority positions orthosonics brazil used 71 million purchase tangible intangible assets invested 10 million acquire licensing rights gotfried pccp system net cash used financing activities 03 million 2002 compared 197 million 2001 2002 net new borrowing 11 million comprised borrowings 31 million line credit italy finance local working capital partially offset debt repayments 20 million plus proceeds 205 million issuance common stock principally stock options 2002 15 million stock options exercised average per share exercise price 1394 2002 used 219 million repurchase shares common stock purchased 677000 shares common stock average per share price 3232 purchased shares current market values time transactions 2002 received authorization board directors purchase shares common stock total 50 number shares common stock issued exercise stock options authorization renewed february 2003 another year 2003 anticipate use cash tangible intangible capital expenditures approximately equivalent 71 million capital expenditures 2002 executive plan options 1945000 shares common stock became fully vested executive plan options per share exercise price 1440 december 31 2002 1267500 executive plan options exercised cancelled remaining executive plan options expire june 2004 exercised prior expiration date remaining executive plan options generate approximately 98 million proceeds us agreed provide approximately 20 million fund research development project fouryear period conducted cleveland clinic 2003 fund approximately 05 million agreed amount expect make investments 2003 fund orthorx joint venture funding amounts could much 25 million 2003 1992 filed claims kinetic concepts inc kci alleging infringement certain us patents claims 2002 united states patent trademark office issued reexamination certificates validating patents thereafter filed motion requesting court proceed expeditiously longpending infringement suit february 2003 received court scheduling order govern matter september 30 2003 expect incur significant legal fees 2003 related matter see item 3 legal proceedings december 31 2002 outstanding borrowings 70 million line credit established italy finance working capital italian operations unused available lines credit 138 million terms line credit give us option borrow amounts italy rates determined time borrowing longterm debt totalling 04 million consisted principally acquisition loan 03 million forgiveable tax loan issued connection move new facility mckinney texas 2001 see notes 8 10 consolidated financial statements december 2002 notified minority holders orthosonics intention request completion purchase remaining 15 minority shareholding orthosonics together earnout provision obligation estimated 07 million provided financial statements december 31 2002 paid 2003 february 2003 purchased equity interest innovative spinal technologies ist made cash investment 15 million new venture march 2003 acquired remaining 48 minority position uk distribution company intavent orthofix ltd iol purchased 48 shareholding intavent ltd cash purchase price 205 million see note 18 consolidated financial statements continue search viable acquisition candidates expand worldwide presence well additional products appropriate current distribution channels acquisition another company product line us could result incurrence additional debt contingent liabilities believe current cash balances together projected cash flows operating activities exercise stock options available debt capacity sufficient cover anticipated operating capital needs research development costs next two fiscal years item 7a quantitative qualitative disclosures market risk ordinary course business exposed foreign currency fluctuations impact changes interest rates fluctuations vary sales costs operations cost financing yields cash short term investments foreign currency exposure results fluctuating currency exchange rates primarily us dollar euro british pound mexican peso brazilian real face transactional currency exposures foreign subsidiaries company enter transactions generally intercompany basis denominated currencies local currency also face currency exposure translating results global operations us dollar exchange rates fluctuated beginning period historically used financial derivatives hedge fluctuations currency exchange rates based overall exposure foreign currency december 31 2002 hypothetical 10 change foreign currency rates would impact companys balance sheet approximately 45 million net sales approximately 41 million net income cash flows approximately 05 million oneyear period cash equivalent balances interest sensitive debt december 31 2002 488 million 70 million based balances 1 movement interest rates would 488000 70000 effect interest receivable interest payable per year respectively item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks part ongoing business operations primary exposures include changes interest rates foreign currency fluctuations exposures vary sales cost goods costs operations cost financing yields cash shortterm investments use derivative financial instruments appropriate manage risks however risk management policy allow us hedge positions hold enter derivative financial investments trading speculative purposes december 31 2004 interest rate hedge transaction place swapped variable rate debt fixed rate see item 7 managements discussion analysis financial condition results operation liquidity capital resources exposed interest rate risk connection senior secured term loan borrowings revolving credit facility bear interest floating rates based london interbank offered rate libor prime rate plus applicable borrowing margin therefore interest rate changes generally affect fair market value debt impact future earnings cash flows assuming factors held constant december 31 2004 768 million variable rate debt represented borrowings senior secured term loans interest rate 455 417 million swapped fixed rate debt interest rate 516 based balance outstanding credit facility december 31 2004 swap agreement immediate change one percentage point applicable interest rate variable rate debt would cause increase decrease interest expense approximately 04 million annual basis fair value interest rate swap agreement 01 million december 31 2004 foreign currency exposure results fluctuating currency exchange rates primarily us dollar euro great britain pound mexican peso brazilian real face cost goods currency exposure produce products foreign currencies euro great britain pound sell products us dollars face transactional currency exposures foreign subsidiaries company enter transactions generally intercompany basis denominated currencies functional currency also face currency exposure translating results global operations us dollar exchange rates fluctuated beginning period us dollar equivalent international sales denominated foreign currencies favorably impacted 2004 2003 foreign currency exchange rate fluctuations weakening us dollar local foreign currency 2004 2003 us dollar equivalent related costs denominated foreign currencies unfavorably impacted 2004 2003 continue distribute manufacture products selected foreign countries expect future sales costs associated activities markets continue denominated applicable foreign currencies could cause currency fluctuations materially impact operating results historically used financial derivatives hedge fluctuations currency exchange rates item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks part ongoing business operations primary exposures include changes interest rates foreign currency fluctuations exposures vary sales cost goods costs operations cost financing yields cash shortterm investments use derivative financial instruments appropriate manage risks however risk management policy allow us hedge positions hold enter derivative financial investments trading speculative purposes december 31 2005 currency hedge transaction place balance eurodenominated current liabilities eurodenominated current assets see item 7 managements discussion analysis financial condition results operations liquidity capital resources exposed interest rate risk connection senior secured term loan borrowings revolving credit facility bear interest floating rates based london interbank offered rate libor prime rate plus applicable borrowing margin therefore interest rate changes generally affect fair market value debt impact future earnings cash flows assuming factors held constant december 31 2005 148 million variable rate debt represented borrowings senior secured term loans interest rate 638 based balance outstanding credit facility december 31 2005 immediate change one percentage point applicable interest rate variable rate debt would cause increase decrease interest expense approximately 01 million annual basis foreign currency exposure results fluctuating currency exchange rates primarily us dollar euro great britain pound mexican peso brazilian real face cost goods currency exposure produce products foreign currencies euro great britain pound sell products us dollars face transactional currency exposures foreign subsidiaries company enter transactions generally intercompany basis denominated currencies functional currency also face currency exposure translating results global operations us dollar exchange rates fluctuated beginning period us dollar equivalent international sales denominated foreign currencies favorably impacted 2005 2004 foreign currency exchange rate fluctuations weakening us dollar local foreign currency 2005 2004 us dollar equivalent related costs denominated foreign currencies unfavorably impacted 2005 2004 continue distribute manufacture products selected foreign countries expect future sales costs associated activities markets continue denominated applicable foreign currencies could cause currency fluctuations materially impact operating results item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks part ongoing business operations primary exposures include changes interest rates foreign currency fluctuations exposures vary sales cost goods costs operations cost financing yields cash shortterm investments use derivative financial instruments appropriate manage risks however risk management policy allow us hedge positions hold enter derivative financial investments trading speculative purposes december 31 2006 currency swap transaction place minimize future foreign currency exchange risk related 426 million euro intercompany note foreign currency exposure see item 7 “management’s discussion analysis financial condition results operations 2006 compared 2005 “other income expense net” exposed interest rate risk connection senior secured term loan borrowings revolving credit facility bear interest floating rates based london interbank offered rate libor prime rate plus applicable borrowing margin therefore interest rate changes generally affect fair market value debt impact future earnings cash flows assuming factors held constant december 31 2006 3152 million variable rate term debt represented borrowings senior secured term loan floating interest rate libor prime rate plus margin currently libor plus 175 effective interest rate december 31 2006 senior secured term loan 712 based balance outstanding credit facility december 31 2006 immediate change one percentage point applicable interest rate variable rate debt would cause increase decrease interest expense approximately 32 million annual basis foreign currency exposure results fluctuating currency exchange rates primarily us dollar euro great britain pound mexican peso brazilian real face cost goods currency exposure produce products foreign currencies euro great britain pound sell products us dollars face transactional currency exposures foreign subsidiaries company enter transactions denominated currencies functional currency period august 1 2006 december 15 2006 uncovered intercompany receivable denominated euro approximately 462 million due european restructuring december 15 2006 entered currency swap transaction bank offset exposure period august 1 2006 december 15 2006 recorded foreign currency gain 21 million resulted strengthening euro us dollar period also face currency exposure translating results global operations us dollar exchange rates fluctuated beginning period us dollar equivalent international sales denominated foreign currencies favorably impacted 2006 2005 foreign currency exchange rate fluctuations weakening us dollar local foreign currency 2006 2005 us dollar equivalent related costs denominated foreign currencies unfavorably impacted 2006 2005 continue distribute manufacture products selected foreign countries expect future sales costs associated activities markets continue denominated applicable foreign currencies could cause currency fluctuations materially impact operating results item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks part ongoing business operations primary exposures include changes interest rates foreign currency fluctuations exposures vary sales cost sales costs operations cost financing yields cash shortterm investments use derivative financial instruments appropriate manage risks however risk management policy allow us hedge positions hold enter derivative financial investments trading speculative purposes december 31 2007 currency swap transaction place minimize future foreign currency exchange risk related 426 million euro intercompany note foreign currency exposure see item 7 heading “management’s discussion analysis financial condition results operations 2007 compared 2006 income expense net” exposed interest rate risk connection senior secured term loan borrowings revolving credit facility bear interest floating rates based london interbank offered rate libor prime rate plus applicable borrowing margin therefore interest rate changes generally affect fair market value debt impact future earnings cash flows assuming factors held constant december 31 2007 2977 million variable rate term debt represented borrowings senior secured term loan floating interest rate libor prime rate plus margin currently libor plus 175 effective interest rate december 31 2007 senior secured term loan 658 based balance outstanding senior secured term loan december 31 2007 immediate change one percentage point applicable interest rate variable rate debt would cause increase decrease interest expense approximately 30 million annual basis foreign currency exposure results fluctuating currency exchange rates primarily us dollar euro great britain pound mexican peso brazilian real face cost goods currency exposure produce products foreign currencies euro great britain pound sell products us dollars face transactional currency exposures foreign subsidiaries company enter transactions denominated currencies functional currency december 31 2007 uncovered intercompany receivable denominated euro approximately 64 million recorded foreign currency gain 2007 08 million resulted strengthening euro us dollar year also face currency exposure translating results global operations us dollar exchange rates fluctuated beginning period us dollar equivalent international sales denominated foreign currencies favorably impacted 2007 2006 foreign currency exchange rate fluctuations weakening us dollar local foreign currency 2007 2006 us dollar equivalent related costs denominated foreign currencies unfavorably impacted 2007 2006 continue distribute manufacture products selected foreign countries expect future sales costs associated activities markets continue denominated applicable foreign currencies could cause currency fluctuations materially impact operating results item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks part ongoing business operations primary exposures include changes interest rates foreign currency fluctuations exposures vary sales cost sales costs operations cost financing yields cash shortterm investments use derivative financial instruments appropriate manage risks however risk management policy allow us hedge positions hold enter derivative financial investments trading speculative purposes december 31 2008 currency swap transaction place minimize future foreign currency exchange risk related 430 million euro intercompany note foreign currency exposure see item 7 heading “management’s discussion analysis financial condition results operations 2007 compared 2006 income expense net” exposed interest rate risk connection senior secured term loan borrowings revolving credit facility bear interest floating rates based libor prime rate plus applicable borrowing margin therefore interest rate changes generally affect fair market value debt impact future earnings cash flows assuming factors held constant interest rate swap place december 31 2008 minimize interest rate risk related liborbased borrowings december 31 2008 2807 million variable rate term debt represented borrowings senior secured term loan floating interest rate libor floor 30 plus margin prime rate plus margin currently term loan 1500 million libor loan plus margin 450 1307 million prime rate loan plus margin 35 adjusted based upon credit rating company subsidiaries june 2008 entered swap notional amount 1500 million expiration date june 30 2011 amount outstanding swap december 31 2008 1500 million swap pay fixed rate 373 receive interest floating rates based three month libor rate quarterly repricing date expiration swap december 31 2008 interest rate debt related swap 98 overall effective interest rate including impact swap december 31 2008 senior secured debt 84 based balance outstanding senior secured term loan combined swap december 31 2008 immediate change one percentage point applicable interest rate variable rate debt would cause increase interest expense approximately 28 million annual basis foreign currency exposure results fluctuating currency exchange rates primarily us dollar euro great britain pound mexican peso brazilian real subject cost goods currency exposure produce products foreign currencies euro great britain pound sell products us dollars subject transactional currency exposures foreign subsidiaries company enter transactions denominated currency functional currency december 31 2008 unhedged intercompany receivable denominated euro approximately 172 million recorded foreign currency loss 2008 11 million resulted weakening euro us dollar period also subject currency exposure translating results global operations us dollar exchange rates fluctuated beginning period us dollar equivalent international sales denominated foreign currencies favorably impacted 2008 2007 foreign currency exchange rate fluctuations weakening us dollar local foreign currency periods continue distribute manufacture products selected foreign countries expect future sales costs associated activities markets continue denominated applicable foreign currencies could cause currency fluctuations materially impact operating results item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks part ongoing business operations primary exposures include changes interest rates foreign currency fluctuations exposures vary sales cost sales costs operations cost financing yields cash shortterm investments use derivative financial instruments appropriate manage risks however risk management policy allow us hedge positions hold enter derivative financial investments trading speculative purposes december 31 2009 currency swap place minimize foreign currency exchange risk related 383 million euro intercompany note exposed interest rate risk connection senior secured term loan borrowings revolving credit facility bear interest floating rates based libor prime rate plus applicable borrowing margin therefore interest rate changes generally affect fair market value debt impact future earnings cash flows assuming factors held constant interest rate swap place december 31 2009 minimize interest rate risk related liborbased borrowings december 31 2009 2524 million variable rate term debt represented borrowings senior secured term loan floating interest rate libor plus margin libor floor 30 prime rate plus margin december 31 2009 entire term loan obligation 2524 million prime rate plus margin 350 adjusted based upon credit rating company subsidiaries june 2008 entered swap notional amount 1500 million expiration date june 30 2011 amount outstanding swap december 31 2009 1500 million swap pay fixed rate 373 receive interest floating rates based three month libor rate quarterly repricing date expiration swap december 31 2009 effective interest rate debt related swap 102 december 31 2009 overall effective interest rate including impact swap senior secured debt 88 based balance outstanding senior secured term loan combined swap december 31 2009 immediate change one percentage point applicable interest rate variable rate debt would cause change interest expense approximately 25 million annual basis foreign currency exposure results fluctuating currency exchange rates primarily us dollar euro great britain pound mexican peso brazilian real subject cost goods currency exposure produce products foreign currencies euro great britain pound sell products us dollars subject transactional currency exposures foreign subsidiaries company enter transactions denominated currency functional currency december 31 2009 unhedged intercompany receivable denominated euro approximately 233 million 334 million recorded foreign currency gain year ended december 31 2009 08 million resulted strengthening euro us dollar period also subject currency exposure translating results global operations us dollar exchange rates fluctuated beginning period us dollar equivalent international sales denominated foreign currencies unfavorably impacted year ended december 31 2009 foreign currency exchange rate fluctuations strengthening us dollar local foreign currency period year ended december 31 2008 us dollar equivalent international sales denominated foreign currencies favorably impacted foreign currency exchange rate fluctuations weakening us dollar local foreign currency period continue distribute manufacture products selected foreign countries expect future sales costs associated activities markets continue denominated applicable foreign currencies could cause currency fluctuations materially impact operating results item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks part ongoing business operations primary exposures include changes interest rates foreign currency fluctuations exposures vary sales cost sales costs operations cost financing yields cash shortterm investments use derivative financial instruments appropriate manage risks however risk management policy allow us hedge positions hold enter derivative financial investments trading speculative purposes december 31 2011 currency swap place minimize foreign currency exchange risk related 383 million intercompany note exposed interest rate risk connection term loan facility revolving credit facility bear interest floating rates based libor plus applicable borrowing margin base rate defined credit agreement plus applicable borrowing margin therefore interest rate changes generally affect fair market value debt impact future earnings cash flows assuming factors held constant december 31 2011 entire term loan facility 913 million libor rate plus margin 300 december 31 2011 100 million revolving credit facility libor rate plus margin 300 remaining 174 million revolving credit facility base rate defined credit agreement plus margin 200 margins adjusted based upon measurement consolidated leverage ratio company subsidiaries respect immediately preceding four fiscal quarters december 31 2011 effective interest rate credit facilities 34 based balance outstanding credit facilities december 31 2011 immediate change one percentage point applicable interest rate term loan facility revolving credit facility would cause change interest expense approximately 21 million annually foreign currency exposure results fluctuating currency exchange rates primarily us dollar euro great britain pound mexican peso brazilian real subject cost goods currency exposure produce products foreign currencies euro great britain pound sell products us dollars subject transactional currency exposures foreign subsidiaries company enter transactions denominated currency functional currency december 31 2011 unhedged intercompany receivable denominated euro approximately 232 million 30 million recorded foreign currency loss year ended december 31 2011 32 million related unhedged longterm intercompany balance accumulated comprehensive income 2011 resulted weakening euro us dollar period year ended december 31 2011 recorded foreign currency loss 16 million statement operations resulting gains losses foreign currency transactions also subject currency exposure translating results global operations us dollar exchange rates fluctuate period us dollar equivalent international sales denominated foreign currencies favorably impacted year ended december 31 2011 monthly foreign currency exchange rate fluctuations us dollar foreign functional currencies international operations 2011 versus periods 2010 us dollar equivalent international sales denominated foreign currencies favorably impacted year ended december 31 2010 monthly foreign currency exchange rate fluctuations us dollar local foreign currency versus periods 2009 certain countries outside europe partially offset effect fluctuations us dollar euro continue distribute manufacture products selected foreign countries expect future sales costs associated activities markets continue denominated applicable foreign currencies could cause currency fluctuations materially impact operating results item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks part ongoing business operations primary exposures include changes interest rates foreign currency fluctuations exposures vary sales cost sales costs operations cost financing yields cash shortterm investments use derivative financial instruments appropriate manage risks however risk management policy allow us hedge positions hold enter derivative financial investments trading speculative purposes december 31 2012 currency swap place minimize foreign currency exchange risk related 287 million 379 million translated december 31 2012 foreign exchange rate intercompany note december 31 2012 fair value currency swap approximately 03 million recorded longterm assets exposed interest rate risk connection term loan facility revolving credit facility bear interest floating rates based libor plus applicable borrowing margin base rate defined credit agreement plus applicable borrowing margin therefore interest rate changes generally affect fair market value debt impact future earnings cash flows assuming factors held constant december 31 2012 20 million revolving credit facility libor rate plus margin 250 margin adjusted based upon measurement consolidated leverage ratio company subsidiaries respect immediately preceding four fiscal quarters december 31 2012 effective interest rate credit facilities 27 based balance outstanding credit facilities december 31 2012 immediate change one percentage point applicable interest rate revolving credit facility would cause change interest expense approximately 02 million annually foreign currency exposure results fluctuating currency exchange rates primarily us dollar euro great britain pound mexican peso brazilian real subject cost goods currency exposure produce products foreign currencies euro great britain pound sell products us dollars subject transactional currency exposures foreign subsidiaries company enter transactions denominated currency functional currency december 31 2012 unhedged intercompany receivable denominated euro approximately 232 million 306 million recorded foreign currency gain year ended december 31 2012 05 million related unhedged longterm intercompany balance accumulated comprehensive income 2012 resulted weakening euro us dollar period year ended december 31 2012 recorded foreign currency loss 05 million statement operations resulting gains losses foreign currency transactions also subject currency exposure translating results global operations us dollar exchange rates fluctuate period us dollar equivalent international sales denominated foreign currencies unfavorably impacted year ended december 31 2012 monthly foreign currency exchange rate fluctuations us dollar foreign functional currencies international operations 2012 versus periods 2011 us dollar equivalent international sales denominated foreign currencies favorably impacted year ended december 31 2011 monthly foreign currency exchange rate fluctuations us dollar local foreign currency versus periods 2010 continue distribute manufacture products selected foreign countries expect future sales costs associated activities markets continue denominated applicable foreign currencies could cause currency fluctuations materially impact operating results item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks part ongoing business operations primary exposures include changes interest rates foreign currency fluctuations exposures vary sales cost sales costs operations cost financing yields cash shortterm investments use derivative financial instruments appropriate manage risks however risk management policy allow us hedge positions hold enter derivative financial investments trading speculative purposes december 31 2013 currency swap place minimize foreign currency exchange risk related 287 million 394 million translated december 31 2013 foreign exchange rate intercompany note december 31 2013 fair value currency swap approximately 10 million recorded longterm liabilities exposed interest rate risk connection term loan facility revolving credit facility bear interest floating rates based libor plus applicable borrowing margin base rate defined credit agreement plus applicable borrowing margin therefore interest rate changes generally affect fair market value debt impact future earnings cash flows assuming factors held constant december 31 2013 20 million revolving credit facility libor rate plus margin 250 margin adjusted based upon measurement consolidated leverage ratio company subsidiaries respect immediately preceding four fiscal quarters december 31 2013 effective interest rate credit facilities 27 based balance outstanding credit facilities december 31 2013 immediate change one percentage point applicable interest rate revolving credit facility would cause change interest expense approximately 02 million annually foreign currency exposure results fluctuating currency exchange rates primarily us dollar euro great britain pound mexican peso brazilian real subject cost sales currency exposure produce products foreign currencies euro great britain pound sell products us dollars subject transactional currency exposures foreign subsidiaries company enter transactions denominated currency functional currency december 31 2013 unhedged intercompany receivable denominated euro approximately 232 million 319 million recorded foreign currency loss year ended december 31 2013 03 million related unhedged longterm intercompany balance included accumulated comprehensive income 2013 resulted weakening euro us dollar period year ended december 31 2013 recorded foreign currency loss 07 million statement operations resulting gains losses foreign currency transactions also subject currency exposure translating results global operations us dollar exchange rates fluctuate period us dollar equivalent international sales denominated foreign currencies unfavorably impacted year ended december 31 2013 monthly foreign currency exchange rate fluctuations us dollar foreign functional currencies international operations 2013 versus periods 2012 us dollar equivalent international sales denominated foreign currencies unfavorably impacted year ended december 31 2012 monthly foreign currency exchange rate fluctuations us dollar local foreign currency versus periods 2011 continue distribute manufacture products selected foreign countries expect future sales costs associated activities markets continue denominated applicable foreign currencies could cause currency fluctuations materially impact operating results item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks part ongoing business operations primary exposures include changes interest rates foreign currency fluctuations exposures impact sales cost sales costs operations cost financing yields cash shortterm investments may use derivative financial instruments appropriate manage risks however risk management policy allow us hedge positions hold enter derivative financial investments trading speculative purposes exposed interest rate risk connection revolving credit facility bears interest floating rates based libor plus applicable borrowing margin base rate defined credit agreement plus applicable borrowing margin therefore interest rate changes generally affect fair market value debt impact future earnings cash flows assuming factors held constant balance outstanding associated credit agreement december 31 2017 risk currently minimal believe concentration credit risk related trade accounts receivable limited customers geographically dispersed end users diversified across several industries reasonably possible changes global economic conditions andor local operating economic conditions regions customers operate factors could affect future realization accounts receivable balances foreign currency exposure results fluctuating currency exchange rates primarily us dollar euro brazilian real great britain pound subject cost sales currency exposure produce products foreign currencies euro brazilian real great britain pound sell products us dollars subject transactional currency exposures subsidiaries company enter transactions denominated currency functional currency year ended december 31 2017 recorded foreign currency gain 19 million statement operations resulting gains losses foreign currency transactions also subject currency exposure translating results global operations us dollar exchange rates fluctuate period us dollar equivalent international sales denominated foreign currencies favorably impacted year ended december 31 2017 unfavorably impacted year ended december 31 2016 monthly foreign currency exchange rate fluctuations us dollar foreign functional currencies international operations 2017 2016 versus periods 2016 2015 continue distribute manufacture products selected foreign countries expect future sales costs associated activities markets continue denominated applicable foreign currencies could cause currency fluctuations materially impact operating results analysis performed determine sensitivity current year net sales operating income changes foreign currency exchange rates determined us dollar decreased value 10 relative foreign currencies international operations would result increase net sales 81 million increase operating income 15 million us dollar increased value 10 relative foreign currencies international operations would result decrease net sales 81 million decrease operating income 15 million item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks part ongoing business operations primary exposures include changes interest rates foreign currency fluctuations exposures impact sales cost sales costs operations cost financing yields cash shortterm investments may use derivative financial instruments appropriate manage risks however risk management policy allow us hedge positions hold enter derivative financial investments trading speculative purposes exposed interest rate risk connection revolving credit facility bears interest floating rates based libor plus applicable borrowing margin base rate defined amended credit agreement plus applicable borrowing margin therefore interest rate changes generally affect fair market value debt impact future earnings cash flows assuming factors held constant balance outstanding associated amended credit agreement december 31 2018 risk currently minimal believe concentration credit risk related trade accounts receivable limited customers geographically dispersed end users diversified across several industries reasonably possible changes global economic conditions andor local operating economic conditions regions customers operate factors could affect future realization accounts receivable balances foreign currency exposure results fluctuating currency exchange rates primarily us dollar euro brazilian real british pound subject cost sales currency exposure produce products foreign currencies euro brazilian real british pound sell products us dollars subject transactional currency exposures subsidiaries company enter transactions denominated currency functional currency year ended december 31 2018 recorded foreign currency loss 33 million statement income comprehensive income resulting gains losses foreign currency transactions also subject currency exposure translating results global operations us dollar exchange rates fluctuate period us dollar equivalent international sales denominated foreign currencies favorably impacted years ended december 31 2018 2017 monthly foreign currency exchange rate fluctuations us dollar foreign functional currencies international operations continue distribute manufacture products selected foreign countries expect future sales costs associated activities markets continue denominated applicable foreign currencies could cause currency fluctuations materially impact operating results analysis performed determine sensitivity current year net sales operating income changes foreign currency exchange rates determined us dollar decreased value 10 relative foreign currencies international operations would result increase net sales 86 million increase operating income 04 million us dollar increased value 10 relative foreign currencies international operations would result decrease net sales 86 million decrease operating income 04 million item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks part ongoing business operations primary exposures include changes interest rates foreign currency fluctuations exposures impact sales cost sales costs operations cost financing yields cash shortterm investments may use derivative financial instruments appropriate manage risks however risk management policy allow us hedge positions hold enter derivative financial investments trading speculative purposes exposed interest rate risk connection revolving credit facility bears interest floating rates based libor possibly alternative reference rate used place libor upon occurrence benchmark transition event plus applicable borrowing margin base rate defined amended credit agreement plus applicable borrowing margin therefore interest rate changes generally affect fair market value debt impact future earnings cash flows assuming factors held constant balance outstanding associated amended credit agreement december 31 2019 risk currently minimal believe concentration credit risk related trade accounts receivable limited customers geographically dispersed end users diversified across several industries reasonably possible changes global economic conditions andor local operating economic conditions regions customers operate factors could affect future realization accounts receivable balances foreign currency exposure results fluctuating currency exchange rates primarily us dollar euro brazilian real british pound subject cost sales currency exposure produce products foreign currencies euro brazilian real british pound sell products us dollars subject transactional currency exposures subsidiaries company enter transactions denominated currency functional currency year ended december 31 2019 recorded foreign currency loss 14 million statement operations comprehensive income loss resulting gains losses foreign currency transactions also subject currency exposure translating results global operations us dollar exchange rates fluctuate period us dollar equivalent international sales denominated foreign currencies unfavorably impacted years ended december 31 2019 december 31 2018 monthly foreign currency exchange rate fluctuations us dollar foreign functional currencies international operations continue distribute manufacture products selected foreign countries expect future sales costs associated activities markets continue denominated applicable foreign currencies could cause currency fluctuations materially impact operating results analysis performed determine sensitivity current year net sales operating income changes foreign currency exchange rates determined us dollar decreased value 10 relative foreign currencies international operations would result increase net sales 86 million increase operating income 08 million us dollar increased value 10 relative foreign currencies international operations would result decrease net sales 86 million decrease operating income 08 million item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks part ongoing business operations primary exposures include changes interest rates foreign currency fluctuations exposures vary sales cost sales costs operations cost financing yields cash shortterm investments use derivative financial instruments appropriate manage risks however risk management policy allow us hedge positions hold enter derivative financial investments trading speculative purposes december 31 2010 currency swap place minimize foreign currency exchange risk related 407 million intercompany note exposed interest rate risk connection term loan facility revolving credit facility bear interest floating rates based libor plus applicable borrowing margin base rate defined new credit agreement plus applicable borrowing margin therefore interest rate changes generally affect fair market value debt impact future earnings cash flows assuming factors held constant december 31 2010 entire term loan facility 988 million libor rate plus margin 300 december 31 2010 1000 million revolving credit facility libor rate plus margin 300 remaining 174 million revolving credit facility base rate defined new credit agreement plus margin 200 margins adjusted based upon measurement consolidated leverage ratio company subsidiaries respect immediately preceding four fiscal quarters december 31 2010 effective interest rate credit facilities 34 based balance outstanding credit facilities december 31 2010 immediate change one percentage point applicable interest rate term loan facility revolving credit facility would cause change interest expense approximately 22 million annually foreign currency exposure results fluctuating currency exchange rates primarily us dollar euro great britain pound mexican peso brazilian real subject cost goods currency exposure produce products foreign currencies euro great britain pound sell products us dollars subject transactional currency exposures foreign subsidiaries company enter transactions denominated currency functional currency december 31 2010 unhedged intercompany receivable denominated euro approximately 232 million 310 million recorded foreign currency loss year ended december 31 2010 20 million related unhedged longterm intercompany balance accumulated comprehensive income 2010 resulted weakening euro us dollar period year ended december 31 2010 recorded foreign currency loss 01 million statement operations resulting gains losses foreign currency transactions also subject currency exposure translating results global operations us dollar exchange rates fluctuated beginning period us dollar equivalent international sales denominated foreign currencies favorably impacted year ended december 31 2010 foreign currency exchange rate fluctuations weakening us dollar local foreign currency period certain countries outside europe partially offset effect strengthening us dollar euro us dollar equivalent international sales denominated foreign currencies unfavorably impacted year ended december 31 2009 foreign currency exchange rate fluctuations strengthening us dollar local foreign currency period continue distribute manufacture products selected foreign countries expect future sales costs associated activities markets continue denominated applicable foreign currencies could cause currency fluctuations materially impact operating results item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks part ongoing business operations primary exposures include changes interest rates foreign currency fluctuations exposures vary sales cost sales costs operations cost financing yields cash shortterm investments use derivative financial instruments appropriate manage risks however risk management policy allow us hedge positions hold enter derivative financial investments trading speculative purposes december 31 2014 currency swap place minimize foreign currency exchange risk related €287 million 347 million translated december 31 2014 foreign exchange rate intercompany note december 31 2014 fair value currency swap approximately 21 million recorded longterm assets exposed interest rate risk connection revolving credit facility bear interest floating rates based libor plus applicable borrowing margin base rate defined credit agreement plus applicable borrowing margin therefore interest rate changes generally affect fair market value debt impact future earnings cash flows assuming factors held constant company believes concentration credit risk related accounts receivable limited customers geographically dispersed end users diversified across several industries reasonably possible changes global economic conditions andor local operating economic conditions regions distributors operate factors could affect future realization accounts receivable balances foreign currency exposure results fluctuating currency exchange rates primarily us dollar euro great britain pound brazilian real subject cost sales currency exposure produce products foreign currencies euro great britain pound sell products us dollars subject transactional currency exposures subsidiaries company enter transactions denominated currency functional currency december 31 2014 unhedged intercompany receivable denominated euro approximately €232 million 281 million recorded foreign currency gain year ended december 31 2014 01 million related unhedged longterm intercompany balance included accumulated comprehensive income 2014 resulted weakening euro us dollar period year ended december 31 2014 recorded foreign currency loss 16 million statement operations resulting gains losses foreign currency transactions also subject currency exposure translating results global operations us dollar exchange rates fluctuate period us dollar equivalent international sales denominated foreign currencies unfavorably impacted year ended december 31 2014 monthly foreign currency exchange rate fluctuations us dollar foreign functional currencies international operations 2014 versus periods 2013 us dollar equivalent international sales denominated foreign currencies unfavorably impacted year ended december 31 2013 monthly foreign currency exchange rate fluctuations us dollar local foreign currency versus periods 2012 continue distribute manufacture products selected foreign countries expect future sales costs associated activities markets continue denominated applicable foreign currencies could cause currency fluctuations materially impact operating results item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks part ongoing business operations primary exposures include changes interest rates foreign currency fluctuations exposures vary sales cost sales costs operations cost financing yields cash shortterm investments use derivative financial instruments appropriate manage risks however risk management policy allow us hedge positions hold enter derivative financial investments trading speculative purposes december 31 2015 crosscurrency swap place minimize foreign currency exchange risk related €96 million 104 million translated december 31 2015 foreign exchange rate intercompany note december 31 2015 fair value crosscurrency swap approximately 25 million recorded prepaid expenses current assets exposed interest rate risk connection revolving credit facility bears interest floating rates based libor plus applicable borrowing margin base rate defined credit agreement plus applicable borrowing margin therefore interest rate changes generally affect fair market value debt impact future earnings cash flows assuming factors held constant company balance outstanding associated credit agreement december 31 2015 risk currently minimal company believes concentration credit risk related accounts receivable limited customers geographically dispersed end users diversified across several industries reasonably possible changes global economic conditions andor local operating economic conditions regions customers operate factors could affect future realization accounts receivable balances foreign currency exposure results fluctuating currency exchange rates primarily us dollar euro brazilian real great britain pound subject cost sales currency exposure produce products foreign currencies euro brazilian real great britain pound sell products us dollars subject transactional currency exposures subsidiaries company enter transactions denominated currency functional currency year ended december 31 2015 recorded foreign currency loss 35 million statement operations resulting gains losses foreign currency transactions also subject currency exposure translating results global operations us dollar exchange rates fluctuate period us dollar equivalent international sales denominated foreign currencies unfavorably impacted years ended december 31 2015 2014 monthly foreign currency exchange rate fluctuations us dollar foreign functional currencies international operations 2015 2014 versus periods 2014 2013 continue distribute manufacture products selected foreign countries expect future sales costs associated activities markets continue denominated applicable foreign currencies could cause currency fluctuations materially impact operating results analysis performed determine sensitivity current year net sales operating income changes foreign currency exchange rates determined us dollar decreased value 10 relative foreign currencies international operations would result increase net sales 95 million increase operating income 02 million us dollar increased value 10 relative foreign currencies international operations would result decrease net sales 95 million decrease operating income 02 million item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks part ongoing business operations primary exposures include changes interest rates foreign currency fluctuations exposures vary sales cost sales costs operations cost financing yields cash shortterm investments use derivative financial instruments appropriate manage risks however risk management policy allow us hedge positions hold enter derivative financial investments trading speculative purposes december 30 2016 crosscurrency swap place minimize foreign currency exchange risk related euro denominated intercompany note crosscurrency swap euro denominated intercompany note matured december 30 2016 exposed interest rate risk connection revolving credit facility bears interest floating rates based libor plus applicable borrowing margin base rate defined credit agreement plus applicable borrowing margin therefore interest rate changes generally affect fair market value debt impact future earnings cash flows assuming factors held constant balance outstanding associated credit agreement december 31 2016 risk currently minimal believe concentration credit risk related trade accounts receivable limited customers geographically dispersed end users diversified across several industries reasonably possible changes global economic conditions andor local operating economic conditions regions customers operate factors could affect future realization accounts receivable balances foreign currency exposure results fluctuating currency exchange rates primarily us dollar euro brazilian real great britain pound subject cost sales currency exposure produce products foreign currencies euro brazilian real great britain pound sell products us dollars subject transactional currency exposures subsidiaries company enter transactions denominated currency functional currency year ended december 31 2016 recorded foreign currency loss less 01 million statement operations resulting gains losses foreign currency transactions also subject currency exposure translating results global operations us dollar exchange rates fluctuate period us dollar equivalent international sales denominated foreign currencies unfavorably impacted years ended december 31 2016 2015 monthly foreign currency exchange rate fluctuations us dollar foreign functional currencies international operations 2016 2015 versus periods 2015 2014 continue distribute manufacture products selected foreign countries expect future sales costs associated activities markets continue denominated applicable foreign currencies could cause currency fluctuations materially impact operating results analysis performed determine sensitivity current year net sales operating income changes foreign currency exchange rates determined us dollar decreased value 10 relative foreign currencies international operations would result increase net sales 81 million increase operating income 10 million us dollar increased value 10 relative foreign currencies international operations would result decrease net sales 81 million decrease operating income 10 million item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks part ongoing business operations primary exposures include changes interest rates foreign currency fluctuations exposures impact sales cost sales costs operations cost financing yields cash shortterm investments may use derivative financial instruments appropriate manage risks however risk management policy allow us hedge positions hold enter derivative financial investments trading speculative purposes exposed interest rate risk connection revolving credit facility bears interest floating rates based libor possibly alternative reference rate used place libor upon occurrence benchmark transition event plus applicable borrowing margin base rate defined amended credit agreement plus applicable borrowing margin therefore interest rate changes generally affect fair market value debt impact future earnings cash flows assuming factors held constant balance outstanding associated amended credit agreement december 31 2020 risk currently minimal believe concentration credit risk related accounts receivable limited customers geographically dispersed end users diversified across several industries reasonably possible changes global economic conditions andor local operating economic conditions regions customers operate factors could affect future realization accounts receivable balances foreign currency exposure results fluctuating currency exchange rates primarily us dollar euro brazilian real british pound subject cost sales currency exposure produce products foreign currencies euro brazilian real british pound sell products us dollars subject transactional currency exposures subsidiaries company enter transactions denominated currency functional currency year ended december 31 2020 recorded foreign currency gain 39 million statement operations comprehensive income loss resulting gains losses foreign currency transactions also subject currency exposure translating results global operations us dollar exchange rates fluctuate period us dollar equivalent international sales denominated foreign currencies favorably impacted year ended december 31 2020 unfavorably impacted year ended december 31 2019 monthly foreign currency exchange rate fluctuations us dollar foreign functional currencies international operations continue distribute manufacture products selected foreign countries expect future sales costs associated activities markets continue denominated applicable foreign currencies could cause currency fluctuations materially impact operating results analysis performed determine sensitivity current year net sales operating income changes foreign currency exchange rates determined us dollar decreased value 10 relative foreign currencies international operations would result increase net sales 71 million decrease operating income 09 million us dollar increased value 10 relative foreign currencies international operations would result decrease net sales 71 million increase operating income 09 million item 8item 7a quantitative qualitative disclosures market risk ordinary course business exposed foreign currency fluctuations impact changes interest rates fluctuations vary sales cost goods costs operations cost financing yields cash shortterm investments foreign currency exposure results fluctuating currency exchange rates primarily us dollar euro uk pound mexican peso brazilian real face cost goods currency exposure produce products foreign currencies euro uk pound sell products us dollars face transactional currency exposures foreign subsidiaries company enter transactions generally intercompany basis denominated currencies local currency also face currency exposure translating results global operations us dollar exchange rates fluctuated beginning period historically used financial derivatives hedge fluctuations currency exchange rates based overall exposure foreign currency december 31 2003 hypothetical 10 change foreign currency rates would impact companys balance sheet approximately 35 million net sales approximately 71 million net income cash flows approximately 08 million oneyear period cash equivalent balances interest sensitive debt december 31 2003 336 million 1102 million based balances 1 movement interest rates would 03 million 11 million effect interest receivable interest payable per year respectively item 8 item 8 financial statements supplementary data see index consolidated financial statements page form 10k item 9item 8 financial statements supplementary data see index consolidated financial statements page form 10k item 9item 8 financial statements supplementary data see index consolidated financial statements page form 10k item 9item 8 financial statements supplementary data see “index consolidated financial statements” page form 10k item 9item 8 financial statements supplementary data see “index consolidated financial statements” page form 10k item 9item 8 financial statements supplementary data see “index consolidated financial statements” page form 10k item 9item 8 financial statements supplementary data see “index consolidated financial statements” page form 10k item 9item 8 financial statements supplementary data see “index consolidated financial statements” page form 10k item 9item 8 financial statements supplementary data see “index consolidated financial statements” page form 10k item 9item 8 financial statements supplementary data see “index consolidated financial statements” page form 10k item 9item 8 financial statements supplementary data see “index consolidated financial statements” page form 10k item 9item 8 financial statements supplementary data see “index consolidated financial statements” page annual report item 9item 8 financial statements supplementary data see “index consolidated financial statements” page annual report item 9item 8 financial statements supplementary data see “index consolidated financial statements” page form 10k item 9item 8 financial statements supplementary data see “index consolidated financial statements” page form 10k item 9item 8 financial statements supplementary data see “index consolidated financial statements” page form 10k item 9item 8 financial statements supplementary data see “index consolidated financial statements” page form 10k item 9item 8 financial statements supplementary data see “index consolidated financial statements” page annual report item 9item 8 financial statements supplementary data see index consolidated financial statements page form 10k item 9 item 15 exhibits financial statement schedules reports form 8k financial statements financial statement schedules see index consolidated financial statements page form 10k b reports form 8k none c exhibits exhibit number description 31 certificate incorporation company filed exhibit companys annual report form 20f dated june 29 2001 incorporated herein reference 32 articles incorporation company filed exhibit companys annual report form 20f dated june 29 2001 incorporated herein reference 101 orthofix inc employee stock purchase plan 102 orthofix international nv staff share option plan 103 form performance accelerated stock option staff share option plan 104 orthofix international nv executive share option plan 105 employment agreement dated july 1 2001 orthofix international nv charles w federico 106 employment agreement dated march 1 2003 company thomas hein 107 employment agreement dated march 1 2003 company gary henley 108 employment agreement dated july 1 1999 orthofix international nv robert gainescooper 109 employment agreement dated july 1 1999 orthofix international nv edgar wallner 1010 full recourse promissory note orthofix international nv charles w federico dated january 10 2002 1011 full recourse promissory note orthofix international nv gary henley dated january 10 2002 161 letter pricewaterhousecoopers regarding change registrants certifying accountant 211 subsidiaries registrant 231 consent ernst young independent auditors 232 consent pricewaterhousecoopers independent accountants filed herewith signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized orthofix international nv dated march 27 2003 charles w federico name charles w federico title chief executive officer president pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated certifications charles w federico certify 1 reviewed annual report form 10k orthofix international nv 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrants certifying officers disclosed based recent evaluation registrants auditors audit committee registrants board directors persons performing equivalent functions significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrants internal controls 6 registrants certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date march 27 2003 charles w federico name charles w federico title chief executive officer president director thomas hein certify 1 reviewed annual report form 10k orthofix international nv 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrants certifying officers disclosed based recent evaluation registrants auditors audit committee registrants board directors persons performing equivalent functions significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrants internal controls 6 registrants certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date march 27 2003 thomas hein name thomas hein title chief financial officer orthofix international nv schedules provision made applicable accounting regulation securities exchange commission required related instructions inapplicable therefore omitted statement managements responsibility financial statements shareholders orthofix international nv management responsible preparation consolidated financial statements related information presented report consolidated financial statements include amounts based managements estimates judgments prepared conformity accounting principles generally accepted united states financial information report shareholders consistent consolidated financial statements company maintains accounting internal control systems provide reasonable assurance reasonable cost assets safeguarded loss unauthorized use disposition financial records reliable preparing financial statements maintaining accountability assets systems augmented written policies organizational structure providing division responsibilities careful selection training qualified personnel company engaged ernst young llp independent accountants 2002 2001 2000 pricewaterhousecoopers two subsidiaries ernst young audit render opinion consolidated financial statements accordance auditing standards generally accepted united states standards include assessment systems internal controls test transactions extent considered necessary support opinion board directors audit committee consisting solely outside directors company meets periodically management independent accountants ensure meeting responsibilities discuss matters concerning internal controls financial reporting ernst young llp pricewaterhousecoopers full free access audit committee robert gainescooper chairman board directors charles w federico president chief executive officer director thomas hein chief financial officer report independent auditors board directors shareholders orthofix international nv audited accompanying consolidated balance sheet orthofix international nv december 31 2002 related consolidated statements operations changes shareholders equity cash flows year ended audit also included financial statement schedule listed index item 15a financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audit conducted audit accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion financial statements referred present fairly material respects consolidated financial position orthofix international nv december 31 2002 consolidated results operations cash flows year ended conformity accounting principles generally accepted united states also opinion related financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein described note 7 consolidated financial statements company adopted statement financial accounting standards 142 goodwill intangible assets effective january 1 2002 ernst young llp charlotte north carolina february 19 2003 except note 18 date march 4 2003 report independent accountants board directors shareholders orthofix international nv opinion based audits reports another auditor accompanying consolidated balance sheet december 31 2001 related consolidated statements operations changes shareholders equity cash flows two years period ended december 31 2001 present fairly material respects financial position orthofix international nv subsidiaries company december 31 2001 results operations cash flows two years period ended december 31 2001 conformity accounting principles generally accepted united states america financial statements responsibility companys management responsibility express opinion financial statements based audits audit financial statements novamedix distribution limited inter medical supplies limited year ended december 31 2001 whollyowned subsidiaries statements reflect total assets 146 million december 31 2001 total revenues 212 million year ended statements audited another auditor whose report thereon furnished us opinion expressed herein insofar relates amounts included novamedix distribution limited inter medical supplies limited based solely report auditor conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits report auditor provide reasonable basis opinion expressed pricewaterhousecoopers london england june 25 2002 report independent auditors board directors management inter medical supplies limited subsidiary orthofix international nv audited accompanying balance sheet inter medical supplies limited subsidiary orthofix international nv december 31 2001 related statements income shareholders equity cash flows year ended presented separately herein financial statements responsibility companys directors responsibility express opinion financial statements based audit conducted audit accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made directors well evaluating overall financial statement presentation believe audit provides reasonable basis opinion financial statements referred present fairly material respects financial position inter medical supplies limited december 31 2001 results operations cash flows year ended conformity accounting principles generally accepted united states ernst young 7 june 2002 nicosia cyprus report independent auditors board directors management novamedix distribution limited subsidiary orthofix international nv audited accompanying balance sheet novamedix distribution limited subsidiary orthofix international nv december 31 2001 related statements income shareholders equity cash flows year ended presented separately herein financial statements responsibility companys directors responsibility express opinion financial statements based audit conducted audit accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made directors well evaluating overall financial statement presentation believe audit provides reasonable basis opinion financial statements referred present fairly material respects financial position novamedix distribution limited december 31 2001 results operations cash flows year ended conformity accounting principles generally accepted united states ernst young 7 june 2002 nicosia cyprus consolidated balance sheets december 31 2002 2001 accompanying notes form integral part consolidated financial statements consolidated statements operations years ended december 31 2002 2001 2000 accompanying notes form integral part consolidated financial statements consolidated statements changes shareholders equity years ended december 31 2002 2001 2000 accompanying notes form integral part consolidated financial statements noncash investing activities comprised acquisitions discussed detail note 2 accompanying notes form integral part consolidated financial statements orthofix international nv notes consolidated financial statements description business orthofix international nv subsidiaries company multinational corporation principally involved design development manufacture marketing distribution medical equipment principally orthopedic market 1 accounting policies basis consolidation consolidated financial statements include financial statements company wholly owned majorityowned subsidiaries entities company control percents ownership december 31 2002 follows 100 owned unless otherwise noted orthofix inc usa orthofix srl italy dmo srl italy novamedix services limited uk orthosonics limited uk intavent orthofix limited uk 52 owned orthofix limited uk novamedix distribution limited cyprus inter medical supplies limited cyprus inter medical supplies limited seychelles orthofix ag switzerland 70 owned orthofix gmbh germany 70 owned orthofix international bv holland orthofix brasil brazil 895 owned orthofix sa france promeca sa de cv mexico 6125 owned intercompany accounts transactions eliminated consolidation equity method accounting used company significant influence operating decisions cannot exercise control equity method original investments recorded cost adjusted companys share undistributed earnings losses companies material intercompany transactions profits associated equity investees eliminated consolidation results subsidiaries acquired disposed year included consolidated statements operations date acquisition date disposal b foreign currency translation foreign currency translation performed accordance sfas 52 foreign currency translation balance sheet accounts except shareholders equity translated year end exchange rates revenue expense items translated weighted average rates exchange prevailing year gains losses resulting foreign currency transactions included income expense gains losses resulting translation foreign currency financial statements recorded accumulated comprehensive income component shareholders equity c inventories valued lower cost estimated net realizable value provision obsolete items cost determined weightedaverage basis approximates fifo method valuation workinprocess finished goods field inventory consignment inventory includes cost materials labor production reporting currency reporting currency united states dollar e market risk ordinary course business company exposed impact changes interest rates foreign currency fluctuations companys objective limit impact movements earnings cash flows order achieve objective company seeks balance nondollar income expenditure company ordinarily use derivative instruments hedge foreign exchange exposure f longlived assets property plant equipment stated cost less accumulated depreciation impairment charges computed accordance companys policy depreciation computed straightline basis useful lives assets except land depreciated depreciation leasehold improvements computed shorter lease term useful life asset useful lives follows years buildings 25 33 plant equipment 2 10 furniture fixtures 4 8 expenditures maintenance repairs minor renewals improvements extend life respective assets expensed expenditures renewals improvements capitalized assets related accumulated depreciation adjusted property retirements disposals resulting gain loss included operations fully depreciated assets remain accounts retired service patents intangible assets recorded cost acquired part business combination estimated fair value assets include patents technology agreements trademarks licenses customer relationships noncompete agreements generally amortized using straightline method estimated useful lives 5 25 years goodwill represents excess purchase price fair value net assets acquired businesses amortized straightline method cases 15 20 years acquisitions completed prior june 30 2001 effective july 1 2001 company adopted provisions statement financial accounting standards sfas 142 goodwill intangible assets applicable business combinations completed june 30 2001 effective january 1 2002 additional provisions sfas 142 relating business combinations completed prior june 30 2001 became effective adopted provisions sfas 142 intangible assets deemed indefinite lives goodwill subject amortization beginning january 1 2002 company reviews longlived assets whenever events changes circumstances indicate carrying amount asset may recoverable general company recognizes impairment loss sum undiscounted expected future cash flows assets remaining estimated useful life less carrying value assets measurement impairment loss based fair value related asset group assets g revenue recognition revenues recognized income period title passes products delivered royalties royalty earned revenues inventory delivered consignment recognized product accepted used consignee revenues exclude value added local taxes intercompany sales trade discounts revenues reduced estimated returns companys limited guarantee programs estimated cancellations time products shipped shipping handling costs included cost sales h research development costs expenditures research development expensed incurred income taxes income taxes provided using liability method accordance sfas 109 accounting income taxes deferred income taxes arise differences treatment income expense items financial reporting income tax purposes deferred tax assets liabilities recognized differences book values tax basis assets liabilities adjusted tax law rate changes j concentration credit risk company performs ongoing credit evaluations customers generally require collateral company becomes aware customers inability meet obligations case bankruptcy filing deterioration customers financial condition company records specific reserve reduce related receivable amount company reasonably believes collectible company also records reserves bad debt customers based variety factors including length time receivables past due financial condition customer macroeconomic conditions historical experience company maintains reserves potential credit losses within managements expectations company invests excess cash deposits major banks company experienced losses deposits k net income per common share net income per common share computed accordance sfas 128 earnings per share net income per common share basic computed using weighted average number common shares outstanding respective years net income per common share diluted computed using weighted average number common equivalent shares outstanding respective years common equivalent shares represent dilutive effect assumed exercise outstanding share options see note 19 consolidated financial statements differences basic diluted shares result solely assumed exercise certain outstanding share options warrants l cash equivalents company considers highly liquid investments original maturity three months less date purchase cash equivalents sale accounts receivable company adopted provisions sfas 140 accounting transfers servicing financial assets extinguishment liabilities april 1 2001 prior company accounted sale receivables accordance sfas 125 accounting transfers servicing financial assets extinguishment liabilities trade accounts receivable sold without recourse removed balance sheet time sale n securities investments marketable equity securities classified availableforsale securities carried fair value unrealized gains losses net income taxes reported component shareholders equity gains losses sale securities recognized using specific identification method use estimates preparation financial statements preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect amounts reported financial statements accompanying notes actual results could differ estimates p reclassifications certain prior year amounts reclassified conform 2002 presentation reclassifications effect previously disclosed net income shareholders equity q acquisition treasury stock companys practice appropriate buy shares order enhance shareholder value treasury stock held cost retired r stock based compensation company accounts stock based awards employees intrinsic value method accordance apb 25 related interpretations accordingly adopted disclosure alternative sfas 123 accounting stockbased compensation apb 25 compensation cost recognized stock options issued plans december 2002 sfas 148 accounting stock based compensation transition disclosure amendment fasb statement 123 issued statement amends sfas 123 provide alternative methods transition voluntary change fair value based method accounting stock based employee compensation addition statement amends disclosure requirements sfas 123 require prominent disclosure annual interim financial statements method accounting stock based employee compensation effects method used reporting results see standard effective beginning financial statements provisions adopted herein pro forma information regarding companys net income net income per common share years ended december 31 2002 2001 2000 required sfas 123 accounting stockbased compensation determined company accounted employee stock option plans fair value method statement purposes proforma disclosures estimated fair value options amortized expense options vesting period fair value options plan estimated date grant using blackscholes option pricing model following weighted average assumptions used grants 2002 2001 2000 respectively dividend yield 0 expected volatility 35 40 45 riskfree interest rates 35 60 expected lives 450 years blackscholes option valuation model developed use estimating fair value traded options vesting restrictions fully transferable option valuation models require input highly subjective assumptions including expected price volatility companys employee stock options characteristics significantly different traded options changes subjective input assumptions materially affect fair value estimate managements opinion existing models necessarily provide reliable single measure fair value employee stock options recently issued accounting standards sfas 143 accounting obligations retirement longlived assets issued june 2001 sfas 143 effective financial statements issued fiscal years beginning june 15 2002 become effective companys fiscal year beginning january 1 2003 standard provides accounting requirements retirement obligations associated tangible longlived assets capitalized assets cost time initial recognition liability discounted fair value time recognition using guidance provided standard new standard material impact companys financial position results operations sfas 144 accounting impairment disposal longlived assets issued october 2001 required implementation 2002 fiscal year sfas 144 addresses financial accounting reporting impairment disposal longlived assets sfas 144 retains fundamental provisions fasb statement 121 accounting impairment longlived assets longlived assets disposed supercedes accounting reporting provisions apb opinion 30 reporting results operations reporting effects disposal segment business extraordinary unusual infrequently occurring events transactions disposal segment business previously defined opinion sfas 144 also amends arb 51 consolidated financial statements eliminate exception consolidation subsidiary control likely temporary requiring operating disposal gainslosses recognized period incurred sfas 144 requires one accounting model used longlived assets disposed sale whether previously held used newly acquired broadens presentation discontinued operations include disposal transactions new standard material impact companys financial position results operations sfas 145 rescission fasb statement 4 44 64 amendment fasb statement 13 technical corrections issued april 2002 sfas 145 effective financial statements issued fiscal years beginning may 15 2002 company expect new standard significant effect financial position results operations company sfas 146 accounting costs associated exit disposal activities issued june 2002 sfas 146 effective exit disposal activities initiated december 31 2002 company expect standard effect financial position results operations company anticipate exiting disposing activities november 2002 fasb issued fasb interpretation fin 45 guarantors accounting disclosure requirements guarantees elaborates disclosures made interim annual financial statements guarantor obligations certain guarantees issued also clarifies guarantor required recognize inception guarantee liability fair value obligation undertaken issuing guarantee initial recognition measurement provisions interpretation applicable prospective basis guarantees issued modified december 31 2002 disclosure requirements effective financial statements interim annual periods ending december 15 2002 december 31 2002 company outstanding guarantees fair value financial instruments carrying amounts reflected consolidated balance sheet cash equivalents accounts receivables current portion longterm debt accounts payable approximate fair value due short term maturities instruments u advertising costs company expenses advertising costs incurred 2 acquisitions following acquisitions recorded using purchase method accounting december 2001 company purchased additional 15 equity interest orthosonics limited osn 190000 thereby raising companys ownership osn 70 85 december 2002 minority interest holders exercised put options sell remaining 15 equity interest osn company approximately 660000 therefore resulting whollyowned subsidiary results operations years ending december 31 2002 2001 included fully consolidated basis statement operations company minority interest adjustment date osn whollyowned impact additional equity ownership results operations acquisition occurred beginning periods immaterial result transactions minority interest obligation approximately 203000 settled approximately 647000 additional goodwill recorded december 2002 company acquired additional 215 equity interest orthofix brasil 70000 thereby raising companys ownership orthofix brasil 895 68 increase ownership stake resulted additional goodwill 70000 april 20 1999 company paid 19 million shareholders novamedix distribution limited ndl additional 10 equity interest following exercise shareholders put option shares thereby raising companys ownership ndl 80 90 december 1999 company acquired remaining 10 equity interest ndl 2 million april 2002 company paid 52 million earnup provision associated acquisition ndl transactions resulted increase goodwill 87 million june 25 2001 company paid 150000 additional 1875 equity interest promeca sa de cv promeca bringing total equity interest company 6625 resulting majority ownership prior july 1 2001 promeca accounted equity method accounting sales thereto eliminated consolidation product sold third party effective july 1 2001 promeca fully consolidated 2002 company sold 5 ownership promeca reducing equity interest 6125 november 28 2001 company order complete ownership acquired remaining 30 interest italian subsidiary dmo srl purchase price 86 million comprised 250000 companys common shares cash 19 million seller 30 interest dmo srl lma international sa purchase price negotiated based upon comparative market multiples 50000 total shares acquired market 3192 per share 100000 shares acquired lma international sa 25 per share 100000 shares acquired international investments venner inc 25 per share mr gainescooper companys chairman interest lma international sa indirectly controls international investments venner inc approximately 28 million purchase price applied minority interest obligation remaining amount 58 million recorded excess purchase price estimated fair values identifiable assets goodwill result transaction dmo srl whollyowned subsidiary company results operations dmo sr1 year ending december 31 2001 included fully consolidated basis statement operations company minority interest adjustment unowned portion date acquisition impact additional equity ownership results operations acquisition occurred january 1 2001 would decrease 492000 minority interest would increased net income amount may 3 2001 company exchanged debt amount 15 million remaining 70 ownership orthofix sa french distributor result transaction approximately 15 million additional goodwill recorded effective may 3 2001 orthofix sa fully consolidated august 31 2000 company acquired substantially assets orthotrac pneumatic vest business kinesis medical inc 73 million 625000 related accrued integration costs 343000 related conversion outstanding stock options warrants balance consisting cash additionally agreement provides contingent payments 700000 upon receipt unique healthcare reimbursement code 400000 upon attainment certain sales thresholds acquisition recorded using purchase method accounting 2002 company paid termination benefits 290000 incurred costs 175000 relocate kinesis minnesota facility companys texas facility additional termination relocation costs associated transaction expected immaterial results operations included statement operations date acquisition impact acquisition results operations occurred january 1 2000 would immaterial 3 inventories december 31 thousands 2002 2001 raw materials 2177 2758 workinprocess 1210 1057 finished goods 11668 8866 field inventory 5260 3780 consignment inventory 5910 4923 less reserve obsolescence 2754 2135 23471 19249 4 securities investments 2000 company acquired 10 interest oped ag 25 million cash accounted cost basis 2002 2001 250000 related marketable equity securities included consolidated balance sheet securities investments january 10 2002 company established joint venture orthorx prior formation joint venture operations orthorx included companys financial statements company invested 30 million acquire 45 share combination cash 20 million contributed assets net book value 10 million november 2002 company contributed additional 10 million cash raised ownership 46 company accounting investment equity method reduced investment 19 million december 31 2002 reflect portion joint ventures net losses year ended february 5 2003 company purchased equity interest innovative spinal technologies ist startup company focused commercializing spinal products 15 million investment accounted cost 5 property plant equipment december 31 thousands 2002 2001 cost buildings 3414 3125 plant equipment 23026 16871 furniture fixtures 7138 7688 33578 27684 accumulated depreciation 19737 15104 13841 12580 depreciation expense years ended december 31 2002 2001 2000 5126000 3807000 3504000 respectively 6 patents intangible assets december 31 thousands 2002 2001 cost patents 16104 14317 522 644 16626 14961 accumulated amortization patents 12196 10594 216 250 4214 4117 amortization expense intangible assets estimated approximately 1140000 417000 140000 periods ending december 31 2003 2004 2005 2006 2007 respectively 7 goodwill sfas 142 intangible assets deemed indefinite lives goodwill subject annual impairment testing using guidance criteria described standard testing requires comparison carrying values fair values appropriate carrying value impaired assets reduced fair value company performed impairment tests goodwill indefinite lived intangible assets determined impairment exists accordance sfas 142 company discontinued amortization goodwill effective january 1 2002 nonamortization goodwill increased companys net income earnings per share beginning 2002 following unaudited pro forma results assuming goodwill amortized prior january 1 2002 december 31 thousands 2002 2001 cost 80379 78305 accumulated amortization 21598 58781 56707 discussion acquisitions since january 1 2001 associated goodwill see note 2 consolidated financial statements total goodwill acquired segment 2002 2001 follows thousands 2002 2001 americas 70 719 international 1381 11779 1451 12498 foreign currency translation effect goodwill december 31 2002 2001 623000 302000 respectively 8 bank borrowings december 31 thousands 2002 2001 borrowings lines credit 6977 3980 december 31 2002 2001 weighted average interest rate year end bank borrowings 406 402 current portion longterm debt 703 775 borrowings lines credit consist borrowings euros company unused available lines credit 138 million 92 million december 31 2002 2001 respectively terms lines credit give company option borrow amounts italy rates determined time borrowing lines credit unsecured 9 current liabilities december 31 thousands 2002 2001 accrued expenses 7031 8182 salaries related taxes payable 4367 4415 payables 2500 1699 provision ame bonus earnout note 15 5182 provision novamedix earnout note 2 4363 income taxes payable 1033 1619 20113 25460 10 longterm debt december 31 thousands 2002 2001 longterm obligations 336 1402 loans 107 178 443 1580 less current portion 399 740 44 840 longterm obligations include note 277000 2001 777000 issued connection acquisition osteogenics december 1994 obligation fixed interest rate 823 matures 2003 remaining longterm obligation represents forgivable tax loan issued connection companys facility mckinney texas loan forgiven amount equal ad valorem taxes less taxes land actually paid company dollar tax years 20012005 accumulated amount loan forgiven january 31 2006 become due payable within thirty days thereafter interest 75 compounded annually date loan advance repayment aggregate maturities longterm debt december 31 2002 follows 2003 399000 2004 22000 2005 22000 11 commitments leases company entered operating leases facilities equipment rent expense companys operating leases years ended december 31 2002 2001 2000 approximately 2282000 2524000 1706000 respectively future minimum lease payments operating leases december 31 2002 follows thousands 2003 2298 2004 2108 2005 1706 2006 1614 2007 1015 thereafter 2258 total 10999 connection incorporation orthofix ag company granted option purchase 15 shares company minority shareholders latter granted option request company purchase remaining 15 shares options exercisable five ten years incorporation orthofix ag purchase consideration based multiple net income orthofix ag twelve month period preceding exercise date december 2002 company acquired rights minimally invasive method fracture stabilization fixation hip company paid 1 million worldwide rights market product four years addition company pay royalty 5 million based future sales company option right acquire patents pertaining schedule devices 5 million royalty fee paid company four year licensing period applied purchase price patents 12 business segment information company designs manufactures markets distributes medical equipment used principally musculoskeletal medical specialists orthopedic applications companys operations managed two geographic business units americas international plus group activities americas consists united states mexico brazil 2001 mexico brazil included international segment information reclassified include mexico brazil americas segment periods presented international consists rest world plus export distribution operations net sales operating income identifiable assets three years ended december 31 2002 company subsidiaries follows capital expenditures segment follows thousands 2002 2001 2000 americas 3631 3902 3084 international 3492 2863 2498 group activities 7 4 7130 6769 5582 geographical information analysis net sales geographic destination thousands 2002 2001 2000 us 117991 110345 87374 4920 2689 americas 122911 113034 87374 uk 22099 19053 15512 italy 12601 11041 10590 19984 19232 18306 international 54684 49326 44408 177595 162360 131782 sales netherlands antilles analysis longlived assets geographic area thousands 2002 2001 us 39936 40149 italy 10529 9163 uk 12202 10826 cyprus 10373 9588 others 8549 6524 81589 76250 13 income tax expense company subsidiaries taxed rates applicable within respective companys jurisdiction composite income tax rate vary according jurisdictions profits arise components provision income tax expense benefit follows year ended december 31 thousands 2002 2001 2000 italy current 2097 1085 2725 deferred 51 211 152 cyprus current 516 133 5210 deferred 28 56 230 uk current 1518 1342 1203 deferred 17 404 68 us current 7651 5097 6045 deferred 1319 165 1027 netherlands antilles current 5 145 85 current 4 83 85 deferred 221 total tax expense 12875 7867 16234 income continuing operations provision income taxes consisted year ended december 31 thousands 2002 2001 2000 us 24781 11689 14866 non us 15749 18978 47709 40530 30667 62575 tax effects significant temporary differences comprise deferred tax liabilities assets follows thousands 2002 2001 deferred tax liabilities goodwill 570 590 patents 375 317 inventories 1 9 property plant equipment 95 130 1161 1013 2202 2041 thousands 2002 2001 deferred tax assets accrued compensation 128 412 inventories related reserves 1146 1440 allowance doubtful accounts 1997 2108 net operating loss carry forwards 80 79 deferred royalties 939 934 162 134 4128 5107 net deferred tax asset 1926 3066 deferred tax provision relates tax effects amortization goodwill deductible income tax purposes period five years prior january 1 2002 charged operating results period twenty years 2000 company generated net taxable losses locations likely losses would utilized accordingly valuation allowance established 2001 allowance reversed taxable income generated loss carry forwards expected utilized prior expiration portion difference relates income tax charged year intergroup stock profits arising sale inventories one subsidiary another sold third parties year end twelve months ended december 31 2002 2001 2000 amounted 894000 556000 113000 respectively 2001 effective tax rate benefited deduction italy intragroup dividend subsequent purchase remaining 30 minority interest dmo resulting basis differential taxable future therefore deferred tax established difference book tax basis net assets dmo company recorded additional income taxes applicable undistributed earnings foreign subsidiaries considered indefinitely reinvested earnings amounted approximately 1241 million 944 million december 31 2002 2001 respectively may become taxable upon remittance dividends upon sale liquidation foreign subsidiaries practicable determine amount net additional income tax may payable earnings repatriated 14 related parties following related party balances transactions three years ended december 31 2002 company companies directors andor executive officers interest reflected consolidated financial statements company buys components related av impulse system purchases quality control logistic services buys laryngeal mask companies two board members beneficial minority interest year ended december 31 thousands 2002 2001 2000 sales 1275 1264 1158 purchases 18038 12126 9679 accounts payable 2075 1455 613 accounts receivable 239 233 164 due officers included assets 330 15 contingencies litigation company normal course business involved various lawsuits time addition company subject certain contingencies discussed january 29 1999 two couples owned shares common stock american medical electronics inc ame commenced civil action company one subsidiaries review committee defined seeking among relief maximum earnout bonus merger agreement company vigorously defending action august 21 1995 company acquired substantially outstanding stock ame merged ame orthofix inc prior merger orthofix inc operating activity principal terms acquisition included cash payments approximately 475 million issuance approximately 195 million shares companys common stock fair market value approximately 335 million additionally merger agreement provided payments contingent upon attainment certain gross revenue thresholds company 1995 1996 andor 1997 compensatory nature earnout bonus paid cash common stock parent combination thereof payout date defined merger agreement company announced review committee established determine contingent amounts payable agreement plan merger relating acquisition ame determined orthofix pay ame record holders 500000 satisfied cash issuance treasury shares fair market value 259000 12 net recovery received judgment biomet ebi ms maximum 5500000 novamedix filed action february 21 1992 kinetic concepts inc kci alleging infringement patents relating novamedixs av impulse system product breach contract unfair competition action novamedix seeking permanent injunction enjoining infringement kci novamedix also seeks damages relating past infringement breach contract unfair competition kci filed counterclaims alleging novamedix engaged inequitable conduct united states patent trademark office fraud kci novamedix engaged common law statutory unfair competition kci seeks declaratory judgment patents invalid unenforceable infringed kci also seeks monetary damages injunctive relief costs attorneys fees unspecified relief 2002 united states patent trademark office issued reexamination certificates validating four us vascular patents owned us district court san antonio texas restored litigation active status provided scheduling order govern matter kci sought add charge infringement novamedix recently issued kci patent request denied procedural basis kci retains right seek enforcement patent separate proceeding portion amounts received payable former owners novomedix original purchase agreement april 17 2001 company received administrative request records office inspector general united states department health human services june 20 2001 company received similar administrative request records office inspector general united states department defense company cooperated government representatives throughout inquiry company continues believe primary focus governments inquiry concerns appropriateness claims company submitted federal health programs offlabel use companys fdaapproved pulsed electronic magnetic field device billing coding offlabel use companys outside counsel presented governmental representatives several letters describing companys coding billing practices offlabel use pulsed electronic magnetic field device discussed companys understanding medicare medicaid champustricare rules respect offlabel use fdaapproved devices company believe resolution matter material adverse effect financial condition cash flows managements opinion company currently involved legal proceeding individually aggregate material effect financial position liquidity operating results company concentrations credit risk financial instruments potentially subject company concentrations credit risk primarily cash investments accounts receivable cash investments primarily money market funds deposited major financial center banks concentrations credit risk respect accounts receivable limited due large number individuals comprising companys customer base certain customers rely third party healthcare payers private insurance companies governments make payments company behalf accounts receivable countries government funds medical spending primarily located north africa middle east south america asia europe company considered special situations establishing allowances potentially uncollectible accounts receivable countries argentina egypt turkey company maintains allowance losses based expected collectability accounts receivable company sells via direct sales force distributors companys distributor av impulse system north america kendall healthcare inc accounted 10 net sales 2002 11 net sales 2001 2000 16 pensions deferred compensation orthofix inc sponsors defined contribution benefit plan 401k plan covering substantially full time employees 401k plan allows participants contribute 15 pretax compensation subject certain limitations company matching 100 first 2 employees base compensation 50 next 4 employees base compensation contributed 401k plan years ended december 31 2002 2001 2000 expenses incurred relating 401k plan including matching contributions approximately 763000 696000 563000 respectively company operates defined contribution pension plans employees described meeting minimum service requirements companys expenses pension contributions 2002 2001 2000 approximately 415000 335000 240000 respectively italian law orthofix srl dmo srl accrue behalf employees deferred compensation paid termination employment years provision deferred compensation based percentage employees current annual remuneration plus annual charge deferred compensation also accrued leaving indemnity payable agents case dismissal regulated national contract equal approximately 35 total commissions earned company companys expenses deferred compensation 2002 2001 2000 approximately 200000 163000 165000 respectively deferred compensation payments 120000 211000 153000 made 2002 2001 2000 respectively yearend balance represents amount would payable employees agents terminated employment date 17 share option plans warrants option plans december 31 2002 company four stockbased compensation plans described staff share option plan staff stock option plan staff plan fixed stock option plan adopted april 1992 staff plan company may grant options employees 1989700 shares common stock estimated fair market value options date grant options generally vest based years service options fully vested within five years date grant options granted staff plan expire ten years date grant ame 1983 1990 plans terms merger agreement company acquired ame options ame common stock still outstanding 1983 plan 1990 plan hereinafter collectively referred ame plan assumed effective time merger company exercisable common shares accordance terms adjustment reflect exchange ratio adjustment immediately following merger options granted ame plan totaled 624794 5394 remained outstanding december 31 2002 expire throughout 2003 2004 executive share option plan executive share option plan executive plan approved shareholders march 1992 1945000 shares reserved issuance certain executive officers grant price determined companys board directors cannot less fair market value time grant 1440 equivalent 120 price initial public offering price 1200 fifty percent options granted vest automatically tenth anniversary date grant earlier satisfaction performance keyed market price common shares service condition remaining fifty percent vest 20 increments first fifth anniversaries date grant options granted executive share option plan expire later june 2004 performance accelerated stock option agreement december 1999 companys board directors adopted resolution approving june 29 2000 companys shareholders approved grant certain executive officers company performance accelerated stock options pasos purchase 1000000 shares companys common stock subject terms summarized option purchase companys common stock pasos granted effective january 1 1999 grant date exercise price equal 17875 per share price companys common stock date shareholders approved reservation 1000000 shares issuance paso plan pasos include servicebased performancebased vesting provisions servicebased provisions subject continued employment executive pasos become 100 nonforfeitable exercisable fifth anniversary grant date vesting pasos accelerated however certain stock price targets achieved performancebased vesting provisions provide vesting oneeighth paso grant 500 increase price companys common stock 1500 per share total number shares eligible accelerated vesting annual basis limited 20 number shares subject paso cumulative carryover unvested portion shares eligible accelerated vesting prior years accordance option plan shares exercised prior december 31 2002 pasos provide one exception general vesting exercise rules described price companys common stock equals exceeds 5500 per share december 31 2002 100 shares subject paso nonforfeitable exercisable 5500 per share price target attained prior december 31 2002 formula describe would applied determine number vested options december 31 2002 options subject paso nonforfeitable exercisable options subject paso earlier exercised terminated terminate tenth anniversary grant date warrants ame warrants time merger ame warrants purchase 320000 shares ame common stock ame warrants outstanding assumed company pursuant merger agreement take account merger exchange ratio 185592 common stock warrants outstanding december 31 2002 ame warrants purchase 12461 shares companys common stock outstanding exercisable expire december 2003 december 31 2002 exercise price 3061 per common share kinesis warrants time acquisition kinesis medical incs assets warrants purchase 672685 shares kinesis common stock kinesis warrants outstanding assumed company pursuant asset purchase agreement adjustment take account agreed exchange ratio 27400 common stock warrants outstanding december 31 2002 warrants purchase 25951 shares companys common stock remain outstanding exercisable expire august 31 2005 exercise prices fixed range 19125 3825 per common share ame warrants settled option warrant holder payment exercise price cash b tendering previously owned common shares commonly referred pyramiding c combination approved board directors kinesis warrants settled payment exercise price cash december 31 2002 based upon exercise price warrants number shares companys common stock settle outstanding warrants would immaterial summaries status companys stock option warrant plans december 31 2002 2001 2000 changes years ended dates presented december 31 2002 company reserved total 24 million shares common stock issuance eligible participants option plans 2386369 warrant holders 38412 18 subsequent events march 4 2003 company announced would complete share purchase agreement acquire remaining 48 minority interest intavent orthofix limited iol 205 million company utilized independent firm perform appraisal valuation iol company use cash hand complete purchase intavent limited intavent mr gainescooper chairman orthofix settlor trust owns 30 interest intavent december 31 2002 iol fully consolidated subsidiary company result transaction minority interest obligation approximately 99 million settled approximately 106 million additional goodwill recorded 19 earnings per share three years period ended december 31 2002 adjustments net income purpose calculating basic diluted net income per common share following reconciliation weighted average shares used basic diluted net income per common share computations include diluted shares outstanding calculation 59000 options 2002 53144 options 2001 142272 options 2000 inclusion would antidilutive exercise price exceeded average market price common stock respective periods 20 quarterly financial data unaudited sum per share earnings quarter may equal earnings per share year due change average share calculations accordance prescribed reporting requirements schedule 2 valuations qualifying accounts years ended december 31 2002 2001 2000 1 established connection acquisition kinesis s1 board directors orthofix international nv audits consolidated financial statements referred report dated june 25 2002 appearing form 10k also included audit financial statement schedule listed index page form 10k opinion financial statement schedule presents fairly material respects information set forth therein two years period ended december 31 2001 read conjunction related consolidated financial statements pricewaterhousecoopers london england june 25 2002 s2item 15 exhibits financial statement schedules reports form 8k documents filed part report form 10k following documents filed part report form 10k 1 financial statements see index consolidated financial statements page form 10k 2 financial statement schedules see index consolidated financial statements page form 10k 3 exhibits exhibit number description 31 certificate incorporation company filed exhibit companys annual report form 20f dated june 29 2001 incorporated herein reference 32 articles association company amended filed exhibit companys quarterly report form 10q quarter ended september 30 2004 incorporated herein reference 101 orthofix inc employee stock purchase plan filed exhibit companys annual report form 10k fiscal year ended december 31 2002 incorporated herein reference 102 orthofix international nv staff share option plan filed exhibit companys annual report form 10k fiscal year ended december 31 2002 incorporated herein reference 103 form performance accelerated stock option staff share option plan filed exhibit companys annual report form 10k fiscal year ended december 31 2002 incorporated herein reference 104 form performance accelerated stock option inducement agreement filed exhibit companys annual report form 10k fiscal year ended december 31 2003 incorporated reference 105 orthofix international nv 2004 long term incentive plan amended filed exhibit companys quarterly report form 10q quarter ended september 30 2004 incorporated herein reference 106 form nonqualified stock option agreement orthofix international nv 2004 long term incentive plan 107 form nonqualified stock option agreement nonemployee directors orthofix international nv 2004 long term incentive plan 108 employment agreement dated july 1 2001 orthofix international nv charles w federico filed exhibit companys annual report form 10k fiscal year ended december 31 2002 incorporated herein reference 109 employment agreement dated march 1 2003 company thomas hein filed exhibit companys annual report form 10k fiscal year ended december 31 2002 incorporated herein reference 1010 employment agreement dated march 1 2003 company gary henley filed exhibit companys annual report form 10k fiscal year ended december 31 2002 incorporated herein reference 1011 employment agreement dated november 20 2003 orthofix international nv bradley r mason filed exhibit companys annual report form 10k fiscal year ended december 31 2003 incorporated herein reference 1012 change control agreement dated february 18 2005 orthofix inc raymond c kolls filed exhibit companys current report form 8k filed february 22 2005 incorporated herein reference 1013 full recourse promissory note orthofix international nv charles w federico dated january 10 2002 filed exhibit companys annual report form 10k fiscal year ended december 31 2002 incorporated herein reference 1014 full recourse promissory note orthofix international nv gary henley dated january 10 2002 filed exhibit companys annual report form 10k fiscal year ended december 31 2002 incorporated herein reference 1015 share purchase agreement dated march 20 2003 orthofix international nv intavent limited filed exhibit companys quarterly report form 10q quarter ended june 30 2003 incorporated herein reference 1016 acquisition agreement dated november 20 2003 among orthofix international nv trevor acquisition inc breg inc bradley r mason shareholders representative filed exhibit companys current report form 8k filed january 8 2004 incorporated herein reference 1017 voting subscription agreement dated november 20 2003 among orthofix international nv significant shareholders breg inc identified signature pages thereto filed exhibit companys current report form 8k filed january 8 2004 incorporated herein reference 1018 credit agreement dated december 30 2003 among colgate medical limited borrower orthofix international nv certain subsidiaries borrower guarantors certain limited guarantors party thereto lenders parties thereto wachovia bank national association administrative agent wachovia capital markets llc sole lead arranger book manager filed exhibit companys current report form 8k filed january 8 2004 incorporated herein reference 1019 first amendment dated september 30 2004 credit agreement dated december 30 2003 among colgate medical limited borrower orthofix international nv certain subsidiaries borrower guarantors certain limited guarantors party thereto lenders parties thereto wachovia bank national association administrative agent wachovia capital markets llc sole lead arranger book manager filed exhibit companys current report form 8k filed october 6 2004 incorporated herein reference 141 code ethics company filed exhibit companys annual report form 10k fiscal year ended december 31 2003 incorporated herein reference 211 subsidiaries company 231 consent ernst young independent auditors 311 rule 13a14a15d14a certification chief executive officer 312 rule 13a14a15d14a certification chief financial officer 321 section 1350 certification chief executive officer 322 section 1350 certification chief financial officer filed herewith 1 management contract compensatory plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized orthofix international nv dated march 15 2005 charles w federico name charles w federico title chief executive officer president pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated index consolidated financial statements schedules provision made applicable accounting regulation securities exchange commission required related instructions inapplicable therefore omitted statement managements responsibility financial statements shareholders orthofix international nv management responsible preparation consolidated financial statements related information presented report consolidated financial statements include amounts based managements estimates judgments prepared conformity accounting principles generally accepted united states financial information report shareholders consistent consolidated financial statements company maintains accounting internal control systems provide reasonable assurance reasonable cost assets safeguarded loss unauthorized use disposition financial records reliable preparing financial statements maintaining accountability assets systems augmented written policies organizational structure providing division responsibilities careful selection training qualified personnel company engaged ernst young llp independent accountants 2004 2003 2002 audit render opinion consolidated financial statements accordance auditing standards public company accounting oversight board united states generally accepted united states standards include assessment systems internal controls test transactions extent considered necessary support opinion board directors audit committee consisting solely outside directors company meets periodically management independent accountants ensure meeting responsibilities discuss matters concerning internal controls financial reporting ernst young llp full free access audit committee james f gero chairman board directors charles w federico president chief executive officer director thomas hein chief financial officer managements report internal control financial reporting management also responsible establishing maintaining adequate internal control financial reporting defined rules 13a15f 15d15f securities exchange act 1934 amended inherent limitations internal control financial reporting may prevent detect misstatements projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management including principal executive officer principal financial officer conducted assessment effectiveness internal control financial reporting december 31 2004 conducting assessment management used criteria issued committee sponsoring organizations treadway commission internal control integrated framework based assessment management concluded companys internal control financial reporting effective reasonable assurance level december 31 2004 reasonable assurance includes understanding remote likelihood material misstatements prevented detected timely basis independent registered public accounting firm issued attestation report managements assessment internal control financial reporting appears following page annual report form 10k report independent registered public accounting firm board directors shareholders orthofix international nv audited accompanying consolidated balance sheets orthofix international nv december 31 2004 2003 related consolidated statements operations changes shareholders equity cash flows three years period ended december 31 2004 audits also included financial statement schedules listed index item 15a financial statements schedules responsibility companys management responsibility express opinion financial statements schedules based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position orthofix international nv december 31 2004 2003 consolidated results operations cash flows three years period ended december 31 2004 conformity us generally accepted accounting principles also opinion related financial statement schedules considered relation basic consolidated financial statements taken whole present fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states effectiveness orthofix international nvs internal control financial reporting december 31 2004 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated march 14 2005 expressed unqualified opinion thereon ernst young llp charlotte north carolina march 14 2005 report independent registered public accounting firm managements assessment effectiveness internal control financial reporting board directors shareholders orthofix international nv audited managements assessment included accompanying managements report internal control financial reporting orthofix international nv maintained effective internal control financial reporting december 31 2004 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria orthofix international nvs management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinion managements assessment opinion effectiveness companys internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting evaluating managements assessment testing evaluating design operating effectiveness internal control performing procedures considered necessary circumstances believe audit provides reasonable basis opinion companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion managements assessment orthofix international nv maintained effective internal control financial reporting december 31 2004 fairly stated material respects based coso criteria also opinion orthofix international nv maintained material respects effective internal control financial reporting december 31 2004 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets december 31 2004 2003 related consolidated statements operations changes shareholders equity cash flows three years period ended december 31 2004 orthofix international nv report dated march 14 2005 expressed unqualified opinion thereon ernst young llp charlotte north carolina march 14 2005 consolidated balance sheets december 31 2004 2003 accompanying notes form integral part consolidated financial statements consolidated statements operations years ended december 31 2004 2003 2002 accompanying notes form integral part consolidated financial statements consolidated statements changes shareholders equity years ended december 31 2004 2003 2002 accompanying notes form integral part consolidated financial statements consolidated statements cash flows years ended december 31 2004 2003 2002 accompanying notes form integral part consolidated financial statements orthofix international nv notes consolidated financial statements description business orthofix international nv subsidiaries company multinational corporation principally involved design development manufacture marketing distribution medical equipment principally orthopedic products market 1 significant accounting policies basis consolidation consolidated financial statements include financial statements company wholly owned majorityowned subsidiaries entities company control percents ownership december 31 2004 follows 100 owned unless otherwise noted orthofix inc usa breg inc usa orthofix holdings inc usa orthofix us llc usa orthofix srl italy novamedix services limited uk orthosonics limited uk intavent orthofix limited uk colgate medical limited uk orthofix limited uk orthofix uk limited uk novamedix distribution limited cyprus inter medical supplies limited cyprus inter medical supplies limited seychelles orthofix ag switzerland orthofix gmbh germany orthofix international bv holland orthofix ii bv holland orthofix sa france implantes sistemas medicos inc puerto rico orthofix brasil brazil 895 owned promeca sa de cv mexico 6125 owned intercompany accounts transactions eliminated consolidation equity method accounting used company significant influence operating decisions cannot exercise control equity method original investments recorded cost adjusted companys share undistributed earnings losses companies material intercompany transactions profits associated equity investees eliminated consolidation results subsidiaries acquired year included consolidated statements operations date acquisition b foreign currency translation foreign currency translation performed accordance sfas 52 foreign currency translation balance sheet accounts except shareholders equity translated year end exchange rates revenue expense items translated weighted average rates exchange prevailing year gains losses 09 million 04 million 06 million years december 31 2004 2003 2002 respectively resulting foreign currency transactions included income expense gains losses resulting translation foreign currency financial statements recorded accumulated comprehensive income component shareholders equity orthofix international nv notes consolidated financial statements cont c inventories valued lower cost estimated net realizable value provision excess obsolete items cost determined weightedaverage basis approximates fifo method valuation workinprocess finished goods field inventory consignment inventory includes cost materials labor production reporting currency reporting currency united states dollar e market risk ordinary course business company exposed impact changes interest rates foreign currency fluctuations companys objective limit impact movements earnings cash flows order achieve objective company seeks balance nondollar income expenditures company ordinarily use derivative instruments hedge foreign exchange exposure 2004 company made use interest rate swap agreement manage exposure fluctuations interest rates see note 11 additional information f longlived assets property plant equipment stated cost less accumulated depreciation impairment charges computed accordance companys policy depreciation computed straightline basis useful lives assets except land depreciated depreciation leasehold improvements computed shorter lease term useful life asset useful lives follows years buildings 25 33 plant equipment 2 10 furniture fixtures 4 8 expenditures maintenance repairs minor renewals improvements extend life respective asset expensed expenditures renewals improvements capitalized assets related accumulated depreciation adjusted property retirements disposals resulting gain loss included operations fully depreciated assets remain accounts retired service patents intangible assets recorded cost acquired part business combination estimated fair value assets primarily include patents technology agreements trademarks licenses customer relationships distribution networks generally amortized using straightline method estimated useful lives 5 25 years acquisitions completed prior june 30 2001 acquisitions completed subsequent june 30 2001 identifiable intangible assets generally amortized useful lives using method amortization reflects pattern economic benefit intangible assets consumed goodwill represents excess purchase price fair value net assets acquired businesses amortized straightline method cases 15 20 years acquisitions completed prior june 30 2001 effective july 1 2001 company adopted provisions statement financial accounting standards sfas 142 goodwill intangible assets applicable business combinations completed june 30 2001 effective january 1 2002 additional provisions sfas 142 relating business combinations completed prior june 30 2001 became effective adopted provisions sfas 142 intangible assets deemed indefinite lives goodwill subject amortization beginning january 1 2002 orthofix international nv notes consolidated financial statements cont company reviews longlived assets goodwill indefinite lived intangible assets whenever events changes circumstances indicate carrying amount asset may recoverable general company recognizes impairment loss sum undiscounted expected future cash flows assets remaining estimated useful lives less carrying value assets measurement impairment loss based fair value related asset group assets g revenue recognition revenues recognized income period title passes products delivered royalties revenues recognized royalty earned revenues inventory delivered consignment recognized product accepted used consignee revenues exclude value added local taxes intercompany sales trade discounts revenues reduced estimated returns companys limited guarantee programs shipping handling costs included cost sales h research development costs expenditures research development expensed incurred income taxes income taxes provided using liability method accordance sfas 109 accounting income taxes deferred income taxes arise differences treatment income expense items financial reporting income tax purposes deferred tax assets liabilities resulting differences recorded based enacted tax rates effect differences expected reverse company operations various tax jurisdictions j concentration credit risk company performs ongoing credit evaluations customers generally require collateral company becomes aware customers inability meet obligations case bankruptcy filing deterioration customers financial condition company records specific reserve reduce related receivable amount company reasonably believes collectible company also records reserves bad debt customers based variety factors including length time receivables past due financial condition customer macroeconomic conditions historical experience company maintains reserves potential credit losses within managements expectations company invests excess cash deposits major banks company experienced losses deposits k net income per common share net income per common share computed accordance sfas 128 earnings per share net income per common share basic computed using weighted average number common shares outstanding respective years net income per common share diluted computed using weighted average number common equivalent shares outstanding respective years common equivalent shares represent diluted effect assumed exercise outstanding share options see note 19 consolidated financial statements differences basic diluted shares result solely assumed exercise certain outstanding share options warrants l cash equivalents company considers highly liquid investments original maturity three months less date purchase cash equivalents orthofix international nv notes consolidated financial statements cont restricted cash restricted cash consists cash held certain subsidiaries distribution transfer orthofix international nv parent restricted senior secured bank facility described note 10 restricts parents access cash held colgate medical limited subsidiaries orthofix group access cash operational purposes n sale accounts receivable company follows provisions sfas 140 accounting transfers servicing financial assets extinguishment liabilities trade accounts receivable sold without recourse removed balance sheet time sale securities investments marketable equity securities classified availableforsale securities carried fair value unrealized gains losses net income taxes reported component shareholders equity gains losses sale securities recognized using specific identification method p use estimates preparation financial statements preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect amounts reported financial statements accompanying notes actual results could differ estimates q reclassifications certain prior year amounts reclassified conform 2004 presentation reclassifications effect previously reported net income shareholders equity r acquisition treasury stock companys practice time buy shares order enhance shareholder value treasury stock held cost retired stock based compensation company accounts stock based awards employees intrinsic value method accordance apb 25 related interpretation accordingly company adopted disclosure alternative sfas 148 accounting stock based compensation transition disclosure amendment fasb statement 123 sfas 148 apb 25 compensation cost recognized stock options issued fair market value plans company recognize compensation expense awards granted less fair market value orthofix international nv notes consolidated financial statements cont pro forma information regarding companys net income net income per common share years ended december 31 2004 2003 2002 required sfas 148 determined company accounted employee stock option plans fair value method statement purposes pro forma disclosures estimated fair value options amortized expense options vesting period fair value options plan estimated date grant using blackscholes option pricing model following weighted average assumptions used grants 2004 2003 2002 respectively dividend yield 0 expected volatility 35 riskfree interest rates 35 expected lives 450 years recently issued accounting standards december 2004 financial accounting standards board fasb issued statement financial accounting standards sfas 123 r sharebased payment revision fasb statement 123 accounting stockbased compensation sfas 123 r also supersedes apb opinion 25 accounting stock issued employees revision require companies recognize compensation costs based fair value equity liability instruments issued report benefits tax deductions excess recognized compensation cost financing cash flow rather operating cash flow reported accompanying consolidated statements cash flows statement 123 r covers wide range sharebased compensation arrangements including share options restricted share plans performancebased awards share appreciation rights employee share purchase plans company currently expects adopt sfas 123 r effective july 1 2005 using modified prospective method modified prospective method compensation cost recognized financial statements beginning effective date based requirements sfas 123 r sharebased payments granted date based requirements sfas 123 unvested awards granted prior effective date sfas 123 r company currently evaluating different valuation methods available determine fair market value companys stock options therefore unable estimate impact new standard orthofix international nv notes consolidated financial statements cont u fair value financial instruments carrying amounts reflected consolidated balance sheet cash equivalents restricted cash accounts receivable shortterm bank debt accounts payable approximate fair value due shortterm maturities instruments companys long term secured debt carries floating rate interest approximates fair value v advertising costs company expenses advertising costs incurred w derivative instruments company manages exposure fluctuations interest rates within consolidated financial statements according hedging policy company may engage nonleveraged transactions involving various financial derivative instruments manage exposed positions policy requires company formally document relationship hedging instrument hedged item well riskmanagement objective strategy undertaking hedge transaction addition company formally assesses hedges inception ongoing basis whether derivative used hedging transaction effective offsetting changes cash flows hedged item whether derivative may expected remain effective future periods determined derivative ceased effective hedge company discontinue related hedge accounting prospectively determination would made 1 derivative longer effective offsetting changes cash flows hedged item 2 derivative expires sold terminated exercised 3 management determines designating derivative hedging instrument longer appropriate ineffective portions changes fair value cash flow hedges recognized earnings company follows statement financial accounting standards sfas 133 accounting derivative instruments hedging activities amended interpreted requires derivatives recorded either assets liabilities balance sheet respective fair values companys interest rate swap identified cash flow hedge cash flow hedge effective portion derivatives change fair value ie gains losses initially reported component comprehensive income net related taxes subsequently reclassified net earnings hedged exposure affects net earnings orthofix international nv notes consolidated financial statements cont x comprehensive income accumulated comprehensive income loss comprised foreign currency translation adjustments effective portion gain loss derivatives designated accounted cash flow hedge unrealized gains losses available sale securities components changes comprehensive income loss follows 2 acquisitions following acquisitions recorded using purchase method accounting december 30 2003 company purchased 100 stock breg inc breg purchase price 150 million plus closing adjustments acquisition costs acquisition related costs financed 110 million senior secured bank debt cash hand issuance 731715 shares orthofix common stock acquisition accounted using purchase method accordance statement financial accounting standards sfas 141 business combinations allocation purchase price performed based assignment fair values assets acquired liabilities assumed fair values based part appraisals performed independent appraisal firm accordance sfas 141 company used year finalize purchase price allocation acquisition purchase price subject potential upward downward adjustments based difference estimated final working capital breg defined acquisition agreement portion purchase price 120 million placed escrow fund indemnities defined acquisition agreement distributions escrow agreement scheduled march 1 2005 december 30 2005 orthofix international nv notes consolidated financial statements cont allocation final purchase price reflects following march 20 2003 company completed acquisition remaining 48 minority interest intavent orthofix limited iol 206 million including acquisition costs effective date january 14 2003 company utilized independent firm complete valuation iol company used cash hand complete purchase intavent limited intavent mr gainescooper director orthofix settlor trust owns 30 interest intavent iol fully consolidated subsidiary whollyowned subsidiary company recorded additional equity purchase using purchase method accounting impact included results operations date acquisition final allocation purchase price reflects settlement minority interest obligation approximately 99 million identifiable intangible assets approximately 12 million 95 million additional goodwill summary pro forma condensed unaudited results operations earnings per share years ended december 31 2003 2002 assuming consummation acquisitions 2003 january 1 2003 2002 respectively follows first quarter 2004 company purchased distributor puerto rico 14 million consisted 11 million cash 03 million assumed liabilities final purchase price included approximately 09 million working capital 05 million goodwill operations acquired distributor included accompanying consolidated statement operations date acquisition company option purchase remaining 30 shares orthofix ag company exercised option 2004 paid approximately 05 million remaining shares recorded additional goodwill resulted orthofix ag wholly owned subsidiary orthofix international nv notes consolidated financial statements cont 3 inventories december 31 thousands 2004 2003 raw materials 6456 6153 workinprocess 2445 2453 finished goods 14823 13437 field inventory 5346 5202 consignment inventory 7835 7124 less reserve obsolescence 4010 3656 32895 30713 4 securities investments 2003 ferrer freeman co private equity firm invests exclusively health care health carerelated companies purchased 100 healthsouths interest orthorx resulted becoming companys new partner joint venture may 6 2003 june 16 2003 company invested additional 350000 1150000 respectively orthorx joint venture ferrer freeman co matched companys investment company accounting investment using equity method reduced investment zero 16 million december 31 2004 2003 respectively reflect portion joint ventures net losses years ended march 2004 company sold portion investment orthorx partner joint venture ferrer freeman co sale combined electing participate next round financing reduced companys ownership orthorx approximately 21 company recorded gain sale investment approximately 08 million reported income 2003 company purchased equity interest innovative spinal technologies ist startup company focused commercializing spinal products 15 million investment accounted cost method 2003 company sold 250000 marketable equity securities 354000 cash company total investments held cost 41 million 41 million 26 million december 31 2004 2003 2002 respectively company assessed cost investments noting impairment carrying value orthofix international nv notes consolidated financial statements cont 5 property plant equipment december 31 thousands 2004 2003 cost buildings 3733 4728 plant equipment 40409 31445 furniture fixtures 7258 9064 51400 45237 accumulated depreciation 33074 26068 18326 19169 depreciation expense years ended december 31 2004 2003 2002 78 million 57 million 51 million respectively 6 patents intangible assets december 31 thousands 2004 2003 cost patents 25411 19709 trademarks 24612 24589 distribution networks 42343 36243 92366 80541 accumulated amortization patents 15989 14366 trademarks 332 271 distribution networks 5418 178 70627 65726 2004 company acquired patented technology pccp system approximately 40 million weighted average useful life 10 years amortization expense intangible assets estimated approximately 64 million 65 million 67 million 63 million 61 million periods ending december 31 2005 2006 2007 2008 2009 respectively company 239 million intangibles indefinite lives december 31 2004 2003 orthofix international nv notes consolidated financial statements cont 7 goodwill sfas 142 intangible assets deemed indefinite lives goodwill subject annual impairment testing using guidance criteria described standard testing requires comparison carrying values fair values appropriate carrying value impaired assets reduced fair value company performed impairment tests goodwill indefinite lived intangible assets determined impairment exists also accordance sfas 142 company discontinued amortization goodwill effective january 1 2002 discussion acquisitions since january 1 2004 associated goodwill see note 2 consolidated financial statements following table presents changes net carrying value goodwill reportable segment thousands americas international orthofix breg orthofix total december 31 2002 32472 26309 58781 acquisitions 94512 9494 104006 adjustments 71 19 52 foreign currency 5662 december 31 2003 32401 94512 41484 168397 acquisitions 532 475 1007 adjustments 2750 foreign currency 19 2656 2675 december 31 2004 32952 91762 44615 169329 8 bank borrowings december 31 thousands 2004 2003 borrowings line credit 76 72 weighted average interest rates borrowings lines credit december 31 2004 2003 340 400 respectively borrowings lines credit consist borrowings euros company unused available lines credit 114 million 106 million december 31 2004 2003 respectively italian line credit gives company option borrow amounts italy rates determined time borrowing line credit unsecured company also available unused senior credit facility 150 million orthofix international nv notes consolidated financial statements cont 9 current liabilities december 31 thousands 2004 2003 accrued expenses 10280 9963 salaries related taxes payable 7721 11259 income taxes payable 4525 2038 payables 3219 1794 provision ame bonus earnout note 17 5182 25745 30236 10 longterm debt december 31 thousands 2004 2003 longterm obligations 76750 110000 loans 556 135 77306 110135 less current portion 10057 11063 67249 99072 concurrently closing breg acquisition colgate medical limited colgate borrower wholly owned subsidiary company entered senior secured bank facility senior secured bank facility provides 1 fiveyear amortizing term loan 110 million proceeds used partial payment purchase price breg 2 fiveyear revolving credit facility 15 million drawn december 31 2004 obligation floating interest rate libor prime rate plus margin current interest rate libor plus 200 adjusted quarterly based borrowers leverage ratio 2004 colgate entered amendment senior secured term loan facility amendment accelerated prepayments principal 2004 reduced interest rate applicable borrowings term loan facility reducing initial interest rate libor plus 275 libor plus 200 december 31 2004 2003 longterm obligations include senior secured term note 768 million 1100 million respectively conjunction obtaining senior secured bank facility amendment thereto company incurred debt issuance costs 33 million 03 million respectively december 31 2004 29 million unamortized debt issuance costs recorded assets may 2004 company entered three year fully amortizable interest rate swap agreement swap company pays fixed rate 316 receives interest floating rates based three month libor rate quarterly repricing date expiration swap december 31 2004 interest rate debt related swap 516 316 plus margin 200 effective interest rate including impact swap december 31 2004 senior secured debt 488 orthofix international nv notes consolidated financial statements cont orthofix colgates direct indirect subsidiaries including orthofix inc breg guaranteed obligations colgate senior secured bank facility obligations colgate senior secured bank facility colgates subsidiaries guarantees secured pledges respective assets certain companys subsidiaries also guaranteed obligations colgate senior secured bank facility limited recourse basis credit agreement relating senior secured bank facility contains customary negative covenants applicable colgate subsidiaries including restrictions indebtedness liens dividends mergers sale assets credit agreement also contains certain financial covenants including fixed charge coverage ratio interest coverage ratio leverage ratio applicable colgate subsidiaries consolidated basis leverage ratio applicable orthofix subsidiaries consolidated basis company compliance financial covenants december 31 2004 weighted average interest rates current maturities longterm obligations december 31 2004 2003 443 392 respectively aggregate maturities longterm debt december 31 2004 follows 2005 101 million 2006 101 million 2007 100 million 2008 471 million 11 derivative instruments second quarter 2004 company entered swap manage interest rate exposure related portion companys 110 million credit facility entered december 30 2003 swap three year fully amortizable agreement notional amount 500 million expires june 27 2007 amount outstanding swap december 31 2004 416 million swap company paying fixed rate 316 receiving interest floating rates based three month libor rate quarterly repricing date expiration swap designated cash flow hedge december 31 2004 determined effective december 31 2004 fair value derivative approximately 132000 included current assets net unrealized gain approximately 92000 net tax 40000 included comprehensive income year ended december 30 2004 fair value swap estimated amount company would pay receive terminate agreement reporting date orthofix international nv notes consolidated financial statements cont 12 commitments leases company entered operating leases facilities equipment rent expense companys operating leases years ended december 31 2004 2003 2002 approximately 35 million 26 million 23 million respectively future minimum lease payments operating leases december 31 2004 follows thousands 2005 3509 2006 3005 2007 2245 2008 1830 2009 1822 thereafter 2909 total 15320 13 business segment information companys segment information prepared basis companys management reviews financial information operational decision making purposes prior acquisition breg companys segments identified geographic areas 2004 management identified breg reportable segment bregs customer type differed previous type orthofix customer americas orthofix americas orthofix operation americas consists operations united states existing prior acquisition breg well mexico brazil puerto rico americas orthofix uses direct distributor sales representatives sell hospitals doctors healthcare providers americas market international orthofix international orthofix operation international consists operations existing prior acquisition breg located rest world well independent distributors international orthofix uses direct distributor sales representatives sell hospitals doctors healthcare providers americas breg americas breg operation breg consists breg inc acquired december 30 2003 breg based vista california designs manufactures distributes orthopedic products postoperative reconstruction rehabilitative patient use sells products network domestic international distributors affiliates group activities group activities comprised parents operating expenses identifiable assets orthofix international nv notes consolidated financial statements cont tables present information reportable segment operating income expense thousands 2004 2003 2002 americas orthofix 28840 25770 25130 americas breg 11498 international orthofix 18808 17564 26143 group activities 4599 4021 3788 eliminations 453 1271 4546 total 55000 40584 42939 following table presents identifiable assets segment excluding intercompany balances investments consolidated subsidiaries 2003 2002 balances reclassified conform current period presentation identifiable assets thousands 2004 2003 2002 americas orthofix 108119 103493 95844 americas breg 177365 181298 international orthofix 148517 137011 134497 group activities 9688 5036 4870 eliminations 12589 13659 14437 total 431100 413179 220774 orthofix international nv notes consolidated financial statements cont capital expenditures segment follows thousands 2004 2003 2002 americas orthofix 3245 2903 3631 americas breg 2820 international orthofix 6178 2327 3492 group activities 8 7 12243 5238 7130 geographical information analysis net sales geographic destination thousands 2004 2003 2002 us 198392 132858 117991 9546 4995 4920 americas 207938 137853 122911 uk 28858 25162 22099 italy 20761 16447 12601 29081 24245 19984 international 78700 65854 54684 286638 203707 177595 sales netherlands antilles orthofix international nv notes consolidated financial statements cont analysis longlived assets geographic area thousands 2004 2003 us 199808 200626 italy 12957 12122 uk 24521 24866 cyprus 10533 10619 others 14545 10834 262364 259067 sales market sector year ended december 31 2004 americas international thousands orthofix breg orthofix total orthopedic spine 81190 185 81375 reconstruction 7318 68083 45534 120935 trauma 36058 211 26623 62892 total orthopedic 124566 68294 72342 265202 nonorthopedic 1406 20030 21436 total 125972 68294 92372 286638 sales market sector year ended december 31 2003 americas international thousands orthofix breg orthofix total orthopedic spine 79453 99 79552 reconstruction 6775 44408 51183 trauma 29242 24464 53706 total orthopedic 115470 68971 184441 nonorthopedic 1378 17888 19266 total 116848 86859 203707 orthofix international nv notes consolidated financial statements cont 14 income taxes company subsidiaries taxed rates applicable within respective companys jurisdiction composite income tax rate vary according jurisdictions profits arise components provision income tax expense benefit follows year ended december 31 thousands 2004 2003 2002 italy current 2727 1948 2097 deferred 241 371 51 cyprus current 251 224 516 deferred 16 28 uk current 985 2670 1518 deferred 34 37 17 us current 15928 9471 7651 deferred 3711 333 1319 netherlands antilles current 25 12 5 deferred 134 current 168 212 4 deferred 22 457 221 total tax expense 16210 14585 12875 income continuing operations provision income taxes consisted year ended december 31 thousands 2004 2003 2002 us 32254 26624 24781 non us 18105 12691 15749 50359 39315 40530 orthofix international nv notes consolidated financial statements cont tax effects significant temporary differences comprise deferred tax liabilities assets follows thousands 2004 2003 deferred tax liabilities goodwill 662 845 patents intangible assets 14598 13605 property plant equipment 491 170 1804 2022 17555 16642 deferred tax assets current 182 193 inventories related reserves 1526 1461 allowance doubtful accounts 2422 2324 net operating loss carry forwards 3760 609 deferred royalties 916 939 long term 873 9679 5526 valuation allowance 3325 529 6354 4997 net deferred tax asset liability 11201 11645 2004 company generated net taxable losses locations likely losses utilized accordingly valuation allowance established 2004 result nonrecurring transaction company recognized 05 million tax benefit utilization net operating loss carry forwards valuation allowance previously established 2003 company net operating loss carry forwards 133 million expire various dates 2008 2012 normal course business company may differences tax provision amounts initially recorded financial reporting purposes final tax settlements differences subject applicable regulations management believe final tax settlements would material adverse effect companys results operations financial position orthofix international nv notes consolidated financial statements cont company recorded additional income taxes applicable undistributed earnings foreign subsidiaries considered indefinitely reinvested earnings amounted approximately 2019 million 1560 million 1241 december 31 2004 2003 2002 respectively may become taxable upon remittance dividends upon sale liquidation foreign subsidiaries practicable determine amounts net additional income tax may payable earnings repatriated 15 restricted net assets subsidiaries certain subsidiaries company effective restrictions ability pay dividends make intercompany loan advances pursuant companys senior secured credit facility net assets colgate medical limited subsidiaries restricted distributions parent company subsidiaries orthofix group access net assets operational purposes amount restricted net assets colgate medical limited subsidiaries december 31 2004 approximately 1200 million 16 related parties following related party balances transactions three years ended december 31 2004 company companies directors andor executive officers interest reflected consolidated financial statements company buys components related av impulse system purchases quality control logistic services buys laryngeal mask companies board member beneficial minority interest year ended december 31 thousands 2004 2003 2002 sales 987 1706 1275 purchases 16986 15916 18038 accounts payable 1386 1929 2075 accounts receivable 198 403 239 due officers included assets 356 342 330 2004 company sold onehalf interest property part plan consolidate united kingdom facilities sale resulted gain approximately 06 million reported income facility purchased company owned mr robert gainescooper director fair value facility determined two independent appraisal firms amount paid approximates fair value orthofix international nv notes consolidated financial statements cont 2003 company purchased remaining 48 interest intavent orthofix limited intavent limited mr gainescooper director orthofix settlor trust owns 30 interest intavent limited 17 contingencies litigation company normal course business involved various lawsuits time addition company subject certain contingencies discussed december 4 1998 review committee established determine amount contingent contract rights merger agreement dated may 8 1995 orthofix international american medical electronics unanimously determined orthofix international would pay ame record holders earnout 500000 plus interest 12 net recovery received resolution 2000 litigation biomet inc electro biology inc maximum 55 million plus interest two lawsuits subsequently initiated disputing determination review committee seeking monetary damages interest lawsuits entitled clarence frere louise frere joseph mooibroek marla b mooibroek individually behalf others similarly situated v orthofix inc arthur schwalm robert gainescooper james gero john jane one 1 four 4 99s445 colo clarence frere louise frere joseph mooibroek marla b mooibroek individually behalf others similarly situated v orthofix inc arthur schwalm robert gainescooper james gero john jane one 1 four 4 99 civ 4049 sdny federal district court hearing cases resolved favor company may 21 2003 plaintiffs subsequent appeal denied time within plaintiffs could requested review united states supreme court expired june 10 2004 august 31 2004 company concluded mentioned actions final payout pursuant merger agreement company ame aggregate amount payout 56 million sum 52 million principal plus 04 million interest june 30 2000 payout date august 31 2004 final payout fully reserved impact companys financial results operations year ended december 31 2004 novamedix subsidiary company filed action february 21 1992 kinetic concepts inc kci alleging infringement patents relating novamedixs av impulse system product breach contract seeks damages relating past infringement breach contract unfair competition kci filed counterclaims alleging novamedix engaged inequitable conduct united states patent trademark office fraud kci novamedix engaged common law statutory unfair competition kci withdrew several counterclaims continues assert affirmative defenses contending patents invalid unenforceable infringed kci also seeks monetary damages injunctive relief costs attorneys fees unspecified relief 2002 united states patent trademark office issued reexamination certificates validating four us vascular patents owned company us district court san antonio texas restored litigation active status portion amounts received company payable former owners novamedix original purchase agreement matter currently pretrial motions phase september 29 2004 triage medical inc triage filed action orthofix international nv action company removed federal court entitled triage medical inc vs orthofix international nv case sacv041377 jvs pending united states district court central district california triage contends company agreed negotiate acquisition triage part acquisition process make unconditional 20 million escrow payment triage contends orthofix international nv notes consolidated financial statements cont company terminated acquisition process failed make payment result triage damaged company answered complaint denying liability pleading certain defenses company believes case without merit intends vigorously defend action managements opinion company currently involved legal proceeding individually aggregate material effect financial position liquidity operating results company concentrations credit risk financial instruments potentially subject company concentrations credit risk primarily cash investments accounts receivable cash investments primarily money market funds deposited major financial center banks concentrations credit risk respect accounts receivable limited due large number individuals comprising companys customer base certain customers rely third party healthcare payers private insurance companies governments make payments company behalf accounts receivable countries government funds medical spending primarily located north africa middle east south america asia europe company considered special situations establishing allowances potentially uncollectible accounts receivable countries india egypt turkey company maintains allowance losses based expected collectability accounts receivable company sells via direct sales force distributors companys distributor av impulse system north america kendall healthcare inc accounted 10 net sales 2003 2002 customers accounted 10 net sales 2004 18 pensions deferred compensation orthofix inc sponsors defined contribution benefit plan 401k plan covering substantially full time employees 401k plan allows participants contribute 15 pretax compensation subject certain limitations company matching 100 first 2 employees base compensation 50 next 4 employees base compensation contributed 401k plan years ended december 31 2004 2003 2002 expenses incurred relating 401k plan including matching contributions approximately 760000 708000 763000 respectively breg also sponsors 401k plan 401k plan allows participants contribute 100 pretax compensation subject certain limitations company matching 100 first 750 deferred year ended december 31 2004 expenses incurred relating breg 401k plan including matching contributions 111000 company operates defined contribution pension plans employees described meeting minimum service requirements companys expenses pension contributions 2004 2003 2002 approximately 573000 487000 415000 respectively italian law orthofix srl accrues behalf employees deferred compensation paid termination employment years provision deferred compensation based percentage employees current annual remuneration plus annual charge deferred compensation also accrued leaving indemnity payable agents case dismissal regulated national contract equal approximately 35 total commissions earned company companys expense deferred compensation 2004 2003 2002 approximately 292000 227000 200000 respectively deferred compensation payments 207000 233000 120000 made 2004 2003 2002 respectively balance december 31 2004 12 million represents amount would payable employees agents terminated employment date included longterm liabilities orthofix international nv notes consolidated financial statements cont 19 share option plans warrants option plans december 31 2004 company four stockbased compensation plans described 2004 long term incentive plan 2004 long term incentive plan 2004 ltip plan long term incentive plan adopted april 2004 ltip plan approved shareholders june 29 2004 20 million shares reserved issuance plan awards generally vest years service awards fully vesting within five years grant date awards form option restricted share unit performance share unit award form determined board directors awards granted 2004 ltip plan expire later 10 years date grant 419000 awards outstanding 2004 ltip plan december 31 2004 none exercisable staff share option plan staff stock option plan staff plan fixed stock option plan adopted april 1992 staff plan company granted options employees estimated fair market value options date grant options generally vest based years service options fully vested within five years date grant options granted staff plan expire ten years date grant options left granted staff plan december 31 2004 627155 options outstanding staff plan 277055 exercisable performance accelerated stock option agreement december 1999 companys board directors adopted resolution approving june 29 2000 companys shareholders approved grant certain executive officers company performance accelerated stock options pasos administers subplan staff plan purchase 1000000 shares companys common stock subject terms summarized option purchase companys common stock pasos granted effective january 1 1999 grant date exercise price equal 17875 per share price companys common stock date shareholders approved reservation 1000000 shares issuance paso plan pasos include servicebased performancebased vesting provisions servicebased provisions subject continued employment executive pasos become 100 nonforfeitable exercisable fifth anniversary grant date vesting pasos accelerated however certain stock price targets achieved performancebased vesting provisions provide vesting oneeighth paso grant 500 increase price companys common stock 1500 per share total number shares eligible accelerated vesting annual basis limited 20 number shares subject paso cumulative carryover unvested portion shares eligible accelerated vesting prior years period ended december 31 2004 386990 stock options exercised none forfeited december 31 2004 513010 options remain outstanding option agreements exercisable expire january 1 2009 ame 1983 1990 plans terms merger agreement company acquired ame options ame common stock still outstanding 1983 plan 1990 plan hereinafter collectively referred ame plan assumed effective time merger company exercisable common shares accordance terms adjustment reflect exchange ratio adjustment immediately following merger options granted ame plan totaled 624794 expired throughout 2004 orthofix international nv notes consolidated financial statements cont executive share option plan executive share option plan executive plan approved shareholders march 1992 1945000 shares reserved issuance certain executive officers grant price determined companys board directors cannot less fair market value time grant 1440 equivalent 120 price initial public offering price 1200 fifty percent options granted vest automatically tenth anniversary date grant earlier satisfaction performance keyed market price common shares service condition remaining fifty percent vest 20 increments first fifth anniversaries date grant options granted executive plan expired later june 2004 performance accelerated stock option inducement agreements december 30 2003 company granted inducement stock option awards two key executives breg inc conjunction acquisition breg inc exercise price fixed 3800 per share november 20 2003 company announced entered agreement acquire breg inc inducement grants include servicebased performancebased vesting provisions servicebased provisions subject continued employment executive inducement grants become 100 nonforfeitable exercisable fourth anniversary grant date vesting portion options inducement agreement accelerated certain stock price targets achieved performancebased vesting provisions generally provide vesting onefifth inducement grants 500 increase price companys common stock 4000 per share total number shares eligible accelerated vesting annual basis limited 25 number shares subject inducement grants cumulative carryover unvested portion shares eligible accelerated vesting prior years prior expiration term options onehalf vested options exercised one year december 31 2004 200000 options remain outstanding inducement grants 20000 exercisable warrants kinesis warrants time acquisition kinesis medical incs assets warrants purchase 672685 shares kinesis common stock kinesis warrants outstanding assumed company pursuant asset purchase agreement adjustment take account agreed exchange ratio 27400 common stock warrants outstanding december 31 2004 warrants purchase 24528 shares companys common stock remain outstanding exercisable expire august 31 2005 exercise prices fixed range 19125 3825 per common share orthofix international nv notes consolidated financial statements cont summaries status companys stock option warrant plans december 31 2004 2003 2002 changes years ended dates presented december 31 2004 company reserved total approximately 18 million shares common stock issuance eligible participants option plans 1759165 shares warrant holders 24528 shares outstanding exercisable price range december 31 2004 orthofix international nv notes consolidated financial statements cont 20 earnings per share three years period ended december 31 2004 adjustments net income purposes calculating basic diluted net income per common share following reconciliation weighted average shares used basic diluted net income per common share computations year ended december 31 2004 2003 2002 sweighted average common sharesbasic 15396540 14061447 13196524 effect diluted securities stock options 578405 620436 1488712 weighted average common sharediluted 15974945 14681883 14685236 company include diluted shares outstanding calculation 200000 options 2004 206000 options 2003 59000 options 2002 inclusion would antidilutive exercise price exceeded average market price common stock respective periods orthofix international nv notes consolidated financial statements cont 21 quarterly financial data unaudited us dollars thousands except per share data sum per share earnings quarter may equal earnings per share year due change average share calculations accordance prescribed reporting requirements orthofix international nv schedule 1 condensed financial information registrant orthofix international nv condensed balance sheets see accompanying notes condensed financial statements s1 orthofix international nv schedule 1 condensed financial information registrant orthofix international nv condensed statements operations see accompanying notes condensed financial statements s2 orthofix international nv schedule 1 condensed financial information registrant orthofix international nv condensed statements cash flows see accompanying notes condensed financial statements s3 orthofix international nv schedule 1 condensed financial information registrant orthofix international nv notes condensed financial statements 1 background basis presentation condensed parent company financial statements prepared accordance rule 1204 schedule 1 regulation sx restricted net assets colgate medical limited subsidiaries exceed 25 consolidated net assets orthofix international nv subsidiaries company parentcompanyonly financial statements companys investment subsidiaries stated cost plus equity undistributed earnings subsidiaries since date acquisition companys share net income unconsolidated subsidiaries included consolidated income using equity method parentcompanyonly financial statements read conjunction companys consolidated financial statements 2 restricted net assets subsidiaries certain companys subsidiaries restrictions effective date january 29 2004 ability pay dividends make intercompany loans advances pursuant financing arrangements amount restricted net assets companys subsidiaries december 31 2004 approximately 1200 million restrictions net assets colgate medical limited subsidiaries 3 guarantee colgate medical limited subsidiary company 768 million longterm debt outstanding terms debt agreement company guaranteed payment principal interest event default debt agreement company directly liable debt holders see note 10 long term debt companys consolidated financial statements included elsewhere document 4 commitments contingencies discussion companys commitments contingencies see note 12 commitments note 17 contingencies companys consolidated financial statements included elsewhere document 5 dividends subsidiaries cash dividends paid orthofix international nv consolidated subsidiaries accounted equity method 75 million 230 million 00 million periods ended december 31 2004 2003 2002 respectively s4 orthofix international nv schedule 2 valuation qualifying accounts years ended december 31 2004 2003 2002 s5item 15 exhibits financial statement schedules documents filed part report form 10k following documents filed part report form 10k 1 financial statements see index consolidated financial statements page form 10k 2 financial statement schedules see index consolidated financial statements page form 10k 3 exhibits filed herewith signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized orthofix international nv dated march 14 2006 charles w federico name charles w federico title chief executive officer president pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated schedules provision made applicable accounting regulation securities exchange commission required related instructions inapplicable therefore omitted statement managements responsibility financial statements shareholders orthofix international nv management responsible preparation consolidated financial statements related information presented report consolidated financial statements include amounts based managements estimates judgments prepared conformity accounting principles generally accepted united states financial information report shareholders consistent consolidated financial statements company maintains accounting internal control systems provide reasonable assurance reasonable cost assets safeguarded loss unauthorized use disposition financial records reliable preparing financial statements maintaining accountability assets systems augmented written policies organizational structure providing division responsibilities careful selection training qualified personnel company engaged ernst young llp independent accountants audit render opinion consolidated financial statements accordance auditing standards public company accounting oversight board united states standards include assessment systems internal controls test transactions extent considered necessary support opinion board directors audit committee consisting solely outside directors company meets periodically management independent accountants ensure meeting responsibilities discuss matters concerning internal controls financial reporting ernst young llp full free access audit committee james f gero chairman board directors charles w federico president chief executive officer director thomas hein chief financial officer managements report internal control financial reporting management also responsible establishing maintaining adequate internal control financial reporting defined rules 13a15f 15d15f securities exchange act 1934 amended inherent limitations internal control financial reporting may prevent detect misstatements projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management including principal executive officer principal financial officer conducted assessment effectiveness internal control financial reporting december 31 2005 conducting assessment management used criteria issued committee sponsoring organizations treadway commission internal control integrated framework based assessment management concluded companys internal control financial reporting effective reasonable assurance level december 31 2005 reasonable assurance includes understanding remote likelihood material misstatements prevented detected timely basis independent registered public accounting firm issued attestation report managements assessment internal control financial reporting appears following page annual report form 10k james f gero chairman board directors charles w federico president chief executive officer director thomas hein chief financial officer report independent registered public accounting firm board directors shareholders orthofix international nv audited accompanying consolidated balance sheets orthofix international nv december 31 2005 2004 related consolidated statements income changes shareholders equity cash flows three years period ended december 31 2005 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position orthofix international nv december 31 2005 2004 consolidated results operations cash flows three years period ended december 31 2005 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states effectiveness orthofix international nvs internal control financial reporting december 31 2005 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated march 13 2006 expressed unqualified opinion thereon ernst young llp charlotte north carolina march 13 2006 report independent registered public accounting firm managements assessment effectiveness internal control financial reporting board directors shareholders orthofix international nv audited managements assessment included accompanying managements report internal control financial reporting orthofix international nv maintained effective internal control financial reporting december 31 2005 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria orthofix international nvs management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinion managements assessment opinion effectiveness companys internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting evaluating managements assessment testing evaluating design operating effectiveness internal control performing procedures considered necessary circumstances believe audit provides reasonable basis opinion companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion managements assessment orthofix international nv maintained effective internal control financial reporting december 31 2005 fairly stated material respects based coso criteria also opinion orthofix international nv maintained material respects effective internal control financial reporting december 31 2005 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets december 31 2005 2004 related consolidated statements income changes shareholders equity cash flows three years period ended december 31 2005 orthofix international nv report dated march 13 2006 expressed unqualified opinion thereon ernst young llp charlotte north carolina march 13 2006 consolidated balance sheets december 31 2005 2004 accompanying notes form integral part consolidated financial statements consolidated statements income years ended december 31 2005 2004 2003 accompanying notes form integral part consolidated financial statements consolidated statements changes shareholders equity years ended december 31 2005 2004 2003 accompanying notes form integral part consolidated financial statements consolidated statements cash flows years ended december 31 2005 2004 2003 accompanying notes form integral part consolidated financial statements notes consolidated financial statements description business orthofix international nv company multinational corporation principally involved design development manufacture marketing distribution medical equipment principally orthopedic products market 1 summary significant accounting policies basis consolidation consolidated financial statements include financial statements company whollyowned majorityowned subsidiaries entities company control percentages ownership december 31 2005 follows 100 owned unless otherwise noted orthofix inc usa breg inc usa orthofix holdings inc usa orthofix us llc usa orthofix srl italy novamedix services limited uk orthosonics limited uk intavent orthofix limited uk colgate medical limited uk orthofix limited uk orthofix uk limited uk swiftsure medical limited uk victory medical limited uk novamedix distribution limited cyprus inter medical supplies limited cyprus inter medical supplies limited seychelles orthofix ag switzerland orthofix gmbh germany orthofix international bv holland orthofix ii bv holland orthofix sa france implantes sistemas medicos inc puerto rico orthofix brasil brazil 895 owned promeca sa de cv mexico 6125 owned results acquired businesses included consolidated statements income date acquisition intercompany accounts transactions profits eliminated consolidation equity method accounting used company significant influence operating decisions cannot exercise control equity method original investments recorded cost adjusted companys share undistributed earnings losses companies companys investments significant influence control accounted cost method accounting b foreign currency translation foreign currency translation performed accordance sfas 52 foreign currency translation balance sheet accounts except shareholders equity translated year end exchange rates revenue expense items translated weighted average rates exchange prevailing year notes consolidated financial statements cont transactional foreign currency gains losses included income expense 10 million 09 million 04 million years december 31 2005 2004 2003 respectively gains losses resulting translation foreign currency recorded accumulated comprehensive income component shareholders equity c inventories valued lower cost estimated net realizable value provision excess obsolete items cost determined weightedaverage basis approximates fifo method valuation workinprocess finished goods field inventory consignment inventory includes cost materials labor production field inventory represents immediately saleable finished goods inventory possession companys direct sales representatives reporting currency reporting currency united states dollar e market risk ordinary course business company exposed impact changes interest rates foreign currency fluctuations companys objective limit impact movements earnings cash flows order achieve objective company seeks balance nondollar income expenditures 2005 company made use interest rate swap agreement foreign currency forward contracts manage exposures fluctuations interest rates see note 11 additional information f longlived assets property plant equipment stated cost less accumulated depreciation impairment charges computed accordance companys policy depreciation computed straightline basis useful lives assets except land depreciated depreciation leasehold improvements computed shorter lease term useful life asset useful lives follows years buildings 25 33 plant equipment 2 10 furniture fixtures 4 8 expenditures maintenance repairs minor renewals improvements extend life respective asset expensed expenditures renewals improvements capitalized assets related accumulated depreciation adjusted property retirements disposals resulting gain loss included operations fully depreciated assets remain accounts retired service patents intangible assets recorded cost acquired part business combination estimated fair value assets primarily include patents technology agreements trademarks licenses customer relationships distribution networks generally amortized using straightline method estimated useful lives 5 25 years acquisitions completed prior june 30 2001 acquisitions completed subsequent june 30 2001 identifiable intangible assets generally amortized useful lives using method amortization reflects pattern economic benefit intangible assets consumed intangible assets deemed indefinite lives goodwill subject amortization accordance statement financial accounting standards sfas 142 company reviews longlived indefinite lived intangible assets least annually events changes circumstances indicate carrying amount asset may recoverable longlived amortizable intangible assets company recognizes impairment loss sum undiscounted expected notes consolidated financial statements cont future cash flows assets remaining estimated useful lives less carrying value assets longlived intangible assets subject amortization company recognizes impairment loss sum discounted expect future cash flows less carrying value assets measurement impairment loss based fair value related asset group assets g revenue recognition revenues recognized income period title passes products delivered bone growth stimulation certain bracing products prescribed physician company recognizes revenue product placed accepted patient sales commercial customers including hospitals distributors revenues recognized time shipment unless contractual agreements specify fob destination company derives significant amount revenues united states thirdparty payors including commercial insurance carriers health maintenance organizations preferred provider organizations governmental payors medicare amounts paid thirdparty payors generally based fixed allowable reimbursement rates revenues recorded expected preauthorized reimbursement rates net contractual allowances adjustments billings subject review thirdparty payors may subject adjustment royalties revenues recognized royalty earned revenues inventory delivered consignment recognized product used consignee revenues exclude value added local taxes intercompany sales trade discounts revenues reduced estimated returns companys limited guarantee programs shipping handling costs included cost sales h research development costs expenditures research development expensed incurred income taxes income taxes provided using liability method accordance sfas 109 accounting income taxes deferred income taxes arise differences treatment income expense items financial reporting income tax purposes deferred tax assets liabilities resulting differences recorded based enacted tax rates effect differences expected reverse company operations various tax jurisdictions j net income per common share net income per common share computed accordance sfas 128 earnings per share net income per common share basic computed using weighted average number common shares outstanding respective years net income per common share diluted computed using weighted average number common equivalent shares outstanding respective years common equivalent shares represent diluted effect assumed exercise outstanding share options see note 19 consolidated financial statements differences basic diluted shares result solely assumed exercise certain outstanding share options warrants k cash equivalents company considers highly liquid investments original maturity three months less date purchase cash equivalents l restricted cash restricted cash consists cash held certain subsidiaries distribution transfer orthofix international nv parent restricted senior secured bank facility described note 10 restricts parents access cash held colgate medical limited subsidiaries orthofix group access cash operational purposes notes consolidated financial statements cont sale accounts receivable company follows provisions sfas 140 accounting transfers servicing financial assets extinguishment liabilities trade accounts receivables sold without recourse removed balance sheet time sale n use estimates preparation financial statements preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect amounts reported financial statements accompanying notes actual results could differ estimates reclassifications certain prior year amounts reclassified conform 2005 presentation reclassifications effect previously reported net income shareholders equity p stock based compensation company accounts stock based awards employees intrinsic value method accordance apb 25 related interpretation accordingly company adopted disclosure alternative sfas 148 accounting stock based compensation transition disclosure amendment fasb statement 123 sfas 148 apb 25 compensation cost recognized stock options issued fair market value plans company recognize compensation expense awards granted less fair market value december 2004 financial accounting standards board fasb issued statement financial accounting standards sfas 123 r sharebased payment revision fasb statement 123 accounting stockbased compensation sfas 123 r also supersedes apb opinion 25 accounting stock issued employees amends sfas 95 statement cash flows revision require companies recognize compensation costs income statement based fair value equity liability instruments issued report benefits tax deductions excess recognized compensation cost financing cash flow rather operating cash flow reported accompanying consolidated statements cash flows statement 123 r covers wide range sharebased compensation arrangements including share options restricted share plans performancebased awards share appreciation rights employee share purchase plans company plans adopt sfas 123 r effective january 1 2006 using modified prospective method modified prospective method compensation cost recognized income statement beginning effective date based requirements sfas 123 r sharebased payments granted date based requirements sfas 123 unvested awards granted prior effective date sfas 123 r company estimates adoption sfas 123 r reduce operating income 2006 approximately 50 million adoption statement 123 rs fair value method significant impact companys results operations although impact overall financial position estimate assumes number employee stock options granted 2006 similar number granted 2005 subject change based actual number stock options granted 2006 dates grants made share price date grant statement 123 r also requires benefits tax deduction excess recognized compensation costs reported financing cash flow rather operating cash flow required current literature requirement reduce net operating cash flows increase net financing cash flows periods adoption cannot estimate amounts future depend among things employees exercise stock options amount operating cash flows recognized twelve months ended december 31 2005 2004 2003 excess tax deductions 13 million 37 million 14 million respectively pro forma information regarding companys net income net income per common share years ended december 31 2005 2004 2003 required sfas 148 determined company accounted employee stock option plans fair value method statement purposes pro forma disclosures estimated fair value options amortized expense options vesting period notes consolidated financial statements cont fair value options plan estimated date grant using blackscholes option pricing model following weighted average assumptions used stock option grants 2005 2004 2003 three years respectively dividend yield 0 expected volatility 35 riskfree interest rates 35 expected lives 450 years q recently issued accounting standards february 2006 fasb issued sfas 155 accounting certain hybrid instruments amendment sfas 133 sfas 140 sfas 155 allows financial instruments embedded derivatives accounted whole eliminating need bifurcate derivative host holder elects account instrument whole instrument fair value basis statement effective financial instruments acquired issued beginning entitys first fiscal year begins september 15 2006 company believe adoption statement material impact financial statements may 2005 fasb issued sfas 154 accounting changes error corrections replacement apb opinion 20 accounting changes sfas 3 reporting accounting changes interim financial statements among changes sfas 154 requires voluntary change accounting principle applied retrospectively prior period financial statements presented accordance new accounting principle unless impracticable sfas 154 also provides 1 change method depreciating amortizing longlived nonfinancial asset accounted change estimate prospectively effected change accounting principle 2 correction errors previously issued financial statements termed restatement sfas 154 effective accounting changes correction errors made fiscal years beginning december 15 2005 company believe adoption statement material impact financial statements november 2004 fasb issued sfas 151 inventory costs amendment arb 43 result efforts converge us accounting standards inventories international accounting standards sfas 151 requires idle facility expenses freight handling costs wasted material spoilage notes consolidated financial statements cont costs recognized currentperiod charges also requires allocation fixed production overheads costs conversion based normal capacity production facilities sfas 151 effective inventory costs incurred fiscal years beginning june 15 2005 company expect adoption sfas 151 material impact consolidated financial statements r fair value financial instruments carrying amounts reflected consolidated balance sheet cash equivalents restricted cash accounts receivable shortterm bank debt accounts payable approximate fair value due shortterm maturities instruments companys long term secured debt carries floating rate interest approximates fair value advertising costs company expenses advertising costs incurred advertising expense years ended december 31 2005 2004 2003 05 million year derivative instruments company manages exposure fluctuations interest rates foreign exchange within consolidated financial statements according hedging policy company may engage nonleveraged transactions involving various financial derivative instruments manage exposed positions policy requires company formally document relationship hedging instrument hedged item well riskmanagement objective strategy undertaking hedge transaction instruments designated cash flow hedge company formally assesses hedges inception ongoing basis whether derivative used hedging transaction effective offsetting changes cash flows hedged item whether derivative may expected remain effective future periods determined derivative ceased effective hedge company discontinue related hedge accounting prospectively determination would made 1 derivative longer effective offsetting changes cash flows hedged item 2 derivative expires sold terminated exercised 3 management determines designating derivative hedging instrument longer appropriate ineffective portions changes fair value cash flow hedges recognized earnings instruments designated fair value hedge company ensures exposed position hedged changes fair value instruments recognized earnings company follows statement financial accounting standards sfas 133 accounting derivative instruments hedging activities amended interpreted requires derivatives recorded either assets liabilities balance sheet respective fair values companys interest rate swap identified cash flow hedge cash flow hedge effective portion derivatives change fair value ie gains losses initially reported component comprehensive income net related taxes subsequently reclassified net earnings hedged exposure affects net earnings companys foreign currency hedges forward contracts used manage foreign currency exposure related portion companys accounts receivable denominated euros forward contracts accounted fair value hedge accordance sfas 133 notes consolidated financial statements cont u comprehensive income accumulated comprehensive income loss comprised foreign currency translation adjustments effective portion gain loss derivatives designated accounted cash flow hedge unrealized gains losses available sale securities components changes comprehensive income loss follows 2 acquisitions following acquisitions recorded using purchase method accounting december 30 2003 company purchased 100 stock privately held breg inc breg purchase price 1500 million plus closing adjustments acquisition costs acquisition related costs financed 1100 million senior secured bank debt cash hand issuance 731715 shares orthofix common stock pursuant voting subscription agreement dated november 20 2003 amended restated december 22 2003 among company certain shareholders breg certain shareholders applied portion proceeds received acquisition purchase 731715 shares orthofix common stock negotiated price 3800 per share aggregate purchase price 278 million price took consideration fair market value determined nasdaq stock market date terms acquisition agreed announced november 20 2003 breg based vista california designs manufactures distributes orthopedic products postoperative reconstruction rehabilitative patient use bregs product lines include bracing products cold therapy products pain therapy products breg generated 720 million 683 million net revenues 2005 2004 respectively notes consolidated financial statements cont company considered acquisition way fortify advance business strategy expand three key sectors orthopedics spine reconstruction trauma acquisition broadened companys product lines reduced reliance success single product enlarged channel opportunities products companies factors contributed valuation breg included recognition breg among top three participants terms market share key markets bracing cold therapy pain therapy breg strong brand name product identity orthopedic industry breg history sales earnings growth rates faster markets three product lines serve orthofix valued breg reviewing range valuation methodologies provided financial advisors transaction including comparable publiclytraded companies comparable precedent transactions discounted cash flow analysis comparison orthofixs trading multiples resulting purchase price breg exceeded value net assets acquired substantial amount final purchase price reflects following assets acquired liabilities assumed current assets cash 16768 fixed assets acquired 5570 intangible assets subject amortization registered trademarks 23900 intangible assets subject amortization 10 year weighted average useful life distribution network 10 year weighted average 41100 useful life patents 16 year weighted average useful life 401 41501 goodwill indefinite lived intangible asset 101322 longterm assets 599 total assets acquired 189660 current liabilities 4996 deferred tax liability 27172 longterm liability 133 total liabilities assumed 32301 net assets acquired final purchase price 157359 residual values intangible assets subject amortization acquired breg acquisition results bregs operations included companys consolidated results operations date acquisition company made correction 2005 purchase accounting breg acquisition increase goodwill deferred tax liabilities 96 million reflect deferred tax liability associated trademarks acquired correction reflected december 31 2005 2004 march 20 2003 company completed acquisition remaining 48 minority interest intavent orthofix limited iol 206 million including acquisition costs effective date january 14 2003 company utilized independent firm complete valuation iol company used cash hand complete purchase intavent limited intavent mr gainescooper director orthofix settlor trust owns 30 interest intavent iol fully consolidated subsidiary whollyowned subsidiary company recorded additional equity purchase using purchase method accounting impact included results operations date acquisition final allocation purchase price reflects settlement minority interest obligation approximately 99 million identifiable intangible assets approximately 12 million 95 million additional goodwill notes consolidated financial statements cont summary pro forma condensed unaudited results operations earnings per share year ended december 31 2003 assuming consummation acquisitions 2003 january 1 2003 follows year ended december 31 2003 reported pro forma net sales 203707 265219 net income 24730 26129 per share data basic 176 177 diluted 168 170 first quarter 2004 company purchased distributor puerto rico 14 million consisted 11 million cash 03 million assumed liabilities final purchase price included approximately 09 million working capital 05 million goodwill operations acquired distributor included accompanying consolidated statement operations date acquisition company option purchase remaining 30 shares orthofix ag company exercised option 2004 paid approximately 05 million remaining shares recorded additional goodwill resulted orthofix ag whollyowned subsidiary 3 inventories december 31 thousands 2005 2004 raw materials 7242 6456 workinprocess 3344 2445 finished goods 11538 14823 field inventory 7404 5346 consignment inventory 6659 7835 36187 36905 less reserve obsolescence 3334 4010 32853 32895 see note 1 summary significant accounting policies part c inventories description field inventory 4 securities investments company total investments held cost 41 million december 31 2005 2004 comprised investment 15 million innovative spinal technologies ist startup company focused commercializing spinal products 26 million oped ag germanbased bracing company assessed cost investments noting impairment carrying value company also investment orthorx investment reduced zero 2004 december 31 2005 companys ownership percentage orthorx reduced 64 notes consolidated financial statements cont 5 property plant equipment december 31 thousands 2005 2004 cost buildings 3535 3733 plant equipment 46094 40409 furniture fixtures 6896 7258 56525 51400 accumulated depreciation 37538 33074 18987 18326 depreciation expense years ended december 31 2005 2004 2003 83 million 78 million 57 million respectively 6 patents intangible assets amortization expense intangible assets estimated approximately 69 million 69 million 66 million 59 million 51 million periods ending december 31 2006 2007 2008 2009 2010 respectively notes consolidated financial statements cont 7 goodwill sfas 142 intangible assets deemed indefinite lives goodwill subject annual impairment testing using guidance criteria described standard testing requires comparison carrying values fair values appropriate carrying value impaired assets reduced fair value company performed impairment tests goodwill indefinite lived intangible assets determined impairment exists discussion acquisitions since january 1 2004 associated goodwill see note 2 consolidated financial statements following table presents changes net carrying value goodwill reportable segment 8 bank borrowings december 31 thousands 2005 2004 borrowings line credit 79 76 weighted average interest rates borrowings lines credit december 31 2005 2004 300 340 respectively borrowings lines credit consist borrowings euros company unused available lines credit 68 million euros 80 million 84 million euros 114 million december 31 2005 2004 respectively italian line credit gives company option borrow amounts italy rates determined time borrowing line credit unsecured notes consolidated financial statements cont 9 current liabilities december 31 thousands 2005 2004 accrued expenses 7206 10280 salaries related taxes payable 11032 7721 income taxes payable 2044 4525 payables 4724 3219 kci settlement proceeds due third parties 26202 51208 25745 10 longterm debt december 31 thousands 2005 2004 longterm obligations 14750 76750 loans 458 556 15208 77306 less current portion 15187 10057 21 67249 concurrently closing breg acquisition colgate medical limited colgate borrower whollyowned subsidiary company entered senior secured bank facility senior secured bank facility provides 1 fiveyear amortizing term loan 110 million proceeds used partial payment purchase price breg 2 fiveyear revolving credit facility 15 million drawn december 31 2005 obligation floating interest rate libor prime rate plus margin current interest rate libor plus 200 adjusted quarterly based borrowers leverage ratio december 31 2005 2004 longterm obligations included senior secured term note 148 million 768 million respectively conjunction obtaining senior secured bank facility amendment thereto company incurred debt issuance costs 33 million 03 million respectively december 31 2005 2004 unamortized debt issuance costs 02 million 29 million respectively recorded longterm assets may 2004 company entered threeyear fully amortizable interest rate swap agreement company paid fixed rate 316 received interest floating rates based three month libor rate quarterly repricing date termination agreement companys accelerated prepayment senior secured term loan caused portion swap agreement ineffective december 22 2005 therefore company terminated interest rate swap agreement orthofix colgates direct indirect subsidiaries including orthofix inc breg guaranteed obligations colgate senior secured bank facility obligations colgate notes consolidated financial statements cont senior secured bank facility colgates subsidiaries guarantees secured pledges respective assets certain companys subsidiaries also guaranteed obligations colgate senior secured bank facility limited recourse basis credit agreement relating senior secured bank facility contains customary negative covenants applicable colgate subsidiaries including restrictions indebtedness liens dividends mergers sale assets credit agreement also contains certain financial covenants including fixed charge coverage ratio interest coverage ratio leverage ratio applicable colgate subsidiaries consolidated basis leverage ratio applicable orthofix subsidiaries consolidated basis company compliance financial covenants december 31 2005 company received waiver lenders technical covenant violations associated changes structure done maximize tax benefits united kingdom connection waiver company required take certain actions respect certain new subsidiaries borrowing group including joined guarantors credit agreement waiver requires company satisfy obligations march 31 2006 management believes probable satisfy obligations repaying outstanding amount term loan canceling revolver facility accordingly companys outstanding obligations credit agreement classified current balance sheet december 31 2005 weighted average interest rates current maturities longterm obligations december 31 2005 2004 612 443 respectively aggregate maturities longterm debt december 31 2005 follows 2006 152 million 11 derivative instruments second quarter 2004 company entered interest rate swap agreement manage interest rate exposure related portion companys 110 million credit facility entered december 30 2003 derivative instrument threeyear fully amortizable agreement notional amount 500 million scheduled expire june 27 2007 instrument designated cash flow hedge company terminated agreement december 22 2005 portion became ineffective termination resulted onetime gain 04 million 2005 recorded reduction interest expense 2005 company utilized foreign currency forward contracts manage foreign currency exposure related portion companys accounts receivable denominated euros strategy foreign currency contracts neutralize foreign currency impact earnings converting 50 million euros accounts receivable us dollars conversion underlying exposure forward contracts offset net impact earnings 2005 foreign currency forward contracts entered 2005 accounted fair value hedges accordance sfas 133 related gains recorded income related tax amounts taxation company received cash 03 million settlement forward contracts hedge foreign currency exposures 2005 december 30 2005 company entered new forward currency contract sell 50 million euro allin rate 11840 outstanding december 31 2005 notes consolidated financial statements cont 12 commitments leases company entered operating leases facilities equipment rent expense companys operating leases years ended december 31 2005 2004 2003 approximately 37 million 35 million 26 million respectively future minimum lease payments operating leases december 31 2005 follows thousands 2006 3096 2007 2650 2008 2353 2009 1886 2010 1842 thereafter 1113 total 12940 13 business segment information companys segment information prepared basis companys management reviews financial information operational decision making purposes prior acquisition breg companys segments identified geographic areas 2004 management identified breg reportable segment bregs customer type differed previous type orthofix customer americas orthofix americas orthofix operation americas consists operations united states existing prior acquisition breg well mexico brazil puerto rico americas defined uses direct distributor sales representatives sell hospitals doctors healthcare providers americas market international orthofix international orthofix operation international consists operations existing prior acquisition breg located rest world well independent distributors international defined uses direct distributor sales representatives sell orthofix breg products hospitals doctors healthcare providers americas breg americas breg operation breg consists breg inc acquired december 30 2003 breg based vista california designs manufactures distributes orthopedic products postoperative reconstruction rehabilitative patient use sells products hospitals doctors healthcare providers network domestic international distributors sales representatives affiliates group activities group activities comprised parents operating expenses identifiable assets notes consolidated financial statements cont tables present information reportable segment following table presents identifiable assets segment excluding intercompany balances investments consolidated subsidiaries identifiable assets thousands 2005 2004 americas orthofix 112058 108119 americas breg 185921 186925 international orthofix 178682 148826 group activities 9957 9688 eliminations 12757 12589 total 473861 440969 notes consolidated financial statements cont capital expenditures tangible intangible segment follows thousands 2005 2004 2003 americas orthofix 3798 3245 2903 americas breg 5040 2820 international orthofix 3410 6178 2327 group activities 8 total 12248 12243 5238 geographical information analysis net sales geographic destination thousands 2005 2004 2003 us 218096 198392 132858 9471 9546 4995 americas 227567 207938 137853 uk 28949 28858 25162 italy 22004 20761 16447 34784 29081 24245 international 85737 78700 65854 total 313304 286638 203707 sales netherlands antilles notes consolidated financial statements cont analysis longlived assets geographic area thousands 2005 2004 us 206287 209368 italy 11443 12957 uk 22379 24521 cyprus 13426 10533 others 9857 14545 total 263392 271924 notes consolidated financial statements cont 14 income taxes company subsidiaries taxed rates applicable within respective companys jurisdiction composite income tax rate vary according jurisdictions profits arise components provision income tax expense benefit follows year ended december 31 thousands 2005 2004 2003 italy current 3011 2727 1948 deferred 310 241 371 cyprus current 2924 251 224 deferred 17 16 uk current 2015 985 2670 deferred 34 37 us current 15299 15928 9471 deferred 1564 3711 333 netherlands antilles current 506 25 12 deferred 892 134 current 4 168 212 deferred 673 22 457 total tax expense 22113 16210 14585 notes consolidated financial statements cont income continuing operations provision income taxes consisted year ended december 31 thousands 2005 2004 2003 us 36511 32254 26624 nonus 59004 18105 12691 95515 50359 39315 tax effects significant temporary differences comprise deferred tax liabilities assets follows thousands 2005 2004 deferred tax liabilities goodwill 5 110 patents intangible assets 22306 24239 property plant equipment 925 477 2416 2598 25652 27424 deferred tax assets current 111 171 inventories related reserves 1781 1619 allowance doubtful accounts 2619 2410 net operating loss carryforwards 396 573 deferred royalties 916 longterm 1993 1111 6900 6800 valuation allowance 376 138 6524 6662 net deferred tax liability 19128 20762 valuation allowance december 31 2005 2004 04 million 01 million respectively net increase valuation allowance 03 million period ended december 31 2005 valuation allowance attributable net operating loss carryforwards certain foreign jurisdictions benefit dependent upon generation future taxable income location assessing realizability deferred tax assets management considers whether likely portion deferred tax assets realized ultimate realization deferred tax assets dependent upon generation future taxable income periods temporary differences become deductible management considers scheduled reversal deferred tax liabilities projected future taxable income tax planning strategies making assessment based upon level historical taxable income projections future taxable income periods deferred tax assets deductible management believes likely company realize benefits deductible differences net existing valuation allowances december 31 2005 notes consolidated financial statements cont companys tax net operating loss carryforwards taxing jurisdictions approximately 10 million expiring various amounts tax years beginning 2009 normal course business company may differences tax provision amounts initially recorded financial reporting purposes final tax settlements differences subject applicable regulations management believe final tax settlements would material adverse effect companys results operations financial position rate reconciliation presented based us federal income tax rate rather parent companys country domicile tax rate management believes given large proportion taxable income earned united states disclosure meaningful company recorded additional income taxes applicable undistributed earnings foreign subsidiaries residing outside netherlands antilles considered indefinitely reinvested taxes attributable amounts deemed indefinitely reinvested material event undistributed earnings deemed indefinitely reinvested longer meet criteria remain undistributed earnings also considered calculating potential future tax liabilities relating undistributed foreign earnings total undistributed earnings amounted approximately 2321 million 2019 million 1560 million december 31 2005 2004 2003 respectively may become taxable upon remittance dividends upon sale liquidation foreign subsidiaries practicable determine amounts net additional income tax may payable earnings repatriated 15 restricted net assets subsidiaries certain subsidiaries company effective restrictions ability pay dividends make intercompany loan advances pursuant companys senior secured credit facility net assets colgate medical limited subsidiaries restricted distributions parent company subsidiaries orthofix group access net assets operational purposes amount restricted net assets colgate medical limited subsidiaries december 31 2005 limited amount remaining paid senior secured term loan 148 million notes consolidated financial statements cont 16 related parties following related party balances transactions three years ended december 31 2005 company companies directors andor executive officers interest reflected consolidated financial statements company buys components related av impulse system purchases quality control logistic services buys laryngeal mask companies board member beneficial minority interest 2004 company sold onehalf interest property part plan consolidate united kingdom facilities sale resulted gain approximately 06 million reported income facility purchased company owned mr robert gainescooper director fair value facility determined two independent appraisal firms amount paid approximates fair value 17 contingencies litigation company normal course business involved various lawsuits time addition company subject certain contingencies discussed novamedix subsidiary company filed action february 21 1992 kinetic concepts inc kci alleging infringement patents relating novamedixs av impulse system foot pump product breach contract unfair competition seeking damages kci filed counterclaims alleging inequitable conduct novamedix united states patent trademark office fraud unfair competition kci withdrew several counterclaims continued assert affirmative defenses contending patents invalid unenforceable infringed 2002 united states patent trademark office issued reexamination certificates validating four us vascular patents owned company us district court san antonio texas denied certain motions filed kci would disposed case without trial september 30 2005 kci novamedix company announced settlement reached kci agreed pay novamedix 750 million give novamedix option receive assignment license certain kci foot pump patent rights company chose receive limited assignment company contractual obligations distribute portion settlement proceeds certain former owners novamedix original patents final settlement amounts concluded december 31 2005 however recorded gain 401 million related tax amount 27 million accrued 262 million contractual obligations see note 22 subsequent events discussion final settlement amounts company agreed indemnify kci certain tax liabilities might arise settlement management believes risk claims might arise indemnity remote september 29 2004 triage medical inc triage filed action orthofix international nv action company removed federal court entitled triage medical inc vs orthofix international nv case sacv041377 jvs triage contended company agreed negotiate acquisition triage part acquisition process make unconditional 20 million escrow payment triage contended company terminated acquisition process failed make payment result triage damaged company answered complaint denying liability pleading notes consolidated financial statements cont certain defenses july 12 2005 triage company engaged mediation proceedings parties agreed resolve action company dismiss lawsuit prejudice settlement amount 350000 paid 2005 managements opinion company currently involved legal proceeding individually aggregate material effect financial position liquidity operating results company concentrations credit risk financial instruments potentially subject company concentrations credit risk primarily cash investments accounts receivable cash investments primarily money market funds deposited major financial center banks concentrations credit risk respect accounts receivable limited due large number individuals comprising companys customer base company performs ongoing credit evaluations customers generally require collateral certain customers rely third party healthcare payers private insurance companies governments make payments company behalf accounts receivable countries government funds medical spending primarily located north africa middle east south america asia europe company considered special situations establishing allowances potentially uncollectible accounts receivable countries india egypt turkey company also records reserves bad debts customers based variety factors including length time receivables past due financial condition customer macroeconomic conditions historical experiences company maintains reserves potential credit losses within managements expectations company sells via direct sales force distributors companys distributor av impulse system north america kendall healthcare inc accounted 10 net sales 2003 customers accounted 10 net sales 2005 2004 18 pensions deferred compensation orthofix inc sponsors defined contribution benefit plan 401k plan covering substantially full time employees 401k plan allows participants contribute 15 pretax compensation subject certain limitations company matching 100 first 2 employees base compensation 50 next 4 employees base compensation contributed 401k plan years ended december 31 2005 2004 2003 expenses incurred relating 401k plan including matching contributions approximately 962000 760000 708000 respectively breg also sponsors 401k plan 401k plan allows participants contribute 100 compensation subject certain limitations company matching 100 first 750 deferred years ended december 31 2005 2004 expenses incurred relating breg 401k plan including matching contributions 101000 111000 respectively company operates defined contribution pension plans employees described meeting minimum service requirements companys expenses pension contributions 2005 2004 2003 approximately 685000 573000 487000 respectively italian law orthofix srl accrues behalf employees deferred compensation paid termination employment years provision deferred compensation based percentage employees current annual remuneration plus annual charge deferred compensation also accrued leaving indemnity payable agents case dismissal regulated national contract equal approximately 35 total commissions earned company companys expense deferred compensation 2005 2004 2003 approximately 316000 292000 227000 respectively deferred compensation payments 215000 207000 233000 made 2005 2004 2003 respectively balance december 31 2005 12 million represents amount would payable employees agents terminated employment date included longterm liabilities notes consolidated financial statements cont 19 share option plans option stock purchase plans december 31 2005 company three stockbased compensation plans one stock purchase plan described 2004 long term incentive plan 2004 long term incentive plan 2004 ltip plan long term incentive plan adopted april 2004 ltip plan approved shareholders june 29 2004 20 million shares reserved issuance plan awards generally vest years service awards fully vesting within five years grant date awards form option restricted share unit performance share unit award form determined board directors awards granted 2004 ltip plan expire later 10 years date grant december 31 2005 881369 awards outstanding 2004 ltip plan 118595 exercisable staff share option plan staff stock option plan staff plan fixed stock option plan adopted april 1992 staff plan company granted options employees estimated fair market value options date grant options generally vest based years service options fully vested within five years date grant options granted staff plan expire ten years date grant options left granted staff plan december 31 2005 475330 options outstanding staff plan 251130 exercisable performance accelerated stock option agreement december 1999 companys board directors adopted resolution approving june 29 2000 companys shareholders approved grant certain executive officers company performance accelerated stock options pasos administers subplan staff plan purchase 1000000 shares companys common stock subject terms summarized option purchase companys common stock pasos granted effective january 1 1999 grant date exercise price equal 17875 per share price companys common stock date shareholders approved reservation 1000000 shares issuance paso plan pasos include servicebased performancebased vesting provisions servicebased provisions subject continued employment executive pasos become 100 nonforfeitable exercisable fifth anniversary grant date vesting pasos accelerated however certain stock price targets achieved performancebased vesting provisions provide vesting oneeighth paso grant 500 increase price companys common stock 1500 per share total number shares eligible accelerated vesting annual basis limited 20 number shares subject paso cumulative carryover unvested portion shares eligible accelerated vesting prior years period ended december 31 2005 125510 stock options exercised none forfeited december 31 2005 387500 options remain outstanding option agreements exercisable expire january 1 2009 performance accelerated stock option inducement agreements december 30 2003 company granted inducement stock option awards two key executives breg inc conjunction acquisition breg inc exercise price fixed 3800 per share november 20 2003 company announced entered agreement acquire breg inc inducement grants include servicebased performancebased vesting provisions servicebased provisions subject continued employment executive inducement grants become 100 nonforfeitable exercisable fourth anniversary grant date vesting portion options notes consolidated financial statements cont inducement agreement accelerated certain stock price targets achieved performancebased vesting provisions generally provide vesting onefifth inducement grants 500 increase price companys common stock 4000 per share total number shares eligible accelerated vesting annual basis limited 25 number shares subject inducement grants cumulative carryover unvested portion shares eligible accelerated vesting prior years prior expiration term options onehalf vested options exercised one year december 31 2005 200000 options remain outstanding inducement grants 20000 exercisable employee stock purchase plan employee stock purchase plan provides issuance shares companys common stock purchase period eligible employees may designate 1 25 cash compensation deducted cash compensation purchase common stock plan purchase price shares plan equal 85 fair market value first day plan year july 1st june 30th purchase price companys officers equal 100 fair market value first day plan year aggregate number shares reserved issuance employee stock purchase plan 2005 450000 shares december 31 2005 278582 shares issued employee stock purchase plan summaries status companys stock option warrant plans december 31 2005 2004 2003 changes years ended dates presented notes consolidated financial statements cont december 31 2005 company reserved total approximately 19 million shares common stock issuance eligible participants option plans 1944199 shares outstanding exercisable price range december 31 2005 20 earnings per share three years period ended december 31 2005 adjustments net income purposes calculating basic diluted net income per common share following reconciliation weighted average shares used basic diluted net income per common share computations company include diluted shares outstanding calculation 592400 options 2005 200000 options 2004 206000 options 2003 inclusion would antidilutive exercise price exceeded average market price common stock respective periods 21 subsequent events unaudited february 2006 company announced succession ceo president along restructuring international operations company expects incur costs approximately 10 million first quarter 2006 associated items first quarter 2006 company entered final agreements certain former owners novamedix established amount company required disburse connection kci litigation settlement result negotiations company expects disburse approximately 249 million instead 262 million accrued december 31 2005 difference approximately 13 million recorded income first quarter 2006 notes consolidated financial statements cont 22 quarterly financial data unaudited us dollars thousands except per share data sum per share earnings quarter may equal earnings per share year due change average share calculations accordance prescribed reporting requirements schedule 2 valuation qualifying accounts years ended december 31 2005 2004 2003 s1item 15 exhibits financial statement schedules documents filed part report form 10k following documents filed part report form 10k 1 financial statements see “index consolidated financial statements” page form 10k 2 financial statement schedules see “index consolidated financial statements” page form 10k 3 exhibits filed herewith signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated name title date alan w milinazzo chief executive officer march 16 2007 alan w milinazzo president director thomas hein chief financial officer march 16 2007 thomas hein principal accounting officer james f gero chairman board directors march 16 2007 james f gero peter j hewett deputy chairman board directors march 16 2007 peter j hewett charles w federico director march 16 2007 charles w federico jerry c benjamin director march 16 2007 jerry c benjamin walter von wartburg director march 16 2007 walter von wartburg thomas j kester director march 16 2007 thomas j kester kenneth r weisshaar director march 16 2007 kenneth r weisshaar guy jordan director march 16 2007 guy jordan stefan widensohler director march 16 2007 stefan widensohler index consolidated financial statements schedules provision made applicable accounting regulation securities exchange commission required related instructions inapplicable therefore omitted statement management’s responsibility financial statements shareholders orthofix international nv management responsible preparation consolidated financial statements related information presented report consolidated financial statements include amounts based management’s estimates judgments prepared conformity accounting principles generally accepted united states financial information report shareholders consistent consolidated financial statements company maintains accounting internal control systems provide reasonable assurance reasonable cost assets safeguarded loss unauthorized use disposition financial records reliable preparing financial statements maintaining accountability assets systems augmented written policies organizational structure providing division responsibilities careful selection training qualified personnel company engaged ernst young llp independent registered public accountants audit render opinion consolidated financial statements accordance auditing standards public company accounting oversight board united states standards include assessment systems internal controls test transactions extent considered necessary support opinion board directors audit committee consisting solely outside directors company meets periodically management independent registered public accountants ensure meeting responsibilities discuss matters concerning internal controls financial reporting ernst young llp full free access audit committee james f gero chairman board directors alan w milinazzo president chief executive officer director thomas hein chief financial officer management’s report internal control financial reporting management also responsible establishing maintaining adequate internal control financial reporting defined rules 13a15f 15d15f securities exchange act 1934 amended inherent limitations internal control financial reporting may prevent detect misstatements projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management including principal executive officer principal financial officer conducted assessment effectiveness internal control financial reporting december 31 2006 conducting assessment management used criteria issued committee sponsoring organizations treadway commission internal control integrated framework completed acquisition blackstone medical inc “blackstone” september 22 2006 fully described note 2 consolidated financial statements part ongoing integration activities process incorporating operations blackstone controls procedures expect complete process later september 22 2007 management excluded evaluation effectiveness internal control financial reporting december 31 2006 certain elements internal control financial reporting blackstone plan include businesses assessment effectiveness internal controls within one year acquisition based assessment management concluded company’s internal control financial reporting effective reasonable assurance level december 31 2006 reasonable assurance includes understanding remote likelihood material misstatements prevented detected timely basis independent registered public accounting firm issued attestation report management’s assessment internal control financial reporting appears following page annual report form 10k james f gero chairman board directors alan w milinazzo president chief executive officer director thomas hein chief financial officer report independent registered public accounting firm board directors shareholders orthofix international nv audited accompanying consolidated balance sheets orthofix international nv december 31 2006 2005 related consolidated statements operations changes shareholders’ equity cash flows three years period ended december 31 2006 audits also included financial statement schedules listed index item 15a financial statements schedules responsibility company’s management responsibility express opinion financial statements schedules based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position orthofix international nv december 31 2006 2005 consolidated results operations cash flows three years period ended december 31 conformity us generally accepted accounting principles also opinion related financial statement schedules considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein discussed note 1 company adopted financial accounting standards board statement 123r sharebased payments january 1 2006 using modified prospective application method also audited accordance standards public company accounting oversight board united states effectiveness orthofix international nv’s internal control financial reporting december 31 2006 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated march 14 2007 expressed unqualified opinion thereon ernst young llp charlotte north carolina march 14 report independent registered public accounting firm management’s assessment effectiveness internal control financial reporting board directors shareholders orthofix international nv audited management’s assessment included accompanying management’s report internal control financial reporting orthofix international nv maintained effective internal control financial reporting december 31 2006 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria orthofix international nv’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinion management’s assessment opinion effectiveness company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate indicated accompanying management’s report internal control financial reporting management’s assessment conclusion effectiveness internal control financial reporting include internal controls blackstone medical inc included 2006 consolidated financial statements orthofix international nv constituted 46 total assets december 31 2006 8 revenues year ended audit internal control financial reporting orthofix international nv also include evaluation internal control financial reporting blackstone medical inc opinion management’s assessment orthofix international nv maintained effective internal control financial reporting december 31 2006 fairly stated material respects based coso criteria also opinion orthofix international nv maintained material respects effective internal control financial reporting december 31 2006 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets december 31 2006 2005 related consolidated statements operations changes shareholders’ equity cash flows three years period ended december 31 2006 orthofix international nv report dated march 14 2007 expressed unqualified opinion thereon ernst young llp charlotte north carolina march 14 consolidated balance sheets december 31 2006 accompanying notes form integral part consolidated financial statements consolidated statements operations years ended december 31 2006 2005 2004 accompanying notes form integral part consolidated financial statements consolidated statements changes shareholders’ equity years ended december 31 2006 2005 2004 accompanying notes form integral part consolidated financial statements consolidated statements cash flows years ended december 31 2006 2005 2004 accompanying notes form integral part consolidated financial statements notes consolidated financial statements description business orthofix international nv “company” multinational corporation principally involved design development manufacture marketing distribution medical equipment principally orthopedic products market summary significant accounting policies basis consolidation consolidated financial statements include financial statements company whollyowned majorityowned subsidiaries entities company control results acquired businesses included consolidated statements operations date acquisition intercompany accounts transactions profits eliminated consolidation equity method accounting used company significant influence operating decisions cannot exercise control equity method original investments recorded cost adjusted company’s share undistributed earnings losses companies company’s investments significant influence control accounted cost method accounting b foreign currency translation foreign currency translation performed accordance sfas 52 “foreign currency translation” balance sheet accounts except shareholders’ equity translated year end exchange rates revenue expense items translated weighted average rates exchange prevailing year gains losses resulting translation foreign currency recorded accumulated comprehensive income component shareholders’ equity transactional foreign currency gains losses including intercompany transactions longterm investing nature included income expense 28 million 10 million 09 million years december 31 2006 2005 2004 respectively c inventories valued lower cost estimated net realizable value provision excess obsolete items cost determined weightedaverage basis approximates fifo method valuation workinprocess finished goods field inventory consignment inventory includes cost materials labor production field inventory represents immediately saleable finished goods inventory possession company’s direct sales representatives reporting currency reporting currency united states dollar e market risk ordinary course business company exposed impact changes interest rates foreign currency fluctuations company’s objective limit impact movements earnings cash flows order achieve objective company seeks balance nondollar income expenditures 2006 company made use interest rate swap agreement foreign currency forward contracts manage exposures fluctuations interest rates see note 11 additional information notes consolidated financial statements cont f longlived assets property plant equipment stated cost less accumulated depreciation impairment charges computed accordance company’s policy depreciation computed straightline basis useful lives assets except land depreciated depreciation leasehold improvements computed shorter lease term useful life asset useful lives follows expenditures maintenance repairs minor renewals improvements extend life respective asset expensed expenditures renewals improvements capitalized assets related accumulated depreciation adjusted property retirements disposals resulting gain loss included operations fully depreciated assets remain accounts retired service patents intangible assets recorded cost acquired part business combination estimated fair value assets primarily include patents technology agreements trademarks licenses customer relationships distribution networks generally amortized using straightline method estimated useful lives 5 years acquisitions completed prior june 30 2001 acquisitions completed subsequent june 30 2001 identifiable intangible assets generally amortized useful lives using method amortization reflects pattern economic benefit intangible assets consumed intangible assets deemed indefinite lives goodwill subject amortization accordance statement financial accounting standards sfas 142 company reviews longlived indefinite lived intangible assets least annually events changes circumstances indicate carrying amount asset may recoverable longlived amortizable intangible assets company recognizes impairment loss sum undiscounted expected future cash flows assets remaining estimated useful lives less carrying value assets longlived intangible assets subject amortization company recognizes impairment loss sum discounted expect future cash flows less carrying value assets measurement impairment loss based fair value related asset group assets g revenue recognition revenue generally recognized income period title passes products delivered bone growth stimulation certain bracing products prescribed physician company recognizes revenue product placed accepted patient domestic spinal implant biologic products revenues recognized product utilized confirming purchase order received hospital sales commercial customers including hospitals distributors revenues recognized time shipment unless contractual agreements specify title passes delivery company derives significant amount revenues united states thirdparty payors including commercial insurance carriers health maintenance organizations preferred provider organizations governmental payors medicare amounts paid thirdparty payors generally based fixed allowable reimbursement rates revenues recorded expected preauthorized reimbursement rates net contractual allowances adjustments billings subject review thirdparty payors may subject adjustment royalties revenues recognized royalty earned revenues inventory delivered consignment recognized product used consignee revenues exclude value added local taxes intercompany sales trade discounts shipping handling costs included cost sales notes consolidated financial statements cont h research development costs expenditures research development expensed incurred accordance eitf 967 “accounting deferred taxes inprocess research development activities acquired purchase business combination” company writes acquired inprocess research development research development expense day acquisition income taxes income taxes provided using liability method accordance sfas 109 “accounting income taxes” deferred income taxes arise differences treatment income expense items financial reporting income tax purposes deferred tax assets liabilities resulting differences recorded based enacted tax rates effect differences expected reverse company operations various tax jurisdictions j net income per common share net income per common share computed accordance sfas 128 “earnings per share” net income per common share basic computed using weighted average number common shares outstanding respective years net income per common share diluted computed using weighted average number common equivalent shares outstanding respective years common equivalent shares represent diluted effect assumed exercise outstanding share options see note 19 consolidated financial statements differences basic diluted shares result solely assumed exercise certain outstanding share options warrants k cash equivalents company considers highly liquid investments original maturity three months less date purchase cash equivalents l restricted cash restricted cash consists cash held certain subsidiaries distribution transfer orthofix international nv “parent” restricted senior secured bank facility described note 10 restricts parent’s access cash held colgate medical limited subsidiaries orthofix group access cash operational purposes sale accounts receivable company follows provisions sfas 140 “accounting transfers servicing financial assets extinguishment liabilities” trade accounts receivables sold without recourse removed balance sheet time sale company generally require collateral trade receivables n use estimates preparation financial statements preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect amounts reported financial statements accompanying notes ongoing basis company evaluates estimates including related contractual allowances doubtful accounts inventories taxes potential goodwill intangibles impairment actual results could differ estimates reclassifications certain prior year amounts reclassified conform 2006 presentation reclassifications effect previously reported net income shareholders’ equity notes consolidated financial statements cont p stock based compensation prior january 1 2006 company accounted stock based compensation plans recognition measurement provisions apb opinion 25 accounting stock issued employees related interpretations permitted sfas 123 accounting stockbased compensation stockbased employee compensation expense recognized relating options granted exercise prices lower fair market value underlying stock date grant effective january 1 2006 company adopted fair value recognition provisions sfas 123r sharebased payment using modified prospective transition method transition method compensation cost recognized 2006 includes compensation cost sharebased payments granted prior yet vested january 1 2006 based grant date fair value estimated accordance original provisions sfas 123 b compensation cost sharebased payments granted subsequent january 1 2006 based grantdate fair value estimated accordance provisions sfas 123r fair value stock options determined using blackscholes valuation model consistent valuation techniques previously utilized options footnote disclosures required sfas 123 value recognized expense service period net estimated forfeitures results prior periods restated expected term options granted estimated based number factors including vesting term award historical employee exercise behavior options currently outstanding options exercised expired expected volatility common stock employee’s average length service riskfree interest rate determined based upon constant us treasury security rate contractual life approximates expected term option award year ended december 31 2006 options valued riskfree interest rates 435 507 expected volatility 334 expected term 43 years dividend rate zero company chosen use “shortcut method” determine pool windfall tax benefits adoption sfas 123r result adopting sfas 123r january 1 2006 companys income taxes net income year ended december 31 2006 73 million 52 million lower respectively continued account sharebased compensation apb 25 basic diluted earnings per share year ended december 31 2006 would 032 higher respectively company adopted sfas 123r december 31 2006 compensation expense relating options already granted expected recognized 142 million expense expected recognized weighted average period 147 years notes consolidated financial statements cont following table shows detail stockbased compensation line item consolidated statements operations year ended december 31 2006 thousands 1 amount includes 656 stockbased compensation accelerated vesting options associated transition senior management first quarter 2006 2 performance requirements consideration received stockbased compensation awarded sales marketing employees prior adoption sfas 123r company presented tax benefits deductions resulting exercise stock options operating cash flows statement cash flows sfas 123r requires cash flows resulting tax benefits resulting tax deductions excess compensation cost recognized options excess tax benefits classified financing cash flows 22 million excess tax benefit classified financing cash inflow year ended december 31 2006 would classified operating cash inflow company adopted sfas 123r notes consolidated financial statements cont following table illustrates effect net income earnings per share fair value based method applied stockbased awards granted periods presented q recently issued accounting standards september 2006 fasb issued sfas 157 fair value measurements statement defines fair value used numerous accounting pronouncements establishes framework measuring fair value generally accepted accounting principles expands disclosure related use fair value measures financial statements statement effective companys financial statements issued 2008 however earlier application encouraged company currently evaluating timing adoption impact adoption might financial position results operations july 2006 fasb issued fasb interpretation 48 accounting uncertainty income taxesan interpretation fasb statement 109 “fin 48” clarifies accounting uncertainty income tax positions interpretation requires company recognize consolidated financial statements impact tax position likely sustained upon examination based technical merits position provisions fin 48 effective beginning companys 2007 fiscal year cumulative effect change accounting principle recorded adjustment opening retained earnings company currently evaluating impact adopting fin 48 consolidated financial statements june 2006 fasb ratified emerging issues task force “eitf” issue 063 taxes collected customers remitted governmental authorities presented income statement gross versus net presentation standard allows companies present statements operations taxes assessed governmental authority directly imposed revenueproducing transactions seller customer sales use valueadded excise taxes either gross included revenue costs net excluded revenue basis standard effective interim fiscal years beginning december 15 2006 company currently evaluating potential impact issue financial statements believe impact adoption standard material notes consolidated financial statements cont february 2006 fasb issued sfas 155 accounting certain hybrid instruments amendment sfas 133 sfas 140 sfas 155 allows financial instruments embedded derivatives accounted whole eliminating need bifurcate derivative host holder elects account instrument whole instrument fair value basis statement effective financial instruments acquired issued beginning entity’s first fiscal year begins september 15 2006 company believe adoption statement material impact financial statements r fair value financial instruments carrying amounts reflected consolidated balance sheet cash equivalents restricted cash accounts receivable shortterm bank debt accounts payable approximate fair value due shortterm maturities instruments company’s long term secured debt carries floating rate interest approximates fair value advertising costs company expenses advertising costs incurred advertising expense years ended december 31 2006 2005 2004 10 million 05 million 05 million respectively derivative instruments company manages exposure fluctuations interest rates foreign exchange within consolidated financial statements according hedging policy company may engage nonleveraged transactions involving various financial derivative instruments manage exposed positions policy requires company formally document relationship hedging instrument hedged item well riskmanagement objective strategy undertaking hedge transaction instruments designated cash flow hedge company formally assesses hedge’s inception ongoing basis whether derivative used hedging transaction effective offsetting changes cash flows hedged item whether derivative may expected remain effective future periods determined derivative ceased effective hedge company discontinue related hedge accounting prospectively determination would made 1 derivative longer effective offsetting changes cash flows hedged item 2 derivative expires sold terminated exercised 3 management determines designating derivative hedging instrument longer appropriate ineffective portions changes fair value cash flow hedges recognized earnings instruments designated fair value hedge company ensures exposed position hedged changes fair value instruments recognized earnings company follows statement financial accounting standards “sfas” 133 “accounting derivative instruments hedging activities” amended interpreted requires derivatives recorded either assets liabilities balance sheet respective fair values cash flow hedge effective portion derivative’s change fair value ie gains losses initially reported component comprehensive income net related taxes subsequently reclassified net earnings hedged exposure affects net earnings company’s foreign currency hedges forward contracts used manage foreign currency exposure related portion company’s accounts receivable denominated euros forward contracts accounted fair value hedge accordance sfas 133 addition company utilizes cross currency swap manage foreign currency exposure related portion company’s intercompany receivable us dollar functional currency subsidiary denominated euro cross currency swap accounted cash flow hedge accordance sfas 133 notes consolidated financial statements cont see note 11 “derivative instruments” description types derivative instruments company utilizes u comprehensive income accumulated comprehensive income loss comprised foreign currency translation adjustments effective portion gain loss derivatives designated accounted cash flow hedge components changes comprehensive income loss follows acquisitions following acquisitions recorded using purchase method accounting blackstone acquisition september 22 2006 company purchased 100 stock blackstone medical inc “blackstone” purchase price 3330 million plus acquisition costs subject certain closing adjustments acquisition related costs financed approximately 3300 million senior secured bank debt described note 10 cash hand blackstone privately held company based springfield massachusetts specializes design development marketing spinal implant related biologic products blackstones product lines include spinal fixating devices including hooks rods screws plates various spacers cages related biologics products company considered acquisition way fortify advance business strategy expand spinal sector acquisition broadened companys product lines reduced reliance success single product enlarged channel opportunities products blackstone’s orthofix’s existing operations notes consolidated financial statements cont factors contributed valuation blackstone included recognition blackstone established company believes one largest private spine companies broad portfolio spinal product offerings blackstone strong brand name product identity spinal industry blackstone history sales earnings growth compares favorably fast growing spinal market product lines serve orthofix valued blackstone reviewing range valuation methodologies provided financial advisors transaction including comparable publiclytraded companies comparable precedent transactions discounted cash flow analysis comparison orthofixs trading multiples acquisition accounted using purchase method accordance sfas 141 business combinations purchase price preliminarily allocated assets acquired liabilities assumed based estimated fair market value date acquisition preliminary allocation purchase price reflects following results blackstone’s operations included company’s consolidated results operations date acquisition preliminary purchase price allocated assets acquired purchased inprocess research development liabilities assumed based estimated fair value acquisition date amount purchase price allocated purchased inprocess research development written date acquisition resulted charge 400 million charge included research development expense line item consolidated statements operations principally comprised value dynamic stabilization cervical disk together accounted 93 fair value fair value inprocess research development estimated using discounted earnings method amount written purchased inprocess research development deductible income tax purposes united states addition items may affect final purchase price allocation include finalization acquisition costs revisions tangible intangible assets based final assessments information provides better estimate fair value assets acquired liabilities assumed notes consolidated financial statements cont residual values intangible assets subject amortization acquired blackstone acquisition definite lived intangible assets acquired blackstone acquisition consist company determined trademarks acquired blackstone acquisition valued 770 million indefinite lived intangible assets company considered criteria prescribed paragraphs 11 c e f sfas 142 determining registered trademarks acquired blackstone acquisition indefinite life company aware legal regulatory contractual provisions limit useful lives registered trademarks company believe effects obsolescence demand competition economic factors cause useful lives registered trademarks limited company concluded legal regulatory contractual competitive economic factors limit useful life registered trademarks company therefore useful lives registered trademarks considered indefinite summary unaudited pro forma condensed results operations earnings per share years ended december 31 2006 2005 assuming consummation blackstone acquisition january 1 2005 follows inprocess research development charge 400 million recorded year ended december 31 2006 excluded pro forma financial information international medical supplies distribution gmbh acquisition notes consolidated financial statements cont february 2006 company purchased 52 international medical supplies distribution gmbh “imes” german distributor breg products 15 million plus closing adjustments acquisition costs operations acquired distributor included companys statement operations date acquisition results operations would materially different acquisition consolidated january 1 2006 final purchase price included approximately 01 million working capital 10 million goodwill puerto rico distributor acquisition first quarter 2004 company purchased distributor puerto rico 14 million consisted 11 million cash 03 million assumed liabilities final purchase price included approximately 09 million working capital 05 million goodwill operations acquired distributor included accompanying consolidated statement operations date acquisition inventories see note 1 “summary significant accounting policies” part c “inventories” description field inventory securities investments company total investments held cost 41 million december 31 2006 2005 comprised investment 15 million innovative spinal technologies ist startup company focused commercializing spinal products 26 million oped ag germanbased bracing company’s ownership percentage ist 287 company assessed cost investments noting impairment carrying value company also investment orthorx investment reduced zero 2004 december 31 2006 company’s ownership percentage orthorx reduced 55 notes consolidated financial statements cont property plant equipment depreciation expense years ended december 31 2006 2005 2004 76 million 83 million 78 million respectively patents intangible assets amortization expense intangible assets estimated approximately 191 million 207 million 199 million 196 million 179 million periods ending december 31 2007 2008 2009 2010 2011 respectively company performed impairment test indefinitelived assets accordance fas 142 determined impairment exists notes consolidated financial statements cont goodwill sfas 142 intangible goodwill subject annual impairment testing using guidance criteria described standard testing requires comparison carrying values fair values appropriate carrying value impaired assets reduced fair value company performed impairment test goodwill determined impairment exists discussion acquisitions since january 1 2004 associated goodwill see note 2 consolidated financial statements following table presents changes net carrying value goodwill reportable segment bank borrowings weighted average interest rate borrowings lines credit december 31 2006 2005 300 years borrowings lines credit consist borrowings euros company unused available lines credit 62 million euros 81 million 68 million euros 80 million december 31 2006 2005 respectively italian line credit gives company option borrow amounts italy rates determined time borrowing line credit unsecured notes consolidated financial statements cont current liabilities longterm debt september 22 2006 whollyowned us holding company subsidiary orthofix holdings inc “orthofix holdings” entered senior secured credit facility syndicate financial institutions finance acquisition blackstone senior secured credit facility provides 1 sevenyear amortizing term loan facility 3300 million proceeds together cash balances used payment purchase price blackstone 2 sixyear revolving credit facility 450 million december 31 2006 amounts outstanding revolving credit facility 3152 million outstanding term loan facility obligations senior secured credit facility floating interest rate libor plus margin prime rate plus margin currently term loan libor loan margin 175 margin adjusted quarterly based upon leverage ratio company subsidiaries effective interest rate december 31 2006 senior secured debt 712 domestic subsidiaries orthofix includes orthofix inc breg inc blackstone medical inc colgate medical limited victory medical guaranteed obligations orthofix holdings inc senior secured bank facility obligations subsidiaries gurantees secured pledges respective assets conjunction obtaining senior secured bank facility amendment thereto company incurred debt issuance costs 60 million december 31 2006 58 million capitalized debt costs included longterm assets notes consolidated financial statements cont certain subsidiaries company effective restrictions ability pay dividends make intercompany loan advances pursuant company’s senior secured credit facility net assets orthofix holdings inc subsidiaries restricted distributions parent company subsidiaries orthofix group access net assets operational purposes amount restricted net assets orthofix holdings inc subsidiaries december 31 2006 2472 million weighted average interest rates current maturities longterm obligations december 31 2006 2005 712 612 respectively aggregate maturities longterm debt december 31 2006 follows 2007 33 million 2008 33 million 2009 34 million 2010 34 2011 33 million thereafter 2987 million derivative instruments 2006 company entered crosscurrency swap agreement manage foreign currency exposure related portion company’s intercompany receivable us dollar functional currency subsidiary denominated euro derivative instrument tenyear fully amortizable agreement notional amount 630 million scheduled expire december 30 2016 instrument designated cash flow hedge amount outstanding agreement december 31 2006 630 million agreement company pays euro receives us dollars based scheduled cash flows agreement 2006 company recognized unrealized loss change fair value swap arrangement 01 million within comprehensive income 2006 company utilized foreign currency forward contracts manage foreign currency exposure related portion company’s accounts receivable denominated euros strategy foreign currency contracts neutralize foreign currency impact earnings converting 50 million euros accounts receivable us dollars conversion underlying exposure forward contracts offset net impact earnings 2006 company paid cash 06 million settle forward contracts year received cash 03 million settlement foreign currency exposures 2005 foreign currency forward contracts entered year ended december 31 2006 accounted fair value hedges accordance sfas 133 related gains losses recorded income related tax amounts taxation 2004 company utilized interest rate swap manage interest rate exposure related portion company senior secured term loan derivative instrument threeyear fully amortizable agreement notional amount 500 million scheduled expire june 27 2007 instrument designated cash flow hedge company terminated agreement december 22 2005 portion became ineffective termination resulted onetime gain 04 million 2005 recorded reduction interest expense commitments leases company entered operating leases facilities equipment rent expense company’s operating leases years ended december 31 2006 2005 2004 approximately 42 million 37 million 35 million respectively future minimum lease payments operating leases december 31 2006 follows notes consolidated financial statements cont business segment information company’s segment information prepared basis company’s management reviews financial information operational decision making purposes concurrent acquisition blackstone company redefined business segments market sectors prior period information presented restated conform new segments market sectors company comprised following segments orthofix domestic orthofix domestic “domestic” consists operations united states orthofix inc distributes stimulation orthopedic products domestic uses direct distributor sales representatives sell spine orthopedic products hospitals doctors healthcare providers united states market blackstone “blackstone” consists blackstone medical inc based springfield massachusetts two subsidiaries blackstone gmbh goldstone gmbh blackstone specializes design development marketing spinal implant related biologic products blackstones operating loss includes amortization acquired intangible assets inventory steppedup value blackstone acquisition breg “breg” consists breg inc breg based vista california designs manufactures distributes orthopedic products postoperative reconstruction rehabilitative patient use sells products network domestic international distributors sales representatives affiliates orthofix international orthofix international “international” consists international operations located europe mexico brazil puerto rico well independent distributors located outside united states international uses direct distributor sales representatives sell spine orthopedics sports medicine vascular products hospitals doctors healthcare providers group activities group activities comprised parent orthofix holdings inc us holding company’s operating expenses identifiable assets notes consolidated financial statements cont tables present information reportable segment includes 400 million inprocess research development related acquisition blackstone following table presents identifiable assets segment excluding intercompany balances investments consolidated subsidiaries notes consolidated financial statements cont capital expenditures tangible intangible assets segment follows geographical information analysis net sales geographic destination sales netherlands antilles notes consolidated financial statements cont analysis longlived assets geographic area notes consolidated financial statements cont income taxes company subsidiaries taxed rates applicable within respective company’s jurisdiction composite income tax rate vary according jurisdictions profits arise components provision income tax expense benefit follows notes consolidated financial statements cont income minority interests provision income taxes consisted tax effects significant temporary differences comprise deferred tax liabilities assets follows valuation allowance december 31 2006 2005 94 million 63 million respectively net increase valuation allowance 31 million period ended december 31 2006 valuation allowance attributable net operating loss carryforwards certain foreign jurisdictions benefit dependent upon generation future taxable income location assessing realizability deferred tax assets management considers whether likely portion deferred tax assets realized ultimate realization deferred tax assets dependent upon generation future taxable income periods temporary differences become deductible management considers scheduled reversal deferred tax liabilities projected future taxable income tax planning strategies making assessment based upon level historical taxable income projections future taxable income periods deferred tax assets deductible management believes likely company realize benefits deductible differences net existing valuation allowances december 31 2006 notes consolidated financial statements cont part acquisition blackstone company acquired net operating loss carryforward 311 million subject annual section 382 limitations approximately 116 million per year 2006 company utilized 59 million net operating loss carryforwards company established valuation allowance net operating loss carryforward management believes net operating loss carryforwards utilized future taxable income company also tax net operating loss carryforwards taxing jurisdictions approximately 290 million expiring various amounts tax years beginning 2009 company provided valuation allowance net operating loss carryforwards since believe deferred tax asset realized prior expiration connection company’s european restructuring 2006 similar transaction 2002 certain intangible assets sold subsidiaries order optimize company’s supply chain assets sold estimates fair value based upon valuations provided independent third party assurance local tax authorities challenge valuations successful challenge tax authorities could materially adverse effect companys tax profile including ability recognize intended tax benefits transaction significantly increase company’s future tax payments company accrued financial statement reserves connection valuation matters rate reconciliation presented based us federal income tax rate rather parent company’s country domicile tax rate management believes given large proportion taxable income earned united states disclosure meaningful difference reported provision income taxes provision computed applying statutory rates applicable subsidiary company attributable companys election adopt new tax provision italy election allowed company increase tax purposes value trademarks italy approximately 150 million company incurred tax liability 27 million applying 19 tax rate revaluation trademark value company expects receive future tax benefit 56 million associated amortization stepup value based current italian tax rates approximately 37 net 56 million deferred tax asset 27 million tax liability resulted 29 million nonrecurring discrete tax benefit company recorded additional income taxes applicable undistributed earnings foreign subsidiaries residing outside netherlands antilles considered indefinitely reinvested taxes attributable amounts deemed indefinitely reinvested material event undistributed earnings deemed indefinitely reinvested longer meet criteria remain undistributed earnings also considered calculating potential future tax liabilities relating undistributed foreign earnings total undistributed earnings amounted approximately 1911 million 2321 million 2019 million december 31 2006 2005 2004 respectively may become taxable upon remittance dividends upon sale liquidation foreign subsidiaries practicable determine amounts net additional income tax may payable earnings repatriated notes consolidated financial statements cont related parties following related party balances transactions three years ended december 31 2006 company companies directors andor executive officers interest reflected consolidated financial statements company buys components related av impulse system purchases quality control logistic services buys laryngeal mask companies former board member beneficial minority interest contingencies litigation company normal course business involved various lawsuits time addition company subject certain contingencies discussed companys subsidiary blackstone medical defendant patent infringement lawsuit captioned medtronic sofamor danek usa inc warsaw orthopedic inc medtronic puerto rico operations co medtronic sofamor danek deggendorf gmbh v blackstone medical inc civil action 0630165map filed september 22 2006 united states district court district massachusetts plaintiffs allege exclusive licensees united states patent nos 6926718 b1 6936050 b2 6936051 b2 6398783 b1 7066961 b2 “patents” ii blackstone medicals making selling offering sale using within united states blackstone anterior cervical plate 3º anterior cervical plate hallmark anterior cervical plate construx mini peek vbr system products infringing infringed patents infringement willful complaint requests damages injunction alleged infringement patents complaint specifically state amount damages blackstone medical denied infringement asserts patents invalid novamedix subsidiary company filed action february 21 1992 kinetic concepts inc “kci” alleging infringement patents relating novamedix’s av impulse system foot pump product breach contract unfair competition seeking damages september 30 2005 kci novamedix company announced settlement reached kci agreed pay novamedix 750 million give novamedix option receive limited assignment certain kci foot pump patent rights company contractual obligations distribute portion settlement proceeds certain former owners novamedix original patents final settlement amounts paid former owners patent holders concluded december 31 2005 company recorded gain 401 million related tax amount 27 million accrued 262 million contractual obligations company agreed indemnify kci certain tax liabilities might arise settlement management believes risk claims might arise indemnity remote management’s opinion company currently involved legal proceeding individually aggregate material effect financial position liquidity operating results company notes consolidated financial statements cont concentrations credit risk financial instruments potentially subject company concentrations credit risk primarily cash investments accounts receivable cash investments primarily money market funds deposited major financial center banks concentrations credit risk respect accounts receivable limited due large number individuals comprising company’s customer base company performs ongoing credit evaluations customers generally require collateral certain customers rely third party healthcare payers private insurance companies governments make payments company behalf accounts receivable countries government funds medical spending primarily located north africa middle east south america asia europe company considered special situations establishing allowances potentially uncollectible accounts receivable countries india egypt turkey company also records reserves bad debts customers based variety factors including length time receivables past due financial condition customer macroeconomic conditions historical experiences company maintains reserves potential credit losses within management’s expectations company sells via direct sales force distributors customers accounted 10 net sales 2006 2005 2004 pensions deferred compensation orthofix inc sponsors defined contribution benefit plan “401k plan” covering substantially full time employees 401k plan allows participants contribute 15 pretax compensation subject certain limitations company matching 100 first 2 employee’s base compensation 50 next 4 employee’s base compensation contributed 401k plan years ended december 31 2006 2005 2004 expenses incurred relating 401k plan including matching contributions approximately 945000 962000 760000 respectively breg also sponsors 401k plan 401k plan allows participants contribute 100 compensation subject certain limitations company matching 100 first 750 deferred years ended december 31 2006 2005 2004 expenses incurred relating breg 401k plan including matching contributions 102000 101000 111000 respectively blackstone also sponsors 401k plan 401k plan allows participants contribute 75 compensation subject certain limitations company matching 50 first 6 employee’s compensation deferred fourth quarter 2006 expense incurred relating blackstone 401k plan including matching contributions 38000 company operates defined contribution pension plans international employees described meeting minimum service requirements company’s expenses pension contributions 2006 2005 2004 approximately 489000 450000 468000 respectively italian law orthofix srl accrues behalf employees deferred compensation paid termination employment year’s provision deferred compensation based percentage employee’s current annual remuneration plus annual charge deferred compensation also accrued leaving indemnity payable agents case dismissal regulated national contract equal approximately 35 total commissions earned company’s expense deferred compensation 2006 2005 2004 approximately 352000 316000 292000 respectively deferred compensation payments 274000 215000 207000 made 2006 2004 respectively balance december 31 2006 14 million represents amount would payable employees agents terminated employment date included longterm liabilities notes consolidated financial statements cont share option plans option stock purchase plans december 31 2006 company three stockbased compensation plans one stock purchase plan described long term incentive plan long term incentive plan “2004 ltip plan” long term incentive plan adopted april 2004 ltip plan approved shareholders june 29 2004 20 million shares reserved issuance plan awards generally vest years service awards fully vesting within five years grant date awards form option restricted share unit performance share unit award form determined board directors awards granted 2004 ltip plan expire later 10 years date grant december 31 2006 1530186 awards outstanding 2004 ltip plan 308222 exercisable staff share option plan staff stock option plan “staff plan” fixed stock option plan adopted april 1992 staff plan company granted options employees estimated fair market value options date grant options generally vest based years service options fully vested within five years date grant options granted staff plan expire ten years date grant options left granted staff plan december 31 2006 346675 options outstanding staff plan 331675 exercisable performance accelerated stock option agreement june 29 2000 company’s shareholders approved grant certain executive officers company performance accelerated stock options “pasos” administers subplan staff plan purchase 1000000 shares company’s common stock subject terms summarized option purchase company’s common stock pasos granted effective january 1 2000 “grant date” exercise price equal 17875 per share price company’s common stock date shareholders approved reservation 1000000 shares issuance paso plan pasos include servicebased performancebased vesting provisions servicebased provisions subject continued employment executive pasos became 100 nonforfeitable exercisable fifth anniversary grant date vesting pasos would accelerated however certain stock price targets achieved performancebased vesting provisions provide vesting oneeighth paso grant 500 increase price company’s common stock 1500 per share total number shares eligible accelerated vesting annual basis limited 20 number shares subject paso cumulative carryover unvested portion shares eligible accelerated vesting prior years period ended december 31 2006 200000 stock options exercised none forfeited december 31 2006 187500 options remain outstanding option agreements initial agreement options expire january 1 2009 due resignation board directors remaining option holder december 5 2006 terms option agreement outstanding options expire december 5 2007 performance accelerated stock option inducement agreements december 30 2003 company granted inducement stock option awards two key executives breg inc conjunction acquisition breg inc exercise price fixed 3800 per share november 20 2003 company announced entered agreement acquire breg inc inducement grants include servicebased performancebased vesting provisions servicebased provisions subject continued employment executive inducement grants become 100 nonforfeitable exercisable fourth anniversary grant date vesting portion options inducement agreement accelerated certain stock price targets achieved performancebased vesting provisions generally provide vesting onefifth inducement grants 500 increase price company’s common stock 4000 per share total number shares eligible accelerated vesting annual basis limited 25 number shares subject inducement grants cumulative carryover unvested portion shares eligible accelerated vesting prior years prior expiration term options onehalf vested options exercised one year december 31 2006 200000 options remain outstanding inducement grants 30000 exercisable notes consolidated financial statements cont employee stock purchase plan employee stock purchase plan provides issuance shares company’s common stock purchase period eligible employees may designate 1 25 cash compensation deducted cash compensation purchase common stock plan purchase price shares plan equal 85 fair market value first day plan year july 1st june 30th purchase price company’s officers equal 100 fair market value first day plan year aggregate number shares reserved issuance employee stock purchase plan 2006 450000 shares december 31 2006 308977 shares issued employee stock purchase plan summaries status company’s stock option warrant plans december 31 2006 2005 2004 changes years ended dates presented notes consolidated financial statements cont weighted average remaining contractual life exercisable options 46 years december 31 2006 total intrinsic value options exercised 19 million 28 million 93 million years ended december 31 2006 2005 2004 respectively aggregate intrinsic value options outstanding options exercisable december 31 2006 calculated difference exercise price underlying options market price company’s common stock shares exercise prices lower 5000 closing price company’s stock december 31 2006 aggregate intrinsic value options outstanding 265 million 84 million 99 million years ended december 31 2006 2005 2004 respectively aggregate intrinsic value options exercised 119 million 54 million 63 million years ended december 31 2006 2005 2004 respectively earnings per share three years period ended december 31 2006 adjustments net income purposes calculating basic diluted net income per common share following reconciliation weighted average shares used basic diluted net income per common share computations company include diluted shares outstanding calculation 763564 options 2006 392400 options 2005 200000 options 2004 inclusion would antidilutive notes consolidated financial statements cont quarterly financial data unaudited us dollars thousands except per share data sum per share earnings quarter may equal earnings per share year due change average share calculations accordance prescribed reporting requirements 1 company formerly reported 217 adjusted exclude antidilutive effect options orthofix international nv schedule 1 condensed financial information registrant orthofix international nv condensed balance sheets see accompanying notes condensed financial statements s1 orthofix international nv schedule 1 condensed financial information registrant orthofix international nv condensed statements operations see accompanying notes condensed financial statements s2 orthofix international nv schedule 1 condensed financial information registrant orthofix international nv condensed statement cash flows see accompanying notes condensed financial statements s3 orthofix international nv schedule 1 condensed financial information registrant orthofix international nv notes condensed financial statements background basis presentation condensed parent company financial statements prepared accordance rule 1204 schedule 1 regulation sx restricted net assets orthofix holdings inc subsidiaries exceed 25 consolidated net assets orthofix international nv subsidiaries “company” information read conjunction company’s consolidated financial statements included elsewhere filing restricted net assets subsidiaries certain company’s subsidiaries restrictions effective date september 22 2006 ability pay dividends make intercompany loans advances pursuant financing arrangements amount restricted net assets company’s subsidiaries held december 31 2006 approximately 2472 million restrictions net assets orthofix holdings inc subsidiaries commitments contingencies long term obligations discussion company’s commitments contingencies long term obligations senior secured credit facility see note 10 long term debt note commitments note 16 contingencies company’s consolidated financial statements dividends subsidiaries cash dividends paid orthofix international nv consolidated subsidiaries accounted equity method 245 million 385 million 75 million periods ended december 31 2006 2005 2004 respectively s4 schedule 2 valuation qualifying accounts years ended december 31 2006 2005 2004 s5item 15 exhibits financial statement schedules documents filed part report form 10k following documents filed part report form 10k 1 financial statements see “index consolidated financial statements” page form 10k 2 financial statement schedules see “index consolidated financial statements” page form 10k 3 exhibits filed herewith signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated name title date alan w milinazzo chief executive officer february 29 2008 alan w milinazzo president director timothy adams chief financial officer february 29 2008 timothy adams principal accounting officer james f gero chairman board directors february 29 2008 james f gero peter j hewett deputy chairman board ofdirectors february 29 2008 peter j hewett charles w federico director february 29 2008 charles w federico jerry c benjamin director february 29 2008 jerry c benjamin walter von wartburg director february 29 2008 walter von wartburg thomas j kester director february 29 2008 thomas j kester kenneth r weisshaar director february 29 2008 kenneth r weisshaar guy jordan director february 29 2008 guy jordan index consolidated financial statements schedules provision made applicable accounting regulation securities exchange commission required related instructions inapplicable therefore omitted statement management’s responsibility financial statements shareholders orthofix international nv management responsible preparation consolidated financial statements related information presented report consolidated financial statements include amounts based management’s estimates judgments prepared conformity accounting principles generally accepted united states financial information report shareholders consistent consolidated financial statements company maintains accounting internal control systems provide reasonable assurance reasonable cost assets safeguarded loss unauthorized use disposition financial records reliable preparing financial statements maintaining accountability assets systems augmented written policies organizational structure providing division responsibilities careful selection training qualified personnel company engaged ernst young llp independent registered public accountants audit render opinion consolidated financial statements accordance auditing standards public company accounting oversight board united states standards include assessment systems internal controls test transactions extent considered necessary support opinion board directors audit committee consisting solely outside directors company meets periodically management independent registered public accountants ensure meeting responsibilities discuss matters concerning internal controls financial reporting ernst young llp full free access audit committee james f gero chairman board directors alan w milinazzo president chief executive officer director timothy adams chief financial officer management’s report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting term defined rule 13a15f exchange act company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements internal control financial reporting designed provide reasonable assurance company’s management board directors regarding preparation reliable financial statements external purposes accordance generally accepted accounting principles internal control financial reporting includes selfmonitoring mechanisms actions taken correct deficiencies identified inherent limitations internal control matter well designed misstatements may occur prevented detected accordingly even effective internal control financial reporting provide reasonable assurance respect financial statement preparation evaluation effectiveness internal control financial reporting made specific date continued effectiveness future periods subject risks controls may become inadequate changes conditions degree compliance policies procedures may decline management conducted evaluation effectiveness company’s system internal control financial reporting december 31 2007 based framework set forth “internal control integrated framework” issued committee sponsoring organizations treadway commission based evaluation management concluded december 31 2007 company’s internal control financial reporting effective based specified criteria company’s internal control financial reporting audited company’s independent auditor ernst young llp registered public accounting firm stated report pages herein james f gero chairman board directors alan w milinazzo president chief executive officer director timothy adams chief financial officer report independent registered public accounting firm board directors shareholders orthofix international nv audited accompanying consolidated balance sheets orthofix international nv december 31 2007 2006 related consolidated statements operations changes shareholders’ equity cash flows three years period ended december 31 2007 audits also included financial statement schedules listed index item 15a financial statements schedules responsibility company’s management responsibility express opinion financial statements schedules based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position orthofix international nv december 31 2007 2006 consolidated results operations cash flows three years period ended december 31 2007 conformity us generally accepted accounting principles also opinion related financial statement schedules considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein discussed note 2 consolidated financial statements company adopted statement financial accounting standards 123r revised 2004 sharebased payment effective january 1 2006 discussed note 14 consolidated financial statements company adopted financial accounting standards board interpretation 48 accounting uncertainty income taxes interpretation fasb statement 109 effective january 1 2007 also audited accordance standards public company accounting oversight board united states effectiveness orthofix international nv’s internal control financial reporting december 31 2007 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated february 27 2008 expressed unqualified opinion thereon ernst young llp charlotte north carolina february 27 2008 report independent registered public accounting firm board directors shareholders orthofix international nv audited orthofix international nv’s internal control financial reporting december 31 2007 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria orthofix international nv’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion orthofix international nv maintained material respects effective internal control financial reporting december 31 2007 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets orthofix international nv december 31 2007 2006 related consolidated statements operations shareholders’ equity cash flows three years period ended december 31 2007 orthofix international nv report dated february 27 2008 expressed unqualified opinion thereon ernst young llp charlotte north carolina february 27 2008 consolidated balance sheets december 31 2007 2006 accompanying notes form integral part consolidated financial statements consolidated statements operations years ended december 31 2007 2006 2005 accompanying notes form integral part consolidated financial statements consolidated statements changes shareholders’ equity years ended december 31 2007 2006 2005 accompanying notes form integral part consolidated financial statements consolidated statements cash flows years ended december 31 2007 2006 2005 accompanying notes form integral part consolidated financial statements notes consolidated financial statements description business orthofix international nv “company” multinational corporation principally involved design development manufacture marketing distribution medical equipment principally orthopedic products market 1 summary significant accounting policies basis consolidation consolidated financial statements include financial statements company whollyowned majorityowned subsidiaries entities company control results acquired businesses included consolidated statements operations date acquisition intercompany accounts transactions profits eliminated consolidation equity method accounting used company significant influence operating decisions cannot exercise control equity method original investments recorded cost adjusted company’s share undistributed earnings losses companies company’s investments significant influence control accounted cost method accounting b foreign currency translation foreign currency translation performed accordance statement financial accounting standards “sfas” 52 “foreign currency translation” balance sheet accounts except shareholders’ equity translated year end exchange rates revenue expense items translated weighted average rates exchange prevailing year gains losses resulting translation foreign currency recorded accumulated comprehensive income component shareholders’ equity transactional foreign currency gains losses including intercompany transactions longterm investing nature included income expense net 08 million 28 million 10 million years ended december 31 2007 2006 2005 respectively c inventories valued lower cost estimated net realizable value provision excess obsolete items cost determined weightedaverage basis approximates fifo method valuation workinprocess finished goods field inventory consignment inventory includes cost materials labor production field inventory represents immediately saleable finished goods inventory possession company’s direct sales representatives reporting currency reporting currency united states dollar e market risk ordinary course business company exposed impact changes interest rates foreign currency fluctuations company’s objective limit impact movements earnings cash flows order achieve objective company seeks balance nondollar income expenditures 2006 company made use interest rate swap agreement foreign currency forward contracts manage exposures interest rates foreign currency fluctuations 2007 company made use foreign currency swap agreement entered december 15 2006 manage foreign currency exposure see note 11 additional information notes consolidated financial statements cont f longlived assets property plant equipment stated cost less accumulated depreciation plant equipment also includes instrumentation working assets depreciation computed straightline basis useful lives assets except land depreciated depreciation leasehold improvements computed shorter lease term useful life asset useful lives follows expenditures maintenance repairs minor renewals improvements extend lives respective assets expensed expenditures renewals improvements capitalized assets related accumulated depreciation adjusted property retirements disposals resulting gain loss included operations fully depreciated assets remain accounts retired service patents intangible assets recorded cost acquired part business combination estimated fair value assets primarily include patents technology agreements trademarks licenses customer relationships distribution networks identifiable intangible assets certain trademarks considered indefinite lived intangible assets generally amortized useful lives using method amortization reflects pattern economic benefit intangible assets consumed intangible assets deemed indefinite lives goodwill subject amortization accordance sfas 142 “goodwill intangible assets” company reviews longlived indefinite lived intangible assets least annually events changes circumstances indicate carrying amount asset may recoverable longlived amortizable intangible assets company recognizes impairment loss sum undiscounted expected future cash flows assets’ remaining estimated useful lives less carrying value assets companys weighted average amortization period patents distribution network 13 9 years respectively indefinitelived intangible assets subject amortization company recognizes impairment loss fair value less carrying value assets december 31 2007 part company’s annual impairment test management recorded 210 million impairment charge composed 200 million relating trademarks blackstone addition company recognized charge 10 million relating certain patents orthofix inc determined company longer intended use patents fourth quarter 2007 management determined event occurred respect distribution network asset blackstone due rapid attrition distributors blackstone anticipated valuation done time acquisition therefore company compared cash flows generated intangible asset undiscounted basis carrying value intangible asset management determined carrying value exceed undiscounted cash flow impairment required result test g revenue recognition revenue generally recognized income period title passes products delivered bone growth stimulation certain bracing products prescribed physician company recognizes revenue product placed implanted accepted patient domestic spinal implant hctp products revenues recognized product utilized confirming purchase order received hospital sales commercial customers including hospitals distributors revenues recognized time shipment unless contractual agreements specify title passes delivery company derives significant amount revenues united states thirdparty payors including commercial insurance carriers health maintenance organizations preferred provider organizations governmental payors medicare amounts paid thirdparty payors generally based fixed allowable reimbursement rates revenues recorded expected preauthorized reimbursement rates net contractual allowances adjustments billings subject review thirdparty payors may subject adjustment royalties revenues recognized royalty earned revenues inventory delivered consignment recognized product used consignee revenues exclude value added local taxes intercompany sales trade discounts shipping handling costs included cost sales notes consolidated financial statements cont h research development costs expenditures research development expensed incurred accordance sfas 141 “business combinations” emerging issues task force “eitf” consensus 967 “accounting deferred taxes inprocess research development activities acquired purchase business combination” company writes acquired inprocess research development research development expense day acquisition corresponding tax benefit income taxes income taxes provided using liability method accordance sfas 109 “accounting income taxes” deferred income taxes arise differences treatment income expense items financial reporting income tax purposes deferred tax assets liabilities resulting differences recorded based enacted tax rates effect differences expected reverse company operations various tax jurisdictions january 1 2007 company adopted provisions fasb interpretation 48 accounting uncertainty income taxes interpretation fasb statement 109 fin 48 clarifies accounting uncertainty income taxes result implementation fin 48 company recognized 12 million additional liability unrecognized tax benefits including interest penalties accounted reduction january 1 2007 balance retained earnings december 31 2007 companys unrecognized tax benefits totaled 17 million plus interest penalties 05 million j net income per common share net income per common share computed accordance sfas 128 “earnings per share” net income per common share basic computed using weighted average number common shares outstanding respective years net income per common share diluted computed using weighted average number common equivalent shares outstanding respective years common equivalent shares represent dilutive effect assumed exercise outstanding share options see note 19 differences basic diluted shares result solely assumed exercise certain outstanding share options warrants 2006 effect options included calculation inclusion would antidilutive k cash equivalents company considers highly liquid investments original maturity three months less date purchase cash equivalents l restricted cash restricted cash consists cash held certain subsidiaries distribution transfer orthofix international nv “parent” subsidiaries credit parties restricted senior secured credit facility described note 10 restricts parent subsidiaries credit parties access cash held colgate medical limited subsidiaries credit party subsidiaries access cash operational purposes sale accounts receivable company follows provisions sfas 140 “accounting transfers servicing financial assets extinguishment liabilities” trade accounts receivables sold without recourse removed balance sheet time sale company generally require collateral trade receivables notes consolidated financial statements cont n use estimates preparation financial statements preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect amounts reported financial statements accompanying notes ongoing basis company evaluates estimates including related contractual allowances doubtful accounts inventories taxes potential goodwill intangible asset impairment actual results could differ estimates reclassifications certain prior year amounts reclassified conform 2007 presentation reclassifications effect previously reported net loss shareholders’ equity p sharebased compensation prior january 1 2006 company accounted sharebased compensation plans recognition measurement provisions accounting principles board “apb” opinion 25 “accounting stock issued employees” “apb 25” related interpretations permitted sfas 123 “accounting stockbased compensation” sharebased compensation expense recognized relating options granted exercise prices lower fair market value underlying stock date grant effective january 1 2006 company adopted fair value recognition provisions sfas 123r revised 2004 “sharebased payment” using modified prospective transition method transition method sharebased compensation expense recognized 2007 2006 includes compensation cost sharebased payments granted prior yet vested january 1 2006 based grantdate fair value estimated accordance original provisions sfas 123 b compensation cost sharebased payments granted subsequent january 1 2006 based grantdate fair value estimated accordance provisions sfas 123r fair value stock options determined using blackscholes valuation model consistent company’s valuation techniques previously utilized options footnote disclosures required sfas 123 value recognized expense service period net estimated forfeitures results prior periods restated expected term options granted estimated based number factors including vesting term award historical employee exercise behavior options currently outstanding options exercised expired expected volatility company’s common stock employee’s average length service riskfree interest rate determined based upon constant us treasury security rate contractual life approximates expected term option award year ended december 31 2007 options valued expected term 394 years expected volatility 303 riskfree interest rates 349 503 dividend rate zero company chosen use “shortcut method” determine pool windfall tax benefits adoption sfas 123r result adopting sfas 123r january 1 2006 company’s income taxes years ended december 31 2007 2006 113 million 73 million lower respectively continued account sharebased compensation apb 25 company adopted sfas 123r company’s net income fiscal years 2007 2006 would higher 79 million 048 per basic share 047 per diluted share 52 million 032 per basic diluted share respective periods december 31 2007 compensation expense relating options already granted expected recognized 138 million expense expected recognized weighted average period 138 years notes consolidated financial statements cont following table shows detail sharebased compensation line item consolidated statements operations years ended december 31 2007 2006 1 performance requirements consideration received sharebased compensation awarded sales marketing employees prior adoption sfas 123r company presented tax benefits deductions resulting exercise stock options operating cash flows consolidated statement cash flows sfas 123r requires cash flows resulting tax benefits resulting tax deductions excess compensation cost recognized options excess tax benefits classified financing cash flows 21 million 22 million excess tax benefit classified financing cash inflow years ended december 31 2007 2006 respectively would classified operating cash inflow company adopted sfas 123r notes consolidated financial statements cont following table illustrates effect net income earnings per share fair value based method applied sharebased awards granted period presented year ended december 31 2007 company granted employees 67422 shares restricted stock vest various dates december 2010 compensation expense represents fair value stock measured market price date grant less estimated forfeitures recognized straightline basis vesting period unamortized compensation expense related restricted stock amounted 27 million december 31 2007 q recently issued accounting standards february 2007 financial accounting standards board fasb issued sfas 159 fair value option financial assets financial liabilitiesincluding amendment fasb statement 115 sfas 159 allows entity irrevocable option elect fair value initial subsequent measurement certain financial assets liabilities instrumentbyinstrument election subsequent measurements financial assets liabilities entity elects fair value recognized results operations sfas 159 also establishes additional disclosure requirements standard effective fiscal years beginning november 15 2007 company process determining financial impact adoption sfas 159 results operations financial position december 2007 fasb issued sfas 141r “business combinations revised 2007” sfas 141r amends sfas 141 “business combinations” provides revised guidance recognizing measuring identifiable assets goodwill acquired liabilities assumed noncontrolling interest acquiree also provides disclosure requirements enable users financial statements evaluate nature financial effects business combination sfas 141 r effective fiscal years beginning december 15 2008 applied prospectively company currently evaluating potential impact adopting sfas 141 r consolidated financial position results operations december 2007 fasb issued sfas 160 “noncontrolling interests consolidated financial statements amendment arb 51” establishes accounting reporting standards pertaining ownership interest subsidiaries held parties parent amount net income attributable parent noncontrolling interest changes parent’s ownership interest valuation retained noncontrolling equity investment subsidiary deconsolidated sfas 160 also establishes disclosure requirements clearly identify distinguish interests parent interests noncontrolling owners sfas 160 effective fiscal years beginning december 15 2008 company currently evaluating potential impact adopting sfas 160 consolidated financial position results operations notes consolidated financial statements cont september 2006 fasb issued sfas 157 “fair value measurements” statement defines fair value used numerous accounting pronouncements establishes framework measuring fair value generally accepted accounting principles expands disclosure related use fair value measures financial statements statement effective companys financial statements issued fiscal years beginning november 15 2008 interim periods within fiscal years however earlier application encouraged company currently evaluating timing adoption impact adoption might financial position results operations r fair value financial instruments carrying amounts reflected consolidated balance sheets cash equivalents restricted cash accounts receivable shortterm bank borrowings accounts payable approximate fair value due shortterm maturities instruments company’s longterm secured debt carries floating rate interest approximates fair value advertising costs company expenses advertising costs incurred advertising expense years ended december 31 2007 2006 2005 18 million 10 million 05 million respectively derivative instruments company manages exposure fluctuations interest rates foreign exchange within consolidated financial statements according hedging policy company may engage nonleveraged transactions involving various financial derivative instruments manage exposed positions policy requires company formally document relationship hedging instrument hedged item well riskmanagement objective strategy undertaking hedge transaction instruments designated cash flow hedge company formally assesses hedge’s inception ongoing basis whether derivative used hedging transaction effective offsetting changes cash flows hedged item whether derivative may expected remain effective future periods determined derivative ceased effective hedge company discontinue related hedge accounting prospectively determination would made 1 derivative longer effective offsetting changes cash flows hedged item 2 derivative expires sold terminated exercised 3 management determines designating derivative hedging instrument longer appropriate ineffective portions changes fair value cash flow hedges recognized earnings instruments designated fair value hedge company ensures exposed position hedged changes fair value instruments recognized earnings company follows sfas 133 “accounting derivative instruments hedging activities” amended interpreted requires derivatives recorded either assets liabilities balance sheet respective fair values cash flow hedge effective portion derivative’s change fair value ie gains losses initially reported component comprehensive income net related taxes subsequently reclassified net earnings hedged exposure affects net earnings notes consolidated financial statements cont 2006 company foreign currency hedges manage forward contracts used manage foreign currency exposure related portion company’s accounts receivable denominated euros forward contracts accounted fair value hedge accordance sfas 133 addition company utilizes cross currency swap manage foreign currency exposure related portion company’s intercompany receivable us dollar functional currency subsidiary denominated euro cross currency swap accounted cash flow hedge accordance sfas 133 see note 11 description types derivative instruments company utilizes u comprehensive income loss accumulated comprehensive income loss comprised foreign currency translation adjustments effective portion gain loss derivatives designated accounted cash flow hedge components changes comprehensive income loss follows 2 acquisitions following acquisitions recorded using purchase method accounting blackstone acquisition september 22 2006 company purchased 100 stock blackstone medical inc “blackstone” purchase price 3330 million plus acquisition costs acquisition related costs financed approximately 3300 million senior secured bank debt described note 10 cash hand blackstone company based springfield massachusetts privately held acquired company specializes design development marketing spinal implant related hctp products blackstones product lines include spinal fixating devices including hooks rods screws plates various spacers cages related hctp products company considered acquisition way fortify advance business strategy expand spinal sector acquisition broadened companys product lines reduced reliance success single product enlarged channel opportunities products blackstone’s company’s existing operations factors contributed valuation blackstone included recognition blackstone established company believes one largest private spine companies broad portfolio spinal product offerings blackstone strong brand name product identity spinal industry blackstone history sales earnings growth compares favorably fast growing spinal market product lines serve company valued blackstone reviewing range valuation methodologies transaction including comparable publiclytraded companies comparable precedent transactions discounted cash flow analysis comparison company’s trading multiples acquisition accounted using purchase method accordance sfas 141 “business combinations” purchase price allocated assets acquired liabilities assumed based estimated fair market value date acquisition notes consolidated financial statements cont final allocation purchase price reflects following us thousands results blackstone’s operations included company’s consolidated results operations date acquisition purchase price allocated assets acquired purchased inprocess research development liabilities assumed based estimated fair market value acquisition date amount purchase price allocated purchased inprocess research development written date acquisition resulted charge 400 million charge included research development expense line item consolidated statements operations year ended december 31 2006 deductible income tax purposes united states purchased inprocess research development principally comprised value dynamic stabilization cervical disk together accounted 93 fair value fair value inprocess research development estimated using discounted earnings method company expects material net cash inflows dynamic stabilization commence 2008 material net cash inflows cervical disk commence 2012 nature costs expected complete dynamic stabilization cervical disk include research development expense research development maintenance expense make modifications enhancements products company incurred costs approximately 07 million dynamic stabilization 2007 expects incur approximately 200 million cervical disk period 2007 2010 december 31 2007 company believe material changes assumptions made time acquisition relating inprocess research development total blackstone purchase price 500 million placed escrow account described agreement plan merger company make claims reimbursement escrow account certain defined items relating acquisition company indemnified described note 16 company certain contingencies arising acquisition management expects reimbursable escrow account company make payment third party company records claims expects recover escrow receivable account included current assets consolidated balance sheets company believes settlement process escrow claims complex claims may reimbursed management recorded reserve escrow receivable items management believes may fully reimbursed escrow fund management believes amount required pay relating contingencies exceed amount escrow account however assurance contingencies exceed amount escrow account notes consolidated financial statements cont residual values intangible assets subject amortization acquired blackstone acquisition definite lived intangible assets acquired blackstone acquisition consist december 31 2007 company determined useful life reduced 8 years see note 6 company determined trademarks acquired blackstone acquisition valued 770 million indefinite lived intangible assets company considered criteria prescribed paragraphs 11 c 3 f sfas 142 determining registered trademarks acquired blackstone acquisition indefinite life company aware legal regulatory contractual provisions limit useful lives registered trademarks company believe effects obsolescence demand competition economic factors cause useful lives registered trademarks limited company concluded legal regulatory contractual competitive economic factors limit useful life registered trademarks company therefore useful lives registered trademarks considered indefinite december 31 2007 part companys annual impairment test management recorded 200 million impairment charge relating trademarks blackstone determined sum discounted expected future cash flows fair value less carrying value intangible assets summary unaudited pro forma condensed results operations earnings per share years ended december 31 2006 2005 assuming consummation blackstone acquisition january 1 2005 follows inprocess research development charge 400 million recorded year ended december 31 2006 excluded pro forma financial information international medical supplies distribution gmbh acquisition february 2006 company purchased 52 international medical supplies distribution gmbh “imes” german distributor breg products 15 million plus closing adjustments acquisition costs operations acquired distributor included companys statements operations date acquisition results operations would materially different acquisition consolidated january 1 2006 final purchase price included approximately 01 million working capital 10 million goodwill notes consolidated financial statements cont 3 inventories see note 1 “summary significant accounting policies” part c “inventories” description field inventory 4 investments company total investments held cost 44 million 41 million december 31 2007 2006 respectively investments december 31 2007 comprised investment 15 million innovative spinal technologies ist startup company focused commercializing spinal products 26 million oped ag germanbased bracing company 03 million biowave corporation pain therapy company’s ownership percentage ist oped ag 186 521 respectively company assessed cost investments noting impairment carrying value company also investment orthorx investment reduced zero 2004 december 31 2007 company’s ownership percentage orthorx reduced 6 notes consolidated financial statements cont 5 property plant equipment depreciation expense years ended december 31 2007 2006 2005 104 million 76 million 83 million respectively 6 patents intangible assets amortization expense intangible assets estimated approximately 224 million 217 million 213 million 197 million 179 million periods ending december 31 2008 2009 2010 2011 2012 respectively accordance sfas 142 “goodwill intangible assets” company performed annual impairment analysis indefinitelived intangibles included blackstone trademark acquired acquisition blackstone annual impairment analysis performed december 31 2007 resulted impairment charge 200 million relating trademark blackstone carrying value intangible asset exceeded fair value due discontinued use patent notes consolidated financial statements cont accordance sfas 144 “accounting impairment disposal longlived assets” company performed impairment analysis orthotrac patent held domestic segment impairment analysis performed december 31 2007 resulted impairment charge 10 million relating impairment orthotrac patent carrying value intangible asset exceeded fair value impairment charges blackstone trademark orthotrac patent resulted total impairment charges 210 million december 2007 company determined triggering event defined sfas 144 occurred respect distribution network blackstone due rapid attrition distributors blackstone anticipated valuation done time acquisition due triggering event company compared cash flows generated distribution network undiscounted basis carrying value intangible asset impairment charge determined necessary carrying value exceed undiscounted cash flow however based attrition distributors distribution network company determined useful life reduced 10 12 years 8 year life 7 goodwill sfas 142 goodwill subject annual impairment testing using guidance criteria described standard testing requires comparison carrying values fair values appropriate carrying value impaired assets reduced fair value company performed impairment test goodwill determined impairment exists discussion acquisitions since january 1 2005 associated goodwill see note 2 following table presents changes net carrying value goodwill reportable segment 1 purchase remaining 3874 minority interest mexican subsidiary 400 minority interest brazilian subsidiary pending final purchase price allocation notes consolidated financial statements cont 2 principally relates legal fees incurred connection acquisition blackstone related contingencies 8 bank borrowings weighted average interest rate borrowings lines credit december 31 2007 2006 479 300 respectively borrowings lines credit consist borrowings euros company unused available lines credit 13 million euros 20 million 62 million euros 81 million december 31 2007 2006 respectively italian line credit gives company option borrow amounts italy rates determined time borrowing line credit unsecured 9 current liabilities longterm debt september 22 2006 company’s whollyowned us holding company subsidiary orthofix holdings inc “orthofix holdings” entered senior secured credit facility syndicate financial institutions finance acquisition blackstone senior secured credit facility provides 1 sevenyear amortizing term loan facility 3300 million proceeds together cash balances used payment purchase price blackstone 2 sixyear revolving credit facility 450 million december 31 2007 company amounts outstanding revolving credit facility 2977 million outstanding term loan facility december 31 2006 company amounts outstanding revolving credit facility 3152 million outstanding term loan facility obligations senior secured credit facility floating interest rate libor plus margin prime rate plus margin currently term loan libor loan margin 175 effective interest rate december 31 2007 2006 senior secured credit facility 658 712 respectively notes consolidated financial statements cont domestic subsidiaries company includes orthofix inc breg inc blackstone colgate medical limited victory medical guaranteed obligations orthofix holdings senior secured credit facility obligations subsidiaries guarantees secured pledges respective assets conjunction obtaining senior secured credit facility amendment thereto company incurred debt issuance costs 65 million december 31 2007 52 million capitalized debt costs included longterm assets compared 58 million december 31 2006 certain subsidiaries company restrictions ability pay dividends make intercompany loan advances pursuant company’s senior secured credit facility net assets orthofix holdings subsidiaries restricted distributions parent company foreign subsidiaries domestic subsidiaries company credit agreement parties access net assets operational purposes amount restricted net assets orthofix holdings subsidiaries december 31 2007 3007 million compared 2472 million december 31 2006 weighted average interest rates current maturities longterm obligations december 31 2007 2006 658 712 respectively aggregate maturities longterm debt december 31 2007 follows 2008 33 million 2009 33 million 2010 33 million 2011 34 million 2012 800 million thereafter 2044 million derivative instruments 2006 company entered crosscurrency swap agreement manage foreign currency exposure related portion company’s intercompany receivable us dollar functional currency subsidiary denominated euro derivative instrument tenyear fully amortizable agreement notional amount 630 million scheduled expire december 30 2016 instrument designated cash flow hedge amount outstanding agreement december 31 2007 598 million agreement company pays euro receives us dollars based scheduled cash flows agreement 2007 2006 company recognized unrealized gainloss change fair value swap arrangement 16 million 01 million respectively within comprehensive incomeloss 2005 2006 company utilized foreign currency forward contracts manage foreign currency exposure related portion company’s accounts receivable denominated euros strategy foreign currency contracts neutralize foreign currency impact earnings converting 50 million euros accounts receivable us dollars conversion underlying exposure forward contracts offset net impact earnings 2006 company paid cash 06 million settle forward contracts year received cash 03 million settlement foreign currency exposures 2005 foreign currency forward contracts entered year ended december 31 2006 accounted fair value hedges accordance sfas 133 related gains losses recorded income related tax amounts taxation notes consolidated financial statements cont 12 commitments leases company entered operating leases facilities equipment rent expense company’s operating leases years ended december 31 2007 2006 2005 approximately 52 million 42 million 37 million respectively future minimum lease payments operating leases december 31 2007 follows 13 business segment information company’s segment information prepared basis company’s management reviews financial information operational decision making purposes concurrent acquisition blackstone company redefined business segments market sectors prior period information presented restated conform new segments market sectors company comprised following segments orthofix domestic orthofix domestic “domestic” consists operations united states orthofix inc designs manufactures distributes stimulation orthopedic products domestic uses direct distributor sales representatives sell spine orthopedic products hospitals doctors healthcare providers united states market blackstone “blackstone” consists blackstone medical inc based springfield massachusetts two subsidiaries blackstone gmbh goldstone gmbh blackstone specializes design development marketing spinal implant related hctp products blackstones operating loss includes amortization acquired intangible assets inventory steppedup value blackstone acquisition breg “breg” consists breg inc breg based vista california designs manufactures distributes orthopedic products postoperative reconstruction rehabilitative patient use sells products network domestic international distributors sales representatives affiliates orthofix international orthofix international “international” consists international operations located europe mexico brazil puerto rico well independent distributors located outside united states international uses direct distributor sales representatives sell spine orthopedics sports medicine vascular products hospitals doctors healthcare providers notes consolidated financial statements cont group activities group activities comprised parent’s orthofix holdings’ operating expenses identifiable assets tables present information reportable segment 1 includes 400 million inprocess research development related acquisition blackstone 2006 2 includes 200 million charge impairment blackstone trademark notes consolidated financial statements cont following table presents identifiable assets segment excluding intercompany balances investments consolidated subsidiaries capital expenditures tangible intangible assets segment follows notes consolidated financial statements cont geographical information analysis net sales geographic destination sales netherlands antilles analysis longlived assets geographic area longlived assets netherlands antilles notes consolidated financial statements cont 14 income taxes company subsidiaries taxed rates applicable within respective company’s jurisdiction composite income tax rate vary according jurisdictions profits arise components provision income tax expense benefit follows notes consolidated financial statements cont income minority interests provision income taxes consisted tax effects significant temporary differences comprise deferred tax liabilities assets follows notes consolidated financial statements cont valuation allowance december 31 2007 2006 114 million 94 million respectively net increase valuation allowance 20 million period ended december 31 2007 increase relates current period losses certain foreign jurisdictions netted reduction deferred tax assets corresponding valuation allowances certain jurisdictions result tax rate changes valuation allowance attributable net operating loss carryforwards certain foreign jurisdictions benefit dependent upon generation future taxable income location assessing realizability deferred tax assets management considers whether likely portion deferred tax assets realized ultimate realization deferred tax assets dependent upon generation future taxable income periods temporary differences become deductible management considers scheduled reversal deferred tax liabilities projected future taxable income tax planning strategies making assessment based upon level historical taxable income projections future taxable income periods deferred tax assets deductible management believes likely company realize benefits deductible differences net existing valuation allowances december 31 2007 part acquisition blackstone company acquired federal net operating loss carryforward 311 million subject annual section 382 limitations 2006 company utilized 74 million net operating loss carryforwards remaining operating losses utilized 2007 company also tax net operating loss carryforwards taxing jurisdictions approximately 430 million majority losses related company’s netherlands operations expiring various amounts tax years beginning 2009 company provided valuation allowance net operating loss carryforwards since believe deferred tax asset realized prior expiration connection company’s european restructuring 2006 similar transaction 2002 certain intangible assets sold subsidiaries order optimize company’s supply chain assets sold estimates fair value based upon valuations provided independent third party assurance local tax authorities challenge valuations successful challenge tax authorities could materially adverse effect companys tax profile including ability recognize intended tax benefits transaction significantly increase company’s future tax payments company believes adequately accrued exposure within fin 48 liability notes consolidated financial statements cont rate reconciliation presented based us federal income tax rate rather parent company’s country domicile tax rate management believes given large proportion taxable income earned united states disclosure meaningful difference reported provision income taxes provision computed applying statutory rates applicable subsidiary company attributable companys 2006 election adopt new tax provision italy election allowed company increase tax purposes value trademarks italy approximately 150 million company incurred tax liability 27 million 2006 applying 19 tax rate revaluation trademark value company expects receive future tax benefit 56 million associated amortization stepup value based current italian tax rates approximately 37 net 56 million deferred tax asset 27 million tax liability resulted 29 million nonrecurring discrete tax benefit december 2007 italian parliament approved income tax rate reduction effectively reduced company’s tax rate italy 585 result approximately 09 million expected tax benefit 2006 revalued trademark reversed 2007 09 million reversal included “tax rate changes” company approximately 13 million gross unrecognized tax benefits 02 million accrued penalties interest related unrecognized tax benefits adoption fin 48 january 1 2007 december 31 2007 company’s gross unrecognized tax benefit 17 million plus 05 million accrued interest penalties notes consolidated financial statements cont reconciliation gross unrecognized tax benefits year ended december 31 2007 follows company recognizes potential accrued interest penalties related unrecognized tax benefits within global operations income tax expense 2007 company recognized approximately 03 million interest penalties company approximately 02 million 05 million accrued payment interest penalties january 1 2007 december 31 2007 respectively company believes reasonably possible 10 million gross unrecognized tax benefit decrease twelve months ending december 31 2008 certain statute limitations expire 2008 entire 10 million unrecognized tax benefits would affect company’s effective tax rate recognized extent interest penalties assessed respect uncertain tax positions amounts accrued reduced reflected reduction overall income tax provision company files consolidated income tax return us federal jurisdiction numerous consolidated separate income tax returns many state foreign jurisdictions following table summarizes open tax years major jurisdiction notes consolidated financial statements cont company recorded additional income taxes applicable undistributed earnings foreign subsidiaries residing outside netherlands antilles considered indefinitely reinvested taxes attributable amounts deemed indefinitely reinvested material event undistributed earnings deemed indefinitely reinvested longer meet criteria remain undistributed earnings also considered calculating potential future tax liabilities relating undistributed foreign earnings total undistributed earnings amounted approximately 1860 million 1911 million 2321 million december 31 2007 2006 2005 respectively may become taxable upon remittance dividends upon sale liquidation foreign subsidiaries practicable determine amounts net additional income tax may payable earnings repatriated 15 related parties following related party balances transactions three years ended december 31 2007 company companies directors andor executive officers interest reflected consolidated financial statements company buys components related av impulse® system buys laryngeal mask companies former board member beneficial minority interest 16 contingencies litigation effective october 29 2007 company’s subsidiary blackstone entered settlement agreement respect patent infringement lawsuit captioned medtronic sofamor danek usa inc warsaw orthopedic inc medtronic puerto rico operations co medtronic sofamor danek deggendorf gmbh v blackstone medical inc civil action 0630165map filed september 22 2006 united states district court district massachusetts lawsuit plaintiffs alleged exclusive licensees united states patent nos 6926718 b1 6936050 b2 6936051 b2 6398783 b1 7066961 b2 “patents” ii blackstones making selling offering sale using within united states blackstone anterior cervical plate 3º anterior cervical plate hallmark anterior cervical plate construx mini peek vbr system products infringed patents infringement willful complaint requested damages injunction alleged infringement patents complaint specifically state amount damages blackstone denied infringement asserted patents invalid july 20 2007 company submitted claim indemnification escrow fund established connection agreement plan merger company new era medical corp blackstone dated august 4 2006 “merger agreement” losses company blackstone resulting matter company subsequently notified legal counsel former shareholders representative former shareholders blackstone objected indemnification claim intends contest accordance terms merger agreement company unable predict outcome escrow claim estimate amount may ultimately returned company escrow fund settlement agreement expected material impact company’s consolidated financial position results operations cash flows notes consolidated financial statements cont july 23 2007 blackstone received subpoena issued department health human services office inspector general authority federal healthcare antikickback false claims statutes subpoena seeks documents period january 1 2000 july 31 2006 prior blackstone’s acquisition company believes subpoena concerns compensation physician consultants related matters blackstone cooperating government’s request process responding subpoena company unable predict action might taken future department health human services office inspector general governmental authorities result investigation impact outcome matter might consolidated financial position results operations cash flows september 17 2007 company submitted claim indemnification escrow fund established connection merger agreement losses company blackstone resulting matter company subsequently notified legal counsel former shareholders representative former shareholders blackstone objected indemnification claim intends contest accordance terms merger agreement company unable predict outcome escrow claim estimate amount may ultimately returned company escrow fund january 7 2008 orthofix international nv “company” received federal grand jury subpoena united states attorney’s office district massachusetts “subpoena” subpoena seeks documents period january 1 2000 july 15 2007 company including subsidiaries company believes subpoena concerns compensation physician consultants related matters believes associated department health human services office inspector general’s investigation matters company cooperating government’s request process responding subpoena company unable predict action might taken future governmental authorities result investigation impact outcome matter might consolidated financial position results operations cash flows company’s intention submit claim indemnification escrow fund established connection merger agreement recoverable losses company blackstone resulting matter friday february 29 2008 blackstone recieved civil investigative demand cid massachusetts attorney generals office public protection advocacy bureau healthcare division management believes cid seeks documents concerning blackstones financial relationships certain physicians related matters period march 2004 date issuance cid september 27 2007 blackstone received federal grand jury subpoena issued united states’ attorney’s office district nevada “usaonevada” subpoena seeks documents period january 1999 present company believes subpoena concerns payments gifts made blackstone certain physicians blackstone cooperating government’s request process responding subpoena company unable predict action might taken future usaonevada governmental authorities result investigation impact outcome matter might consolidated financial position results operations cash flows company’s intention submit claim indemnification escrow fund established connection merger agreement losses company blackstone resulting matter order entered january 4 2007 united states district court eastern district arkansas unsealed qui tam complaint captioned thomas v chan et al 406cv00465jlh filed dr chan blackstone defendants including another device manufacturer qui tam action civil lawsuit brought individual alleged violation federal statute us department justice right intervene take prosecution lawsuit option complaint alleges causes action false claims act alleged inappropriate payments items value conferred dr chan december 29 2006 us department justice filed notice nonintervention case plaintiff subsequently amended complaint add company defendant company believes blackstone company meritorious defenses claims alleged company intends defend vigorously lawsuit september 17 2007 company submitted claim indemnification escrow fund established connection merger agreement losses company blackstone resulting matter company subsequently notified legal counsel former shareholders representative former shareholders blackstone objected indemnification claim intends contest accordance terms merger agreement company unable predict outcome escrow claim estimate amount may ultimately returned company escrow fund notes consolidated financial statements cont january 2007 may 2007 company andor blackstone named defendants along medical device manufacturers three civil lawsuits alleging dr chan performed unnecessary surgeries three different instances january 2008 company learned named defendant along medical device manufacturers fourth civil lawsuit alleging dr chan performed unnecessary surgeries four civil lawsuits served pending circuit court white county arkansas company believes blackstone company meritorious defenses claims alleged company intends defend vigorously lawsuits september 17 2007 company submitted claim indemnification escrow fund established connection merger agreement losses company blackstone resulting one four civil lawsuits company subsequently notified legal counsel former shareholders representative former shareholders blackstone objected indemnification claim intends contest accordance terms merger agreement company unable predict outcome escrow claim estimate amount may ultimately returned company escrow fund total blackstone purchase price 500 million placed escrow account described agreement plan merger company make claims reimbursement escrow account certain defined items relating acquisition company indemnified described note 16 company certain contingencies arising acquisition management expects reimbursable escrow account company make payment third party company records claims expects recover escrow receivable account included current assets consolidated balance sheets company believes settlement process escrow claims complex claims may reimbursed management recorded reserve escrow receivable management believes may fully reimbursed escrow fund management believes amount required pay relating contingencies exceed amount escrow account however assurance contingencies exceed amount escrow account addition foregoing company submitted claims indemnification escrow fund established connection merger agreement losses may result certain claims blackstone alleging plaintiffs andor claimants entitled payments blackstone stock options reflected blackstones corporate ledger time blackstones acquisition company date representative former shareholders blackstone company objected approximately 15 million claims escrow fund certain claims remaining pending company cannot predict outcome proceedings claims made company subsidiaries assurance ultimate resolution claim material adverse impact consolidated financial position results operations cash flows addition foregoing normal course business company involved various lawsuits time may subject certain contingencies united kingdom payroll taxes 2007 intavent orthofix limited company’s uk distribution subsidiary received inquiry hm revenue customs hmrc relating tax treatment gains made uk employees exercise stock options company process formulating response hmrc based preliminary calculations provision 05 million provided company cannot predict ultimate outcome discussions hmrc concentrations credit risk financial instruments potentially subject company concentrations credit risk primarily cash investments accounts receivable cash investments primarily money market funds deposited major financial center banks concentrations credit risk respect accounts receivable limited due large number individuals comprising company’s customer base company performs ongoing credit evaluations customers generally require collateral certain customers rely third party healthcare payers private insurance companies governments make payments company behalf accounts receivable countries government funds medical spending primarily located north africa middle east south america asia europe company considered special situations establishing allowances potentially uncollectible accounts receivable countries india egypt turkey company also records reserves bad debts customers based variety factors including length time receivables past due financial condition customer macroeconomic conditions historical experiences company maintains reserves potential credit losses within management’s expectations notes consolidated financial statements cont company sells via direct sales force distributors customers accounted 10 net sales 2007 2006 2005 17 pensions deferred compensation orthofix inc sponsors defined contribution benefit plan “401k plan” covering substantially full time employees 401k plan allows participants contribute 15 pretax compensation subject certain limitations company matching 100 first 2 employee’s base compensation 50 next 4 employee’s base compensation contributed 401k plan years ended december 31 2007 2006 2005 expenses incurred relating 401k plan including matching contributions approximately 12 million 09 million 10 million respectively breg also sponsors 401k plan 401k plan allows participants contribute 100 compensation subject certain limitations company matching 100 first 1000 deferred years ended december 31 2007 2006 2005 expenses incurred relating breg 401k plan including matching contributions 01 million three years blackstone also sponsors 401k plan 401k plan allows participants contribute 75 compensation subject certain limitations company matching 50 first 6 employee’s compensation deferred 2007 fourth quarter 2006 expenses incurred relating blackstone 401k plan including matching contributions 02 million 38000 respectively company operates defined contribution pension plans international employees described meeting minimum service requirements company’s expenses pension contributions 2007 2006 2005 approximately 10 million 05 million 05 million respectively italian law orthofix srl accrues behalf employees deferred compensation paid termination employment year’s provision deferred compensation based percentage employee’s current annual remuneration plus annual charge deferred compensation also accrued leaving indemnity payable agents case dismissal regulated national contract equal approximately 35 total commissions earned company’s expense deferred compensation 2007 2006 2005 approximately 04 million 04 million 03 million respectively deferred compensation payments 03 million 03 million 02 million made 2007 2006 2005 respectively balance december 31 2007 17 million represents amount would payable employees agents terminated employment date included longterm liabilities orthofix deferred compensation plan “the plan” administered board directors orthofix effective january 1 2007 plan intended allow select group key management highly compensated employees directors orthofix defer receipt compensation would otherwise payable terms plan intended comply respects provisions code section 409a plan employees orthofix subsidiaries eligible participate employee management highly compensated employee named board directors participant plan directors also eligible participate plan eligible employee director may elect enter salary deferral commitment andor director’s fees deferral commitment respect plan year submitting participation agreement plan administrator december 31 calendar year immediately preceding plan year eligible employee may elect enter bonus deferral commitment respect bonus compensation earned plan year submitting participation agreement plan administrator december 31 calendar year immediately preceding plan year deferral commitments stated percentage flat dollar amount allowed plan administrator participant’s participation agreement remain effect immediately succeeding plan year distributions made accordance requirements code section 409a notes consolidated financial statements cont 18 sharebased compensation plans december 31 2007 company three stock option award plans one stock purchase plan described long term incentive plan 2004 long term incentive plan “2004 ltip plan” long term incentive plan originally adopted april 2004 ltip plan approved shareholders june 29 2004 20 million shares reserved issuance plan addition shares available future awards june 29 2004 prior plans ii become available future issuance upon expiration forfeiture june 29 2004 awards upon prior plans awards generally vest years service awards fully vesting within three years date grant employees either three four years date grant nonemployee directors awards form stock option restricted stock restricted share unit performance share unit award form determined board directors awards granted 2004 ltip plan expire later 10 years date grant june 20 2007 company’s shareholders approved amendments restatement 2004 ltip plan providing following major changes increase number shares available grant 20 million shares 28 million shares specific allowance grants restricted stock awards provision fixed awards nonemployee directors date first election board subsequent reelection december 31 2007 2104110 options outstanding 2004 ltip plan 639240 exercisable addition 65787 shares restricted stock outstanding none vested staff share option plan staff stock option plan “staff plan” fixed stock option plan adopted april 1992 staff plan company granted options employees estimated fair market value options date grant options generally vest based years service options fully vested within five years date grant options granted staff plan expire ten years date grant options left granted staff plan december 31 2007 140125 options outstanding exercisable staff plan performance accelerated stock option inducement grants december 30 2003 company granted inducement stock option awards two key executives breg inc conjunction acquisition breg inc exercise price fixed 3800 per share november 20 2003 company announced entered agreement acquire breg inc inducement grants included servicebased performancebased vesting provisions inducement grants became 100 vested fourth anniversary grant date subject certain exercisability limitations following vesting december 30 2007 original inducement grants limited executives’ ability exercise specific numbers options years 2008 2012 prior options fully vesting inducement executives extend term employment agreements one year november 2007 company entered amended award agreements two executives amended agreements change vesting date options provide options granted thereunder exercisable fixed period beginning january 1 2009 ending december 31 2009 subject certain termination employment provisions notwithstanding provisions amended agreements portion options exercised december 31 2009 exercisable thereafter lapse cancelled december 31 2007 200000 options outstanding exercisable inducement grants notes consolidated financial statements cont employee stock purchase plan employee stock purchase plan provides issuance shares company’s common stock purchase period eligible employees may designate 1 25 compensation deducted purchase common stock plan purchase price shares plan equal 85 fair market value first day plan year amended december 2007 calendar year running january 1st december 31st lieu july 1st june 30th plan year purchase price officers directors orthofix inc equal 100 fair market value first day plan year aggregate number shares reserved issuance employee stock purchase plan 450000 shares december 31 2007 383553 shares issued employee stock purchase plan summaries status company’s stock option plans december 31 2007 2006 2005 changes years ended dates presented notes consolidated financial statements cont weighted average remaining contractual life exercisable options 681 years december 31 2007 total intrinsic value options exercised 146 million 19 million 28 million years ended december 31 2007 2006 2005 respectively aggregate intrinsic value options outstanding options exercisable december 31 2007 calculated difference exercise price underlying options market price company’s common stock shares exercise prices lower 5797 closing price company’s stock december 31 2007 aggregate intrinsic value options outstanding 381 million 265 million 84 million years ended december 31 2007 2006 2005 respectively aggregate intrinsic value options exercisable 194 million 119 million 54 million years ended december 31 2007 2006 2005 respectively 19 earnings per share three years period ended december 31 2007 adjustments net income loss purposes calculating basic diluted net income loss per common share following reconciliation weighted average shares used basic diluted net income loss per common share computations company include diluted shares outstanding calculation 309651 options 2007 763564 options 2006 392400 options 2005 inclusion would antidilutive notes consolidated financial statements cont 20 quarterly financial data unaudited us dollars thousands except per share data sum per share earnings quarter may equal earnings per share year due change average share calculations accordance prescribed reporting requirements 1 company formerly reported 217 adjusted exclude antidilutive effect options orthofix international nv schedule 1 condensed financial information registrant orthofix international nv condensed balance sheets see accompanying notes condensed financial statements s1 orthofix international nv schedule 1 condensed financial information registrant orthofix international nv condensed statements operations see accompanying notes condensed financial statements s2 orthofix international nv schedule 1 condensed financial information registrant orthofix international nv condensed statement cash flows see accompanying notes condensed financial statements s3 orthofix international nv schedule 1 condensed financial information registrant orthofix international nv notes condensed financial statements 1 background basis presentation condensed parent company financial statements prepared accordance rule 1204 schedule 1 regulation sx restricted net assets orthofix holdings inc subsidiaries exceed 25 consolidated net assets orthofix international nv subsidiaries “company” information read conjunction company’s consolidated financial statements included elsewhere filing 2 restricted net assets subsidiaries certain company’s subsidiaries restrictions effective date september 22 2006 ability pay dividends make intercompany loans advances pursuant financing arrangements amount restricted net assets company’s subsidiaries held december 31 2007 2006 approximately 3007 million 2472 million respectively restrictions net assets orthofix holdings inc subsidiaries 3 commitments contingencies long term obligations discussion company’s commitments contingencies long term obligations senior secured credit facility see note 10 note 12 note 16 company’s consolidated financial statements 4 dividends subsidiaries cash dividends paid orthofix international nv consolidated subsidiaries accounted equity method 220 million 245 million 385 million years ended december 31 2007 2006 2005 respectively s4 schedule 2 valuation qualifying accounts years ended december 31 2007 2006 2005 s5item 15 exhibits financial statement schedules documents filed part report form 10k following documents filed part report form 10k 1 financial statements see “index consolidated financial statements” page form 10k 2 financial statement schedules see “index consolidated financial statements” page form 10k 3 exhibits exhibit number description 31 certificate incorporation company filed exhibit company’s annual report form 20f dated june 29 2001 incorporated herein reference 32 articles association company amended filed exhibit companys quarterly report form 10q quarter ended june 30 2008 incorporated herein reference 101 orthofix international nv amended restated stock purchase plan filed exhibit companys quarterly report form 10q quarter ended june 30 2008 incorporated herein reference 102 orthofix international nv staff share option plan amended april 22 2003 filed exhibit company’s annual report form 10k fiscal year ended december 31 2007 incorporated herein reference 103 orthofix international nv amended restated 2004 long term incentive plan filed exhibit company’s current report form 8k filed june 26 2007 incorporated herein reference 104 amendment 1 orthofix international nv amended restated 2004 longterm incentive plan filed exhibit companys current report form 8k filed june 20 2008 incorporated herein reference 105 form nonqualified stock option agreement orthofix international nv amended restated 2004 long term incentive plan vesting 3 years filed exhibit companys current report form 8k filed june 20 2008 incorporated herein reference 106 form nonqualified stock option agreement orthofix international nv amended restated 2004 long term incentive plan 3 year cliff vesting filed exhibit companys current report form 8k filed june 20 2008 incorporated herein reference 107 form restricted stock grant agreement orthofix international nv amended restated 2004 long term incentive plan vesting 3 years filed exhibit companys current report form 8k filed june 20 2008 incorporated herein reference 108 form restricted stock grant agreement orthofix international nv amended restated 2004 long term incentive plan 3 year cliff vesting filed exhibit companys current report form 8k filed june 20 2008 incorporated herein reference 109 amended restated orthofix deferred compensation plan filed exhibit company’s current report form 8k filed january 7 2009 incorporated herein reference 1010 acquisition agreement dated november 20 2003 among orthofix international nv trevor acquisition inc breg inc bradley r mason shareholders’ representative filed exhibit company’s current report form 8k filed january 8 2004 incorporated herein reference 1011 amended restated voting subscription agreement dated december 22 2003 among orthofix international nv significant shareholders breg inc identified signature pages thereto filed exhibit company’s current report form 8k filed january 8 2004 incorporated herein reference 1012 amendment employment agreement dated december 29 2005 orthofix inc charles w federico filed exhibit company’s current report form 8k filed december 30 2005 incorporated herein reference 1013 form indemnity agreement 1014 settlement agreement dated february 23 2006 intavent orthofix limited whollyowed subsidiary orthofix international nv galvin mould filed exhibit company’s annual report form 8k filed april 17 2006 incorporated herein reference 1015 amended restated employment agreement dated december 6 2007 orthofix inc alan w milinazzo filed exhibit company’s annual report form 10k fiscal year ended december 31 2007 amended incorporated herein reference 1016 amended restated employment agreement dated december 6 2007 orthofix inc raymond c kolls filed exhibit company’s annual report form 10k fiscal year ended december 31 2007 amended incorporated herein reference 1017 amended restated employment agreement dated december 6 2007 orthofix inc michael finegan filed exhibit company’s annual report form 10k fiscal year ended december 31 2007 amended incorporated herein reference 1018 credit agreement dated september 22 2006 among orthofix holdings inc orthofix international nv certain domestic subsidiaries orthofix international nv colgate medical limited victory medical limited swiftsure medical limited orthofix uk ltd several banks financial institutions may time become parties thereunder wachovia bank national association filed exhibit company’s current report form 8k filed september 27 2006 incorporated herein reference 1019 first amendment credit agreement dated september 29 2008 among orthofix holdings inc orthofix international nv certain domestic subsidiaries orthofix international nv colgate medical limited victory medical limited swiftsure medical limited orthofix uk ltd wachovia bank national association administrative agent behalf lenders credit agreement filed exhibit company’s current report form 8k filed september 29 2008 incorporated herein reference 1020 agreement plan merger dated august 4 2006 among orthofix international nv orthofix holdings inc new era medical limited blackstone medical inc william g lyons iii equityholders’ representative filed exhibit companys current report form 8k filed august 7 2006 incorporated herein reference 1021 employment agreement dated september 22 2006 blackstone medical inc matthew v lyons filed exhibit company’s annual report form 10k fiscal year ended december 31 2006 amended incorporated herein reference 1022 amended restated employment agreement dated december 6 2007 orthofix inc timothy adams filed exhibit company’s annual report form 10k fiscal year ended december 31 2007 amended incorporated herein reference 1023 nonqualified stock option agreement timothy adams orthofix international nv dated november 19 2007 filed exhibit company’s current report form 8k filed november 21 2007 incorporated herein reference 1024 employment agreement orthofix inc scott dodson dated december 10 2007 filed exhibit company’s annual report form 10k fiscal year ended december 31 2007 amended incorporated herein reference 1025 employment agreement orthofix inc michael simpson dated december 6 2007 filed exhibit company’s annual report form 10k fiscal year ended december 31 2007 amended incorporated herein reference 1026 description director fee policy filed exhibit company’s annual report form 10k fiscal year ended december 31 2007 amended incorporated herein reference 1027 summary orthofix international nv annual incentive program filed exhibit company’s current report form 8k filed april 11 2008 incorporated herein reference 1028 employment agreement orthofix inc thomas hein dated april 11 2008 filed exhibit companys quarterly report form 10q quarter ended march 31 2008 incorporated herein reference 1029 nonqualified stock option agreement orthofix international nv amended restated 2004 longterm incentive plan dated april 11 2008 orthofix international nv thomas hein filed exhibit companys quarterly report form 10q quarter ended march 31 2008 incorporated herein reference 1030 summary consulting arrangement orthofix international nv peter hewett filed exhibit companys quarterly report form 10q quarter ended march 31 2008 incorporated herein reference 1031 employment agreement orthofix inc denise e pedulla dated june 9 2008 filed exhibit company’s quarterly report form 10q quarter ended june 30 2008 incorporated herein reference 1032 form inducement grant nonqualified stock option agreement orthofix international nv robert vaters filed exhibit current report form 8k orthofix international nv dated september 10 2008 incorporated herein reference 1033 employment agreement orthofix inc robert vaters effective september 7 2008 filed exhibit company’s current report form 8k filed september 10 2008 incorporated herein reference 1034 offer letter orthofix international nv robert vaters dated september 5 2008 filed exhibit company’s current report form 8k filed september 10 2008 incorporated herein reference 1035 letter agreement orthofix inc oliver burckhardt dated august 28 2008 filed exhibit company’s quarterly report form 10q quarter ended september 30 2008 incorporated herein reference 1036 notice termination orthofix inc oliver burckhardt dated august 27 2008 filed exhibit company’s quarterly report form 10q quarter ended september 30 2008 incorporated herein reference 1037 employment agreement orthofix inc bradley r mason dated october 14 2008 filed exhibit company’s current report form 8k filed october 15 2008 incorporated herein reference 1038 second amended restated performance accelerated stock options agreement orthofix international nv bradley r mason dated october 14 2008 filed exhibit company’s current report form 8k filed october 15 2008 incorporated herein reference 1039 nonqualified stock option agreement orthofix international nv bradley r mason dated october 14 2008 filed exhibit company’s current report form 8k filed october 15 2008 incorporated herein reference 211 list subsidiaries 231 consent ernst young llp 311 rule 13a14a15d14a certification chief executive officer 312 rule 13a14a15d14a certification chief financial officer 321 section 1350 certification chief executive officer 322 section 1350 certification chief financial officer filed herewith certain confidential portions exhibit omitted means redacting portion text exhibit filed separately secretary commission without redactions pursuant application requesting confidential treatment securities exchange act 1934 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated name title date alan w milinazzo chief executive officer march 12 2009 alan w milinazzo president director robert vaters executive vice president march 12 2009 robert vaters chief financial officer james f gero chairman board directors march 12 2009 james f gero peter j hewett deputy chairman board march 12 2009 peter j hewett directors charles w federico director march 12 2009 charles w federico jerry c benjamin director march 12 2009 jerry c benjamin walter von wartburg director march 12 2009 walter von wartburg thomas j kester director march 12 2009 thomas j kester kenneth r weisshaar director march 12 2009 kenneth r weisshaar guy jordan director march 12 2009 guy jordan maria sainz director march 12 2009 maria sainz index consolidated financial statements schedules provision made applicable accounting regulation securities exchange commission required related instructions inapplicable therefore omitted f statement management’s responsibility financial statements shareholders orthofix international nv management responsible preparation consolidated financial statements related information presented report consolidated financial statements include amounts based management’s estimates judgments prepared conformity accounting principles generally accepted united states financial information report shareholders consistent consolidated financial statements company maintains accounting internal control systems provide reasonable assurance reasonable cost assets safeguarded loss unauthorized use disposition financial records reliable preparing financial statements maintaining accountability assets systems augmented written policies organizational structure providing division responsibilities careful selection training qualified personnel company engaged ernst young llp independent registered public accountants audit render opinion consolidated financial statements accordance auditing standards public company accounting oversight board united states standards include assessment systems internal controls test transactions extent considered necessary support opinion board directors audit committee consisting solely outside directors company meets periodically management independent registered public accountants ensure meeting responsibilities discuss matters concerning internal controls financial reporting ernst young llp full free access audit committee james f gero chairman board directors alan w milinazzo president chief executive officer director robert vaters executive vice president chief financial officer f management’s report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting term defined rule 13a15f exchange act company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements internal control financial reporting designed provide reasonable assurance company’s management board directors regarding preparation reliable financial statements external purposes accordance generally accepted accounting principles internal control financial reporting includes selfmonitoring mechanisms actions taken correct deficiencies identified inherent limitations internal control matter well designed misstatements may occur prevented detected accordingly even effective internal control financial reporting provide reasonable assurance respect financial statement preparation evaluation effectiveness internal control financial reporting made specific date continued effectiveness future periods subject risks controls may become inadequate changes conditions degree compliance policies procedures may decline management conducted evaluation effectiveness company’s system internal control financial reporting december 31 2008 based framework set forth “internal control integrated framework” issued committee sponsoring organizations treadway commission based evaluation management concluded december 31 2008 company’s internal control financial reporting effective based specified criteria company’s internal control financial reporting audited company’s independent registered public accounting firm ernst young llp stated reports pages herein james f gero chairman board directors alan w milinazzo president chief executive officer director robert vaters executive vice president chief financial officer f report independent registered public accounting firm board directors shareholders orthofix international nv audited accompanying consolidated balance sheets orthofix international nv december 31 2008 2007 related consolidated statements operations shareholders’ equity cash flows three years period ended december 31 2008 audits also included financial statement schedules listed index item 15a financial statements schedules responsibility company’s management responsibility express opinion financial statements schedules based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position orthofix international nv december 31 2008 2007 consolidated results operations cash flows three years period ended december 31 2008 conformity us generally accepted accounting principles also opinion related financial statement schedules considered relation basic consolidated financial statements taken whole present fairly material respects information set forth therein discussed note 15 consolidated financial statements company adopted financial accounting standards board interpretation 48 accounting uncertainty income taxes interpretation fasb statement 109 effective january 1 2007 also audited accordance standards public company accounting oversight board united states orthofix international nv’s internal control financial reporting december 31 2008 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated march 11 2009 expressed unqualified opinion thereon ernst young llp boston massachusetts march 11 f report independent registered public accounting firm board directors shareholders orthofix international nv audited orthofix international nv’s internal control financial reporting december 31 2008 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria orthofix international nv’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion orthofix international nv maintained material respects effective internal control financial reporting december 31 2008 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets orthofix international nv december 31 2008 2007 related consolidated statements operations shareholders’ equity cash flows three years period ended december 31 2008 orthofix international nv report dated march 11 2009 expressed unqualified opinion thereon ernst young llp boston massachusetts march 11 f consolidated balance sheets december 31 2008 2007 accompanying notes form integral part consolidated financial statements f consolidated statements operations years ended december 31 2008 2007 2006 accompanying notes form integral part consolidated financial statements f consolidated statements changes shareholders’ equity years ended december 31 2008 2007 2006 accompanying notes form integral part consolidated financial statements f consolidated statements cash flows years ended december 31 2008 2007 2006 accompanying notes form integral part consolidated financial statements f notes consolidated financial statements description business orthofix international nv “company” multinational corporation principally involved design development manufacture marketing distribution medical equipment principally orthopedic products market summary significant accounting policies basis consolidation consolidated financial statements include financial statements company whollyowned majorityowned subsidiaries entities company control results acquired businesses included consolidated statements operations date acquisition intercompany accounts transactions profits eliminated consolidated financial statements company’s investments significant influence control accounted cost method accounting b foreign currency translation foreign currency translation performed accordance statement financial accounting standards “sfas” 52 “foreign currency translation” balance sheet accounts except shareholders’ equity translated year end exchange rates revenue expense items translated weighted average rates exchange prevailing year gains losses resulting translation foreign currency recorded accumulated comprehensive income component shareholders’ equity transactional foreign currency gains losses including intercompany transactions longterm investing nature included income expense net 27 million 08 million 28 million years ended december 31 2008 2007 2006 respectively c inventories valued lower cost estimated net realizable value provision excess obsolete items cost determined weightedaverage basis approximates fifo method valuation workinprocess finished products field inventory consignment inventory includes cost materials labor production field inventory represents immediately saleable finished products inventory possession company’s direct sales representatives reporting currency reporting currency united states dollar e market risk ordinary course business company exposed impact changes interest rates foreign currency fluctuations company’s objective limit impact movements earnings cash flows order achieve objective company seeks balance nondollar denominated income expenditures 2008 company executed interest rate swap agreement manage exposure interest rate fluctuations 2008 2007 2006 company made use foreign currency swap agreement entered december 2006 manage exposure foreign currency fluctuations see note 11 additional information f notes consolidated financial statements cont f longlived assets property plant equipment stated cost less accumulated depreciation plant equipment also includes instrumentation working assets depreciation computed straightline basis useful lives assets except land depreciated depreciation leasehold improvements computed shorter lease term useful life asset useful lives follows expenditures maintenance repairs minor renewals improvements extend lives respective assets expensed expenditures renewals improvements capitalized assets related accumulated depreciation adjusted property retirements disposals resulting gain loss included operations fully depreciated assets remain accounts retired service patents intangible assets recorded cost acquired part business combination estimated fair value assets primarily include patents technology agreements “developed technologies” certain trademarks licenses customer relationships distribution networks identifiable intangible assets considered definite lived generally amortized useful lives using method amortization reflects pattern economic benefit intangible assets consumed company’s weighted average amortization period developed technologies distribution networks 11 9 years respectively sfas 144 “accounting impairment disposal longlived assets” requires intangible assets definite lives orthofix’s developed technologies distribution network assets tested impairment adverse conditions exist change circumstances occurred would indicate impairment change remaining useful life impairment indicator exists company tests intangible asset recoverability purposes recoverability test company groups intangible assets liabilities lowest level identifiable cash flows intangible asset generate cash flows independent assets liabilities carrying value intangible asset group exceeds undiscounted cash flows expected result use eventual disposition intangible asset group company write carrying value fair value period identified company generally calculates fair value intangible assets present value estimated future cash flows company expects generate asset using riskadjusted discount rate determining estimated future cash flows associated intangible assets company uses estimates assumptions future revenue contributions cost structures remaining useful lives asset group use alternative assumptions including estimated cash flows discount rates alternative estimated remaining useful lives could result different calculations impairment company tests goodwill certain trademarks least annually company tests frequently indicators present changes circumstances suggest impairment may exist performing test company utilizes twostep approach prescribed sfas 142 “goodwill intangible assets” first step requires comparison carrying value reporting units defined standard fair value units purposes performing annual goodwill impairment test assets liabilities including corporate assets relate reporting unit’s operations would considered determining fair value allocated individual reporting units company allocates assets liabilities directly related specific reporting unit reporting unit benefits based primarily respective contribution reporting unit carrying value reporting unit exceeds fair value company perform second step goodwill impairment test measure amount impairment loss f notes consolidated financial statements cont second step goodwill impairment test compares implied fair value reporting unit’s goodwill carrying value company unable complete second step test prior issuance company’s financial statements impairment loss probable could reasonably estimated company would recognize company’s best estimate loss current period financial statements disclose amount estimate company would recognize adjustment estimate subsequent reporting periods company finalized second step impairment test certain impairment tests require orthofix make estimate fair value goodwill intangible assets primarily determined using discounted cash flow methodologies research analyst estimates market comparisons review recent transactions since number factors may influence determinations fair value intangible assets orthofix unable predict whether impairments goodwill indefinite lived intangibles occur future g revenue recognition accounts receivable revenue generally recognized income period title passes products delivered bone growth stimulation certain bracing products prescribed physician company recognizes revenue product placed implanted accepted patient domestic spinal implant human cellular tissue based products “hctp products” revenues recognized product utilized confirming purchase order received hospital sales commercial customers including hospitals distributors revenues recognized time shipment unless contractual agreements specify title passes delivery company derives significant amount revenues united states thirdparty payors including commercial insurance carriers health maintenance organizations preferred provider organizations governmental payors medicare amounts paid thirdparty payors generally based fixed allowable reimbursement rates revenues recorded expected preauthorized reimbursement rates net contractual allowances adjustments certain billings subject review thirdparty payors may subject adjustment royalties revenues recognized royalty earned revenues inventory delivered consignment recognized product used consignee revenues exclude value added local taxes intercompany sales trade discounts shipping handling costs included cost sales process estimating ultimate collection accounts receivable involves significant assumptions judgments historical collection payor reimbursement experience integral part estimation process related reserves doubtful accounts establishment contractual allowances accounts receivable analyzed quarterly basis assess adequacy reserves doubtful accounts contractual allowances revisions allowances doubtful accounts estimates recorded adjustment bad debt expense within sales marketing expenses revisions contractual allowances recorded adjustment net sales judgment management adequate allowances provided doubtful accounts contractual allowances estimates periodically tested actual collection experience h research development costs expenditures research development expensed incurred accordance sfas 141 “business combinations” emerging issues task force “eitf” consensus 967 “accounting deferred taxes inprocess research development activities acquired purchase business combination” company recognizes acquired inprocess research development research development expense day acquisition corresponding tax benefit july 24 2008 company entered agreement musculoskeletal transplant foundation “mtf” collaborate development commercialization new stem cellbased bone growth biologic matrix terms agreement company invest 100 million development new stem cellbased bone growth biologic matrix designed provide beneficial properties autograft spinal orthopedic surgeries completion development process company mtf operate terms separate commercialization agreement terms 10year agreement mtf source tissue process create bone growth matrix package deliver accordance orders received directly customers company exclusive global marketing rights new allograft receive marketing fee mtf based total sales company accounts collaborative arrangements considering guidance included emerging issues task force issue 071 “accounting collaborative arrangements” prevailing guidance approximately 61 million expenses incurred terms agreement included research development expense year ended december 31 2008 f notes consolidated financial statements cont income taxes income taxes provided using liability method accordance sfas 109 “accounting income taxes” deferred income taxes arise differences treatment income expense items financial reporting income tax purposes deferred tax assets liabilities resulting differences recorded based enacted tax rates effect differences expected reverse company operations various tax jurisdictions january 1 2007 company adopted provisions fasb interpretation 48 “accounting uncertainty income taxes interpretation fasb statement 109” “fin 48” clarifies accounting uncertainty income taxes result implementation fin 48 company recognized 12 million additional liability unrecognized tax benefits including interest penalties accounted reduction january 1 2007 balance retained earnings december 31 2008 company 07 million unrecognized tax benefits j net income per common share net income per common share computed accordance sfas 128 “earnings per share” net income per common share basic computed using weighted average number common shares outstanding respective years net income per common share diluted computed using weighted average number common equivalent shares outstanding respective years using “treasury stock” method common equivalent shares represent dilutive effect assumed exercise outstanding share options see note 20 differences basic diluted shares result solely assumed exercise certain outstanding share options warrants 2006 2008 effect options included calculation inclusion would antidilutive k cash equivalents company considers highly liquid investments original maturity three months less date purchase cash equivalents l restricted cash restricted cash consists cash held certain subsidiaries distribution transfer orthofix international nv “parent” subsidiaries parties credit facility described note 10 restricted senior secured credit facility restricts parent subsidiaries parties facilities access cash held colgate medical limited subsidiaries credit party subsidiaries access cash operational debt repayment purposes sale accounts receivable company follows provisions sfas 140 “accounting transfers servicing financial assets extinguishment liabilities” trade accounts receivables sold without recourse removed balance sheet time sale company generally require collateral trade receivables f notes consolidated financial statements cont n use estimates preparation financial statements preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect amounts reported financial statements accompanying notes ongoing basis company evaluates estimates including related contractual allowances doubtful accounts inventories taxes potential goodwill intangible asset impairment actual results could differ estimates reclassifications certain prior year amounts reclassified conform 2008 presentation reclassifications effect previously reported net earnings shareholders’ equity p sharebased compensation effective january 1 2006 company adopted fair value recognition provisions sfas 123r revised 2004 “sharebased payment” using modified prospective transition method transition method sharebased compensation expense recognized 2008 2007 2006 includes compensation cost sharebased payments granted prior yet vested january 1 2006 based grantdate fair value estimated accordance original provisions sfas 123 b compensation cost sharebased payments granted subsequent january 1 2006 based grantdate fair value estimated accordance provisions sfas 123r fair value stock options determined using blackscholes valuation model value recognized expense service period net estimated forfeitures expected term options granted estimated based number factors including vesting term award historical employee exercise behavior options currently outstanding options exercised expired expected volatility company’s common stock employee’s average length service riskfree interest rate determined based upon constant us treasury security rate contractual life approximates expected term option award management estimates expected volatility based historical volatility company’s stock compensation expense recognized equitybased awards net estimated forfeitures estimated based analysis actual option forfeitures year ended december 31 2008 options valued expected term 392 years expected volatility 284 riskfree interest rates 152 349 dividend rate zero company chosen use “shortcut method” determine pool windfall tax benefits adoption sfas 123r december 31 2008 unamortized compensation expense relating options granted expected recognized 85 million expense expected recognized weighted average period 134 years f notes consolidated financial statements cont following table shows detail sharebased compensation line item consolidated statements operations years ended december 31 2008 2007 2006 1 performance requirements consideration received sharebased compensation awarded sales marketing employees year ended december 31 2008 company granted employees 83434 shares restricted stock vest various dates december 2011 compensation expense represents fair value stock measured market price date grant less estimated forfeitures recognized straightline basis vesting period unamortized compensation expense related restricted stock amounted 35 million december 31 2008 q recently issued accounting standards may 2008 financial accounting standards board “fasb” issued statement financial accounting standards “sfas” 162 “the hierarchy generally accepted accounting principles” statement identified sources accounting principles framework selecting principles used preparation financial statements presented conformity generally accepted accounting principles united states statement effective 60 days following sec’s approval public company accounting oversight board amendments au section 411 “the meaning present fairly conformity generally accepted accounting principles” anticipate adoption sfas 162 material impact company’s results operations financial position march 2008 fasb issued sfas 161 “disclosures derivative instruments hedging activities amendment fasb statement 133” sfas 161 requires entities provide greater transparency additional disclosures entity uses derivative instruments b derivative instruments related hedged items accounted sfas 133 “accounting derivative instruments hedging activities” related interpretations c derivative instruments related hedged items affect entity’s financial position results operations cash flows sfas 161 effective financial statements issued fiscal years interim periods beginning november 15 2008 company currently evaluating potential impact adopting sfas 161 company’s disclosures derivative instruments hedging activities f notes consolidated financial statements cont december 2007 fasb ratified emerging issues task force eitf issue 071 “accounting collaborative arrangements” eitf 071 eitf 071 provides guidance related classification payments participants appropriate income statement presentation well disclosures related certain collaborative arrangements eitf 071 effective fiscal years beginning december 15 2008 adopted company first quarter 2009 company applied guidance included eitf 071 collaborative arrangements entered 2008 contracts prevailing guidance december 2007 fasb issued sfas 141r “business combinations revised 2007” sfas 141r amends sfas 141 “business combinations” provides revised guidance recognizing measuring identifiable assets goodwill acquired liabilities assumed noncontrolling interest acquiree also provides disclosure requirements enable users financial statements evaluate nature financial effects business combination sfas 141r effective fiscal years beginning december 15 2008 applied prospectively company currently evaluating potential impact adopting sfas 141r consolidated financial position results operations december 2007 fasb issued sfas 160 “noncontrolling interests consolidated financial statements amendment arb 51” establishes accounting reporting standards pertaining ownership interest subsidiaries held parties parent amount net income attributable parent noncontrolling interest changes parent’s ownership interest valuation retained noncontrolling equity investment subsidiary deconsolidated sfas 160 also establishes disclosure requirements clearly identify distinguish interests parent interests noncontrolling owners sfas 160 effective fiscal years beginning december 15 2008 anticipate adoption sfas 160 material impact company’s results operations financial position r fair value financial instruments carrying amounts reflected consolidated balance sheets cash equivalents restricted cash accounts receivable shortterm bank borrowings accounts payable approximate fair value due shortterm maturities instruments company’s longterm secured debt carries floating rate interest therefore carrying value considered approximate fair value advertising costs company expenses advertising costs incurred advertising expense years ended december 31 2008 2007 2006 11 million 18 million 10 million respectively derivative instruments company manages exposure fluctuations interest rates foreign exchange within consolidated financial statements according hedging policy company may engage nonleveraged transactions involving various financial derivative instruments manage exposed positions policy requires company formally document relationship hedging instrument hedged item well riskmanagement objective strategy undertaking hedge transaction instruments designated cash flow hedge company formally assesses hedge’s inception ongoing basis whether derivative used hedging transaction effective offsetting changes cash flows hedged item whether derivative may expected remain effective future periods determined derivative ceased effective hedge company discontinue related hedge accounting prospectively determination would made 1 derivative longer effective offsetting changes cash flows hedged item 2 derivative expires sold terminated exercised 3 management determines designating derivative hedging instrument longer appropriate ineffective portions changes fair value cash flow hedges recognized earnings instruments designated fair value hedge company ensures exposed position hedged changes fair value instruments recognized earnings company follows sfas 133 “accounting derivative instruments hedging activities” amended interpreted requires derivatives recorded either assets liabilities balance sheet respective fair values cash flow hedge effective portion derivative’s change fair value ie gains losses initially reported component comprehensive income net related taxes subsequently reclassified net earnings hedged exposure affects net earnings f notes consolidated financial statements cont company utilizes cross currency swap manage foreign currency exposure related portion company’s intercompany receivable us dollar functional currency subsidiary denominated euro cross currency swap accounted cash flow hedge accordance sfas 133 see note 11 description types derivative instruments company utilizes u accumulated comprehensive income loss accumulated comprehensive income loss comprised foreign currency translation adjustments effective portion gain loss derivatives designated accounted cash flow hedge components comprehensive income loss follows 2 acquisitions blackstone acquisition september 22 2006 company purchased 100 stock blackstone medical inc “blackstone” purchase price 3330 million plus acquisition costs acquisition related costs financed approximately 3300 million senior secured bank debt described note 10 cash hand blackstone company based springfield massachusetts privately held acquired company specializes design development marketing spinal implant related hctp products blackstones product lines include spinal fixating devices including hooks rods screws plates various spacers cages related hctp products company considered acquisition way fortify advance business strategy expand spinal sector acquisition broadened companys product lines reduced reliance success single product enlarged channel opportunities products blackstone’s company’s existing operations acquisition accounted using purchase method accordance sfas 141 “business combinations” purchase price allocated assets acquired liabilities assumed based estimated fair market value date acquisition purchase price allocation resulted goodwill 1362 million 2020 million intangible assets 2007 2008 company recorded impairment charges related certain assets recorded blackstone see note 6 “patents intangible assets” note 7 “goodwill” detail purchase price allocated assets acquired purchased inprocess research development liabilities assumed based estimated fair market value acquisition date amount purchase price allocated purchased inprocess research development recognized date acquisition resulted charge 400 million charge included research development expense line item consolidated statements operations year ended december 31 2006 deductible income tax purposes united states f notes consolidated financial statements cont total blackstone purchase price 500 million placed escrow account described agreement plan merger company make claims reimbursement escrow account certain defined items relating acquisition company indemnified see note 17 “contingencies” information summary unaudited pro forma condensed results operations earnings per share year ended december 31 2006 assuming consummation blackstone acquisition january 1 2006 follows inprocess research development charge 400 million recorded year ended december 31 2006 excluded pro forma financial information international medical supplies distribution gmbh acquisition february 2006 company purchased 52 international medical supplies distribution gmbh “imes” german distributor breg products 15 million plus closing adjustments acquisition costs operations acquired distributor included companys statements operations date acquisition results operations would materially different acquisition consolidated january 1 2006 final purchase price included approximately 01 million working capital 10 million goodwill 3 inventories f notes consolidated financial statements cont see note 1 “summary significant accounting policies” part c “inventories” description field inventory year ended december 31 2008 due reduced projections revenue distributor terminations new products replacement one product successor product company changed estimates regarding inventory allowance blackstone primarily based estimated net realizable value using assumptions future demand market conditions change estimate resulted increase reserve obsolescence approximately 109 million 4 investments company total investments held cost 21 million 44 million december 31 2008 2007 respectively investments december 31 2008 comprised investment 18 million oped ag germanbased bracing company 03 million biowave corporation pain therapy company third quarter 2008 company sold portion ownership oped ag net proceeds 08 million company assessed cost investments december 31 2008 2007 noting impairment carrying value company also investment orthorx investment reduced zero 2004 year ended december 31 2008 company’s investment innovative spinal technologies ist recorded 15 million december 31 2007 reduced zero 5 property plant equipment depreciation expense years ended december 31 2008 2007 2006 142 million 104 million 76 million respectively f notes consolidated financial statements cont 6 patents intangible assets amortization expense intangible assets estimated approximately 63 million 62 million 61 million 49 million 67 million periods ending december 31 2009 2010 2011 2012 2013 thereafter respectively third quarter 2008 company determined test impairment indefinite lived assets blackstone accordance sfas 142 “goodwill intangible assets” necessary due decreasing revenues blackstone among matters company evaluated indefinitelived intangible assets included blackstone trademark acquired acquisition blackstone impairment analysis resulted carrying value adjusted impairment charge recognized fourth quarter 2007 trademark exceeding fair value company recognized 570 million impairment charge included impairment goodwill certain intangible assets year ended december 31 2008 also third quarter 2008 company determined impairment indicator described sfas 144 “accounting impairment disposal longlived assets” occurred respect definitelived intangibles blackstone due impairment indicator company compared expected cash flows generated blackstone reporting unit represented lowest level cash flows specifically identifiable undiscounted basis carrying value reporting unit’s assets including goodwill company determined carrying value blackstone reporting unit exceeded related undiscounted cash flows determination resulted impairment distribution network technologies blackstone based fair values resulting impairment charge 1057 million included impairment goodwill certain intangible assets 7 goodwill sfas 142 “goodwill intangible assets” goodwill subject annual frequent impairment testing indicators impairment exist using guidance criteria described standard testing requires comparison carrying values fair values reporting units defined standard appropriate carrying value impaired assets reduced fair value third quarter 2008 due matters described note 6 company also performed impairment analysis goodwill blackstone impairment analysis resulted goodwill impairment charge 1269 million carrying value exceeded implied fair value goodwill discussion acquisitions associated goodwill see note 2 f notes consolidated financial statements cont following table presents changes net carrying value goodwill reportable segment 1 purchase remaining 3874 minority interest mexican subsidiary 400 minority interest brazilian subsidiary 2 principally relates legal fees incurred connection acquisition blackstone related contingencies 3 sale operations relating pain carer business breg first quarter 2008 4 impairment analysis resulted goodwill impairment charge 1269 million carrying value exceeded implied fair value goodwill fair value blackstone reporting unit estimated using combination income approach estimates fair value reporting units based expected present value future cash flows lesser extent market approach estimates fair value reporting units based comparable market indicators multiples earnings measures income approach heavily weighted company’s development fair value calculates fair value estimating aftertax cash flows attributable reporting unit discounting aftertax cash flows present value using riskadjusted discount rate methodology consistent company estimates fair value reporting units annual goodwill impairment tests applying income approach calculate fair value blackstone reporting unit company used reasonable estimates assumptions future revenue contributions cost structures addition application income approach requires judgment determining riskadjusted discount rate reporting unit level company based determination estimates weightedaverage costs capital market participant company performed peer company analysis considered industry weightedaverage return debt equity market participant perspective f notes consolidated financial statements cont calculate amount goodwill impairment charge company allocated fair value blackstone reporting unit assets liabilities inprocess research development certain unrecognized intangible assets order determine implied fair value goodwill september 30 2008 allocation process required judgment use additional valuation assumptions deriving individual fair values blackstone reporting unit’s assets liabilities blackstone reporting unit acquired business combination company believes determined fair values resulting goodwill impairment charge based reasonable assumptions represent best estimate amounts september 30 2008 december 31 2008 company performed annual impairment review reporting units updated blackstone impairment review determined additional impairment goodwill 8 bank borrowings weighted average interest rate borrowings lines credit december 31 2008 2007 586 479 respectively borrowings lines credit consist borrowings euros company unused available lines credit 52 million euros 73 million 13 million euros 20 million december 31 2008 2007 respectively italian line credit lines credit provide company option borrow amounts italy rates determined time borrowing line credit unsecured 9 current liabilities f notes consolidated financial statements cont 10 longterm debt september 22 2006 company’s whollyowned us holding company subsidiary orthofix holdings inc “orthofix holdings” entered senior secured credit facility syndicate financial institutions finance acquisition blackstone certain terms senior secured credit facility amended september 29 2008 senior secured credit facility provides 1 sevenyear amortizing term loan facility 3300 million proceeds together cash balances used payment purchase price blackstone 2 sixyear revolving credit facility 450 million december 31 2008 company amounts outstanding revolving credit facility 2807 million outstanding term loan facility december 31 2007 company amounts outstanding revolving credit facility 2977 million outstanding term loan facility obligations senior secured credit facility floating interest rate libor floor 30 plus margin prime rate plus margin currently term loan 1500 million libor loan plus margin 450 1307 million prime rate loan plus margin 35 effective interest rate december 31 2008 2007 senior secured credit facility 84 658 respectively domestic subsidiaries company includes orthofix inc breg inc blackstone colgate medical limited victory medical guaranteed obligations orthofix holdings senior secured credit facility obligations subsidiaries guarantees secured pledges respective assets conjunction obtaining senior secured credit facility company incurred debt issuance costs 64 million amortizing life facility portion capitalized debt issuance costs included longterm assets related senior secured credit facility expensed result amendment september 29 2008 included loss refinancing senior secured term loan connection amendment credit facility company paid additional fees 24 million year ended december 31 2008 21 million included loss refinancing senior secured term loan december 31 2008 08 million debt issuance costs relate company’s revolving credit facility included longterm assets december 31 2007 debt issuance costs related senior secured term loan revolving credit facility 52 million certain subsidiaries company restrictions ability pay dividends make intercompany loan advances pursuant company’s senior secured credit facility net assets orthofix holdings subsidiaries restricted distributions parent company foreign subsidiaries domestic subsidiaries company parties credit facility access net assets operational purposes amount restricted net assets orthofix holdings subsidiaries december 31 2008 1113 million compared 3007 million december 31 2007 weighted average interest rates current maturities longterm obligations december 31 2008 2007 84 658 respectively f notes consolidated financial statements cont aggregate maturities longterm debt december 31 2008 follows 2009 33 million 2010 34 million 2011 34 million 2012 800 million 2013 1908 million 11 derivative instruments 2006 company entered crosscurrency swap agreement manage foreign currency exposure related portion company’s intercompany receivable us dollar functional currency subsidiary denominated euro derivative instrument tenyear fully amortizable agreement notional amount 630 million scheduled expire december 30 2016 instrument designated cash flow hedge amount outstanding agreement december 31 2008 567 million agreement company pays euro receives us dollars based scheduled cash flows agreement year ended december 31 2008 2007 company recorded unrealized gain change fair value swap arrangement 16 million within comprehensive incomeloss june 2008 company entered three year fully amortizable interest rate swap agreement “swap” notional amount 1500 million expiration date june 30 2011 fourth quarter company incurred unrealized noncash loss approximately 80 million resulted changes fair value company’s interest rate swap second third quarters 2008 interest rate swap accounted cash flow hedge changes value recorded part accumulated comprehensive income balance sheet due declining interest rates libor floor companys amended credit facility effectiveness swap longer deemed highly effective therefore cash flow accounting longer applied marktomarket adjustments required reported current earnings expiration swap june 2011 swap continues provide economic hedge fluctuating interest rate exposure 1500 million portion outstanding debt covers libor interest rate rise 373 12 fair value measurements described note 1 company adopted sfas 157 effective january 1 2008 sfas 157 defines fair value price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date sfas 157 also describes three levels inputs may used measure fair value level 1 quoted prices active markets identical assets liabilities level 2 observable inputs quoted prices active markets identical assets liabilities level 3 unobservable inputs little market data available require reporting entity develop assumptions fair value company’s financial assets liabilities measured fair value recurring basis follows 1 see note 11 “derivative instruments” f notes consolidated financial statements cont 13 commitments leases company entered operating leases facilities equipment rent expense company’s operating leases years ended december 31 2008 2007 2006 approximately 56 million 52 million 42 million respectively future minimum lease payments operating leases december 31 2008 follows february 2009 part consolidation reorganization companys spine business new jersey massachusetts texas facility company entered ten year operating lease lewisville texas includes future minimum lease payments 12 million per year first five years 13 million per year following five years lease commence upon earlier occupancy completion improvements earlier january 31 2010 14 business segment information company’s segment information prepared basis company’s management reviews financial information operational decision making purposes company comprised following segments domestic consists operations united states orthofix inc designs manufactures distributes stimulation orthopedic products domestic uses direct distributor sales representatives sell spine orthopedic products hospitals doctors healthcare providers united states market blackstone “blackstone” consists blackstone medical inc based springfield massachusetts two subsidiaries blackstone gmbh goldstone gmbh blackstone specializes design development marketing spinal implant related hctp products breg “breg” consists breg inc breg based vista california designs manufactures distributes orthopedic products postoperative reconstruction rehabilitative patient use sells products network domestic international distributors sales representatives affiliates f notes consolidated financial statements cont international consists international operations located europe mexico brazil puerto rico well independent distributors located outside united states international uses direct distributor sales representatives sell spine orthopedics sports medicine vascular products hospitals doctors healthcare providers group activities group activities comprised parent’s orthofix holdings’ operating expenses identifiable assets tables present information reportable segment 1 includes 400 million inprocess research development related acquisition blackstone 2006 2 includes 2895 200 million charge impairment certain blackstone assets 2008 2007 respectively f notes consolidated financial statements cont following table presents identifiable assets segment excluding intercompany balances investments consolidated subsidiaries following table presents depreciation amortization income tax expense benefit income expense segment f notes consolidated financial statements cont capital expenditures tangible intangible assets segment follows geographical information analysis net sales geographic destination sales netherlands antilles analysis property plant equipment assets geographic area longlived assets netherlands antilles f notes consolidated financial statements cont f notes consolidated financial statements cont 15 income taxes income loss provision benefit income taxes consisted benefit provision income taxes accompanying consolidated statements operations consists following tax effects significant temporary differences comprise deferred tax liabilities assets follows f notes consolidated financial statements cont valuation allowance december 31 2008 2007 144 million 114 million respectively net increase valuation allowance 30 million year relates current period foreign losses benefitted valuation allowance attributable net operating loss carryforwards certain foreign jurisdictions benefit dependent upon generation future taxable income location assessing realizability deferred tax assets management considers whether likely portion deferred tax assets realized ultimate realization deferred tax assets dependent upon generation future taxable income periods temporary differences become deductible management considers scheduled reversal deferred tax liabilities projected future taxable income tax planning strategies making assessment based upon level historical taxable income projections future taxable income periods deferred tax assets deductible management believes likely company realize benefits deductible differences net existing valuation allowances december 31 2008 part acquisition blackstone company acquired federal net operating loss carryforward 311 million subject annual section 382 limitations 2006 company utilized 74 million federal net operating loss carryforwards remaining operating losses utilized 2007 company also tax net operating loss carryforwards taxing jurisdictions approximately 551 million majority losses related company’s netherlands operations expiring various amounts tax years beginning 2009 company provided valuation allowance net operating loss carryforwards since believe deferred tax asset realized prior expiration rate reconciliation presented based us federal income tax rate rather parent company’s country domicile tax rate management believes given large proportion taxable income earned united states disclosure meaningful company’s gross unrecognized tax benefit 07 million 17 million years ended december 31 2008 december 31 2007 respectively f notes consolidated financial statements cont reconciliation gross unrecognized tax benefits years ended december 31 2008 december 31 2007 follows company recognizes potential accrued interest penalties related unrecognized tax benefits within global operations income tax expense 2008 company recognized approximately 45 thousand interest penalties company approximately 04 million 05 million accrued payment interest penalties december 31 2008 december 31 2007 respectively entire 07 million unrecognized tax benefits would affect company’s effective tax rate recognized december 31 2008 company expect amount unrecognized tax benefits change significantly next twelve months company files consolidated income tax return us federal jurisdiction numerous consolidated separate income tax returns many state foreign jurisdictions statute limitations respect federal tax authorities closed years prior december 31 2004 statute limitations various state tax filings closed instances years prior december 31 2005 certain state tax statutes open years 1997 forward due current examinations statute limitations respect major foreign tax filing jurisdictions closed years prior december 31 2004 company recorded additional income taxes applicable undistributed earnings foreign subsidiaries residing outside netherlands antilles considered indefinitely reinvested taxes attributable amounts deemed indefinitely reinvested material event undistributed earnings deemed indefinitely reinvested longer meet criteria remain undistributed earnings also considered calculating potential future tax liabilities relating undistributed foreign earnings total undistributed earnings amounted approximately 2194 million 1860 million 1911 million december 31 2008 2007 2006 respectively may become taxable upon remittance dividends upon sale liquidation foreign subsidiaries practicable determine amounts net additional income tax may payable earnings repatriated 16 related parties following related party balances transactions three years ended december 31 2008 company companies directors andor executive officers interest reflected consolidated financial statements company buys components related av impulser system buys laryngeal mask companies former board member beneficial minority interest company sells bracing products orthorx f notes consolidated financial statements cont 17 contingencies litigation effective october 29 2007 subsidiary blackstone entered settlement agreement respect patent infringement lawsuit captioned medtronic sofamor danek usa inc warsaw orthopedic inc medtronic puerto rico operations co medtronic sofamor danek deggendorf gmbh v blackstone medical inc civil action 0630165map filed september 22 2006 united states district court district massachusetts lawsuit plaintiffs alleged exclusive licensees united states patent nos 6926718 b1 6936050 b2 6936051 b2 6398783 b1 7066961 b2 “patents” ii blackstones making selling offering sale using within united states blackstone anterior cervical plate 3º anterior cervical plate hallmark anterior cervical plate construx mini peek vbr system products infringed patents infringement willful complaint requested damages injunction alleged infringement patents blackstone denied infringement asserted patents invalid july 20 2007 company submitted claim indemnification escrow fund established connection agreement plan merger company new era medical corp blackstone dated august 4 2006 “blackstone merger agreement” losses us resulting matter company subsequently notified legal counsel former shareholders representative former shareholders blackstone objected indemnification claim intends contest accordance terms blackstone merger agreement settlement agreement expected material impact company’s consolidated financial position results operations cash flows july 23 2007 blackstone received subpoena issued department health human services office inspector general authority federal healthcare antikickback false claims statutes subpoena seeks documents period january 1 2000 july 31 2006 prior blackstone’s acquisition company believes subpoena concerns compensation physician consultants related matters september 17 2007 company submitted claim indemnification escrow fund established connection blackstone merger agreement losses company resulting matter company subsequently notified legal counsel former shareholders representative former shareholders blackstone objected indemnification claim intends contest accordance terms blackstone merger agreement january 7 2008 company received federal grand jury subpoena united states attorney’s office district massachusetts subpoena seeks documents company period january 1 2000 july 15 2007 company believes subpoena concerns compensation physician consultants related matters believe associated department health human services office inspector general’s investigation matters september 18 2008 company submitted claim indemnification escrow fund established connection blackstone merger agreement losses company resulting matter december 5 2008 company obtained copy qui tam complaint filed susan hutcheson philip brown blackstone company us district court district massachusetts qui tam action civil lawsuit brought individual alleged violation federal statute us department justice right intervene take prosecution lawsuit option november 21 2008 us department justice filed notice nonintervention case knowledge plaintiffs served either blackstone company copy complaint alleges cause action false claims act alleged inappropriate payments items value conferred physician consultants well cause action retaliation wrongful discharge company believes lawsuit related matters described involving department health human services office inspector general united states attorney’s office district massachusetts company intends defend vigorously lawsuit september 27 2007 blackstone received federal grand jury subpoena issued united states attorney’s office district nevada “usaonevada subpoena” subpoena seeks documents period january 1999 date issuance subpoena company believes subpoena concerns payments gifts made blackstone certain physicians february 29 2008 blackstone received civil investigative demand “cid” massachusetts attorney general’s office public protection advocacy bureau healthcare division company believes cid seeks documents concerning blackstone’s financial relationships certain physicians related matters period march 2004 date issuance cid september 18 2008 company submitted claim indemnification escrow fund established connection merger agreement losses us resulting matter f notes consolidated financial statements cont ohio attorney general’s office health care fraud section issued criminal subpoena dated august 8 2008 orthofix inc “ohio ag subpoena” ohio ag subpoena seeks documents period january 1 2000 date issuance subpoena company believes ohio ag subpoena arises government investigation concerns compensation physician consultants related matters september 18 2008 company submitted claim indemnification escrow fund established connection merger agreement losses us resulting usaonevada subpoena massachusetts cid ohio ag subpoena blackstone cooperated government’s request subpoenas set forth company unable predict actions might taken governmental authorities issued subpoenas impact outcome matters might company’s consolidated financial position results operations cash flows order entered january 4 2007 united states district court eastern district arkansas unsealed qui tam complaint captioned thomas v chan et al 406cv00465jlh filed dr patrick chan blackstone defendants including another device manufacturer complaint alleges causes action false claims act alleged inappropriate payments items value conferred dr chan december 29 2006 us department justice filed notice nonintervention case plaintiff subsequently amended complaint add company defendant january 3 2008 dr chan pled guilty one count knowingly soliciting receiving kickbacks medical device distributor criminal matter neither company business units employees defendants january 2008 dr chan entered settlement agreement plaintiff certain governmental entities civil qui tam action february 21 2008 joint stipulation dismissal claims dr chan action filed court removed defendant action july 11 2008 court granted motion dismiss company defendant action blackstone remains defendant company believes blackstone meritorious defenses claims alleged company intends defend vigorously lawsuit september 17 2007 company submitted claim indemnification escrow fund established connection merger agreement losses us resulting matter company subsequently notified legal counsel former shareholders representative former shareholders blackstone objected indemnification claim intends contest accordance terms merger agreement january 2007 may 2007 blackstone orthofix inc named defendants along medical device manufacturers three civil lawsuits alleging dr chan performed unnecessary surgeries three different instances january 2008 company learned orthofix inc named defendant along medical device manufacturers fourth civil lawsuit alleging dr chan performed unnecessary surgeries four civil lawsuits filed circuit court white county arkansas company reached settlement four civil lawsuits court entered order dismissal two four cases settlement agreements expected material impact consolidated financial position results operations cash flows september 17 2007 company submitted claim indemnification escrow fund established connection merger agreement losses us resulting one four civil lawsuits company subsequently notified legal counsel former shareholders representative former shareholders blackstone objected indemnification claim intends contest accordance terms merger agreement company unable predict outcome escrow claims described preceding paragraphs estimate amount may ultimately returned company escrow fund assurance losses us matters exceed amount escrow account december 31 2008 2007 included current assets approximately 83 million 21 million escrow receivable balances related blackstone matters described respectively f notes consolidated financial statements cont addition foregoing claims company submitted claims indemnification escrow fund established connection blackstone merger agreement losses may result certain claims blackstone alleging plaintiffs andor claimants entitled payments blackstone stock options reflected blackstones corporate ledger time blackstones acquisition company shares stock options improperly diluted blackstone date representative former shareholders blackstone objected approximately 15 million claims escrow fund certain claims remaining pending company cannot predict outcome proceedings claims made company subsidiaries described preceding paragraphs assurance ultimate resolution claim material adverse impact consolidated financial position results operations cash flows addition foregoing normal course business company involved various lawsuits time may subject certain contingencies united kingdom payroll taxes 2007 intavent orthofix limited company’s uk distribution subsidiary received inquiry hm revenue customs hmrc relating tax treatment gains made uk employees exercise stock options company process formulating response hmrc based preliminary calculations provision 05 million provided company paid 02 million company cannot predict ultimate outcome discussions hmrc concentrations credit risk financial instruments potentially subject company concentrations credit risk primarily cash investments accounts receivable cash investments primarily money market funds deposited major financial center banks concentrations credit risk respect accounts receivable limited due large number entities comprising company’s customer base company performs ongoing credit evaluations customers generally require collateral certain customers rely third party healthcare payers private insurance companies governments make payments company behalf accounts receivable countries government funds medical spending primarily located north africa middle east south america asia europe company considered special situations establishing allowances potentially uncollectible accounts receivable countries india egypt turkey company also records reserves bad debts customers based variety factors including length time receivables past due financial condition customer macroeconomic conditions historical experiences company maintains reserves potential credit losses within management’s expectations company sells via direct sales force distributors customers accounted 5 net sales 2008 2007 2006 18 pensions deferred compensation orthofix inc sponsors defined contribution plan “orthofix inc 401k plan” covering substantially full time employees orthofix inc 401k plan allows participants contribute 15 pretax compensation subject certain limitations company matching 100 first 2 employee’s base compensation 50 next 4 employee’s base compensation contributed orthofix inc 401k plan breg also sponsors 401k plan “breg 401k plan breg 401k plan allows participants contribute 100 compensation subject certain limitations company matching 100 first 1000 deferred blackstone also sponsors 401k plan “blackstone 401k plan blackstone 401k plan allows participants contribute 75 compensation subject certain limitations company matching 50 first 6 employee’s compensation deferred years ended december 31 2008 2007 2006 expenses incurred relating 401k plans including matching contributions approximately 18 million 15 million 11 million respectively f notes consolidated financial statements cont company operates defined contribution pension plans international employees described meeting minimum service requirements company’s expenses pension contributions 2008 2007 2006 approximately 10 million 10 million 05 million respectively italian law orthofix srl accrues behalf employees deferred compensation paid termination employment year’s provision deferred compensation based percentage employee’s current annual remuneration plus annual charge deferred compensation also accrued leaving indemnity payable agents case dismissal regulated national contract equal approximately 35 total commissions earned company’s expense deferred compensation 2008 2007 2006 approximately 05 million 04 million 04 million respectively deferred compensation payments 05 million 03 million 03 million made 2008 2007 2006 respectively balance december 31 2008 2007 17 million represents amount would payable employees agents terminated employment date included longterm liabilities orthofix deferred compensation plan “plan” administered board directors orthofix effective january 1 2007 amended restated effective january 1 2009 plan intended allow select group key management highly compensated employees orthofix defer receipt compensation would otherwise payable terms plan intended comply respects provisions code section 409a code section 457a plan employees orthofix subsidiaries eligible participate employee management highly compensated employee named board directors participant plan directors eligible participate plan effective january 1 2009 prohibited participation unless director performs services employee attributable tax purposes us subsidiary company eligible employee may elect enter salary deferral commitment andor director’s fees deferral commitment respect plan year submitting participation agreement plan administrator december 31 calendar year immediately preceding plan year eligible employee may elect enter bonus deferral commitment respect bonus compensation earned plan year submitting participation agreement plan administrator december 31 calendar year immediately preceding plan year deferral commitments stated percentage flat dollar amount allowed plan administrator participant’s participation agreement remain effect immediately succeeding plan year distributions made accordance requirements code section 409a 19 sharebased compensation plans december 31 2008 company three stock option award plans one stock purchase plan described long term incentive plan 2004 long term incentive plan “2004 ltip plan” long term incentive plan originally adopted april 2004 ltip plan approved shareholders june 29 2004 20 million shares reserved issuance plan addition shares available future awards june 29 2004 prior plans ii become available future issuance upon expiration forfeiture june 29 2004 awards upon prior plans awards generally vest years service awards fully vesting within three years date grant employees either three four years date grant nonemployee directors awards form stock option restricted stock restricted share unit performance share unit award form determined board directors awards granted 2004 ltip plan expire later 10 years date grant june 20 2007 company’s shareholders approved amendments restatement 2004 ltip plan providing following major changes increase number shares available grant 20 million shares 28 million shares specific allowance grants restricted stock awards provision fixed awards nonemployee directors date first election board subsequent reelection june 19 2008 company’s shareholders approved amendments 2004 ltip plan increase number shares available grant 28 million shares 31 million shares increase annual grant nonemployee directors 3000 shares 5000 shares limit future number shares may awarded plan full value awards 100000 shares december 31 2008 2666395 options outstanding 2004 ltip plan 1181744 exercisable addition 118993 shares restricted stock outstanding none vested f notes consolidated financial statements cont staff share option plan staff stock option plan “staff plan” fixed stock option plan adopted april 1992 staff plan company granted options employees estimated fair market value options date grant options generally vest based years service options fully vested within five years date grant options granted staff plan expire ten years date grant options left granted staff plan december 31 2008 133625 options outstanding exercisable staff plan performance accelerated stock option inducement grants december 30 2003 company granted inducement stock option awards two key executives breg conjunction acquisition breg exercise price fixed 3800 per share november 20 2003 company announced entered agreement acquire breg inducement grants included servicebased performancebased vesting provisions inducement grants became 100 vested fourth anniversary grant date subject certain exercisability limitations following vesting december 30 2007 original inducement grants limited executives’ ability exercise specific numbers options years 2008 2012 prior options fully vesting inducement executives extend term employment agreements one year november 2007 company entered amended award agreements two executives amended agreements change vesting date options provided options granted thereunder exercisable fixed period beginning january 1 2009 ending december 31 2009 december 2008 order meet certain requirements code section 409a treasury regulations promulgated thereunder fulfill company’s desire extend executives’ terms employment company executives entered second amended restated award agreements second amended agreements provided election executives respective periods exercise options bradley mason elected exercise 50000 options following periods april 1 2010 december 31 2010 january 1 2011 december 31 2011 january 1 2012 december 31 2012 william hopson elected exercise 50000 options period january 1 2011 december 31 2011 subject certain termination employment provisions notwithstanding provisions second amended agreements portion options exercised respective exercise periods exercisable thereafter lapse cancelled december 31 2008 200000 options outstanding exercisable inducement grants inducement stock option agreement year ended december 31 2008 stock options granted pursuant standalone inducement stock option agreement terms substantially grants made company’s amended restated 2004 long term incentive plan grant 150000 stock options vests onethird increments annually f notes consolidated financial statements cont stock purchase plan orthofix international nv amended restated stock purchase plan “stock purchase plan” provides issuance shares company’s common stock eligible employees directors company subsidiaries elect participate plan acquire shares common stock payroll deductions including executive officers june 20 2008 company’s shareholders approved amendment restatement plan providing following major change allow officers directors orthofix inc participate plan basis employees ii provide company assume adopt plan amended lieu orthofix inc acting sponsor plan iii allow nonemployee directors company participate plan iv increase 500000 shares maximum number shares available issuance plan v provide determination value common stock plan determined either first last day plan year whichever date renders lower value changes generally effective plan year starting january 1 2009 purchase period eligible employees may designate 1 25 compensation deducted purchase common stock plan 25 employees working north america south america asia 15 employees working europe eligible directors designated percentage amount equal annual director compensation paid cash current plan year purchase price shares plan equal 85 fair market value first day plan year calendar year running january 1st december 31st lower last day plan year aggregate number shares reserved issuance employee stock purchase plan 950000 shares december 31 2008 429688 shares issued stock purchase plan summaries status company’s stock option plans december 31 2008 2007 changes years ended dates presented options granted 2008 2007 less market value f notes consolidated financial statements cont weighted average remaining contractual life exercisable options 644 years december 31 2008 total intrinsic value options exercised 88000 146 million 19 million years ended december 31 2008 2007 2006 respectively aggregate intrinsic value options outstanding options exercisable december 31 2008 calculated difference exercise price underlying options market price company’s common stock shares exercise prices lower 1533 closing price company’s stock december 31 2008 aggregate intrinsic value options outstanding 05 million 381 million 265 million years ended december 31 2008 2007 2006 respectively aggregate intrinsic value options exercisable 10000 194 million 119 million years ended december 31 2008 2007 2006 respectively summary status restricted stock december 31 2008 changes year presented f notes consolidated financial statements cont 20 earnings per share three years period ended december 31 2008 adjustments net income loss purposes calculating basic diluted net income loss per common share following reconciliation weighted average shares used basic diluted net income loss per common share computations years ended december 31 2008 2006 effects potentially dilutive options excluded computation diluted earnings per share company net loss therefore effect would antidilutive options purchase shares common stock exercise prices excess average market price common shares included computation diluted earnings per share 309651 outstanding options included diluted earnings per share computation fiscal year ended december 31 2007 options’ exercise prices greater average market price common shares 21 quarterly financial data unaudited us dollars thousands except per share data sum per share earnings quarter may equal earnings per share year due change average share calculations accordance prescribed reporting requirements f orthofix international nv schedule 1 condensed financial information registrant orthofix international nv condensed balance sheets see accompanying notes condensed financial statements orthofix international nv schedule 1 condensed financial information registrant orthofix international nv condensed statements operations see accompanying notes condensed financial statements orthofix international nv schedule 1 condensed financial information registrant orthofix international nv condensed statement cash flows see accompanying notes condensed financial statements orthofix international nv schedule 1 condensed financial information registrant orthofix international nv notes condensed financial statements 1 background basis presentation condensed parent company financial statements prepared accordance rule 1204 schedule 1 regulation sx restricted net assets orthofix holdings inc subsidiaries exceed 25 consolidated net assets orthofix international nv subsidiaries “company” information read conjunction company’s consolidated financial statements included elsewhere filing 2 restricted net assets subsidiaries certain company’s subsidiaries restrictions effective date september 22 2006 ability pay dividends make intercompany loans advances pursuant financing arrangements amount restricted net assets company’s subsidiaries held december 31 2008 2007 approximately 1113 million 3007 million respectively restrictions net assets orthofix holdings inc subsidiaries 3 commitments contingencies long term obligations discussion company’s commitments contingencies long term obligations senior secured credit facility see note 10 note 13 note 17 company’s consolidated financial statements dividends subsidiaries cash dividends received orthofix international nv consolidated subsidiaries accounted equity method 111 million 220 million 245 million years ended december 31 2008 2007 2006 respectively schedule 2 valuations qualifying amounts years ended december 31 2008 2007 2006 item 15 exhibits financial statement schedules documents filed part report form 10k following documents filed part report form 10k 1 financial statements see “index consolidated financial statements” page form 10k 2 financial statement schedules see “index consolidated financial statements” page form 10k 3 exhibits filed herewith certain confidential portions exhibit omitted means redacting portion text exhibit filed separately secretary commission without redactions pursuant application requesting confidential treatment securities exchange act 1934 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated name title date alan w milinazzo chief executive officer march 1 2010 alan w milinazzo president director robert vaters executive vice president march 1 2010 robert vaters chief financial officer james f gero chairman board directors march 1 2010 james f gero jerry c benjamin vice chairman board march 1 2010 jerry c benjamin directors walter von wartburg director march 1 2010 walter von wartburg thomas j kester director march 1 2010 thomas j kester charles w federico director march 1 2010 charles w federico guy jordan director march 1 2010 guy jordan kenneth r weisshaar director march 1 2010 kenneth r weisshaar maria sainz director march 1 2010 maria sainz michael mainelli director march 1 2010 michael mainelli orthofix international nv index consolidated financial statements schedules provision made applicable accounting regulation securities exchange commission required related instructions inapplicable therefore omitted orthofix international nv statement management’s responsibility financial statements shareholders orthofix international nv management responsible preparation consolidated financial statements related information presented report consolidated financial statements include amounts based management’s estimates judgments prepared conformity accounting principles generally accepted united states financial information report shareholders consistent consolidated financial statements company maintains accounting internal control systems provide reasonable assurance reasonable cost assets safeguarded loss unauthorized use disposition financial records reliable preparing financial statements maintaining accountability assets systems augmented written policies organizational structure providing division responsibilities careful selection training qualified personnel company engaged ernst young llp independent registered public accountants audit render opinion consolidated financial statements accordance auditing standards public company accounting oversight board united states standards include assessment systems internal controls test transactions extent considered necessary support opinion board directors audit committee consisting solely outside directors company meets periodically management independent registered public accountants ensure meeting responsibilities discuss matters concerning internal controls financial reporting ernst young llp full free access audit committee james f gero chairman board directors alan w milinazzo president chief executive officer director robert vaters executive vice president chief financial officer orthofix international nv management’s report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting term defined rule 13a15f exchange act company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements internal control financial reporting designed provide reasonable assurance company’s management board directors regarding preparation reliable financial statements external purposes accordance generally accepted accounting principles internal control financial reporting includes selfmonitoring mechanisms actions taken correct deficiencies identified inherent limitations internal control matter well designed misstatements may occur prevented detected accordingly even effective internal control financial reporting provide reasonable assurance respect financial statement preparation evaluation effectiveness internal control financial reporting made specific date continued effectiveness future periods subject risks controls may become inadequate changes conditions degree compliance policies procedures may decline management conducted evaluation effectiveness company’s system internal control financial reporting december 31 2009 based framework set forth “internal control integrated framework” issued committee sponsoring organizations treadway commission based evaluation management concluded december 31 2009 company’s internal control financial reporting effective based specified criteria company’s internal control financial reporting audited company’s independent registered public accounting firm ernst young llp stated reports pages herein james f gero chairman board directors alan w milinazzo president chief executive officer director robert vaters executive vice president chief financial officer report independent registered public accounting firm board directors shareholders orthofix international nv audited accompanying consolidated balance sheets orthofix international nv december 31 2009 2008 related consolidated statements operations shareholders’ equity cash flows three years period ended december 31 2009 audits also included financial statement schedules listed index item 15a financial statements schedules responsibility company’s management responsibility express opinion financial statements schedules based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position orthofix international nv december 31 2009 2008 consolidated results operations cash flows three years period ended december 31 2009 conformity us generally accepted accounting principles also opinion related financial statement schedules considered relation basic consolidated financial statements taken whole present fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states orthofix international nv’s internal control financial reporting december 31 2009 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated march 1 2010 expressed unqualified opinion thereon ernst young llp boston massachusetts march 1 report independent registered public accounting firm board directors shareholders orthofix international nv audited orthofix international nv’s internal control financial reporting december 31 2009 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria orthofix international nv’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion orthofix international nv maintained material respects effective internal control financial reporting december 31 2009 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets orthofix international nv december 31 2009 2008 related consolidated statements operations shareholders’ equity cash flows three years period ended december 31 2009 orthofix international nv report dated march 1 2010 expressed unqualified opinion thereon ernst young llp boston massachusetts march 1 orthofix international nv consolidated balance sheets december 31 2009 2008 accompanying notes form integral part consolidated financial statements orthofix international nv consolidated statements operations years ended december 31 2009 2008 accompanying notes form integral part consolidated financial statements orthofix international nv consolidated statements changes shareholders’ equity years ended december 31 2009 2008 2007 accompanying notes form integral part consolidated financial statements orthofix international nv consolidated statements cash flows years ended december 31 2009 2008 accompanying notes form integral part consolidated financial statements orthofix international nv notes consolidated financial statements description business orthofix international nv “company” multinational corporation principally involved design development manufacture marketing distribution medical equipment principally orthopedics products market company comprised four reportable segments domestic spinal implants biologics formerly referred “blackstone” breg international see note 13 description segment 1 summary significant accounting policies basis consolidation consolidated financial statements include financial statements company whollyowned majorityowned subsidiaries entities company control results acquired businesses included consolidated statements operations date acquisition intercompany accounts transactions profits eliminated consolidated financial statements company’s investments significant influence control accounted cost method accounting b foreign currency translation foreign currency translation performed accordance accounting standards codification “asc” topic 830 foreign currency matters “asc topic 830” formerly known statement financial accounting standards “sfas” 52 “foreign currency translation” balance sheet accounts except shareholders’ equity translated year end exchange rates revenue expense items translated weighted average rates exchange prevailing year gains losses resulting translation foreign currency recorded accumulated comprehensive income component shareholders’ equity transactional foreign currency gains losses including intercompany transactions longterm investing nature included income expense net 05 million 27 million 08 million years ended december 31 2009 2008 2007 respectively c inventories valued lower cost estimated net realizable value provision excess obsolete items cost determined weightedaverage basis approximates fifo method valuation workinprocess finished products field inventory consignment inventory includes cost materials labor production field inventory represents immediately saleable finished products inventory possession company’s direct sales representatives reporting currency reporting currency united states “us” dollar e market risk ordinary course business company exposed impact changes interest rates foreign currency fluctuations company’s objective limit impact movements earnings cash flows order achieve objective company seeks balance nondollar denominated income expenditures 2008 company executed interest rate swap agreement manage cash flow exposure generated interest rate fluctuations 2009 2008 2007 company made use foreign currency swap agreement entered december 2006 manage cash flow exposure generated foreign currency fluctuations see note 10 additional information orthofix international nv notes consolidated financial statements cont f longlived assets property plant equipment stated cost less accumulated depreciation plant equipment also includes instrumentation depreciation computed straightline basis useful lives assets except land depreciated depreciation leasehold improvements computed shorter lease term useful life asset useful lives follows expenditures maintenance repairs minor renewals improvements extend lives respective assets expensed expenditures renewals improvements capitalized assets related accumulated depreciation adjusted property retirements disposals resulting gain loss included operations fully depreciated assets remain accounts retired service patents intangible assets recorded cost acquired part business combination estimated fair value assets primarily include patents technology agreements “developed technologies” certain trademarks distribution networks identifiable intangible assets considered definite lived generally amortized useful lives using method amortization reflects pattern economic benefit intangible assets consumed company’s weighted average amortization period developed technologies distribution networks 11 10 years respectively asc topic 360 property plant equipment “asc topic 360” formerly known sfas 144 “accounting impairment disposal longlived assets” requires intangible assets definite lives orthofix’s developed technologies distribution network assets tested impairment adverse conditions exist change circumstances occurred would indicate impairment change remaining useful life impairment indicator exists company tests intangible asset recoverability purposes recoverability test company groups intangible assets liabilities lowest level identifiable cash flows intangible asset generate cash flows independent assets liabilities carrying value intangible asset group exceeds undiscounted cash flows expected result use eventual disposition intangible asset group company write carrying value fair value period identified company generally calculates fair value intangible assets present value estimated future cash flows company expects generate asset using riskadjusted discount rate determining estimated future cash flows associated intangible assets company uses estimates assumptions future revenue contributions cost structures remaining useful lives asset group use alternative assumptions including estimated cash flows discount rates alternative estimated remaining useful lives could result different calculations impairment company tests goodwill certain trademarks least annually company tests frequently indicators present changes circumstances suggest impairment may exist indicators include among others declines sales earnings cash flows development material adverse change business climate company assesses goodwill impairment reporting unit level defined operating segment one level operating segment referred component consistent prior years company identified four reporting units consistent company’s reporting segments domestic spinal implants biologics breg international see note 13 additional information performing annual impairment test company utilizes twostep approach prescribed asc topic 350 intangibles goodwill “asc topic 350” formerly known sfas 142 “goodwill intangible assets” first step requires comparison reporting unit’s carrying value fair value respective unit carrying value exceeds fair value second step performed measure amount impairment loss orthofix international nv notes consolidated financial statements cont carrying value order calculate respective carrying values company records goodwill based purchase price allocation performed time acquisition corporate assets liabilities directly relate reporting unit’s operations ascribed directly reporting unit corporate assets liabilities directly related specific reporting unit reporting unit benefits allocated based respective revenue contribution reporting unit fair value income approach fair value reporting unit estimated entirely predominantly using income based approach income approach utilizes discounted cash flow “dcf” estimates aftertax cash flows debt free basis discounted present value using riskadjusted discount rate company believes dcf generally provides meaningful fair value appropriately measures company’s income producing assets company may consider using cost approach generally believes appropriate given inability replicate value specific technologybased assets within reporting units circumstances dcf indicator fair value sufficiently conclusive support carrying value reporting unit measures provide appropriate indicator may consider market approach determination reporting unit’s fair value performing dcf calculation company required make assumptions amount timing future expected cash flows terminal value growth rates appropriate discount rates connection therewith considers following · determination expected cash flows based company’s strategic plans longrange planning forecasts extent reasonably possible reflect anticipated changes economy industry revenue growth rates represent estimates based current forecasted market conditions profit margin assumptions projected reporting unit based historical margins current cost structure anticipated net cost reductions · terminal value growth rate used calculate value cash flows beyond last projected period dcf rate reflects company’s estimates stable perpetual growth reporting unit · discount rates based reporting unit’s riskadjusted weighted average cost capital using assumptions consistent publicly traded guideline companies operating within medical device industry well company specific risk factors reporting unit inputs represent company’s best estimate however different cash flows growth discount rate assumptions could generate different fair values potentially impacting company’s impairment assessment domestic breg international reporting units fair value domestic breg international reporting units established using dcf method dcf results concluded fair value domestic breg international reporting units exceeded respective carrying values december 31 2009 december 31 2008 assumptions used december 31 2009 dcf results consistent dcf results used prior year reflecting appropriate adjustments changes economic climate orthofix international nv notes consolidated financial statements cont spinal implants biologics reporting unit third quarter 2008 company indentified indicators impairment respect spinal implants biologics reporting unit prompting interim impairment test determination spinal implants biologics fair value calculated using combination income market approaches weighted based guidance provided independent appraisal firm income approach based dcf model market approach based guideline transaction method derived applicable market multiples prices comparable companies acquired marketplace company applied weighted average percentage 75 25 placing greater weight income approach provided lower fair value calculation resulted 1269 million impairment loss reducing related goodwill balance 94 million december 31 2008 company used dcf determine fair value spinal implants biologics reporting units december 31 2009 resulted significant changes spinal implants biologics fair value assumptions accordingly annual impairment test december 31 2009 resulted impairment spinal implants biologics reporting unit g revenue recognition accounts receivable revenue generally recognized income period title passes products delivered revenues exclude value added local taxes intercompany sales trade discounts shipping handling costs included cost sales royalty revenues recognized royalty earned bone growth stimulation certain bracing products prescribed physician company recognizes revenue product placed implanted accepted patient domestic spinal implant human cellular tissue based products “hctp products” revenues recognized product utilized confirming purchase order received hospital sales commercial customers including hospitals distributors revenues recognized time shipment unless contractual agreements specify title passes delivery revenues inventory delivered consignment recognized product used consignee 2008 company entered agreement musculoskeletal transplant foundation “mtf” develop commercialize new stem cellbased bone growth biologic matrix development process completed 2009 company mtf operate terms separate commercialization agreement terms 10year agreement mtf sources tissue processes create bone growth matrix packages delivers accordance orders received directly customers company exclusive global marketing rights new allograft receives marketing fee mtf based total sales marketing fee recorded net basis within net sales company derives significant amount revenues us thirdparty payors including commercial insurance carriers health maintenance organizations preferred provider organizations governmental payors medicare amounts paid thirdparty payors generally based fixed allowable reimbursement rates revenues recorded expected preauthorized reimbursement rates net contractual allowances adjustments certain billings subject review thirdparty payors may subject adjustment process estimating ultimate collection accounts receivable involves significant assumptions judgments historical collection payor reimbursement experience integral part estimation process related reserves doubtful accounts establishment contractual allowances accounts receivable analyzed quarterly basis assess adequacy reserves doubtful accounts contractual allowances revisions allowances doubtful accounts estimates recorded adjustment bad debt expense within sales marketing expenses revisions contractual allowances recorded adjustment net sales judgment management adequate allowances provided doubtful accounts contractual allowances estimates periodically tested actual collection experience orthofix international nv notes consolidated financial statements cont h research development costs expenditures research development expensed incurred expenditures related collaborative arrangements expensed based terms related agreements july 24 2008 company entered agreement mtf collaborate development commercialization new stem cellbased bone growth biologic matrix terms agreement company invested 100 million develop new stem cellbased bone growth biologic matrix provides beneficial properties autograft spinal orthopedic surgeries new matrix launched full market release us effective july 1 2009 total 61 million 39 million expenses recognized terms agreement included research development expense years ended december 31 2009 2008 respectively previously announced 2008 company entered agreement intelligent implant systems “iis” acquisition development nextgeneration pedicle screw system spinal implants division agreement company purchased 25 million intellectual property related technology year ended december 31 2009 iis met first development milestone terms agreement company paid iis 10 million also 2009 company iis amended existing agreement company paid iis additional 08 million partially meeting next milestone company recorded payments totaling 18 million year ended december 31 2009 research development expense iis continue perform research development functions related technology agreement amended agreement pay iis additional amount 27 million research development performance milestones income taxes company accounts income taxes accordance asc topic 740 income taxes “asc topic 740” company subject income taxes united states foreign jurisdictions uses estimates determining provision income taxes company accounts income taxes using asset liability method accounting reporting income taxes method deferred tax assets liabilities recognized based temporary differences financial reporting income tax bases assets liabilities using statutory rates process requires company project current tax liability estimate deferred tax assets liabilities including net operating loss tax credit carryforwards assessing need valuation allowance company considered recent operating results future taxable income projections prudent feasible tax planning strategies asc topic 740 also provides criteria recognition measurement presentation disclosures uncertain tax positions tax benefit uncertain tax position may recognized “more likely not” position sustainable based solely technical merits company recognized 12 million additional tax liability inclusive interest accounted reduction retained earnings date implementation january 1 2007 december 31 2008 december 31 2009 company 11 million 08 million respectively including interest unrecognized tax benefits j net income loss per common share net income per common share computed accordance asc topic 260 earnings per share formerly known sfas 128 “earnings per share” net income per common share basic computed using weighted average number common shares outstanding respective years net income per common share diluted computed using weighted average number common equivalent shares outstanding respective years using “treasury stock” method common equivalent shares represent dilutive effect assumed exercise outstanding share options see note 19 differences basic diluted shares result solely assumed exercise certain outstanding share options warrants 2008 effect options included calculation inclusion would antidilutive orthofix international nv notes consolidated financial statements cont k cash equivalents company considers highly liquid investments original maturity three months less date purchase cash equivalents l restricted cash restricted cash consists cash held certain subsidiaries distribution transfer orthofix international nv “parent” subsidiaries parties credit facility described note 9 restricted senior secured credit facility restricts parent subsidiaries parties facilities access cash held colgate medical limited subsidiaries credit party subsidiaries access cash operational debt repayment purposes sale accounts receivable company follows provisions asc topic 860 transfers servicing formerly known sfas 140 “accounting transfers servicing financial assets extinguishment liabilities” trade accounts receivables sold without recourse removed balance sheet time sale company generally require collateral trade receivables n use estimates preparation financial statements preparation financial statements conformity accounting principles generally accepted us requires management make estimates assumptions affect amounts reported financial statements accompanying notes ongoing basis company evaluates estimates including related contractual allowances doubtful accounts inventories taxes potential goodwill intangible asset impairment actual results could differ estimates reclassifications certain prior year amounts reclassified conform 2009 presentation reclassifications effect previously reported net earnings shareholders’ equity p sharebased compensation company recognizes sharebased compensation accordance asc topic 718 compensation stock compensation “asc topic 718” formerly known sfas 123r revised 2004 “sharebased payment” fair value stock options determined using blackscholes valuation model value recognized expense service period net estimated forfeitures expected term options granted estimated based number factors including vesting term award historical employee exercise behavior options currently outstanding options exercised expired expected volatility company’s common stock employee’s average length service riskfree interest rate determined based upon constant us treasury security rate contractual life approximates expected term option award management estimates expected volatility based historical volatility company’s stock compensation expense recognized equitybased awards net estimated forfeitures estimated based analysis actual option forfeitures q advertising costs company expenses advertising costs incurred advertising expense years ended december 31 2009 2008 2007 07 million 11 million 18 million respectively orthofix international nv notes consolidated financial statements cont r derivative instruments company manages exposure fluctuating cash flows resulting changes interest rates foreign exchange within consolidated financial statements according hedging policy company may engage nonleveraged transactions involving various financial derivative instruments manage exposed positions policy requires company formally document relationship hedging instrument hedged item well riskmanagement objective strategy undertaking hedge transaction instruments designated cash flow hedge company formally assesses hedge’s inception ongoing basis whether derivative used hedging transaction effective offsetting changes cash flows hedged item whether derivative may expected remain effective future periods determined derivative ceased effective hedge company discontinue related hedge accounting prospectively determination would made 1 derivative longer effective offsetting changes cash flows hedged item 2 derivative expires sold terminated exercised 3 management determines designating derivative hedging instrument longer appropriate ineffective portions changes fair value cash flow hedges recognized earnings company follows asc topic 815 derivatives hedging “asc topic 815” formerly known sfas 133 “accounting derivative instruments hedging activities” amended interpreted requires derivatives recorded either assets liabilities balance sheet respective fair values cash flow hedge effective portion derivative’s change fair value ie gains losses initially reported component comprehensive income net related taxes subsequently reclassified net earnings hedged exposure longer effective company utilizes cross currency swap manage foreign currency exposure related portion company’s intercompany receivable us dollar functional currency subsidiary denominated euro cross currency swap accounted cash flow hedge accordance asc topic 815 see note 10 description types derivative instruments company utilizes accumulated comprehensive income accumulated comprehensive income comprised foreign currency translation adjustments effective portion gain loss company’s crosscurrency swap designated accounted cash flow hedge refer note 10 components changes accumulated comprehensive income follows 1 cash remains permanently invested foreign subsidiaries deferred taxes recognized related foreign currency translation adjustment orthofix international nv notes consolidated financial statements cont recently issued accounting standards january 2009 company adopted financial accounting standards board fasb asc topic 808 collaborative arrangements “asc topic 808” formerly known emerging issues task force “eitf” 071 “accounting collaborative arrangements” asc topic 808 provides information related classification payments participants appropriate income statement presentation well disclosures related certain collaborative arrangements adoption asc topic 808 material impact company’s results operations financial position company applied guidance since prevailing authority previously january 2009 company adopted asc topic 810 consolidations “asc topic 810” formerly known sfas 160 “noncontrolling interests consolidated financial statements amendment arb 51” asc topic 810 establishes accounting reporting standards pertaining ownership interest subsidiaries held parties parent amount net income attributable parent noncontrolling interest changes parent’s ownership interest valuation retained noncontrolling equity investment subsidiary deconsolidated asc topic 810 also establishes disclosure requirements clearly identify distinguish interests parent interests noncontrolling owners asc topic 810 adoption changed method company accounted minority interest acquisition first quarter 2009 also requires excess purchase price minority interest liability time acquisition recorded capital transaction disclosure requirements asc topic 810 impact company’s financial reporting remaining minority interest liability immaterial may 2009 fasb issued asc topic 855 subsequent events “asc topic 855” formerly known sfas 165 “subsequent events” asc topic 855 provides authoritative accounting literature topic previously addressed auditing literature aicpa au section 560 subsequent events guidance asc topic 855 largely similar current guidance auditing literature exceptions intended result significant changes practice two modifications subsequent events guidance au section 560 1 name two types subsequent events either recognized subsequent events currently referred practice type subsequent events nonrecognized subsequent events currently referred practice type ii subsequent events 2 modify definition subsequent events refer events transactions occur balance sheet date financial statements issued public entities asc topic 855 effective interim annual financial periods ending june 15 2009 february 24 2010 fasb issued accounting standards updated asu 201009 amend asc topic 855 preparation december 31 2009 financial statements company performed related procedures required asc topic 855 orthofix international nv notes consolidated financial statements cont 2 inventories field inventory represents immediately saleable finished products inventory possession company’s direct sales representatives 3 investments company total investments held cost 03 million 21 million december 31 2009 2008 respectively august 2008 orthofix entered agreement oped ag liquidate portion company’s investment oped ag third quarter 2008 company received net proceeds 08 million sale portion ownership oped ag 2009 orthofix modified agreement oped ag sold 100 remaining investment third quarter 2009 net proceeds 17 million company’s investments december 31 2009 reflect ownership biowave corporation pain therapy company assessed cost investments december 31 2009 2008 noting impairment carrying value company also investment orthorx reduced zero 2004 4 property plant equipment depreciation expense years ended december 31 2009 2008 2007 153 million 142 million 104 million respectively orthofix international nv notes consolidated financial statements cont 5 patents intangible assets amortization expense intangible assets estimated approximately 60 million 59 million 47 million 16 million 16 million 43 million periods ending december 31 2010 2011 2012 2013 2014 2015 thereafter respectively third quarter 2008 company determined test impairment indefinite lived assets blackstone accordance asc topic 350 necessary due decreasing revenues blackstone among matters company evaluated indefinitelived intangible assets included blackstone trademark acquired acquisition blackstone impairment analysis resulted carrying value adjusted impairment charge recognized fourth quarter 2007 trademark exceeding fair value company recognized 570 million impairment charge included impairment goodwill certain intangible assets year ended december 31 2008 also third quarter 2008 company determined impairment indicator described asc topic 360 occurred respect definitelived intangibles spinal implants biologics due impairment indicator company compared expected cash flows generated spinal implants biologics reporting unit represented lowest level cash flows specifically identifiable undiscounted basis carrying value reporting unit’s assets including goodwill company determined carrying value spinal implants biologics reporting unit exceeded related undiscounted cash flows determination resulted impairment distribution network technologies spinal implants biologics based fair values resulting impairment charge 1057 million included impairment goodwill certain intangible assets 6 goodwill third quarter 2008 due matters described note 5 company performed impairment analysis goodwill spinal implants biologics impairment analysis resulted goodwill impairment charge 1269 million carrying value exceeded implied fair value goodwill discussion company tests determine goodwill impaired see note 2 orthofix international nv notes consolidated financial statements cont following table presents changes net carrying value goodwill reportable segment 1 sale operations relating pain care® business breg first quarter 2008 2 purchase remaining 3874 minority interest mexican subsidiary 400 minority interest brazilian subsidiary 3 impairment analysis resulted goodwill impairment charge 1269 million carrying value exceeded implied fair value goodwill december 31 2009 company performed annual impairment review reporting units determined additional impairment goodwill 7 bank borrowings weighted average interest rate borrowings lines credit december 31 2009 2008 515 586 respectively borrowings line credit consist borrowings euros company unused available line credit 58 million euros 82 million 52 million euros 73 million december 31 2009 2008 respectively italian line credit line credit provides company option borrow amounts italy rates determined time borrowing line credit unsecured orthofix international nv notes consolidated financial statements cont 8 current liabilities 9 longterm debt september 22 2006 company’s whollyowned us holding company subsidiary orthofix holdings inc “orthofix holdings” entered senior secured credit facility syndicate financial institutions finance acquisition blackstone medical inc “blackstone” certain terms senior secured credit facility amended september 29 2008 senior secured credit facility provides 1 sevenyear amortizing term loan facility 3300 million 2 sixyear revolving credit facility 450 million december 31 2009 company 03 million letters credit outstanding revolving credit facility 2524 million outstanding term loan facility obligations senior secured credit facility floating interest rate london interbank offered rate “libor” plus margin libor floor 30 prime rate plus margin december 31 2009 entire term loan obligation 2524 million prime rate plus margin 350 effective interest rates senior secured credit facility including impact interest rate swap see note 10 december 31 2009 december 31 2008 88 84 respectively domestic subsidiaries company includes orthofix inc breg inc blackstone colgate medical limited victory medical limited whollyowned financing subsidiaries company guaranteed obligations orthofix holdings senior secured credit facility obligations subsidiaries guarantees secured pledges respective assets certain subsidiaries company restrictions ability pay dividends make intercompany loan advances pursuant company’s senior secured credit facility net assets orthofix holdings subsidiaries restricted distributions parent company domestic subsidiaries company parties credit agreement access net assets operational purposes amount restricted net assets orthofix holdings subsidiaries december 31 2009 1430 million compared 1113 million december 31 2008 addition senior secured credit facility restricts company subsidiaries parties credit facility access cash held colgate medical limited subsidiaries credit party subsidiaries access cash operational debt repayment purposes result company prepaying 250 million longterm debt 2009 aggregate maturities longterm debt contractual obligations december 31 2009 follows 2010 0 2011 0 2012 354 million 2013 2170 million however company’s intentions follow original agreed upon payment schedule senior secured credit facility therefore aggregate maturities december 31 2009 follows 2010 33 million 2011 33 million 2012 800 million 2013 1658 million orthofix international nv notes consolidated financial statements cont conjunction obtaining senior secured credit facility company incurred debt issuance costs 64 million amortizing life facility portion capitalized debt issuance costs included longterm assets related senior secured credit facility expensed result amendment september 29 2008 included loss refinancing senior secured term loan year ended december 31 2008 connection amendment credit facility company paid additional fees 24 million year ended december 31 2008 21 million included loss refinancing senior secured term loan december 31 2009 2008 02 million 08 million respectively debt issuance costs relate company’s revolving credit facility included longterm assets 10 derivative instruments 2006 company entered crosscurrency swap agreement manage cash flows related foreign currency exposure portion company’s intercompany receivable us dollar functional currency subsidiary denominated euro derivative instrument tenyear fully amortizable agreement initial notional amount 630 million scheduled expire december 30 2016 instrument designated cash flow hedge amount outstanding agreement december 31 2009 december 31 2008 535 million 567 million respectively agreement company pays euro receives us dollars based scheduled cash flows agreement company recognized unrealized gain loss change fair value swap arrangement 27 million 16 million net tax within comprehensive income year ended december 31 2009 december 31 2008 respectively june 2008 company entered threeyear fully amortizable interest rate swap agreement “swap” notional amount 1500 million expiration date june 30 2011 second third quarters 2008 interest rate swap accounted cash flow hedge changes value recorded part accumulated comprehensive income balance sheet due declining interest rates libor floor companys amended credit facility swap longer deemed highly effective therefore fourth quarter 2008 company recognized earnings unrealized noncash loss approximately 80 million resulted changes fair value company’s interest rate swap special hedge accounting longer applied fair value adjustments expected reported current earnings expiration swap june 2011 year ended december 31 2009 company recorded unrealized gain 19 million unrealized noncash gain loss interest rate swap statement operations swap continues provide economic hedge fluctuating interest rate exposure 1500 million portion outstanding debt covers libor interest rate rise 373 required asc topic 815 derivatives hedging formerly known sfas 161 “disclosures derivative instruments hedging activities” tables disclose types derivative instruments company owns classifications fair values instruments within balance sheet amount gain loss recognized comprehensive income loss “oci” income loss orthofix international nv notes consolidated financial statements cont 11 fair value measurements company adopted accounting guidance fair value measurements january 1 2008 fair value defined price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date nonfinancial assets liabilities company measured fair value include longlived assets equity method investments impaired currently reported period authoritative guidance also describes three levels inputs may used measure fair value level 1 quoted prices active markets identical assets liabilities level 2 observable inputs quoted prices active markets identical assets liabilities level 3 unobservable inputs little market data available require reporting entity develop assumptions december 31 2009 company held certain items required measured fair value recurring basis included cash equivalents restricted cash accounts receivable shortterm bank borrowings accounts payable longterm secured debt interest rate derivative contract cross currency derivative contract cash equivalents consist shortterm highly liquid incomeproducing investments original maturities 90 days less including money market funds restricted cash accounts receivable shortterm bank borrowings accounts payable approximate fair value due shortterm maturities instruments company’s longterm secured debt carries floating rate interest therefore carrying value considered approximate fair value derivative instruments related company’s interest rate foreign currency hedges company’s interest rate derivative instrument overthecounter “otc” swap contract inputs used determine fair value contract obtained quoted public markets therefore company categorized swap contract level 2 company also considers counterparty credit risk credit risk determination estimated fair values company consistently applied valuation techniques periods presented company’s cross currency derivative instrument otc contract traded public exchange fair value swap contract determined based inputs readily available public markets derived information available publicly quoted markets therefore company categorized swap contract level 2 derivative financial instrument company also considers counterparty credit risk credit risk determination estimated fair values company consistently applied valuation techniques periods presented fair value company’s financial assets liabilities recurring basis follows 1 see note 10 “derivative instruments” orthofix international nv notes consolidated financial statements cont 12 commitments leases company entered operating leases facilities equipment leases noncancellable typically contain renewal options certain leases contain rent escalation clauses company recognizes expense straightline basis rent expense company’s operating leases years ended december 31 2009 2008 2007 approximately 62 million 56 million 52 million respectively future minimum lease payments operating leases december 31 2009 follows february 2009 part consolidation reorganization company’s spine business new jersey massachusetts texas facility company entered ten year operating lease lewisville texas future minimum lease payments 15 million per year first five years 16 million per year following five years included table lease commence upon earlier occupancy completion improvements expected occur second quarter 2010 13 business segment information company’s segment information prepared basis company’s management reviews financial information operational decision making purposes company comprised following segments domestic “domestic” consists operations orthofix inc within us domestic designs manufactures distributes stimulation orthopedic biologics products domestic uses direct distributor sales representatives sell spine orthopedic products hospitals doctors healthcare providers us market spinal implants biologics previously referred “blackstone” spinal implants biologics “spinal implants biologics” consists blackstone two subsidiaries blackstone gmbh goldstone gmbh spinal implants biologics specializes design development marketing spinal implant related hctp products spinal implants biologics distributes products network domestic international distributors sales representatives affiliates orthofix international nv notes consolidated financial statements cont breg inc “breg” based vista california designs manufactures distributes orthopedic products postoperative reconstruction rehabilitative patient use sells products network domestic international distributors sales representatives affiliates international “international” consists international operations located europe mexico brazil puerto rico well independent distributors located outside us international uses direct distributor sales representatives sell spine orthopedics sports medicine vascular products hospitals doctors healthcare providers group activities group activities comprised operating expenses orthofix international nv us holding company subsidiary orthofix holdings inc tables present information reportable segment 1 includes 57 million research development expense collaborative arrangements 36 million restructuring charges year ended december 31 2009 2 includes impairment charges goodwill certain intangible assets 2895 million 200 million years ended december 31 2008 2007 respectively 3 includes increase reserve obsolescence 109 million year ended december 31 2008 due reduced projections revenue distributor terminations new products replacement one product successor product orthofix international nv notes consolidated financial statements cont following table presents identifiable assets segment excluding intercompany balances investments consolidated subsidiaries following table presents depreciation amortization income tax expense benefit income expense segment capital expenditures tangible intangible assets segment follows orthofix international nv notes consolidated financial statements cont geographical information analysis net sales geographic destination sales netherlands antilles analysis property plant equipment investments geographic area longlived assets netherlands antilles orthofix international nv notes consolidated financial statements cont 14 income taxes income loss provision benefit income taxes consisted orthofix international nv notes consolidated financial statements cont provision benefit income taxes accompanying consolidated statements operations consists following tax effects significant temporary differences comprise deferred tax assets liabilities assets follows valuation allowance december 31 2009 2008 172 million 144 million respectively net increase valuation allowance 28 million year relates current period foreign losses benefitted valuation allowance attributable net operating loss carryforwards certain foreign jurisdictions benefit dependent upon generation future taxable income location assessing realizability deferred tax assets management considers whether likely portion deferred tax assets realized ultimate realization deferred tax assets dependent upon generation future taxable income periods temporary differences become deductible management considers scheduled reversal deferred tax liabilities projected future taxable income tax planning strategies making assessment based upon level historical taxable income projections future taxable income periods deferred tax assets deductible management believes likely company realize benefits deductible differences net existing valuation allowances december 31 2009 company tax net operating loss carryforwards various taxing jurisdictions approximately 673 million majority losses related company’s netherlands operations expiring various amounts tax years beginning 2010 company provided valuation allowance significant portion net operating loss carryforwards since believe deferred tax asset realized prior expiration orthofix international nv notes consolidated financial statements cont rate reconciliation presented based us federal income tax rate rather parent company’s country domicile tax rate management believes given large proportion taxable income earned united states disclosure meaningful company’s gross unrecognized tax benefit 04 million 07 million years ended december 31 2009 2008 respectively company recognizes potential accrued interest penalties related unrecognized tax benefits within global operations income tax expenses company approximately 04 million 04 million accrued payment interest penalties december 31 2009 2008 respectively entire amount unrecognized tax benefits including interest would favorably impact company’s effective tax rate recognized december 31 2009 company expect amount unrecognized tax benefits change significantly next twelve months reconciliation gross unrecognized tax benefits excluding interest years ended december 31 2009 december 31 2008 follows company files consolidated income tax return us federal jurisdiction numerous consolidated separate income tax returns many state foreign jurisdictions statute limitations respect federal tax authorities closed years prior december 31 2006 statute limitations various state tax filings closed instances years prior december 31 2006 certain state tax statutes open years 1997 forward due current examinations statute limitations respect major foreign tax filing jurisdictions closed years prior december 31 2005 orthofix international nv notes consolidated financial statements cont company’s intention reinvest total amount unremitted foreign earnings residing outside netherland antilles local jurisdiction extent generated available repatriate earnings taxeffective company provided tax expense 2761 million unremitted earnings foreign subsidiaries practicable determine amounts net additional income tax may payable earnings repatriated 15 related parties following related party balances transactions three years ended december 31 2009 among company companies directors andor executive officers interest reflected consolidated financial statements company buys components related av impulse® system buys laryngeal mask companies former board member beneficial minority interest orthopro inc independent distributor breg inc owned son one company’s current board members company sells bracing products orthorx entity company minority interest equity ownership accounted cost method 16 contingencies litigation july 23 2007 subsidiary blackstone medical inc “blackstone” received subpoena issued department health human services office inspector general authority federal healthcare antikickback false claims statutes subpoena seeks documents period january 1 2000 july 31 2006 prior blackstone’s acquisition company believes subpoena concerns compensation physician consultants related matters september 17 2007 company submitted claim indemnification escrow fund established connection agreement plan merger company new era medical corp blackstone dated august 4 2006 “blackstone merger agreement” losses us resulting matter company’s indemnification rights blackstone merger agreement described company subsequently notified legal counsel former shareholders representative former shareholders blackstone objected indemnification claim intends contest accordance terms blackstone merger agreement january 7 2008 company received federal grand jury subpoena us attorney’s office district massachusetts subpoena seeks documents company period january 1 2000 july 15 2007 company believes subpoena concerns compensation physician consultants related matters believes associated department health human services office inspector general’s investigation matters september 18 2008 company submitted claim indemnification escrow fund established connection blackstone merger agreement losses company resulting matter april 29 2009 counsel company received hipaa subpoena issued us department justice subpoena seeks documents company period january 1 2000 july 15 2007 company believes subpoena concerns compensation physician consultants related matters believes associated department health human services office inspector general’s investigation matters well january 7 2008 federal grand jury subpoena february 25 2010 counsel orthofix inc blackstone sent us attorney’s office district massachusetts tolling agreement “tolling agreement” executed orthofix inc blackstone extends agreement tolling statute limitations applicable criminal civil administrative proceedings government might later initiate upon execution us attorneys office district massachusetts tolling agreement extend period tolling statute limitations include period december 1 2008 including march 31 2010 orthofix international nv notes consolidated financial statements cont december 5 2008 company obtained copy qui tam complaint filed susan hutcheson philip brown blackstone company us district court district massachusetts qui tam action civil lawsuit brought individual alleged violation federal statute us department justice right intervene take prosecution lawsuit option november 21 2008 us department justice filed notice nonintervention case complaint served blackstone march 24 2009 counsel plaintiffs filed amended complaint june 4 2009 amended complaint sets forth cause action blackstone false claims act alleged inappropriate payments items value conferred physician consultants orthofix named defendant amended complaint company believes lawsuit related matters described involving department health human services office inspector general us attorney’s office district massachusetts us department justice company intends defend vigorously lawsuit september 18 2008 informed existence lawsuit representatives us department justice prior unsealing complaint unsealed court november 24 2008 company submitted claim indemnification escrow fund established connection blackstone merger agreement losses us resulting matter september 27 2007 blackstone received federal grand jury subpoena issued us attorney’s office district nevada “usaonevada subpoena” subpoena seeks documents period january 1999 date issuance subpoena company believes subpoena concerns payments gifts made blackstone certain physicians february 29 2008 blackstone received civil investigative demand “cid” massachusetts attorney general’s office public protection advocacy bureau healthcare division cid seeks documents period march 2004 date issuance cid company believes cid concerns blackstone’s financial relationships certain physicians related matters ohio attorney general’s office health care fraud section issued criminal subpoena dated august 8 2008 orthofix inc “ohio ag subpoena” ohio ag subpoena seeks documents period january 1 2000 date issuance subpoena company believes ohio ag subpoena arises government investigation concerns compensation physician consultants related matters september 18 2008 company submitted claim indemnification escrow fund established connection blackstone merger agreement losses us resulting usaonevada subpoena massachusetts cid ohio ag subpoena order entered january 4 2007 us district court eastern district arkansas unsealed qui tam complaint captioned thomas v chan et al 406cv00465jlh filed dr patrick chan blackstone defendants including another device manufacturer amended complaint thomas action alleges causes action false claims act alleged inappropriate payments items value conferred dr chan another provider company believes blackstone meritorious defenses claims alleged company intends defend vigorously lawsuit september 17 2007 company submitted claim indemnification escrow fund established connection blackstone merger agreement losses us resulting matter company subsequently notified legal counsel former shareholders representative former shareholders blackstone objected indemnification claim intends contest accordance terms blackstone merger agreement orthofix international nv notes consolidated financial statements cont blackstone merger agreement former shareholders blackstone agreed indemnify company breaches representations warranties agreement well certain specified matters postclosing indemnification obligations former blackstone shareholders limited cumulative aggregate amount 666 million closing escrow fund established pursuant terms blackstone merger agreement fund timely submitted indemnification claims initial amount escrow fund 500 million december 31 2009 escrow fund subsequently accrued interest contained 520 million company also entitled seek direct personal recourse certain principal shareholders blackstone monies deposit escrow fund paid released subject pending unresolved indemnification claims period six years closing date merger amount equal 666 million less indemnification claims previously paid addition foregoing claims company submitted claims indemnification escrow fund losses resulted may result certain civil actions filed blackstone well certain claims blackstone alleging rights payments blackstone stock options reflected blackstone’s corporate ledger time acquisition company shares stock options subject claims improperly diluted blackstone date representative former shareholders blackstone objected approximately 15 million claims escrow fund certain claims remaining pending company unable predict outcome escrow claims described preceding paragraphs estimate amount may ultimately returned company escrow fund assurance losses company matters exceed amount escrow fund expenses incurred company relating matters recorded escrow receivable company’s financial statements extent company believes among things collection claims reasonably assured expenditures related matters company believes collection doubtful recognized earnings incurred december 31 2009 december 31 2008 included prepaid expenses current assets approximately 129 million 83 million respectively escrow receivable balances related blackstone matters described amounts include among things attorneys’ fees costs related government investigations manifested subpoenas described stock optionrelated claims described costs related quitam action described reimbursement claims contested representative former shareholders blackstone mitigate risk reimbursement claims collected company records reserve escrow receivable period reimbursement claims recognized 2009 company received approximately 10 million proceeds escrow fund represented portion escrow claims previously submitted company effective october 29 2007 blackstone entered settlement agreement patent infringement lawsuit brought certain affiliates medtronic sofamor danek usa inc lawsuit medtronic plaintiffs alleged exclusive licensees certain us patents blackstone’s making selling offering sale using blackstone anterior cervical plate 3º anterior cervical plate hallmark anterior cervical plate reliant cervical plate pillar peek construx mini peek vbr system products within us willfully infringed subject patents blackstone denied infringement asserted patents invalid settlement agreement expected material impact company’s consolidated financial position results operations cash flows july 20 2007 company submitted claim indemnification escrow fund established connection blackstone merger agreement losses us resulting matter company subsequently notified legal counsel former shareholders representative former shareholders blackstone objected indemnification claim intends contest accordance terms blackstone merger agreement orthofix international nv notes consolidated financial statements cont april 10 2009 company received hipaa subpoena “hipaa subpoena” issued us attorney’s office district massachusetts “boston usao” subpoena sought documents concerning among things company’s promotion marketing bone growth stimulator devices boston usao issued supplemental subpoena matter dated july 23 2009 requiring testimony office later excused performance july 23 2009 subpoena indefinitely boston usao also issued supplemental subpoenas matter dated september 21 2009 december 16 2009 respectively seeking documents subpoenas seek documents period january 1 1995 date respective subpoenas document production response subpoenas ongoing december 21 2009 boston usao provided company grand jury subpoenas testimony certain current employees connection ongoing investigation company intends cooperate government’s requests meetings company attorneys regarding matter boston usao informed company investigating possible criminal civil violations federal law related company’s promotion marketing bone growth stimulator devices april 14 2009 company obtained copy qui tam complaint filed jeffrey j bierman us district court district massachusetts orthofix inc company companies allegedly manufactured bone growth stimulation devices including orthologic corp djo incorporated reable therapeutics inc blackstone group lp biomet inc ebi lp ebi holdings inc ebi medical systems inc bioelectron inc lbv acquisition inc smith nephew inc order entered march 24 2009 court unsealed case amended complaint alleges various causes action federal false claims act state city false claims acts premised contention defendants improperly promoted sale opposed rental bone growth stimulation devices amended complaint also includes claims defendants among things allegedly misleading physicians purportedly causing file false claims allegedly violating antikickback act providing free products physicians waiving patients’ insurance copayments providing inducements independent sales agents generate business company believes lawsuit related matter described involving hipaa subpoena company orthofix inc served september 8 2009 company intends defend vigorously lawsuit july 2 2009 company obtained copy qui tam complaint filed marcus laughlin pending us district court district massachusetts company complaint consolidated complaint described immediately preceding paragraph unsealed june 30 2009 complaint alleges violations false claims act fraudulent billing illegal kickbacks wrongful termination based allegations company promoted sale rather rental bone growth stimulation devices systematically overcharged products provided physicians kickbacks form free units referral fees fitting fees defendant competitors discussed together strategies encourage higher government pricing products complaint also alleges tricare reimbursing company cervical stim® product without approval amended complaint alleges conspiracy violations sherman antitrust act connection alleged conduct company served complaint september 9 2009 company intends defend vigorously lawsuit june 18 2008 lawsuit company filed unpaid royalties agreement terminated company 2007 company counterclaimed overpayment commissions previously paid agreement plaintiffs seeking approximately 37 million company’s counterclaim exceeds amount outcome matter uncertain orthofix international nv notes consolidated financial statements cont subsidiary breg inc engaged manufacturing sale local infusion pumps pain management 1999 2008 product line divested 2008 present numerous product liability cases filed united states alleging local anesthetic dispensed infusion pumps inside joint causes rare arthritic condition called “chondrolysis” company believes meritorious defenses exist claims breg inc intends vigorously defend cases company cannot predict outcome proceedings claims made company subsidiaries described preceding paragraphs assurance ultimate resolution claim material adverse impact consolidated financial position results operations cash flows addition foregoing normal course business company involved various lawsuits time may subject certain contingencies extent losses related contingencies probable estimable company provides appropriate amounts accompanying financial statements concentrations credit risk financial instruments potentially subject company concentrations credit risk primarily cash investments accounts receivable cash investments primarily money market funds deposited major financial center banks concentrations credit risk respect accounts receivable limited due large number entities comprising company’s customer base company performs ongoing credit evaluations customers generally require collateral certain customers rely third party healthcare payers private insurance companies governments make payments company behalf accounts receivable countries government funds medical spending primarily located north africa middle east south america asia europe company considered special situations establishing allowances potentially uncollectible accounts receivable countries india egypt turkey company also records reserves bad debts customers based variety factors including length time receivables past due financial condition customer macroeconomic conditions historical experiences company maintains reserves potential credit losses within management’s expectations company sells via direct sales force distributors customers accounted 5 net sales 2009 2008 2007 17 pensions deferred compensation orthofix inc sponsors defined contribution plan “orthofix inc 401k plan” covering substantially full time employees orthofix inc 401k plan allows participants contribute 15 pretax compensation subject certain limitations company matching 100 first 2 employee’s base compensation 50 next 4 employee’s base compensation contributed orthofix inc 401k plan breg also sponsors 401k plan “breg 401k plan” breg 401k plan allows participants contribute 100 compensation subject certain limitations company matching 100 first 1000 deferred blackstone also sponsors 401k plan “blackstone 401k plan” blackstone 401k plan allows participants contribute 75 compensation subject certain limitations company matching 50 first 6 employee’s compensation deferred 2010 blackstone 401k plan merged orthofix inc 401k plan years ended december 31 2009 2008 2007 expenses incurred relating 401k plans including matching contributions approximately 19 million 18 million 15 million respectively orthofix international nv notes consolidated financial statements cont company operates defined contribution pension plans international employees described meeting minimum service requirements company’s expenses pension contributions 2009 2008 2007 approximately 10 million year italian law orthofix srl accrues behalf employees deferred compensation paid termination employment year’s provision deferred compensation based percentage employee’s current annual remuneration plus annual charge deferred compensation also accrued leaving indemnity payable agents case dismissal regulated national contract equal approximately 35 total commissions earned company’s expense deferred compensation 2009 2008 2007 approximately 06 million 05 million 04 million respectively deferred compensation payments 06 million 05 million 03 million made 2009 2008 2007 respectively balance december 31 2009 2008 17 million represents amount would payable employees agents terminated employment date included longterm liabilities orthofix deferred compensation plan “plan” administered board directors orthofix effective january 1 2007 amended restated effective january 1 2009 plan intended allow select group key management highly compensated employees orthofix defer receipt compensation would otherwise payable terms plan intended comply respects provisions code section 409a code section 457a plan employees orthofix subsidiaries eligible participate employee management highly compensated employee named board directors participant plan directors eligible participate plan effective january 1 2009 prohibited participation unless director performs services employee attributable tax purposes us subsidiary company eligible employee may elect enter salary deferral commitment andor director’s fees deferral commitment respect plan year submitting participation agreement plan administrator december 31 calendar year immediately preceding plan year eligible employee may elect enter bonus deferral commitment respect bonus compensation earned plan year submitting participation agreement plan administrator december 31 calendar year immediately preceding plan year deferral commitments stated percentage flat dollar amount allowed plan administrator participant’s participation agreement remain effect immediately succeeding plan year distributions made accordance requirements code section 409a orthofix international nv notes consolidated financial statements cont 18 sharebased compensation plans december 31 2009 company three stock option award plans one stock purchase plan described long term incentive plan 2004 long term incentive plan “2004 ltip plan” long term incentive plan originally adopted april 2004 ltip plan approved shareholders june 29 2004 20 million shares reserved issuance plan addition shares available future awards june 29 2004 prior plans ii become available future issuance upon expiration forfeiture june 29 2004 awards upon prior plans awards generally vest years service awards fully vesting within three years date grant employees either three five years date grant nonemployee directors awards form stock option restricted stock restricted share unit performance share unit award form determined board directors awards granted 2004 ltip plan expire later 10 years date grant june 20 2007 company’s shareholders approved amendments restatement 2004 ltip plan providing following major changes increase number shares available grant 20 million shares 28 million shares specific allowance grants restricted stock awards provision fixed awards nonemployee directors date first election board subsequent reelection june 19 2008 company’s shareholders approved amendments 2004 ltip plan increase number shares available grant 28 million shares 31 million shares increase annual grant nonemployee directors 3000 shares 5000 shares limit future number shares may awarded plan full value awards 100000 shares december 31 2009 2948798 options outstanding 2004 ltip plan 1501982 exercisable addition 62161 shares restricted stock outstanding none vested staff share option plan staff stock option plan “staff plan” fixed stock option plan adopted april 1992 staff plan company granted options employees estimated fair market value options date grant options generally vest based years service options fully vested within five years date grant options granted staff plan expire ten years date grant options left granted staff plan december 31 2009 128825 options outstanding exercisable staff plan performance accelerated stock option inducement grants december 30 2003 company granted inducement stock option awards two key executives breg conjunction acquisition breg exercise price fixed 3800 per share november 20 2003 company announced entered agreement acquire breg inducement grants included servicebased performancebased vesting provisions inducement grants became 100 vested fourth anniversary grant date subject certain exercisability limitations following vesting december 30 2007 original inducement grants limited executives’ ability exercise specific numbers options years 2008 2012 prior options fully vesting inducement executives extend term employment agreements one year november 2007 company entered amended award agreements two executives amended agreements change vesting date options provided options granted thereunder exercisable fixed period beginning january 1 2009 ending december 31 2009 december 2008 order meet certain requirements code section 409a treasury regulations promulgated thereunder fulfill company’s desire extend executives’ terms employment company executives entered second amended restated award agreements second amended agreements provided election executives respective periods exercise options bradley mason elected exercise 50000 options following periods april 1 2010 december 31 2010 january 1 2011 december 31 2011 january 1 2012 december 31 2012 william hopson elected exercise 50000 options period january 1 2011 december 31 2011 subject certain termination employment provisions notwithstanding provisions second amended agreements portion options exercised respective exercise periods exercisable thereafter lapse cancelled december 31 2009 200000 options outstanding exercisable inducement grants orthofix international nv notes consolidated financial statements cont inducement stock option agreement years ended december 31 2009 2008 50000 stock options 150000 stock options respectively granted pursuant standalone inducement stock option agreements terms substantially grants made company’s amended restated 2004 long term incentive plan stock option grants vest onethird increments annually stock purchase plan orthofix international nv amended restated stock purchase plan “stock purchase plan” provides issuance shares company’s common stock eligible employees directors company subsidiaries elect participate plan acquire shares common stock payroll deductions including executive officers june 20 2008 company’s shareholders approved amendment restatement plan providing following major change allow officers directors orthofix inc participate plan basis employees ii provide company assume adopt plan amended lieu orthofix inc acting sponsor plan iii allow nonemployee directors company participate plan iv increase 500000 shares maximum number shares available issuance plan v provide determination value common stock plan determined either first last day plan year whichever date renders lower value changes generally effective plan year starting january 1 2009 june 2009 company’s shareholders approved amendment stock purchase plan increase number shares available grant 950000 shares 1400000 shares purchase period eligible employees may designate 1 25 compensation deducted purchase common stock plan 25 employees working north america south america asia 15 employees working europe eligible directors designated percentage amount equal annual director compensation paid cash current plan year purchase price shares plan equal 85 fair market value first day plan year calendar year running january 1st december 31st lower last day plan year aggregate number shares reserved issuance employee stock purchase plan 1400000 shares december 31 2009 429688 shares issued stock purchase plan orthofix international nv notes consolidated financial statements cont sharebased compensation december 31 2009 unamortized compensation expense relating options granted expected recognized 76 million amount expected recognized weighted average period 124 years following table shows detail sharebased compensation line item consolidated statements operations years ended december 31 2009 2008 2007 assumptions years company chosen use “shortcut method” determine pool windfall tax benefits adoption asc topic 718 year ended december 31 2008 company granted employees 83434 shares restricted stock vest various dates december 2011 compensation expense represents fair value stock measured market price date grant less estimated forfeitures recognized straightline basis vesting period unamortized compensation expense related restricted stock amounted 14 million december 31 2009 shares restricted stock granted 2009 stock option activity summaries status company’s stock option plans december 31 2009 2008 changes year ended december 31 2009 presented orthofix international nv notes consolidated financial statements cont options granted 2009 less market value weighted average remaining contractual life exercisable options 598 years december 31 2009 total intrinsic value options exercised 67000 88000 146 million years ended december 31 2009 2008 2007 respectively aggregate intrinsic value options outstanding options exercisable december 31 2009 calculated difference exercise price underlying options market price company’s common stock shares exercise prices lower 3093 closing price company’s stock december 31 2009 aggregate intrinsic value options outstanding 109 million 05 million 381 million years ended december 31 2009 2008 2007 respectively aggregate intrinsic value options exercisable 19 million 10000 194 million years ended december 31 2009 2008 2007 respectively restricted stock summary status restricted stock december 31 2009 2008 changes year ended december 31 2009 presented orthofix international nv notes consolidated financial statements cont 19 earnings per share three years period ended december 31 2009 adjustments net income loss purposes calculating basic diluted net income loss available common shareholders following reconciliation weighted average shares used basic diluted net income loss per common share computations year ended december 31 2008 effects potentially dilutive options excluded computation diluted earnings per share company net loss therefore effect would antidilutive options purchase shares common stock exercise prices excess average market price common shares included computation diluted earnings per share 3220357 outstanding options included diluted earnings per share computation fiscal year ended december 31 2009 inclusion options antidilutive 309651 outstanding options included diluted earnings per share computation fiscal year ended december 31 2007 inclusion options antidilutive 20 restructuring charges fourth quarter 2008 part company’s strategic plan strengthen business company initiated restructuring plan improve operations reduce costs blackstone plan involves consolidation substantially blackstone’s operations previously conducted wayne nj springfield facility housing spine stimulation us orthopedics business dallas tx area company plans complete restructuring consolidation second quarter 2010 time company anticipates total restructuring expense 36 million year ended december 31 2009 company recorded net restructuring charges 36 million primarily related severance costs accelerated depreciation costs related shortening lives assets disposed restructuring costs recorded general administrative expense classified spinal implants biologics segment orthofix international nv notes consolidated financial statements cont following table presents changes restructuring liability activity discussed included within current liabilities company’s consolidated balance sheets december 31 2009 december 31 2008 21 quarterly financial data unaudited us dollars thousands except per share data sum per share earnings quarter may equal earnings per share year due change average share calculations accordance prescribed reporting requirements orthofix international nv schedule 1 condensed financial information registrant orthofix international nv condensed balance sheets see accompanying notes condensed financial statements s1 orthofix international nv schedule 1 condensed financial information registrant orthofix international nv condensed statements operations see accompanying notes condensed financial statements s2 orthofix international nv schedule 1 condensed financial information registrant orthofix international nv condensed statement cash flows see accompanying notes condensed financial statements s3 orthofix international nv schedule 1 condensed financial information registrant orthofix international nv notes condensed financial statements 1 background basis presentation condensed parent company financial statements prepared accordance rule 1204 schedule 1 regulation sx restricted net assets orthofix holdings inc subsidiaries exceed 25 consolidated net assets orthofix international nv subsidiaries “company” information read conjunction company’s consolidated financial statements included elsewhere filing 2 restricted net assets subsidiaries certain company’s subsidiaries restrictions effective date september 22 2006 ability pay dividends make intercompany loans advances pursuant financing arrangements amount restricted net assets company’s subsidiaries held december 31 2009 2008 approximately 1430 million 1113 million respectively restrictions net assets orthofix holdings inc subsidiaries 3 commitments contingencies longterm obligations discussion company’s commitments contingencies long term obligations senior secured credit facility see note 9 note 12 note 16 company’s consolidated financial statements 4 dividends subsidiaries cash dividends received orthofix international nv consolidated subsidiaries accounted equity method 132 million 111 million 220 million years ended december 31 2009 2008 2007 respectively s4 orthofix international nv schedule 2 valuation qualifying accounts years ended december 31 2009 2008 2007 1 year ended december 31 2008 due reduced projections revenue distributor terminations new products replacement one product successor product company changed estimates regarding inventory allowance spinal implants biologics primarily based estimated net realizable value using assumptions future demand market conditions change estimate resulted increase reserve obsolescence approximately 109 million s5item 15 exhibits financial statement schedules documents filed part report form 10k following documents filed part report form 10k 1 financial statements see “index consolidated financial statements” page form 10k 2 financial statement schedules see “index consolidated financial statements” page form 10k 3 exhibits exhibit number description 21 agreement plan merger dated august 4 2006 among orthofix international nv orthofix holdings inc new era medical limited blackstone medical inc william g lyons iii equityholders’ representative filed exhibit company’s current report form 8k filed august 7 2006 incorporated herein reference 22 asset purchase agreement dated march 8 2010 tyco healthcare group lp dba covidien ag mallinckrodt brasilltda kendall de mexico sa de cv novamedix limited novamedix distribution limited novamedix services limited promeca sa de cv orthofix brasil orthofixsrl orthofix sa intavent orthofix limited breg mexico de ri de cv implantes sistemas medicos inc filed exhibit company’s current report form 8k filed march 9 2010 incorporated herein reference 31 certificate incorporation company filed exhibit company’s annual report form 20f dated june 29 2001 incorporated herein reference 32 articles association company amended 101 credit agreement dated august 30 2010 among orthofix holdings inc orthofix international nv certain domestic subsidiaries orthofix international nv several banks financial institutions may time become parties thereunder jpmorgan chase na filed exhibit company’s current report form 8k filed august 31 2010 incorporated herein reference 102 first amendment credit agreement dated may 4 2011 among orthofix holdings inc delaware corporation orthofix international nv “orthofix international” netherlands antilles corporation certain domestic direct indirect subsidiaries orthofix international jpmorgan chase bank na administrative agent certain lender parties thereto filed exhibit company’s current report form 8k filed may 5 2011 incorporated herein reference 103 matrix commercialization collaboration agreement entered july 24 2008 orthofix holdings inc musculoskeletal transplant foundation filed exhibit company’s annual report form 10k fiscal year ended december 31 2009 incorporated herein reference 104 amendment 1 matrix commercialization collaboration agreement dated december 15 2010 musculoskeletal transplant foundation inc orthofix holdings inc filed exhibit company’s annual report form 10k fiscal year ended december 31 2010 incorporated herein reference 105 amendment 2 matrix commercialization collaboration agreement dated january 9 2012 musculoskeletal transplant foundation inc orthofix holdings inc 106 orthofix international nv amended restated stock purchase plan amended filed exhibit company’s quarterly report form 10q quarter ended march 31 2011 incorporated herein reference 107 orthofix international nv amended restated 2004 long term incentive plan filed exhibit company’s quarterly report form 10q quarter ended june 30 2009 incorporated herein reference 108 orthofix international nv staff share option plan amended april 22 2003 filed exhibit company’s annual report form 10k fiscal year ended december 31 2007 incorporated herein reference 109 amended restated orthofix deferred compensation plan filed exhibit company’s current report form 8k filed january 7 2009 incorporated herein reference 1010 form employee nonqualified stock option agreement post2008 grants filed exhibit company’s current report form 8k filed july 7 2009 incorporated herein reference 1011 form nonemployee director nonqualified stock option agreement post2008 grants filed exhibit company’s current report form 8k filed july 7 2009 incorporated herein reference 1012 form nonqualified stock option agreement orthofix international nv amended restated 2004 long term incentive plan pre2009 grants vesting 3 years filed exhibit company’s current report form 8k filed june 20 2008 incorporated herein reference 1013 form nonqualified stock option agreement orthofix international nv amended restated 2004 long term incentive plan pre2009 grants 3 year cliff vesting filed exhibit company’s current report form 8k filed june 20 2008 incorporated herein reference 1014 form restricted stock grant agreement orthofix international nv amended restated 2004 long term incentive plan pre2011 grants vesting 3 years filed exhibit company’s current report form 8k filed june 20 2008 incorporated herein reference 1015 form restricted stock grant agreement orthofix international nv amended restated 2004 long term incentive plan post2010 grants vesting 3 years filed exhibit company’s annual report form 10k fiscal year ended december 31 2010 incorporated herein reference 1016 form restricted stock grant agreement orthofix international nv amended restated 2004 long term incentive plan 3 year cliff vesting filed exhibit company’s current report form 8k filed june 20 2008 incorporated herein reference 1017 inducement grant nonqualified stock option agreement orthofix international nv robert vaters filed exhibit current report form 8k orthofix international nv dated september 10 2008 incorporated herein reference 1018 inducement grant nonqualified stock option agreement dated april 1 2011 orthofix international nv vicente trelles filed exhibit company’s quarterly report form 10q quarter ended march 31 2011 incorporated herein reference 1019 second amended restated performance accelerated stock options agreement orthofix international nv bradley r mason dated october 14 2008 filed exhibit company’s current report form 8k filed october 15 2008 incorporated herein reference 1020 nonqualified stock option agreement orthofix international nv bradley r mason dated october 14 2008 filed exhibit company’s current report form 8k filed october 15 2008 incorporated herein reference 1021 form award letter regarding special retention cash bonus award filed exhibit company’s current report form 8ka filed february 23 2011 incorporated herein reference 1022 description director compensation policy filed exhibit company’s quarterly report form 10q quarter ended march 31 2011 incorporated herein reference 1023 form indemnity agreement filed exhibit company’s annual report form 10k fiscal year ended december 31 2008 incorporated herein reference 1024 amended restated employment agreement entered effective july 1 2009 orthofix inc alan w milinazzo filed exhibit company’s current report form 8k filed july 7 2009 incorporated herein reference 1025 amendment 1 amended restated employment agreement dated july 30 2009 orthofix inc alan w milinazzo filed exhibit company’s quarterly report form 10q quarter ended september 30 2009 incorporated herein reference 1026 letter agreement dated june 15 2011 orthofix inc orthofix international nv alan w milinazzo filed exhibit company’s quarterly report current report form 8k filed june 16 2011 incorporated herein reference 1027 amended restated employment agreement entered effective july 28 2010 orthofix inc robert vaters filed exhibit company’s current report form 8k filed august 3 2010 incorporated herein reference 1028 addendum amended restated employment agreement entered march 9 2011 orthofix inc robert vaters filed exhibit company’s quarterly report current report form 8k filed march 15 2011 incorporated herein reference 1029 amended restated employment agreement dated june 15 2011 effective august 1 2011 orthofix inc orthofix international nv robert vaters filed exhibit company’s quarterly report current report form 8k filed june 16 2011 incorporated herein reference 1030 amended restated employment agreement entered effective july 1 2009 orthofix inc michael finegan filed exhibit company’s current report form 8k filed july 7 2009 incorporated herein reference 1031 amendment 1 amended restated employment agreement dated august 4 2009 orthofix inc michael finegan filed exhibit company’s quarterly report form 10q quarter ended september 30 2009 incorporated herein reference 1032 amendment 2 amended restated employment agreement dated october 1 2011 orthofix inc michael finegan filed exhibit company’s current report form 8k filed october 4 2011 incorporated herein reference 1033 amended restate employment agreement entered february 11 2011 breg inc brad lee filed exhibit company’s annual report form 10k fiscal year ended december 31 2010 incorporated herein reference 1034 employment agreement entered december 9 2010 orthofix inc jeffrey schumm filed exhibit company’s annual report form 10k fiscal year ended december 31 2010 incorporated herein reference 1035 employment agreement entered march 2 2011 orthofix inc brian mccollum filed exhibit company’s current report form 8k filed march 7 2011 incorporated herein reference 1036 employment agreement entered april 1 2011 orthofix inc vicente trelles filed exhibit company’s quarterly report form 10q quarter ended march 31 2011 incorporated herein reference 1037 employment agreement entered october 1 2011 orthofix inc bryan mcmillan filed exhibit company’s quarterly report form 10q quarter ended september 30 2011 incorporated herein reference 1038 amended restated employment agreement entered july 28 2010 orthofix inc michael simpson filed exhibit company’s current report form 8k filed august 3 2010 incorporated herein reference 1039 separation letter agreement dated february 7 2011 orthofix inc michael simpson filed exhibit company’s current report form 8k filed february 10 2011 incorporated herein reference 1040 amended restated employment agreement entered july 1 2009 orthofix inc eric brown filed exhibit company’s annual report form 10k fiscal year ended december 31 2009 incorporated herein reference 1041 separation letter agreement dated january 10 2011 orthofix inc eric brown filed exhibit company’s current report form 8k filed january 14 2011 incorporated herein reference 1042 form amendment stock option agreements alan w milinazzo robert vaters bradley r mason michael finegan michael simpson filed exhibit company’s current report form 8k filed july 7 2009 incorporated herein reference 211 list subsidiaries 231 consent independent registered public accounting firm 311 rule 13a14a15d14a certification chief executive officer 312 rule 13a14a15d14a certification chief financial officer 321 section 1350 certification chief executive officer 322 section 1350 certification chief financial officer 101 following financial statements orthofix international nv form 10k year ended december 31 2011 filed february 29 2012 formatted xbrl consolidated balance sheets ii consolidated statements operations iii consolidated statements changes shareholders’ equity comprehensive income loss iv consolidated statements cash flows v notes consolidated financial statements filed herewith certain confidential portions exhibit omitted means redacting portion text exhibit filed separately secretary commission without redactions pursuant application requesting confidential treatment securities exchange act 1934 exhibit deemed “filed” purposes section 18 securities exchange act 1934 15 usc 78r otherwise subject liability section signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated name title date robert vaters president chief executive officer february 29 2012 robert vaters director principal executive officer brian mccollum senior vice president finance chief february 29 2012 brian mccollum financial officer principal financial accounting officer james f gero chairman board directors february 29 2012 james f gero walter von wartburg director february 29 2012 walter von wartburg guy jordan director february 29 2012 guy jordan kenneth r weisshaar director february 29 2012 kenneth r weisshaar michael mainelli director february 29 2012 michael mainelli alan w milinazzo director february 29 2012 alan w milinazzo davey scoon director february 29 2012 davey scoon orthofix international nv index consolidated financial statements page index consolidated financial statements statement management’s responsibility financial statements management’s report internal control financial reporting reports independent registered public accounting firm consolidated balance sheets december 31 2011 2010 consolidated statements operations years ended december 31 2011 2010 2009 consolidated statements changes shareholders’ equity comprehensive income loss years ended december 31 2011 2010 2009 consolidated statements cash flows years ended december 31 2011 2010 2009 notes consolidated financial statements schedule 1condensed financial information registrant orthofix international nv s1 schedule 2valuation qualifying accounts s5 schedules provision made applicable accounting regulation securities exchange commission required related instructions inapplicable therefore omitted orthofix international nv statement management’s responsibility financial statements shareholders orthofix international nv management responsible preparation consolidated financial statements related information presented report consolidated financial statements include amounts based management’s estimates judgments prepared conformity accounting principles generally accepted united states financial information report shareholders consistent consolidated financial statements company maintains accounting internal control systems provide reasonable assurance reasonable cost assets safeguarded loss unauthorized use disposition financial records reliable preparing financial statements maintaining accountability assets systems augmented written policies organizational structure providing division responsibilities careful selection training qualified personnel company engaged ernst young llp independent registered public accountants audit render opinion consolidated financial statements accordance auditing standards public company accounting oversight board united states standards include assessment systems internal controls test transactions extent considered necessary support opinion board directors audit committee consisting solely outside directors company meets periodically management independent registered public accountants ensure meeting responsibilities discuss matters concerning internal controls financial reporting ernst young llp full free access audit committee james f gero chairman board directors robert vaters president chief executive officer director brian mccollum senior vice president finance chief financial officer orthofix international nv management’s report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting term defined rule 13a15f exchange act company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements internal control financial reporting designed provide reasonable assurance company’s management board directors regarding preparation reliable financial statements external purposes accordance generally accepted accounting principles internal control financial reporting includes selfmonitoring mechanisms actions taken correct deficiencies identified inherent limitations internal control matter well designed misstatements may occur prevented detected accordingly even effective internal control financial reporting provide reasonable assurance respect financial statement preparation evaluation effectiveness internal control financial reporting made specific date continued effectiveness future periods subject risks controls may become inadequate changes conditions degree compliance policies procedures may decline management conducted evaluation effectiveness company’s system internal control financial reporting december 31 2011 based framework set forth “internal controlintegrated framework” issued committee sponsoring organizations treadway commission based evaluation management concluded december 31 2011 company’s internal control financial reporting effective based specified criteria company’s internal control financial reporting audited company’s independent registered public accounting firm ernst young llp stated reports pages herein james f gero chairman board directors robert vaters president chief executive officer director brian mccollum senior vice president finance chief financial officer reports independent registered public accounting firm board directors shareholders orthofix international nv audited accompanying consolidated balance sheets orthofix international nv december 31 2011 2010 related consolidated statements operations changes shareholders’ equity comprehensive income loss cash flows three years period ended december 31 2011 audits also included financial statement schedules listed index item 15a financial statements schedules responsibility company’s management responsibility express opinion financial statements schedules based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position orthofix international nv december 31 2011 2010 consolidated results operations cash flows three years period ended december 31 2011 conformity us generally accepted accounting principles also opinion related financial statement schedules considered relation basic consolidated financial statements taken whole present fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states orthofix international nv’s internal control financial reporting december 31 2011 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated february 29 2012 expressed unqualified opinion thereon ernst young llp dallas texas february 29 2012 report independent registered public accounting firm board directors shareholders orthofix international nv audited orthofix international nv’s internal control financial reporting december 31 2011 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria orthofix international nv’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion orthofix international nv maintained material respects effective internal control financial reporting december 31 2011 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets orthofix international nv december 31 2011 2010 related consolidated statements operations changes shareholders’ equity comprehensive income loss cash flows three years period ended december 31 2011 orthofix international nv report dated february 29 2012 expressed unqualified opinion thereon ernst young llp dallas texas february 29 2012 orthofix international nv consolidated balance sheets december 31 2011 2010 accompanying notes form integral part consolidated financial statements orthofix international nv consolidated statements operations years ended december 31 2011 2010 2009 accompanying notes form integral part consolidated financial statements orthofix international nv consolidated statements changes shareholders’ equity comprehensive income loss years ended december 31 2011 2010 2009 accompanying notes form integral part consolidated financial statements orthofix international nv consolidated statements cash flows years ended december 31 2011 2010 2009 accompanying notes form integral part consolidated financial statements orthofix international nv notes consolidated financial statements description business orthofix international nv “company” diversified global medical device company focused developing delivering innovative repair regenerative technologies spine orthopedic markets company comprised three reportable segments spine orthopedics sports medicine supported corporate activities see note 12 description segment 1 summary significant accounting policies basis consolidation consolidated financial statements include financial statements company whollyowned majorityowned subsidiaries entities company control intercompany accounts transactions profits eliminated consolidated financial statements b use estimates preparation financial statements preparation financial statements conformity accounting principles generally accepted united states “us” requires management make estimates assumptions affect amounts reported financial statements accompanying notes ongoing basis company evaluates estimates including related resolution us government matters contractual allowances doubtful accounts inventories taxes sharedbased compensation potential goodwill intangible asset impairment actual results could differ estimates c foreign currency translation foreign currency denominated balance sheet accounts except shareholders’ equity translated year end exchange rates revenue expense items translated weighted average rates exchange prevailing year gains losses resulting translation foreign currency recorded accumulated comprehensive income component shareholders’ equity transactional foreign currency gains losses including generated intercompany operations included expense net 16 million loss 01 million loss 05 million loss years ended december 31 2011 2010 2009 respectively reporting currency reporting currency us dollar e cash equivalents company considers highly liquid investments original maturity three months less date purchase cash equivalents f restricted cash restricted cash consists cash held certain subsidiaries distribution transfer orthofix international nv “parent” subsidiaries parties credit facility described note 8 restricted senior secured credit facility restricts parent subsidiaries parties facilities access cash held orthofix holdings inc subsidiaries credit party subsidiaries access cash operational debt repayment purposes g market risk ordinary course business company exposed impact changes interest rates foreign currency fluctuations company’s objective limit impact movements earnings cash flows order achieve objective company seeks balance nondollar denominated income expenditures 2008 company executed interest rate swap agreement manage cash flow exposure generated interest rate fluctuations june 29 2010 company settled interest rate swap 2011 2010 2009 company made use foreign currency swap agreement manage cash flow exposure generated foreign currency fluctuations see note 9 additional information company generally require collateral trade receivables orthofix international nv notes consolidated financial statements h inventories valued lower cost estimated net realizable value provision excess obsolete items cost determined weightedaverage basis approximates firstin firstout “fifo” method valuation workinprocess finished products field inventory consignment inventory includes cost materials labor production field inventory represents immediately saleable finished products inventory possession company’s direct sales representatives consignment inventory represents immediately saleable finished products located third party customers distributors hospitals longlived assets including intangibles goodwill property plant equipment stated cost less accumulated depreciation costs include expenditures necessary place asset service including freight sales use taxes plant equipment also includes instrumentation held customers used company’s products depreciation computed straightline basis useful lives assets except land depreciated depreciation leasehold improvements computed shorter lease term useful life asset useful lives follows expenditures maintenance repairs minor renewals improvements extend lives respective assets expensed expenditures renewals improvements capitalized assets related accumulated depreciation adjusted property retirements disposals resulting gain loss included operations fully depreciated assets remain accounts retired service patents intangible assets recorded cost acquired part business combination estimated fair value assets primarily include patents technology agreements “developed technologies” trademarks distribution networks identifiable intangible assets considered definite lived amortized useful lives using method amortization reflects pattern economic benefit intangible assets consumed company’s weighted average amortization period developed technologies distribution networks 11 10 years respectively intangible longlived assets definite lives orthofix’s developed technologies distribution network assets tested impairment adverse conditions exist change circumstances occurred would indicate impairment change remaining useful life impairment indicator exists company tests intangible asset recoverability purposes recoverability test company groups intangible assets liabilities lowest level identifiable cash flows intangible asset generate cash flows independent assets liabilities carrying value intangible asset group exceeds undiscounted cash flows expected result use eventual disposition intangible asset group company write carrying value fair value period identified company generally calculates fair value intangible assets present value estimated future cash flows determining estimated future cash flows associated intangible assets company uses estimates assumptions future revenue contributions cost structures remaining useful lives asset group use alternative assumptions including estimated cash flows discount rates alternative estimated remaining useful lives could result different calculations impairment company tests goodwill certain indefinite lived trademarks least annually impairment company tests frequently indicators present changes circumstances suggest impairment may exist indicators include among others declines sales earnings cash flows development material adverse change business climate company assesses goodwill impairment reporting unit level defined operating segment one level operating segment referred component company identified three reporting units consistent company’s reporting segments spine orthopedics sports medicine see note 12 additional information 2011 company elected perform optional “step zero” qualitative assessment support fair value spine reporting unit whereby entity concludes likely fair value reporting unit less carrying amount would required perform twostep impairment test reporting unit 2011 company performed “step zero” qualitative assessment spine reporting unit noted impairments recorded performing annual impairment test 2011 2010 2009 performed fourth quarter frequently impairment indicators exist company utilized twostep approach prescribed orthopedics sports medicine reporting units 2011 reporting units 2010 2009 first step requires comparison reporting unit’s carrying value fair value respective unit see additional discussions carrying value exceeds fair value second step performed measure amount impairment loss impairments recorded 2010 2009 orthofix international nv notes consolidated financial statements cont carrying value order calculate respective carrying values company initially recorded goodwill based purchase price allocation performed time acquisition corporate assets liabilities directly relate reporting unit’s operations ascribed directly reporting unit corporate assets liabilities directly related specific reporting unit reporting unit benefits allocated based respective contribution measure reporting unit effective january 1 2011 company realigned reporting units consequently reallocated carrying value goodwill previous reporting units new reporting units based relative fair value new reporting units total enterprise value january 1 2011 fair value fair value reporting unit estimated entirely predominantly using income based approach based company’s new reporting units realigned effective january 1 2011 income approach utilizes discounted cash flow “dcf” estimates aftertax cash flows debt free basis discounted present value using riskadjusted discount rate company believes dcf generally provides meaningful fair value appropriately measures company’s income producing assets company may consider using cost approach generally believes appropriate given inability replicate value specific technologybased assets within reporting units circumstances dcf indicator fair value sufficiently conclusive support carrying value reporting unit measures provide appropriate indicator company may use market approach determination reporting unit’s fair value performing dcf calculation company required make assumptions amount timing future expected cash flows terminal value growth rates appropriate discount rates connection estimates company considers following · determination expected cash flows based company’s strategic plans longrange planning forecasts extent reasonably possible reflect anticipated changes economy industry revenue growth rates represent estimates based current forecasted market conditions profit margin assumptions projected reporting unit based historical margins current cost structure anticipated net cost reductions · terminal value growth rate used calculate value cash flows beyond last projected period dcf rate reflects company’s estimates stable perpetual growth reporting unit · discount rates based reporting unit’s riskadjusted weighted average cost capital using assumptions consistent publicly traded guideline companies operating within medical device industry well company specific risk factors reporting unit · market approach considered determination reporting unit’s fair value company considers market participant multiples earnings measures primarily earnings interest taxes depreciation amortization ebidta market based indicators fair value j investments company total investments held cost 03 million december 31 2010 represented minority interest ownership biowave corporation pain therapy company 2011 company assessed cost investment noted impairment carrying value recorded charge write investment biowave zero k derivative instruments company manages exposure fluctuating cash flows resulting changes interest rates foreign exchange within consolidated financial statements according hedging policy company may engage nonleveraged transactions involving various financial derivative instruments manage exposed positions policy requires company formally document relationship hedging instrument hedged item well riskmanagement objective strategy undertaking hedge transaction instruments designated cash flow hedge company formally assesses hedge’s inception ongoing basis whether derivative used hedging transaction effective offsetting changes cash flows hedged item whether derivative may expected remain effective future periods determined derivative ceased effective hedge company discontinue related hedge accounting prospectively determination would made 1 derivative longer effective offsetting changes cash flows hedged item 2 derivative expires sold terminated exercised 3 management determines designating derivative hedging instrument longer appropriate ineffective portions changes fair value cash flow hedges recognized earnings orthofix international nv notes consolidated financial statements cont company records derivatives either assets liabilities balance sheet respective fair values cash flow hedge effective portion derivative’s change fair value ie gains losses initially reported component comprehensive income net related taxes subsequently reclassified net earnings hedged exposure longer effective company utilizes cross currency swap manage foreign currency exposure related portion company’s intercompany receivable us dollar functional currency subsidiary denominated euro cross currency swap accounted cash flow hedge accordance asc topic 815 derivatives hedging “asc topic 815” see note 9 description types derivative instruments company utilizes l accumulated comprehensive income accumulated comprehensive income comprised foreign currency translation adjustments effective portion gain loss company’s crosscurrency swaps designated accounted cash flow hedge see note 9 components changes accumulated comprehensive income follows 1 cash generally remains permanently invested non us dollar denominated foreign subsidiaries deferred taxes recognized related foreign currency translation adjustment revenue recognition accounts receivable revenue generally recognized income period title passes products delivered subject fixed determinable fee collectability reasonably assured extent criteria met company accounts shipments consigned inventory recognizes revenue criteria met revenues exclude value added local taxes intercompany sales trade discounts shipping handling costs included cost sales royalty revenues recognized royalty earned stimulation certain bracing products prescribed physician company recognizes revenue product placed implanted accepted patient domestic spinal implant human cellular tissue based products “hctp products” revenues recognized product utilized confirming purchase order received hospital sales commercial customers including hospitals distributors revenues recognized time shipment unless contractual agreements specify title passes delivery revenues inventory delivered consignment recognized product used consignee 2008 company entered agreement musculoskeletal transplant foundation “mtf” develop commercialize trinity ® evolution ™ stem cellbased bone growth biologic matrix development process completed 2009 company mtf operated terms separate commercialization agreement terms 10year agreement mtf sourced tissue processed create bone growth matrix packaged delivered customer accordance orders received company exclusive global marketing rights trinity ® evolution ™ receives marketing fee mtf based total sales marketing fee recorded net basis within net sales january 10 2012 company announced reached agreement mtf codevelop commercialize new technology use bone grafting applications expand mtf’s trinity evolution processing capacity mtf company also extended initial term existing agreement additional five years company derives significant amount revenues us thirdparty payors including commercial insurance carriers health maintenance organizations preferred provider organizations governmental payors medicare amounts paid thirdparty payors generally based fixed allowable reimbursement rates revenues recorded expected preauthorized reimbursement rates net contractual allowances adjustments certain billings subject review thirdparty payors may subject adjustment orthofix international nv notes consolidated financial statements cont process estimating ultimate collection accounts receivable involves significant assumptions judgments historical collection payor reimbursement experience integral part estimation process related reserves doubtful accounts establishment contractual allowances accounts receivable analyzed quarterly basis assess adequacy reserves doubtful accounts contractual allowances revisions allowances doubtful accounts estimates recorded adjustment bad debt expense within sales marketing expenses revisions contractual allowances recorded adjustment net sales judgment management adequate allowances provided doubtful accounts contractual allowances estimates periodically tested actual collection experience n sale accounts receivable company generally sell receivables certain italian hospitals fourth quarter year estimate related fee provided throughout year interest expense trade accounts receivables sold without recourse removed balance sheet time sale sharebased compensation company recognizes sharebased compensation accordance asc topic 718 compensationstock compensation “asc topic 718” fair value stock options determined using blackscholes valuation model value recognized expense service period net estimated forfeitures expected term options granted estimated based number factors including vesting expiration terms award historical employee exercise behavior options currently outstanding options exercised expired expected volatility company’s common stock employee’s average length service riskfree interest rate determined based upon constant us treasury security rate contractual life approximates expected term option award management estimates expected volatility based historical volatility company’s stock compensation expense recognized equitybased awards net estimated forfeitures estimated based analysis actual option forfeitures p advertising costs company expenses advertising costs incurred advertising expense years ended december 31 2011 2010 2009 05 million 06 million 07 million respectively q research development costs expenditures research development expensed incurred expenditures related collaborative arrangements mtf expensed based terms related agreements r income taxes company subject income taxes us foreign jurisdictions uses estimates determining provision income taxes company accounts income taxes using asset liability method accounting reporting income taxes method deferred tax assets liabilities recognized based temporary differences financial reporting income tax basis assets liabilities using statutory rates process requires company project current tax liability estimate deferred tax assets liabilities including net operating loss tax credit carryforwards assessing need valuation allowance company considered recent operating results future taxable income projections prudent feasible tax planning strategies company also recognizes tax benefit uncertain tax position “more likely not” position sustainable based solely technical merits december 31 2011 2010 company 12 million 10 million respectively inclusive interest penalties unrecognized tax benefits net income loss per common share net income loss per common sharebasic computed using weighted average number common shares outstanding respective years net income loss per common sharediluted computed using weighted average number common equivalent shares outstanding respective years using “treasury stock” method dilutive common equivalent shares represent dilutive effect assumed exercise outstanding share options see note 18 differences basic diluted shares result assumed exercise certain outstanding share options orthofix international nv notes consolidated financial statements cont recently issued accounting standards june 2011 fasb issued accounting standards update “asu” 201105 comprehensive income topic 220 presentation comprehensive income update intended increase prominence comprehensive income financial statements help financial statement users better understand cause company’s change financial position results operations stakeholders however raised concerns new presentation requirements reclassification items accumulated comprehensive income would costly preparers add unnecessary complexity financial statements result concerns fasb decided reconsider whether necessary require companies present reclassification adjustments component statement net income presented statement comprehensive income presented interim annual financial statements result issuance asu 201112 december 2011 fasb issued accounting standards update “asu” 201112 deferral effective date amendments presentation reclassifications items accumulated comprehensive income asu 201105 update defers effective date requirement present separate line items income statement reclassification adjustments items accumulated comprehensive income net income deferral temporary fasb reconsiders operational concerns needs financial statement users fasb yet established timetable reconsideration disclosure requirements standard material effect company’s results operations financial position amendment impacts presentation september 2011 fasb issued asu 201108 testing goodwill impairment revised standard revised standard intended reduce cost complexity annual goodwill impairment test providing public nonpublic entities option performing “qualitative” assessment determine morelikelythannot goodwill might impaired whether necessary perform twostep goodwill impairment test required current accounting standards revised standard effective annual interim goodwill impairment tests performed fiscal years beginning december 15 2011 early adoption permitted certain companies company adopted revised standard 2011 disclosure requirements standard material effect company’s results operations financial position 2 inventories field inventory represents immediately saleable finished products possession company’s direct sales representatives consignment inventory represents immediately saleable finished products located third party customers distributors hospitals orthofix international nv notes consolidated financial statements cont 3 property plant equipment depreciation expense years ended december 31 2011 2010 2009 172 million 168 million 153 million respectively 4 patents intangible assets amortization expense intangible assets estimated approximately 51 million 45 million 15 million 14 million 09 million 11 million periods ending december 31 2012 2013 2014 2015 2016 2017 thereafter respectively orthofix international nv notes consolidated financial statements cont 5 goodwill following table presents changes net carrying value goodwill reportable segment 1 connection sale vascular operations see note 20 company disposed goodwill amounting 70 million 2 connection acquisition omni motion inc february 17 2011 6 bank borrowings line credit consist borrowings euros used fund international operations borrowings facility 13 million 38 million december 31 2011 2010 respectively weighted average interest rate borrowings lines credit december 31 2011 2010 402 357 respectively company unused available line credit 63 million 81 million 44 million 59 million december 31 2011 2010 respectively italian line credit line credit provides company option borrow amounts italy rates determined time borrowing line credit unsecured 7 current liabilities 8 longterm debt august 30 2010 company’s whollyowned us holding company subsidiary orthofix holdings inc “orthofix holdings” entered credit agreement “credit agreement” certain domestic direct indirect subsidiaries company “guarantors” jpmorgan chase bank na administrative agent rbs citizens na syndication agent certain lender parties thereto orthofix international nv notes consolidated financial statements cont credit agreement provides five year 2000 million secured revolving credit facility “revolving credit facility” five year 1000 million secured term loan facility “term loan facility” together revolving credit facility “credit facilities” orthofix holdings ability increase amount credit facilities aggregate amount 500 million upon satisfaction certain conditions december 31 2011 company 913 million outstanding term loan facility 1174 million outstanding revolving credit facility borrowings credit facilities bear interest floating rate orthofix holdings’ option either london interbank offered rate “libor” plus applicable margin base rate defined credit agreement plus applicable margin case subject adjustment based financial ratios applicable margin 325 libor borrowings 225 base rate borrowings depending upon measurement consolidated leverage ratio respect immediately preceding four fiscal quarters december 31 2011 entire term loan facility 100 million revolving credit facility libor rate plus margin 300 addition december 31 2011 100 million revolving credit facility libor rate plus margin 300 remaining 174 million revolving credit facility base rate defined credit agreement plus margin 200 effective interest rate credit facilities december 31 2011 2010 34 principal amount term loan facility amortizes rate 5 15 25 30 year 1 2 3 4 5 respectively amortization payments began december 31 2010 end december 31 2015 aggregate maturities longterm debt contractual obligations december 31 2011 follows 2012175 million 2013250 million 2014263 million 20151399 million outstanding principal revolving credit facility due december 31 2015 borrowings revolving credit facility may made future used working capital expenditures general corporate purposes orthofix holdings subsidiaries guarantors guaranteed repayment orthofix holdings’ obligations credit agreement obligations orthofix holdings guarantors respect credit facilities secured pledge substantially assets orthofix holdings guarantors may 2011 company obtained amendment credit agreement provide additional capacity various restrictive negative covenants payment company specified settlement amounts defined credit agreement amended associated potential settlements see note 15 amendment updates definition consolidated ebitda exclude specified settlement amounts 50 million aggregate company expects compliance covenants prospectively credit agreement amended requires orthofix holdings company comply coverage ratios contains affirmative negative covenants including limitations additional debt liens investments acquisitions credit agreement amended also includes events default customary facilities type upon occurrence event default outstanding loans may accelerated andor lenders’ commitments terminated management believes company compliance affirmative negative covenants december 31 2011 events default certain subsidiaries company restrictions ability pay dividends make intercompany loan advances pursuant company’s credit facilities net assets orthofix holdings subsidiaries restricted distributions parent company domestic subsidiaries company parties credit agreement access net assets operational purposes orthofix international nv notes consolidated financial statements cont amount restricted net assets orthofix holdings subsidiaries december 31 2011 1860 million compared 1785 million december 31 2010 addition credit agreement restricts company subsidiaries parties credit facilities access cash held orthofix holdings inc subsidiaries company’s subsidiaries parties credit agreement access cash operational debt repayment purposes amount restricted cash company december 31 2011 471 million compared 229 million december 31 2010 conjunction obtaining credit facilities credit agreement amended company incurred debt issuance costs 5 million includes 08 million costs related may 2011 amendment costs amortized using effective interest method life credit facilities december 31 2011 debt issuance costs net accumulated amortization related credit agreement 35 million 9 derivative instruments tables disclose types derivative instruments company owns classifications fair values instruments within balance sheet amount gain loss recognized comprehensive income loss “oci” net income loss crosscurrency swap 2006 company entered crosscurrency swap agreement wells fargo manage cash flows related foreign currency exposure portion company’s intercompany receivable us dollar functional currency subsidiary denominated euro derivative instrument tenyear fully amortizable agreement initial notional amount 630 million scheduled expire december 30 2016 upon executing company’s credit agreement see note 8 company terminated crosscurrency swap agreement september 30 2010 also september 30 2010 company entered new crosscurrency swap agreement “replacement swap agreement” jpmorgan chase bank royal bank scotland plc “counterparties” upon termination crosscurrency swap agreement wells fargo september 30 2010 amount representing current fair value terminated crosscurrency swap 450000 “cash settlement amount” cash settlement amount recorded longterm assets consolidated balance sheets amortized remaining life underlying transaction assuming payments remain probable orthofix international nv notes consolidated financial statements cont terms replacement swap agreement company pays euros based 335 million notional value fixed rate 500 receives us dollars based notional value 455 million fixed rate 4635 expiration date december 30 2016 date upon underlying intercompany debt replacement swap agreement applies matures replacement swap agreement designated cash flow hedge therefore company recognized unrealized gain loss change fair value net tax within comprehensive income interest rate swap june 2008 company entered threeyear fully amortizable interest rate swap agreement “swap” notional amount 1500 million expiration date june 30 2011 fourth quarter 2008 result declining interest rates libor floor company’s former credit facility swap longer deemed highly effective special hedge accounting longer applied fair value adjustments reported current earnings june 29 2010 company settled swap financial institution holder derivative instrument part terms buyout swap company paid 48 million financial institution holder instrument fair value 61 million december 31 2009 transaction resulted 13 million gain 2010 10 fair value measurements fair value defined price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date nonfinancial assets liabilities company measured fair value include longlived assets equity method investments impaired currently reported period authoritative guidance also describes three levels inputs may used measure fair value level 1 quoted prices active markets identical assets liabilities level 2 observable inputs quoted prices active markets identical assets liabilities level 3 unobservable inputs little market data available require reporting entity develop assumptions december 31 2011 company’s financial instruments included cash equivalents restricted cash accounts receivable shortterm bank borrowings accounts payable longterm secured debt cross currency derivative contract cash equivalents consist shortterm highly liquid incomeproducing investments original maturities 90 days less including money market funds carrying value restricted cash accounts receivable shortterm bank borrowings accounts payable approximate fair value due shortterm maturities instruments company’s credit facilities carry floating rate interest therefore carrying value considered approximate fair value company’s crosscurrency derivative instrument financial instrument recorded fair value recurring basis instrument consists overthecounter contract traded public exchange fair value swap contract determined based inputs readily available public markets derived information available publicly quoted markets therefore company orthofix international nv notes consolidated financial statements cont categorized swap contract level 2 derivative financial instrument company also considers counterparty credit risk credit risk determination estimated fair values company consistently applied valuation techniques periods presented fair value company’s financial assets liabilities recurring basis follows 1 see note 9 “derivative instruments” 11 commitments leases company entered operating leases facilities equipment leases noncancellable typically contain renewal options certain leases contain rent escalation clauses company recognizes expense straightline basis rent expense company’s operating leases years ended december 31 2011 2010 2009 approximately 48 million 68 million 62 million respectively future minimum lease payments operating leases net amounts received subleases december 31 2011 follows 12 business segment information company’s segment information prepared basis management reviews financial information operational decision making purposes time company’s chief operating decision maker “codm” uses gbu reporting sales operating income assess operating performance items operating income considered measuring profitability segment future codm may decide review financial metrics gbu goodwill also assigned specific gbus company neither discretely allocates assets goodwill operating segments evaluates operating segments using discrete asset information beginning january 1 2011 company began managing business three gbus comprised spine orthopedics sports medicine supported corporate activities gbus represent current segments company’s chief operating decision maker reviews financial information makes resource allocation decisions among business units accordingly company’s segment information provided prepared based company’s three gbus reporting segments prior year disclosures revised conform new gbu reporting segments new segments discussed spine provides portfolio repair regenerative products allow physicians successfully treat variety spinal conditions global business unit specializes design development marketing company’s spinal repair products along regenerative stimulation biologics products used spine applications spine distributes products network distributors sales representatives affiliates global business unit uses direct distributor sales representatives sell spine products hospitals doctors healthcare providers globally orthofix international nv notes consolidated financial statements cont orthopedics provides comprehensive portfolio repair regenerative products allow physicians successfully treat variety orthopedic conditions unrelated spine global business unit specializes design development marketing company’s orthopedic repair products along regenerative stimulation biologics products used orthopedic applications orthopedics distributes products network distributors sales representatives affiliates global business unit uses direct distributor sales representatives sell orthopedics products hospitals doctors healthcare providers globally sports medicine sports medicine designs manufactures distributes portfolio noninvasive products allow physicians clinicians treat variety sports medicine related conditions order minimize pain restore mobility patients sports medicine distributes products network domestic international distributors sales representatives affiliates hospitals doctors healthcare providers primarily us corporate activities comprised operating expenses orthofix international nv us holding company subsidiary orthofix holdings inc along activities necessarily identifiable within three gbus business segments gbu market sectors spine includes implants biologics also stimulation products orthopedics sports medicine market sectors orthofix international nv notes consolidated financial statements cont 1 2011 operating income spine gbu included 425 million expenses connection charges related us government resolutions 2 2011 operating income orthopedics gbu included 65 million expenses connection charges related us government resolutions 3 2011 operating income sports medicine gbu included 5 million litigation settlement costs certain product liability matters related sports medicine gbu 2011 operating income sports medicine gbu included 2 million insurance expense cover additional product liability claims related sports medicine gbu 2010 operating income sports medicine gbu included 12 million net gain sale vascular operations 2010 operating income sports medicine gbu included 17 million insurance expense cover new product liability claims former pain management operations sold 2008 4 2011 operating loss corporate gbu included 75 million expenses connection charges related us government inquiries 32 million senior management succession charges following table presents depreciation amortization segment orthofix international nv notes consolidated financial statements cont analysis property plant equipment geographic area 13 income taxes income provision income taxes consisted provision benefit income taxes accompanying consolidated statements operations consists following orthofix international nv notes consolidated financial statements cont tax effects significant temporary differences comprise deferred tax assets liabilities assets follows 2011 company made reclassification adjustment approximately 9 million deferred tax assets additional paidincapital reduction deffered tax asset related benefit taken exercise stock options december 31 2011 valuation allowance december 31 2011 2010 191 million 210 million respectively net decrease valuation allowance 19 million year principally relates reduction net operating losses due expiration carryforward periods partially offset current period foreign losses benefitted valuation allowance attributable net operating loss carryforwards certain temporary differences certain foreign jurisdictions benefit dependent upon generation future taxable income location assessing realizability deferred tax assets management considers whether likely portion deferred tax assets realized ultimate realization deferred tax assets dependent upon generation future taxable income periods temporary differences become deductible management considers scheduled reversal deferred tax liabilities projected future taxable income tax planning strategies making assessment based upon level historical taxable income projections future taxable income periods deferred tax assets deductible management believes likely company realize benefits deductible differences net existing valuation allowances december 31 2011 company state net operating loss carryforwards approximately 237 million begin expire 2012 company net operating losses foreign taxing jurisdictions approximately 741 million majority losses related company’s netherlands operations expiring various amounts tax years beginning 2012 company provided valuation allowance significant portion net operating loss carryforwards since believe deferred tax asset realized prior expiration orthofix international nv notes consolidated financial statements cont rate reconciliation presented based us federal income tax rate rather parent company’s country domicile tax rate management believes given large proportion taxable income earned united states disclosure meaningful income tax expense effective tax rate year ended 2011 reflects disproportionate ratio 282 million income tax expense effective tax rate 389 company record tax benefit certain expenses associated company’s estimate charges related us government resolutions effective tax rate 2011 381 excluding impact charges related us government resolutions effective tax rate 389 2010 impacted 12 million net gain sale vascular operations company’s gross unrecognized tax benefit 07 million 06 million years ended december 31 2011 2010 respectively company recognizes potential accrued interest penalties related unrecognized tax benefits within global operations income tax expense company approximately 05 million 04 million accrued payment interest penalties december 31 2011 2010 respectively entire amount unrecognized tax benefits including interest would favorably impact company’s effective tax rate recognized december 31 2011 company expect amount unrecognized tax benefits change significantly next twelve months reconciliation gross unrecognized tax benefits excluding interest years ended december 31 2011 december 31 2010 follows company files consolidated income tax return us federal jurisdiction numerous consolidated separate income tax returns many state foreign jurisdictions statute limitations respect federal tax authorities closed years prior december 31 2008 statute limitations various state tax filings closed instances years prior december 31 2007 statute limitations respect major foreign tax filing jurisdictions closed years prior december 31 2006 company’s intention reinvest total amount unremitted foreign earnings residing outside netherland antilles local jurisdiction extent generated available repatriate orthofix international nv notes consolidated financial statements cont earnings taxeffective company provided tax expense 3018 million unremitted earnings foreign subsidiaries practicable determine amounts net additional income tax may payable earnings repatriated 14 related parties following related party balances transactions three years ended december 31 2011 among company companies directors executive officers interest reflected consolidated financial statements company bought components related av impulse ® system laryngeal mask products related party former board member retired may 2010 beneficial minority interest products longer purchased company 2010 additionally orthopro inc superior medical equipment independent distributors breg inc owned son former board member company sold bracing products orthorx entity company minority interest equity ownership three years ended december 31 2011 following table summarizes related party balances transactions years ended december 31 2011 2010 2009 15 contingencies company party outstanding legal proceedings investigations claims described company believes unlikely outcome matters including matters discussed material adverse effect company subsidiaries whole notwithstanding unfavorable resolution matter may material effect company’s net earnings particular quarter however company cannot predict certainty outcome legal proceedings investigations including settlement discussions government seeking resolve investigations claims made subsidiaries described paragraphs assurance ultimate resolution matter material adverse impact company’s consolidated financial position results operations cash flows company records accruals certain outstanding legal proceedings investigations claims probable liability incurred amount loss reasonably estimated company evaluates quarterly basis developments legal proceedings investigations claims could affect amount accrual well developments would make loss contingency probable reasonably estimable loss contingency probable reasonably estimable company accrue loss however loss additional loss excess accrual least reasonable possibility material company discloses reasonable estimate possible loss range loss reasonable estimate made company cannot make reasonable estimate possible loss range loss disclosed assessments whether loss probable reasonable possibility whether loss range loss reasonably estimable often involve series complex judgments future events among factors company considers assessment nature existing legal proceedings investigations claims asserted possible damages loss contingency reasonably estimable progress matter existing law precedent opinions views legal counsel advisers involvement us government agencies proceedings company’s experience similar matters experience companies facts available company time assessment company intends respond responded proceeding investigation claim company’s assessment factors may change time individual proceedings investigations claims progress matters company currently able reasonably estimate range reasonably possible loss factors contributed determination include following damages sought indeterminate investigation manifested filed civil criminal complaint ii matters early stages iii matters involve novel unsettled legal theories large uncertain number actual potential cases parties andor iv discussions government parties matters may expected ultimately resolved negotiation settlement reached point company believes reasonable estimate loss range loss made instances company believes considerable uncertainty regarding timing ultimate resolution matters including possible eventual loss fine penalty business impact orthofix international nv notes consolidated financial statements cont addition matters described paragraphs normal course business company involved various lawsuits time may subject certain contingencies extent losses related contingencies probable reasonably estimable company accrues appropriate amounts accompanying financial statements provides disclosures possible range loss excess amount accrued range reasonable estimable december 31 2011 company recognized aggregate accrual 12 million additional matters company believes additional losses individually collectively immaterial possible loss range loss litigation matters related blackstone medical inc related escrow claims july 23 2007 company’s subsidiary blackstone medical inc “blackstone” received subpoena issued department health human services office inspector general authority federal healthcare antikickback false claims statutes subpoena sought documents period january 1 2000 july 31 2006 prior blackstone’s acquisition company believes subpoena concerned compensation physician consultants related matters september 17 2007 company submitted claim indemnification escrow fund established connection agreement plan merger company new era medical corp blackstone dated august 4 2006 “blackstone merger agreement” losses company resulting matter company subsequently notified legal counsel former shareholders representative former shareholders blackstone objected indemnification claim intends contest accordance terms blackstone merger agreement january 7 2008 company received federal grand jury subpoena us attorney’s office district massachusetts subpoena sought documents company period january 1 2000 july 15 2007 company believes subpoena concerned compensation physician consultants related matters believes associated department health human services office inspector general’s investigation matters september 18 2008 company submitted claim indemnification escrow fund established connection blackstone merger agreement losses company resulting matter april 29 2009 counsel received hipaa subpoena issued us department justice subpoena sought documents company period january 1 2000 july 15 2007 company believes subpoena concerned compensation physician consultants related matters believes associated department health human services office inspector general’s investigation matters well january 7 2008 federal grand jury subpoena august 26 2010 counsel orthofix inc blackstone executed tolling agreement us attorney’s office district massachusetts “tolling agreement” extended agreement tolling statute limitations applicable criminal civil administrative proceedings government might later initiate include period december 1 2008 including october 31 2010 february 1 2011 parties extended tolling statute limitations including may 31 2011 respect criminal proceedings government might later initiate december 5 2008 company obtained copy qui tam complaint filed susan hutcheson philip brown blackstone company us district court district massachusetts qui tam action civil lawsuit brought individual alleged violation federal statute us department justice right intervene take prosecution lawsuit option september 18 2008 informed existence lawsuit representatives us department justice prior unsealing complaint unsealed court november 24 2008 company submitted claim indemnification escrow fund established connection blackstone merger agreement losses company resulting matter november 21 2008 us department justice filed notice nonintervention case complaint served blackstone march 24 2009 counsel plaintiffs filed amended complaint june 4 2009 amended complaint sets forth cause action blackstone false claims act alleged inappropriate payments items value conferred physician consultants orthofix named defendant amended complaint company understands lawsuit related matters described involving us department health human services office inspector general us attorney’s office district massachusetts us department justice march 12 2010 united states district court district massachusetts granted blackstone’s motion dismiss march 15 2010 entered judgment favor blackstone june 1 2011 united states court appeals first circuit reversed motion dismiss remanded district court proceedings response joint motion stay action august 22 2011 united states district court district massachusetts entered order administratively closing lawsuit period ninety 90 days august 30 2011 blackstone filed united states supreme court petition writ certiorari review june 1 2011 judgment united states court appeals first circuit denied december 5 2011 orthofix international nv notes consolidated financial statements cont january 2012 series ongoing discussions negotiations boston usao company’s board directors approved agreement principle pay 32 million resolve matters described immediately preceding two paragraphs company currently discussions boston usao united states department justice “doj” office inspector general department health human services “oig” terms definitive written agreements finally resolve matters based information currently available company believes probable final written definitive settlement agreement us government entered economic terms described would fully funded escrow fund established connection blackstone merger agreement assurance enter consensual resolution matters final terms resolution might however company believes likelihood additional material loss excess amount remote 2007 2008 company received certain subpoenas state federal entities related blackstone’s financial relationship physicians company described prior reports company fully responded subpoenas currently pending proceedings related matters blackstone merger agreement former shareholders blackstone agreed indemnify company breaches representations warranties agreement well certain specified matters postclosing indemnification obligations former blackstone shareholders limited cumulative aggregate amount 666 million closing escrow fund established pursuant terms blackstone merger agreement fund timely submitted indemnification claims initial amount escrow fund 500 million december 31 2011 escrow fund contained 475 million february 2012 company reached agreement representative former shareholders blackstone resolving outstanding escrow indemnification claims blackstone merger agreement approximately 425 million distributed escrow fund company used among things fund proposed 320 settlement principle described company former shareholders also mutually released claims related matters september 30 2011 company recognized 155 million “escrow receivables” consolidated balance sheet reflecting previously incurred expenses company believed reasonably assured collection company received approximately 95 million cash escrow fund application 320 million allocated settlement principle described government ii approximately 1 million fees incurred respect matter since september 30 2011 result company recorded charge approximately 6 million fourth quarter 2011 previously incurred legal fees reflected escrow receivable balance september 30 2011 matters related regenerative stimulation business april 10 2009 company received hipaa subpoena “hipaa subpoena” issued boston usao subpoena sought documents concerning among things company’s promotion marketing regenerative stimulator devices boston usao issued supplemental subpoenas seeking documents matter dated september 21 2009 december 16 2009 october 13 2010 october 14 2010 october 18 2010 december 3 2010 january 13 2011 respectively subpoenas seek documents period january 1 1995 date respective subpoenas boston usao also issued two supplemental subpoenas requiring testimony matter dated july 23 2009 june 3 2010 office excused performance july 23 2009 subpoena indefinitely boston usao provided company grand jury subpoenas testimony certain current former employees connection ongoing investigation company cooperating intends continue cooperate government’s requests meetings company attorneys regarding matter boston usao informed company investigating possible criminal civil violations federal law related company’s promotion marketing regenerative stimulator devices april 14 2009 company obtained copy qui tam complaint filed jeffrey j bierman us district court district massachusetts company orthofix inc companies allegedly manufactured regenerative stimulation devices including orthologic corp djo incorporated reable therapeutics inc blackstone group lp biomet inc ebi lp ebi holdings inc ebi medical systems inc bioelectron inc lbv acquisition inc smith nephew inc order entered march 24 2009 court unsealed case company orthofix inc served september 8 2009 leave court relator’s second amended complaint filed june 11 2010 complaint alleges various causes action federal false claims orthofix international nv notes consolidated financial statements cont act state city false claims acts premised contention defendants improperly promoted sale opposed rental regenerative stimulation devices complaint also includes claims defendants among things allegedly misleading physicians purportedly causing file false claims allegedly violating antikickback act providing free products physicians waiving patients’ insurance copayments providing inducements independent sales agents generate business company believes lawsuit related matter described involving hipaa subpoena december 4 2010 us district court district massachusetts denied company’s motion dismiss april 28 2011 series ongoing discussions negotiations boston usao company’s board directors approved agreement principle proposed boston usao resolve criminal civil matters described immediately preceding two paragraphs company currently finalizing definitive written agreements boston usao united states department justice “doj” office inspector general department health human services “oig” finally resolve matters company expects terms agreements pay 43 million company recorded charge 43 million first quarter 2011 anticipation agreement company expect subsidiary orthofix inc plead violation 18 usc 1516 obstruction federal audit related june 2008 federal audit ii orthofix international nv orthofix inc enter fiveyear corporate integrity agreement cia oig part resolution matters based information currently available company believes probable final definitive written settlement agreement us government entered terms company therefore recognized accrual 43 million first quarter 2011 assurance company enter consensual resolution matters final terms resolution might however company believes likelihood additional material loss excess amount remote matters related promeca second quarter 2010 internal management review promeca sa de cv “promeca” one company’s mexican subsidiaries company received allegations improper payments allegedly made certain promeca’s local employees mexico employees mexican governmental healthcare entity company engaged hogan lovells us llp deloitte financial advisory services llp conduct internal investigation “promeca internal investigation” focusing compliance foreign corrupt practices act “fcpa” voluntarily contacted securities exchange commission “sec” united states department justice “doj” advise agencies internal investigation underway promeca accounted approximately one percent company’s consolidated net sales consolidated total assets november 16 2010 company received subpoena sec doj seeking documents related matter company completed production documents sec doj connection subpoena company completed promeca internal investigation april 2011 commenced settlement discussions us government regarding matter may 2011 january 2012 company reached agreement principle settle matters doj currently discussions doj final terms resolution also currently engaged discussions regarding settlement matters sec company previously recorded charge related matters 3 million first quarter 2011 subsequently recorded additional charge 45 million fourth quarter 2011 establish additional accrual anticipation future final resolution matters doj sec assurance company enter consensual resolution matters final terms resolution might however company believes based information known date likelihood additional material loss excess amount remote matters related breg company’s subsidiary breg inc “breg” engaged manufacturing sale local infusion pumps pain management 1999 2008 product line divested since 2008 numerous product liability cases filed united states alleging local anesthetic dispensed infusion pumps inside joint causes rare arthritic condition called “chondrolysis” company believes meritorious defenses exist claims breg vigorously defending cases one insurance carriers asserted us certain potential losses related matter covered insurance coverage currently arbitration carrier currently cannot reasonably estimate possible loss range loss connection matters august 2 2010 breg received hipaa subpoena issued us department justice “doj” subpoena seeks documents company subsidiaries period january 1 2000 date subpoena document production response subpoena ongoing company believes subpoena relates investigation doj whether breg’s sale marketing labeling local infusion pumps pain management prior breg’s divestiture product line 2008 complied fda regulations federal law january 27 2012 company orally notified us government official civil investigation breg pending connection matter company currently cannot reasonably estimate possible loss range loss connection matters breg currently engaged manufacturing sales motorized cold therapy units used reduce pain swelling beginning 2010 several domestic product liability cases filed mostly california state court alleging use cold therapy causes skin andor nerve injury seeking damages behalf individual plaintiffs allegedly injured units cases early stage conclusion drawn present time regarding potential outcome however company believes meritorious defenses exist claims company currently cannot reasonably estimate possible loss range loss connection matter orthofix international nv notes consolidated financial statements cont 16 pensions deferred compensation orthofix inc sponsors defined contribution plan “orthofix inc 401k plan” covering substantially full time us employees orthofix inc 401k plan allows participants contribute 15 pretax compensation subject certain limitations company matching 100 first 2 employee’s base compensation 50 next 4 employee’s base compensation contributed orthofix inc 401k plan breg also sponsors 401k plan “breg 401k plan” breg 401k plan allows participants contribute 100 compensation subject certain limitations company matching 100 first 1000 deferred blackstone also sponsors 401k plan “blackstone 401k plan” blackstone 401k plan allows participants contribute 75 compensation subject certain limitations company matching 50 first 6 employee’s deferred compensation blackstone 401k plan merged orthofix inc 401k plan beginning 2010 years ended december 31 2011 2010 2009 expenses incurred relating 401k plans including matching contributions approximately 26 million 28 million 19 million respectively company operates defined contribution pension plans international employees described meeting minimum service requirements company’s expenses pension contributions 2011 2010 2009 08 million 07 million 10 million respectively italian law orthofix srl accrues behalf employees deferred compensation paid termination employment year’s provision deferred compensation based percentage employee’s current annual remuneration plus annual charge deferred compensation also accrued leaving indemnity payable agents case dismissal regulated national contract equal approximately 35 total commissions earned company’s expense deferred compensation 2011 2010 2009 approximately 01 million 01 million 06 million respectively deferred compensation payments 02 million 06 million made 2010 2009 respectively payments made 2011 balance december 31 2011 2010 15 million represents amount would payable employees agents terminated employment date included longterm liabilities orthofix deferred compensation plan “plan” administered board directors company effective january 1 2007 amended restated effective january 1 2009 plan intended allow select group key management highly compensated employees company defer receipt compensation would otherwise payable terms plan intended comply respects provisions code section 409a code section 457a plan employees company subsidiaries eligible participate employee management highly compensated employee named board directors participant plan directors eligible participate plan effective january 1 2009 prohibited participation unless director performs services employee attributable tax purposes us subsidiary company eligible employee may elect enter salary deferral commitment andor director’s fees deferral commitment respect plan year submitting participation agreement plan administrator december 31 calendar year immediately preceding plan year eligible employee may elect enter bonus deferral commitment respect bonus compensation earned plan year submitting participation agreement plan administrator december 31 calendar year immediately preceding plan year deferral commitments stated percentage flat dollar amount allowed plan administrator participant’s participation agreement remain effect immediately succeeding plan year distributions made accordance requirements code section 409a orthofix international nv notes consolidated financial statements cont 17 sharebased compensation plans december 31 2011 company three stock option award plans one stock purchase plan described 2004 long term incentive plan 2004 long term incentive plan “2004 ltip plan” long term incentive plan originally adopted april 2004 ltip plan approved shareholders june 29 2004 20 million shares reserved issuance plan addition shares available future awards june 29 2004 prior plans ii become available future issuance upon expiration forfeiture june 29 2004 awards upon prior plans awards generally vest years service awards fully vesting within three years date grant employees either three five years date grant nonemployee directors awards form stock option restricted stock restricted share unit performance share unit award form determined board directors awards granted 2004 ltip plan expire later ten years date grant june 20 2007 company’s shareholders approved amendments restatement 2004 ltip plan providing following major changes increase number shares available grant 20 million shares 28 million shares specific allowance grants restricted stock awards provision fixed awards nonemployee directors date first election board subsequent reelection june 19 2008 company’s shareholders approved amendments 2004 ltip plan increase number shares available grant 28 million shares 31 million shares increase annual grant nonemployee directors 3000 shares 5000 shares limit future number shares may awarded plan full value awards 100000 shares december 31 2011 2371147 options outstanding 2004 ltip plan 1891828 exercisable addition 69000 shares restricted stock outstanding none vested staff share option plan staff stock option plan “staff plan” fixed stock option plan adopted april 1992 staff plan company granted options employees estimated fair market value options date grant options generally vest based years service options fully vested within five years date grant options granted staff plan expire ten years date grant options left granted staff plan december 31 2011 58125 options outstanding exercisable staff plan performance accelerated stock option inducement grants december 30 2003 company granted inducement stock option awards two key executives breg conjunction acquisition breg exercise price fixed 3800 per share november 20 2003 company announced entered agreement acquire breg inducement grants included servicebased performancebased vesting provisions inducement grants became 100 vested fourth anniversary grant date subject certain exercisability limitations following vesting december 30 2007 original inducement grants limited executives’ ability exercise specific numbers options years 2008 2012 prior options fully vesting inducement executives extend term employment agreements one year november 2007 company entered amended award agreements two executives amended agreements change vesting date options provided options granted thereunder exercisable fixed period beginning january 1 2009 ending december 31 2010 december 2008 order meet certain requirements code section 409a treasury regulations orthofix international nv notes consolidated financial statements cont promulgated thereunder fulfill company’s desire extend executives’ terms employment company executives entered second amended restated award agreements second amended agreements provided election executives respective periods exercise options bradley mason elected exercise 50000 options following periods april 1 2010 december 31 2010 january 1 2011 december 31 2011 january 1 2012 december 31 2012 william hopson elected exercise 50000 options period january 1 2011 december 31 2011 subject certain termination employment provisions notwithstanding provisions second amended agreements portion options exercised respective exercise periods exercisable thereafter lapse cancelled december 31 2011 130000 options outstanding exercisable inducement grants stock purchase plan orthofix international nv amended restated stock purchase plan “stock purchase plan” provides issuance shares company’s common stock eligible employees directors company subsidiaries elect participate plan acquire shares common stock payroll deductions including executive officers june 20 2008 company’s shareholders approved amendment restatement plan providing following major change allow officers directors orthofix inc participate plan basis employees ii provide company assume adopt plan amended lieu orthofix inc acting sponsor plan iii allow nonemployee directors company participate plan iv increase 500000 shares maximum number shares available issuance plan v provide determination value common stock plan determined either first last day plan year whichever date renders lower value changes generally effective plan year starting january 1 2009 june 2009 company’s shareholders approved amendment stock purchase plan increase number shares available grant 950000 shares 1400000 shares may 2010 company’s shareholders approved additional increase 450000 shares available grant total 1850000 shares purchase period eligible employees may designate 1 25 compensation deducted purchase common stock plan 25 employees working north america south america asia 15 employees working europe eligible directors designated percentage amount equal annual director compensation paid cash current plan year purchase price shares plan equal 85 fair market value first day plan year calendar year running january 1 december 31 lower last day plan year due compensatory nature plan company recorded related share based compensation consolidated statement operations aggregate number shares reserved issuance employee stock purchase plan 1850000 shares december 31 2011 1224756 shares issued stock purchase plan orthofix international nv notes consolidated financial statements cont sharebased compensation december 31 2011 unamortized compensation expense relating options granted expected recognized 34 million amount expected recognized august 2016 following table shows detail sharebased compensation line item consolidated statements operations years ended december 31 2011 2010 2009 assumptions years grants awarded 1 company grant options 2010 stock option activity summaries status company’s stock option plans december 31 2011 2010 changes year ended december 31 2011 presented orthofix international nv notes consolidated financial statements cont outstanding exercisable price range december 31 2011 weighted average remaining contractual life exercisable options 428 years december 31 2011 total intrinsic value options exercised 42 million 30 million 01 million years ended december 31 2011 2010 2009 respectively aggregate intrinsic value options outstanding options exercisable december 31 2011 calculated difference exercise price underlying options market price company’s common stock shares exercise prices lower 3523 closing price company’s stock december 31 2011 aggregate intrinsic value options outstanding 108 million 48 million 109 million years ended december 31 2011 2010 2009 respectively aggregate intrinsic value options exercisable 84 million 21 million 19 million years ended december 31 2011 2010 2009 respectively restricted stock year ended december 31 2008 company granted employees 83434 shares restricted stock vest various dates december 2011 year ended december 31 2011 company granted employees 94000 shares restricted stock vest various dates february 2014 compensation expense represents fair value stock measured market price date grant less estimated forfeitures recognized straightline basis vesting period unamortized compensation expense related restricted stock amounted 18 million december 31 2011 orthofix international nv notes consolidated financial statements cont summary status restricted stock december 31 2011 2010 changes year ended december 31 2011 presented 18 earnings per share three years ended december 31 2011 adjustments net income loss purposes calculating basic diluted net income loss available common shareholders following reconciliation weighted average shares used basic diluted net income loss per common share computations adjustment made 2011 common stock equivalents effects would antidilutive 2011 potentially dilutive shares totaled 344168 options purchase shares common stock exercise prices excess average market price common shares included computation diluted earnings per share 1487809 1750213 outstanding options included diluted earnings per share computation fiscal years ended december 31 2011 2010 respectively inclusion options antidilutive 19 restructuring charges fourth quarter 2008 part company’s strategic plan strengthen business company initiated restructuring plan improve operations reduce costs blackstone plan involved consolidation substantially blackstone’s operations previously conducted wayne nj springfield facility housing spine stimulation us orthopedics business dallas tx area company completed restructuring consolidation second quarter 2010 recognized total restructuring expense 36 million fourth quarter 2010 company initiated reorganization plan streamline operations lower operating costs within spine orthopedics sports medicine gbu fourth quarter 2010 company recorded restructuring charges 04 million spine 32 million orthopedics related employee severance costs final cash payments made third quarter 2011 charges anticipated orthofix international nv notes consolidated financial statements cont restructuring costs recorded year ended december 31 2010 consolidated statements operations 16 million selling marketing 20 million general administrative expense following table presents changes restructuring liability included within current liabilities company’s consolidated balance sheets december 31 2011 december 31 2010 20 net gain sale vascular operations march 8 2010 company entered asset purchase agreement “apa” company agreed sell substantially assets vascular operations related av impulse system ® related accessories including finished goods inventory tangible assets closing company received payment approximately 277 million amount includes estimated value certain finished goods inventory conveyed closing remains subject postclosing verification pursuant apa company agreed enter certain transition arrangements closing including transition services agreement pursuant among things company would continue provide operational support respect transferred assets certain jurisdictions period five months ii two separate supply agreements certain impads period two years provide products period 90 days second third quarters 2010 company completed transition services agreement one supply agreements supplies products september 2011 company completed amendment supply agreement supply certain impads march 2014 company also agreed enter 5year noncompetition agreement closing respect business assets transferred due continuing contractual involvement agreements transaction meet criteria presentation discontinued operations orthofix international nv notes consolidated financial statements cont following table presents value asset disposition cash proceeds received net litigation settlement costs net gain sale vascular operations shown consolidated statements operations year ended december 31 2011 1 conjunction sale vascular operations company settled outstanding litigation claim former patent holders 35 million 21 quarterly financial data unaudited us dollars thousands except per share data 1 includes 120 million gain sale divested vascular business see note 20 2 includes 46 million charges related us government resolutions 3 sum per share earnings quarter may equal earnings per share year due change average share calculations accordance prescribed reporting requirements orthofix international nv schedule 1condensed financial information registrant orthofix international nv condensed balance sheets unaudited see accompanying notes condensed financial statements s1 orthofix international nv schedule 1condensed financial information registrant orthofix international nv condensed statements operations unaudited see accompanying notes condensed financial statements s2 orthofix international nv schedule 1condensed financial information registrant orthofix international nv condensed statement cash flows see accompanying notes condensed financial statements s3 orthofix international nv schedule 1condensed financial information registrant orthofix international nv notes condensed financial statements unaudited 1 background basis presentation condensed parent company financial statements prepared accordance rule 1204 schedule 1 regulation sx restricted net assets orthofix holdings inc subsidiaries exceed 25 consolidated net assets orthofix international nv subsidiaries “company” information read conjunction company’s consolidated financial statements included elsewhere filing 2 restricted net assets subsidiaries certain company’s subsidiaries restrictions effective date august 30 2010 ability pay dividends make intercompany loans advances pursuant financing arrangements amount restricted net assets company’s subsidiaries held december 31 2011 2010 approximately 1860 million 1785 million respectively restrictions net assets orthofix holdings inc subsidiaries 3 commitments contingencies longterm obligations discussion company’s commitments contingencies long term obligations senior secured credit facility see note 8 note 11 note 15 company’s consolidated financial statements 4 dividends subsidiaries cash dividends received orthofix international nv consolidated subsidiaries accounted equity method 59 million 216 million 132 million years ended december 31 2011 2010 2009 respectively s4 orthofix international nv schedule 2valuation qualifying accounts years ended december 31 2011 2010 2009 s5item 15 exhibits financial statement schedules documents filed part report form 10k following documents filed part report form 10k 1 financial statements see “index consolidated financial statements” page form 10k 2 financial statement schedules see “index consolidated financial statements” page form 10k 3 exhibits exhibit number description 21 asset purchase agreement dated march 8 2010 tyco healthcare group lp dba covidien ag mallinckrodt brasilltda kendall de mexico sa de cv novamedix limited novamedix distribution limited novamedix services limited promeca sa de cv orthofix brasil orthofixsrl orthofix sa intavent orthofix limited breg mexico de ri de cv implantes sistemas medicos inc filed exhibit company’s current report form 8k filed march 9 2010 incorporated herein reference 22 stock purchase agreement dated april 23 2012 among breg inc orthofix holdings inc breg acquisition corp filed exhibit company’s current report form 8k filed april 24 2012 incorporated herein reference 31 certificate incorporation company filed exhibit company’s annual report form 20f dated june 29 2001 incorporated herein reference 32 articles association company amended filed exhibit company’s annual report form 10k year ended december 31 2011 incorporated herein reference 101 credit agreement dated august 30 2010 among orthofix holdings inc orthofix international nv certain domestic subsidiaries orthofix international nv several banks financial institutions may time become parties thereunder jpmorgan chase na filed exhibit company’s current report form 8k filed august 31 2010 incorporated herein reference 102 first amendment credit agreement dated may 4 2011 among orthofix holdings inc delaware corporation orthofix international nv “orthofix international” netherlands antilles corporation certain domestic direct indirect subsidiaries orthofix international jpmorgan chase bank na administrative agent certain lender parties thereto filed exhibit company’s current report form 8k filed may 5 2011 incorporated herein reference 103 matrix commercialization collaboration agreement entered july 24 2008 orthofix holdings inc musculoskeletal transplant foundation filed exhibit company’s annual report form 10k fiscal year ended december 31 2009 incorporated herein reference 104 amendment 1 matrix commercialization collaboration agreement dated december 15 2010 musculoskeletal transplant foundation inc orthofix holdings inc filed exhibit company’s annual report form 10k fiscal year ended december 31 2010 incorporated herein reference 105 amendment 2 matrix commercialization collaboration agreement dated january 9 2012 musculoskeletal transplant foundation inc orthofix holdings inc filed exhibit amendment 1 company’s annual report form 10ka year ended december 31 2011 incorporated herein reference filed herewith certain confidential portions exhibit omitted means redacting portion text exhibit filed separately secretary commission without redactions pursuant application requesting confidential treatment securities exchange act 1934 exhibit deemed “filed” purposes section 18 securities exchange act 1934 15 usc 78r otherwise subject liability section signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized orthofix international nv dated march 1 2013 robert vaters name robert vaters title president chief executive officer director pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated orthofix international nv statement management’s responsibility financial statements shareholders orthofix international nv management responsible preparation consolidated financial statements related information presented report consolidated financial statements include amounts based management’s estimates judgments prepared conformity accounting principles generally accepted united states financial information report shareholders consistent consolidated financial statements company maintains accounting internal control systems provide reasonable assurance reasonable cost assets safeguarded loss unauthorized use disposition financial records reliable preparing financial statements maintaining accountability assets systems augmented written policies organizational structure providing division responsibilities careful selection training qualified personnel company engaged ernst young llp independent registered public accountants audit render opinion consolidated financial statements accordance auditing standards public company accounting oversight board united states standards include assessment systems internal controls test transactions extent considered necessary support opinion board directors audit committee consisting solely outside directors company meets periodically management independent registered public accountants ensure meeting responsibilities discuss matters concerning internal controls financial reporting ernst young llp full free access audit committee james f gero chairman board directors robert vaters president chief executive officer director emily v buxton interim chief financial officer chief financial officer orthopedic global business unit orthofix international nv index consolidated financial statements schedules provision made applicable accounting regulation securities exchange commission required related instructions inapplicable therefore omitted reports independent registered public accounting firm board directors shareholders orthofix international nv audited accompanying consolidated balance sheets orthofix international nv december 31 2012 2011 related consolidated statements operations comprehensive income loss changes shareholders’ equity cash flows three years period ended december 31 2012 audits also included financial statement schedule listed index item 15a financial statements schedules responsibility company’s management responsibility express opinion financial statements schedules based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position orthofix international nv december 31 2012 2011 consolidated results operations cash flows three years period ended december 31 2012 conformity us generally accepted accounting principles also opinion related financial statement schedules considered relation basic consolidated financial statements taken whole present fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states orthofix international nv’s internal control financial reporting december 31 2012 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated march 1 2013 expressed unqualified opinion thereon ernst young llp dallas texas march 1 2013 orthofix international nv consolidated balance sheets december 31 2012 2011 accompanying notes form integral part consolidated financial statements orthofix international nv consolidated statements operations comprehensive income loss years ended december 31 2012 2011 2010 orthofix international nv consolidated statements changes shareholders’ equity years ended december 31 2012 2011 2010 accompanying notes form integral part consolidated financial statements orthofix international nv consolidated statements cash flows years ended december 31 2012 2011 2010 accompanying notes form integral part consolidated financial statements orthofix international nv notes consolidated financial statements description business orthofix international nv “company” diversified global medical device company focused developing delivering innovative repair regenerative technologies spine orthopedic markets company comprised two reportable segments spine orthopedics supported corporate activities see note 12 description segment 1 summary significant accounting policies basis consolidation consolidated financial statements include financial statements company whollyowned majorityowned subsidiaries entities company control intercompany accounts transactions profits eliminated consolidated financial statements continuing operations basis unless otherwise noted b use estimates preparation financial statements preparation financial statements conformity gaap requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period ongoing basis evaluate estimates including related recoverability useful lives longlived assets adequacy allowance doubtful accounts inventory obsolescence income taxes base estimates historical experience future expectations relevant assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources actual results could differ estimates c foreign currency translation financial statements operations outside united states generally maintained local currency foreign currency denominated balance sheet accounts except shareholders’ equity translated us dollars year end exchange rates revenue expense items translated weighted average rates exchange prevailing year gains losses resulting translation foreign currency recorded accumulated comprehensive income component shareholders’ equity transactional foreign currency gains losses including generated intercompany operations included expense net 05 million loss 16 million loss 07 million gain years ended december 31 2012 2011 2010 respectively cash equivalents company considers highly liquid investments original maturity three months less date purchase cash equivalents e restricted cash restricted cash consists cash held certain subsidiaries distribution transfer orthofix international nv “parent” subsidiaries parties credit facility described note 8 restricted senior secured credit facility restricts parent subsidiaries parties facility access cash held orthofix holdings inc subsidiaries credit party subsidiaries access cash operational debt repayment purposes f market risk ordinary course business company exposed impact changes interest rates foreign currency fluctuations company’s objective limit impact movements earnings cash flows order achieve objective company seeks balance nondollar denominated income expenditures 2008 company executed interest rate swap agreement manage cash flow exposure generated interest rate fluctuations june 29 2010 company settled interest rate swap 2012 2011 2010 company made use foreign currency swap agreement manage cash flow exposure generated foreign currency fluctuations see note 9 additional information company generally require collateral trade receivables orthofix international nv notes consolidated financial statements g inventories valued lower cost estimated net realizable value provision excess obsolete items inventory procured produced whether internally contract manufacturing arrangements manufacturing facility italy cost determined weightedaverage basis approximates firstin firstout “fifo” method inventory procured produced whether internally contract manufacturing arrangements manufacturing facility texas standard costs approximates actual cost used value inventory standard costs reviewed annually management often event circumstances indicate change cost occurred valuation workinprocess finished products field inventory consignment inventory includes cost materials labor production costs field inventory represents immediately saleable finished products inventory possession company’s direct sales representatives consignment inventory represents immediately saleable finished products located third party customers distributors hospitals h longlived assets including intangibles goodwill property plant equipment stated cost less accumulated depreciation costs include expenditures necessary place asset service including freight sales use taxes plant equipment also includes instrumentation held customers used company’s products depreciation computed straightline basis useful lives assets depreciation leasehold improvements computed shorter lease term useful life asset useful lives follows expenditures maintenance repairs minor renewals improvements extend lives respective assets expensed incurred expenditures renewals improvements capitalized assets related accumulated depreciation adjusted property retirements disposals resulting gain loss included operations fully depreciated assets remain accounts retired service patents intangible assets recorded cost acquired part business combination estimated fair value assets primarily include patents technology agreements “developed technologies” trademarks identifiable intangible assets considered definite lived amortized useful lives using method amortization reflects pattern economic benefit intangible assets consumed company’s weighted average amortization period developed technologies 11 years intangible longlived assets definite lives developed technologies tested impairment adverse conditions exist change circumstances occurred would indicate impairment change remaining useful life impairment indicator exists company tests intangible asset recoverability purposes recoverability test company groups intangible assets liabilities lowest level identifiable cash flows intangible asset generate cash flows independent assets liabilities carrying value intangible asset group exceeds undiscounted cash flows expected result use eventual disposition intangible asset group company write carrying value fair value period identified company generally calculates fair value indefinite lived intangible assets present value estimated future cash flows determining estimated future cash flows associated intangible assets company uses estimates assumptions future revenue contributions cost structures remaining useful lives asset group use alternative assumptions including estimated cash flows discount rates alternative estimated remaining useful lives could result different calculations impairment company tests goodwill least annually impairment company tests frequently indicators present changes circumstances suggest impairment may exist indicators include among others declines sales earnings cash flows development material adverse change business climate company assesses goodwill impairment reporting unit level defined operating segment one level operating segment referred component company identified two reporting units consistent company’s reporting segments spine orthopedics see note 12 additional information orthofix international nv notes consolidated financial statements cont goodwill order calculate respective carrying values company initially recorded goodwill based purchase price allocation performed time acquisition corporate assets liabilities directly relate reporting unit’s operations ascribed directly reporting unit corporate assets liabilities directly related specific reporting unit reporting unit benefits allocated based respective contribution measure reporting unit effective january 1 2011 company realigned reporting units consequently reallocated carrying value goodwill previous reporting units new reporting units based relative fair value new reporting units total enterprise value january 1 2011 first quarter 2012 asu 201108 “testing goodwill impairment” became effective asu 201108 allows entities testing goodwill impairment option performing qualitative assessment calculating fair value reporting unit ie first step goodwill impairment test entities determine basis qualitative factors fair value reporting unit likely greater carrying amount quantitative calculation would needed company’s annual goodwill impairment analysis performed qualitatively fourth quarter 2012 result impairment charge derivative instruments company manages exposure fluctuating cash flows resulting changes interest rates foreign exchange within consolidated financial statements according hedging policy company may engage nonleveraged transactions involving various financial derivative instruments manage exposed positions policy requires company formally document relationship hedging instrument hedged item well riskmanagement objective strategy undertaking hedge transaction instruments designated cash flow hedge company formally assesses hedge’s inception ongoing basis whether derivative used hedging transaction effective offsetting changes cash flows hedged item whether derivative may expected remain effective future periods determined derivative ceased effective hedge company discontinue related hedge accounting prospectively determination would made 1 derivative longer effective offsetting changes cash flows hedged item 2 derivative expires sold terminated exercised 3 management determines designating derivative hedging instrument longer appropriate ineffective portions changes fair value cash flow hedges recognized earnings orthofix international nv notes consolidated financial statements cont company records derivatives either assets liabilities balance sheet respective fair values cash flow hedge effective portion derivative’s change fair value ie gains losses initially reported component comprehensive income net related taxes subsequently reclassified net earnings hedged exposure longer effective company utilizes cross currency swap manage foreign currency exposure related portion company’s intercompany receivable us dollar functional currency subsidiary denominated euro cross currency swap accounted cash flow hedge accordance asc topic 815 derivatives hedging “asc topic 815” see note 9 description types derivative instruments company utilizes j accumulated comprehensive income accumulated comprehensive income comprised foreign currency translation adjustments effective portion gain loss company’s crosscurrency swap designated accounted cash flow hedge see note 9 components changes accumulated comprehensive income follows 1 cash generally remains permanently invested non us dollar denominated foreign subsidiaries deferred taxes recognized related foreign currency translation adjustment k revenue recognition accounts receivable product revenue generally recognized income period risk loss title transfers products delivered subject fixed determinable fee collectability reasonably assured extent criteria met company accounts shipments consigned inventory recognizes revenue criteria met revenues exclude value added local taxes intercompany sales trade discounts shipping handling costs included cost sales certain products prescribed physician company recognizes revenue product placed implanted accepted patient domestic spinal implant human cellular tissue based products “hctp products” revenues recognized product utilized confirming purchase order received hospital sales commercial customers including hospitals distributors revenues recognized time shipment unless contractual agreements specify title passes delivery revenues inventory delivered consignment recognized product used consignee 2008 company entered collaborative arrangement musculoskeletal transplant foundation “mtf” develop commercialize trinity evolution ® stem cellbased bone growth biologic matrix development process completed 2009 company mtf operated terms separate commercialization agreement terms 10year agreement mtf sourced tissue processed create bone growth matrix packaged delivered customer accordance orders received company exclusive global marketing rights trinity evolution ® receives marketing fees mtf based total sales marketing fees recorded net basis within net sales 465 million 371 million 298 million 2012 2011 2010 respectively january 10 2012 company announced reached agreement mtf codevelop commercialize new technology use bone grafting applications expand mtf’s trinity evolution ® processing capacity amendment amends term existing agreement later 15 years date certain development milestones achieved existing agreement occurred 2010 ii date certain licensing arrangements company nuvasive inc expire company derives significant amount revenues us thirdparty payors including commercial insurance carriers health maintenance organizations preferred provider organizations governmental payors medicare amounts paid thirdparty payors generally based fixed allowable reimbursement rates revenues recorded expected preauthorized reimbursement rates net contractual allowances adjustments certain billings subject review thirdparty payors may subject adjustment orthofix international nv notes consolidated financial statements cont process estimating ultimate collection accounts receivable involves significant assumptions judgments historical collection payor reimbursement experience integral part estimation process related reserves doubtful accounts establishment contractual allowances accounts receivable analyzed quarterly basis assess adequacy reserves doubtful accounts contractual allowances revisions allowances doubtful accounts estimates recorded adjustment bad debt expense within sales marketing expenses contractual allowances recorded adjustment revenue judgment management adequate allowances provided doubtful accounts contractual allowances estimates periodically tested actual collection experience l sale accounts receivable company generally sell receivables certain italian hospitals year estimate related fee provided throughout year interest expense trade accounts receivables sold without recourse removed balance sheet time sale sharebased compensation fair value stock options determined using blackscholes valuation model value recognized expense service period net estimated forfeitures expected term options granted estimated based number factors including vesting expiration terms award historical employee exercise behavior options currently outstanding options exercised expired expected volatility company’s common stock employee’s average length service riskfree interest rate determined based upon constant us treasury security rate contractual life approximates expected term option award management estimates expected volatility based historical volatility company’s stock compensation expense recognized equitybased awards net estimated forfeitures estimated based analysis actual option forfeitures n advertising costs company expenses advertising costs incurred advertising expense included sales marketing expense years ended december 31 2012 2011 2010 02 million 03 million 05 million respectively research development costs expenditures research development expensed incurred expenditures related collaborative arrangement mtf expensed based terms related agreement milestone payments made mtf 2012 totaled 3 million p income taxes company subject income taxes us foreign jurisdictions uses estimates determining provision income taxes company accounts income taxes using asset liability method accounting reporting income taxes method deferred tax assets liabilities recognized based temporary differences financial reporting income tax basis assets liabilities using statutory rates process requires company project current tax liability estimate deferred tax assets liabilities including net operating loss tax credit carryforwards assessing need valuation allowance company considered recent operating results future taxable income projections prudent feasible tax planning strategies company accounts uncertain tax positions accordance asc 740 contains twostep approach recognizing measuring uncertain tax positions first step evaluate tax position taken expected taken tax return determining weight available evidence indicates likely evaluation technical merits tax position sustained audit including resolution related appeals litigation processes second step measure tax benefit largest amount 50 likely realized upon ultimate settlement company reevaluates income tax positions periodically consider factors changes facts circumstances changes interpretations tax law effectively settled issues audit new audit activity change recognition measurement would result recognition tax benefit additional charge tax provision company includes imputed interest related tax issues part income tax expense consolidated financial statements company records applicable penalties related tax issues within income tax provision q net income loss per common share net income loss per common sharebasic computed using weighted average number common shares outstanding respective years net income loss per common sharediluted computed using weighted average number common equivalent shares outstanding respective years using “treasury stock” method dilutive common equivalent shares represent dilutive effect assumed exercise outstanding share options see note 19 differences basic diluted shares result assumed exercise certain outstanding share options orthofix international nv notes consolidated financial statements cont r financial instruments concentration credit risk financial instruments could subject company concentration credit risk consist primarily cash equivalents accounts receivable generally cash held large financial institutions cash equivalents consist highly liquid money market funds company performs ongoing credit evaluations customers generally require collateral maintain reserve potential credit losses company believes concentration credit risk related accounts receivable limited customers geographically dispersed end users diversified across several industries net sales customers distributors based europe approximately 55 million 2012 results substantial portion trade accounts receivable balance december 31 2012 least reasonably possible changes global economic conditions andor local operating economic conditions regions distributors operate factors could affect future realization accounts receivable balances recently issued accounting standards july 2012 fasb issued asu 201202 intangiblesgoodwill topic 350 standard intended reduce cost complexity performing impairment test indefinitelived intangible assets simplifying entity tests assets impairment improve consistency impairment testing guidance among longlived asset categories amendments permit entity first assess qualitative factors determine whether likely indefinitelived intangible asset impaired basis determining whether necessary perform quantitative impairment test accordance subtopic 35030 intangiblesgoodwill othergeneral intangibles goodwill morelikelythannot threshold defined likelihood 50 percent amendments effective annual interim impairment tests performed fiscal years beginning september 15 2012 company adopted asu december 31 2012 material impact company’s consolidated financial statements june 16 2011 fasb issued accounting standards update “asu” 201105 presentation comprehensive income asu eliminates current option present comprehensive income components statement changes shareholders’ equity increases prominence comprehensive income statements providing alternative present components net income comprehensive income either one continuous two separate consecutive financial statements companies also required present reclassification adjustments items reclassified comprehensive income net income within statements standard applied retrospectively effective fiscal years beginning december 15 2011 early adoption permitted company adopted asu march 31 2012 material impact company’s consolidated financial statements 2 inventories field inventory represents immediately saleable finished products possession company’s direct sales representatives consignment inventory represents immediately saleable finished products located third party customers distributors hospitals orthofix international nv notes consolidated financial statements cont 3 property plant equipment depreciation expense years ended december 31 2012 2011 2010 157 million 143 million 136 million respectively 4 patents intangible assets amortization expense intangible assets estimated approximately 21 million 14 million 13 million 12 million 08 million 01 million periods ending december 31 2013 2014 2015 2016 2017 2018 thereafter respectively orthofix international nv notes consolidated financial statements cont 5 goodwill following table presents changes net carrying value goodwill reportable segment 6 bank borrowings line credit consist borrowings euros used fund international operations borrowings facility less 01 million 13 million december 31 2012 2011 respectively weighted average interest rate borrowings lines credit december 31 2012 2011 370 402 respectively company unused available line credit 58 million 76 million 63 million 81 million december 31 2012 2011 respectively italian line credit line credit provides company option borrow amounts italy rates determined time borrowing line credit unsecured 7 current liabilities 8 longterm debt august 30 2010 company’s whollyowned us holding company orthofix holdings inc “orthofix holdings” entered credit agreement “credit agreement” certain domestic direct indirect subsidiaries company “guarantors” jpmorgan chase bank na administrative agent rbs citizens na syndication agent certain lender parties thereto orthofix international nv notes consolidated financial statements cont credit agreement provides five year 2000 million secured revolving credit facility “revolving credit facility” five year 1000 million secured term loan facility “term loan facility” together revolving credit facility “credit facilities” orthofix holdings ability increase amount credit facilities aggregate amount 500 million upon satisfaction certain conditions may 2012 company used portion proceeds sale breg inc “breg” see note 15 repay full remaining 875 million balance term loan facility pay 575 million amounts outstanding revolving credit facility use proceeds required lenders’ consent dated april 23 2012 credit agreement result sale breg ceased subsidiary company therefore breg released credit party credit agreement additionally company paid 20 million june 20 million september 2012 reduce amounts outstanding revolving credit facility result december 31 2012 term loan facility repaid full 20 million outstanding revolving credit facility december 31 2011 company 913 million outstanding term loan facility 1174 million outstanding revolving credit facility borrowings credit facilities bear interest floating rate orthofix holdings’ option either london interbank offered rate “libor” plus applicable margin base rate defined credit agreement plus applicable margin case subject adjustment based financial ratios applicable margin 325 libor borrowings 225 base rate borrowings depending upon measurement consolidated leverage ratio respect immediately preceding four fiscal quarters december 31 2012 entire revolving credit facility libor rate plus margin 250 december 31 2011 entire term loan facility 100 million revolving credit facility libor rate plus margin 300 december 31 2011 remaining 174 million revolving credit facility base rate defined credit agreement plus margin 200 effective interest rate credit facilities december 31 2012 2011 27 34 respectively outstanding principal revolving credit facility due august 30 2015 borrowings revolving credit facility may made future used working capital expenditures general corporate purposes orthofix holdings subsidiaries guarantors guaranteed repayment orthofix holdings’ obligations credit agreement obligations orthofix holdings guarantors respect credit facilities secured pledge substantially assets orthofix holdings guarantors credit agreement amended requires orthofix holdings company comply coverage ratios consolidated basis contains affirmative negative covenants including limitations additional debt liens investments acquisitions credit agreement amended also includes events default customary facilities type upon occurrence event default outstanding loans may accelerated andor lenders’ commitments terminated company compliance affirmative negative covenants december 31 2012 events default certain subsidiaries company restrictions ability pay dividends make intercompany loan advances pursuant company’s credit facilities net assets orthofix holdings subsidiaries restricted distributions parent company domestic subsidiaries company parties credit agreement access net assets operational purposes orthofix international nv notes consolidated financial statements cont amount restricted net assets orthofix holdings subsidiaries december 31 2012 2011 2474 million 1860 million respectively addition credit agreement restricts company subsidiaries parties credit facilities access cash held orthofix holdings inc subsidiaries company’s subsidiaries parties credit agreement access cash operational debt repayment purposes amount restricted cash company december 31 2012 2011 213 million 455 million respectively conjunction obtaining credit facilities credit agreement amended company incurred debt issuance costs 5 million includes 08 million costs related may 2011 amendment costs amortized using effective interest method life credit facilities conjunction term loan facility repayment may 2012 company wrote 08 million related debt issuance costs december 31 2012 2011 debt issuance costs net accumulated amortization related credit agreement 18 million 35 million respectively 9 derivative instruments tables disclose types derivative instruments company owns classifications fair values instruments within balance sheet amount gain loss recognized comprehensive income loss “oci” net income loss crosscurrency swap september 30 2010 company entered crosscurrency swap agreement “replacement swap agreement” jpmorgan chase bank royal bank scotland plc “counterparties” manage cash flows related foreign currency exposure portion company’s intercompany receivable us dollar functional currency subsidiary denominated euro orthofix international nv notes consolidated financial statements cont terms swap agreement company pays euros based 287 million notional value fixed rate 500 receives us dollars based notional value 39 million fixed rate 4635 expiration date december 30 2016 date upon underlying intercompany debt swap agreement applies matures swap agreement designated cash flow hedge therefore company recognized unrealized gain loss change fair value net tax within comprehensive income interest rate swap june 2008 company entered threeyear fully amortizable interest rate swap agreement “swap” notional amount 1500 million expiration date june 30 2011 june 29 2010 company settled swap financial institution holder derivative instrument resulted 13 million gain 2010 10 fair value measurements fair value defined price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date nonfinancial assets liabilities company measured fair value include longlived assets equity method investments impaired currently reported period authoritative guidance also describes three levels inputs may used measure fair value level 1 quoted prices active markets identical assets liabilities level 2 observable inputs quoted prices active markets identical assets liabilities level 3 unobservable inputs little market data available require reporting entity develop assumptions december 31 2012 company’s financial instruments included cash equivalents restricted cash accounts receivable shortterm bank borrowings accounts payable longterm secured debt cross currency derivative contract cash equivalents consist shortterm highly liquid incomeproducing investments original maturities 90 days less including money market funds carrying value restricted cash accounts receivable shortterm bank borrowings accounts payable approximate fair value due shortterm maturities instruments company’s credit facilities carry floating rate interest therefore carrying value considered approximate fair value company’s crosscurrency derivative instrument financial instrument recorded fair value recurring basis instrument consists overthecounter contract traded public exchange fair value swap contract determined based inputs readily available public markets derived information available publicly quoted markets therefore company categorized swap contract level 2 derivative financial instrument company also considers counterparty credit risk credit risk determination estimated fair values company consistently applied valuation techniques periods presented orthofix international nv notes consolidated financial statements cont fair value company’s financial assets liabilities recurring basis follows 1 see note 9 “derivative instruments” 11 commitments leases company entered operating leases facilities equipment leases noncancellable typically contain renewal options certain leases contain rent escalation clauses company recognizes expense straightline basis rent expense company’s operating leases years ended december 31 2012 2011 2010 approximately 41 million 48 million 68 million respectively future minimum lease payments operating leases net amounts received subleases december 31 2012 follows 12 business segment information company’s segment information prepared basis management reviews financial information operational decision making purposes time company’s chief operating decision maker “codm” uses gbu reporting sales operating income assess operating performance items operating income considered measuring profitability segment goodwill also assigned specific gbus company neither discretely allocates assets goodwill operating segments evaluates operating segments using discrete asset information may 24 2012 result sale sports medicine business company began managing business two gbus comprised spine orthopedics supported corporate activities represent current segments company’s chief operating decision maker reviews financial information makes resource allocation decisions among business units segments discussed spine provides portfolio repair regenerative products allow physicians successfully treat variety spinal conditions global business unit specializes design development marketing company’s spinal repair products along regenerative stimulation biologics products used spine applications spine distributes products network distributors sales representatives affiliates global business unit uses direct distributor sales representatives sell spine products hospitals doctors healthcare providers globally orthofix international nv notes consolidated financial statements cont orthopedics provides portfolio repair regenerative products allow physicians successfully treat variety orthopedic conditions unrelated spine global business unit specializes design development marketing company’s orthopedic repair products along regenerative stimulation biologics products used orthopedic applications orthopedics distributes products network distributors sales representatives affiliates global business unit uses direct distributor sales representatives sell orthopedics products hospitals doctors healthcare providers globally corporate activities comprised operating expenses orthofix international nv holding company subsidiaries along activities necessarily identifiable within two gbus business segments gbu table presents external net sales continuing operations gbu reporting segment net sales includes product sales marketing service fees comprised sales trinity evolution® spine orthopedic applications orthofix international nv notes consolidated financial statements cont table presents operating income loss continuing operations gbu reporting segment 1 2011 operating income spine gbu included 425 million expenses connection charges related us government resolutions 2 2011 operating income orthopedics gbu included 65 million expenses connection charges related us government resolutions 3 2011 operating loss corporate gbu included 75 million expenses connection charges related us government inquiries 32 million senior management succession charges following table presents depreciation amortization continuing operations gbu reporting segment orthofix international nv notes consolidated financial statements cont geographical information analysis net sales geographic destination analysis property plant equipment geographic area 13 income taxes income continuing operations provision income taxes consisted provision benefit income taxes continuing operations accompanying consolidated statements operations consists following tax effects significant temporary differences comprise deferred tax assets liabilities assets follows valuation allowance december 31 2012 2011 261 million 191 million respectively net increase valuation allowance 7 million year principally relates certain current period foreign losses benefitted valuation allowance attributable net operating loss carryforwards certain temporary differences certain foreign jurisdictions benefit dependent upon generation future taxable income foreign jurisdictions assessing realizability deferred tax assets management considers whether likely portion deferred tax assets realized ultimate realization deferred tax assets dependent upon generation future taxable income periods temporary differences become deductible management considers scheduled reversal deferred tax liabilities projected future taxable income tax planning strategies making assessment based upon level historical taxable income projections future taxable income periods deferred tax assets deductible management believes likely company realize benefits temporary differences net existing valuation allowances december 31 2012 company state net operating loss carryforwards approximately 215 million begin expire 2013 company net operating losses foreign taxing jurisdictions approximately 1016 million majority losses related company’s netherlands operations expiring various amounts tax years beginning 2013 company provided valuation allowance significant portion net operating loss carryforwards since believe deferred tax asset realized prior expiration rate reconciliation continuing operations presented based us federal income tax rate rather parent company’s country domicile tax rate management believes given large proportion taxable income earned united states disclosure meaningful effective tax rate 348 2012 impacted change estimate tax deduction associated settlement us government investigation company’s bone growth stimulation business income tax expense effective tax rate year ended 2011 reflects disproportionate ratio 288 million income tax expense effective tax rate 348 2012 company record tax benefit certain expenses associated company’s estimate charges related us government resolutions effective tax rate approximately 36 2012 38 2011 excluding impact charges related us government resolutions january 2 2013 american taxpayer relief act 2012 “act” enacted act provides tax relief businesses reinstating certain tax benefits credits retroactively january 1 2012 several provisions act impact company notably extension research development credit income tax accounting rules require tax law changes recognized period enactment associated tax benefits act recognized company’s provision income taxes first quarter 2013 company’s gross unrecognized tax benefit 10 million 06 million years ended december 31 2012 2011 respectively company recognizes potential accrued interest penalties related unrecognized tax benefits within global operations income tax expense company approximately 06 million 05 million accrued payment interest penalties december 31 2012 2011 respectively entire amount unrecognized tax benefits including interest would favorably impact company’s effective tax rate recognized december 31 2012 company expect amount unrecognized tax benefits change significantly next twelve months reconciliation gross unrecognized tax benefits excluding interest penalties years ended december 31 2012 december 31 2011 follows company files consolidated income tax return us federal jurisdiction uk italy numerous consolidated separate income tax returns many state foreign jurisdictions statute limitations respect federal tax authorities closed years prior december 31 2009 statute limitations various state tax filings closed instances years prior december 31 2008 statute limitations respect major foreign tax filing jurisdictions closed years prior december 31 2007 company’s intention reinvest total amount unremitted foreign earnings residing outside curaçao local jurisdiction extent generated available repatriate earnings taxeffective company provided tax expense 248 million unremitted earnings foreign subsidiaries practicable determine amounts net additional income tax may payable earnings repatriated orthofix international nv notes consolidated financial statements cont 14 related parties following related party balances transactions three years ended december 31 2012 among company companies directors executive officers interest reflected consolidated financial statements company bought components related av impulse ® system laryngeal mask products related party former board member retired may 2010 beneficial minority interest products longer purchased company 2010 additionally orthopro inc superior medical equipment independent distributors breg inc owned son former board member following table summarizes related party balances transactions years ended december 31 2012 2011 2010 15 sale breg disposition sports medicine gbu april 23 2012 company’s subsidiary orthofix holdings breg entered stock purchase agreement “spa” breg acquisition corp “buyer” newly formed affiliate water street healthcare partners ii lp pursuant buyer agreed acquire orthofix holdings outstanding shares breg subject terms conditions contained therein “transaction” terms spa upon closing sale orthofix holdings company agreed indemnify buyer respect certain specified matters including government investigation product liability matters regarding previously owned infusion pump product line preclosing sales cold therapy units certain postclosing sales cold therapy units see “matters related company’s former breg subsidiary possible indemnification obligations note 16 may 24 2012 “closing date” orthofix holdings completed sale outstanding shares breg 1575 million cash adjustments working capital indebtedness accordance terms spa orthofix holdings used 145 million net proceeds prepay outstanding company indebtedness required lender consent received connection company’s existing credit agreement result closing transaction breg ceased subsidiary company therefore breg released credit party credit agreement company also agreed enter certain transition arrangements closing including transition services agreement pursuant company agreed continue provide administrative operational support period twelve months result sale breg company completed exit sports medicine gbu breg significant component portion indemnification related post closing claims related postclosing sales cold therapy created guarantee accounting standards codification asc 460guarantees fair value liability recorded initial recognition criteria amount 2 million closing date transaction company amortize fair value noncontingent liability ratably period indemnification three years company’s obligations guarantee approximately 16 million december 31 2012 gain sale discontinued operations following table presents value asset disposition proceeds received net various working capital adjustments indebtedness net gain sale breg shown condensed consolidated statement operations year ended december 31 2012 sports medicine gbu contributed 44 million 1089 million net sales year ended december 31 2012 2011 respectively sports medicine gbu 29 million operating losses 12 million operating income years ended december 31 2012 2011 respectively financial information includes financial results breg operations date sale company’s consolidated financial statements related footnote disclosures reflect sports medicine gbu discontinued operations income loss associated sports medicine gbu net applicable income taxes shown income loss discontinued operations periods presented addition assets liabilities discontinued entity reclassified presented assets held sale liabilities held sale company’s balance sheet december 31 2011 assets liabilities discontinued operations follows 16 contingencies company party outstanding legal proceedings investigations claims described company believes unlikely outcome matters including matters discussed material adverse effect company subsidiaries whole notwithstanding unfavorable resolution matter may material effect company’s net earnings particular quarter however company cannot predict certainty final outcome legal proceedings investigations including settlement discussions government seeking resolve investigations claims made subsidiaries described paragraphs assurance ultimate resolution matter material adverse impact company’s consolidated financial position results operations cash flows company records accruals certain outstanding legal proceedings investigations claims probable liability incurred amount loss reasonably estimated company evaluates quarterly basis developments legal proceedings investigations claims could affect amount accrual well developments would make loss contingency probable reasonably estimable loss contingency probable reasonably estimable company accrue loss however loss additional loss excess accrual least reasonable possibility material company discloses reasonable estimate possible loss range loss reasonable estimate made company cannot make reasonable estimate possible loss range loss disclosed assessments whether loss probable reasonable possibility whether loss range loss reasonably estimable often involve series complex judgments future events among factors company considers assessment nature existing legal proceedings investigations claims asserted possible damages loss contingency reasonably estimable progress matter existing law precedent opinions views legal counsel advisers involvement us government agencies proceedings company’s experience similar matters experience companies facts available company time assessment company intends respond responded proceeding investigation claim company’s assessment factors may change time individual proceedings investigations claims progress matters company currently able reasonably estimate range reasonably possible loss factors contributed determination include following damages sought indeterminate investigation manifested filed civil criminal complaint ii matters early stages iii matters involve novel unsettled legal theories large uncertain number actual potential cases parties andor iv discussions government parties matters may expected ultimately resolved negotiation settlement reached point company believes reasonable estimate loss range loss made instances company believes considerable uncertainty regarding timing ultimate resolution matters including possible eventual loss fine penalty business impact addition matters described paragraphs normal course business company involved various lawsuits time may subject certain contingencies extent losses related contingencies probable reasonably estimable company accrues appropriate amounts accompanying financial statements provides disclosures possible range loss excess amount accrued range reasonably estimable company believes losses individually collectively immaterial possible loss range loss litigation matters related blackstone medical inc related escrow claims 2007 company’s subsidiary blackstone medical inc “blackstone” received subpoena issued office inspector general department health human services “hhsoig” authority federal healthcare antikickback false claims statutes subpoena sought certain documents period january 1 2000 july 31 2006 covered period prior blackstone’s acquisition company september 22 2006 2008 2009 respectively company received federal grand jury subpoena us attorney’s office district massachusetts “boston usao” hipaa subpoena issued us department justice “doj” subpoena sought certain documents us period january 1 2000 july 15 2007 subpoenas concerned compensation physician consultants related matters 2008 company obtained copy qui tam complaint filed company blackstone us district court district massachusetts complaint related matters described involving hhsoig boston usao doj us department justice subsequently filed notice nonintervention case january 2012 series ongoing discussions negotiations boston usao company’s board directors approved agreement principle pay 32 million resolve matters october 29 2012 company blackstone entered definitive settlement agreement us government qui tam relator settlement agreement memorialized agreement 32 million company paid pursuant settlement funded proceeds received escrow fund established connection company’s acquisition blackstone 2006 also recorded charge 03 million 2012 represented imputed interest settlement accrued payment date october 2012 matters related regenerative stimulation business 2009 company received hipaa subpoena “hipaa subpoena” issued boston usao subpoena sought documents concerning among things company’s promotion marketing regenerative stimulator devices company also described past “bone growth stimulator devices” boston usao issued several subsequent document testimony subpoenas company cooperated requests company subsequently obtained copy qui tam complaint filed us district court district massachusetts company orthofix inc companies allegedly manufactured regenerative stimulation devices including orthologic corp djo incorporated reable therapeutics inc blackstone group lp biomet inc ebi lp ebi holdings inc ebi medical systems inc bioelectron inc lbv acquisition inc smith nephew inc complaint subsequently amended 2010 alleged various causes action federal false claims act state city false claims acts premised contention defendants improperly promoted sale opposed rental regenerative stimulation devices complaint also included claims defendants among things allegedly misleading physicians purportedly causing file false claims allegedly violating antikickback act providing free products physicians waiving patients’ insurance copayments providing inducements independent sales agents generate business april 28 2011 series ongoing discussions negotiations boston usao company’s board directors approved agreement principle proposed boston usao resolve criminal civil matters described immediately preceding two paragraphs june 6 2012 company entered definitive settlement agreement united states america acting doj behalf hhsoig tricare management activity general counsel office personnel management capacity administrator federal employees health benefits program united states department veteran affairs qui tam relator company agreed pay 342 million plus interest rate 3 may 5 2011 day payment made terms settlement agreement addition company agreed july 2012 pay qui tam relator’s counsel 10 million fees amounts paid fourth quarter 2012 connection settlement agreement company’s whollyowned subsidiary orthofix inc entered plea agreement boston usao doj june 7 2012 orthofix inc agreed plead guilty one felony count obstruction june 2008 federal audit §18 usc 1516 plea agreement amended december 14 2012 though terms remained materially consistent earlier plea agreement company executed plea accepted entered us district court district massachusetts december 14 2012 consistent terms recommended plea agreement court imposed criminal fine 78 million mandatory special assessment 400 company subsequently paid fourth quarter 2012 addition court imposed five year term probation special conditions mandate certain nondisparagement obligations order orthofix inc continue complying terms company’s previouslydisclosed 5year corporate integrity agreement described expiration term company previously recorded charge 43 million first quarter 2011 anticipation settlement company also recorded charge 17 million 2012 represented imputed interest settlement accrued payment date december 2012 corporate integrity agreement hhsoig june 6 2012 connection company’s settlement matters described related regenerative stimulation business anticipation final settlement government investigation related qui tam complaint described related blackstone medical inc company also entered fiveyear corporate integrity agreement hhsoig “cia” cia acknowledges existence company’s current compliance program requires company continue maintain term cia compliance program designed promote compliance federal healthcare food drug administration “fda” requirements company also required maintain several elements previously existing program term cia including maintaining chief compliance officer compliance committee code conduct cia requires company conduct certain additional compliancerelated activities term cia including various training monitoring procedures maintaining disciplinary process compliance obligations pursuant cia company required notify hhsoig writing among things ongoing government investigation legal proceeding involving allegation company committed crime engaged fraudulent activities ii matter reasonable person would consider probable violation applicable criminal civil administrative laws related compliance federal healthcare programs fda requirements iii change location sale closing purchase establishment new business unit location related items services may reimbursed federal healthcare programs company also subject periodic reporting certification requirements attesting provisions cia implemented followed well certain document record retention mandates cia provides event uncured material breach cia company could excluded participation federal healthcare programs andor subject monetary penalties matters related promeca july 10 2012 company entered definitive agreements doj securities exchange commission “sec” agreeing settle selfinitiated selfreported internal investigation mexican subsidiary promeca sa de cv “promeca” regarding noncompliance promeca foreign corrupt practices act “the fcpa” terms agreements company voluntarily disgorged profits united states government amount 52 million inclusive prejudgment interest agreed pay fine 22 million company paid 22 million july 2012 52 million september 2012 part settlement company entered 3year deferred prosecution agreement “dpa” doj agreed pursue criminal charges company connection matter company complies terms dpa takes note company’s selfreporting matter doj sec remedial measures including implementation enhanced compliance program previously undertaken company dpa provides company shall continue cooperate fully doj future matters related corrupt payments false books records inadequate internal controls regard company represented implemented continue implement compliance ethics program designed prevent detect violations fcpa applicable anticorruption laws company periodically report doj term dpa regarding remediation implementation compliance measures part settlement company also agreed certain reporting obligations sec regarding status remediation implementation compliance measures event company fails comply obligations could subject criminal prosecution doj fcparelated matters selfreported matters related company’s former breg subsidiary possible indemnification obligations may 24 2012 company sold breg inc “breg” affiliate water street healthcare partners ii lp “water street” pursuant stock purchase agreement “breg spa” terms breg spa upon closing sale company subsidiary orthofix holdings inc agreed indemnify water street breg respect certain specified matters including government investigation product liability matters regarding previously owned infusion pump product line described ii preclosing sales cold therapy units certain postclosing sales cold therapy units company established accrual 42 million indemnification obligations connection july 2012 verdict described fourth paragraph however actual liability case could higher lower amount accrued company established accrual connection indemnification obligations breg spa currently cannot reasonably estimate possible loss range loss connection obligations including respect matters described three paragraphs breg engaged manufacturing sale local infusion pumps pain management 1999 2008 since 2008 numerous product liability cases filed united states alleging local anesthetic dispensed infusion pumps inside joint causes rare arthritic condition called “chondrolysis” company believes meritorious defenses exist claims breg vigorously defending cases one company’s insurance carriers previously asserted company certain potential losses related matter covered insurance coverage company subsequently went arbitration carrier january 22 2013 company obtained binding arbitration award providing carrier obligated reimburse company defense expenses settlements judgments certain policies company currently estimates entitled reimbursement approximately 13 million past losses incurred well 15 million potential future coverage pending products liability matters approximately 13 million recorded income loss discontinued operations 2012 current assets december 31 2012 august 2 2010 breg received hipaa subpoena issued doj subpoena seeks documents company subsidiaries period january 1 2000 date subpoena company believes document production response subpoena completed july 2012 company believes subpoena relates investigation doj whether breg’s sale marketing labeling local infusion pumps pain management prior breg’s divestiture product line 2008 complied fda regulations federal law company currently cooperating us government connection matter january 27 2012 company orally notified us government official civil investigation breg pending connection matter january 18 2013 company served qui tam complaint filed united states district court western district missouri company former owner breg stryker corporation iflow corporation djo incorporated contains allegations relating marketing promotion breg’s former infusion pump products company vigorously defending matter time divestiture company breg currently engaged manufacturing sales motorized cold therapy units used reduce pain swelling several domestic product liability cases filed recent years mostly california state court alleging use cold therapy causes skin andor nerve injury seeking damages behalf individual plaintiffs allegedly injured units majority cases early stage conclusion drawn present time regarding potential outcome however company believes meritorious defenses exist claims july 2012 jury one case related motorized cold therapy unit previously sold breg returned verdict providing approximately 21 million compensatory damages plaintiff breg 7 million exemplary damages case remains subject appeal company believes damages without merit however ultimate outcome uncertain company previously established accrual related charge discontinued operations 42 million compensatory damages exemplary damages indemnification obligations connection july 2012 verdict however actual liability case could higher lower amount accrued orthofix international nv notes consolidated financial statements cont 17 pensions deferred compensation orthofix inc sponsors defined contribution plan “orthofix inc 401k plan” covering substantially full time us employees orthofix inc 401k plan allows participants contribute 15 pretax compensation subject certain limitations company matching 100 first 2 employee’s base compensation 50 next 4 employee’s base compensation contributed orthofix inc 401k plan years ended december 31 2012 2011 2010 expenses incurred relating 401k plans including matching contributions approximately 25 million 25 million 28 million respectively company operates defined contribution pension plans international employees described meeting minimum service requirements company’s expenses pension contributions 2012 2011 2010 07 million 08 million 07 million respectively italian law orthofix srl accrues behalf employees deferred compensation paid termination employment year’s provision deferred compensation based percentage employee’s current annual remuneration plus annual charge deferred compensation also accrued leaving indemnity payable agents case dismissal regulated national contract equal approximately 35 total commissions earned company orthofix deferred compensation plan “plan” administered board directors company effective january 1 2007 amended restated effective january 1 2009 plan intended allow select group key management highly compensated employees company defer receipt compensation would otherwise payable terms plan intended comply respects provisions code section 409a code section 457a january 1 2011 company disallowed contributions plan new plan participants distributions made accordance requirements code section 409a company’s expense deferred compensation 2012 2011 2010 approximately 04 million 01 million 01 million respectively deferred compensation payments 08 million 02 million made 2012 2011 2010 respectively balance december 31 2012 2011 23 15 million represents amount would payable employees agents terminated employment date included longterm liabilities orthofix international nv notes consolidated financial statements cont 18 sharebased compensation plans december 31 2012 company stock option award plans employee stock purchase plan described 2012 long term incentive plan board directors adopted orthofix international nv 2012 longterm incentive plan “2012 ltip” april 13 2012 subject shareholder approval subsequently provided shareholder ratification 2012 ltip provides grant options purchase shares company’s common stock awards including restricted stock unrestricted stock units stock appreciation rights performancebased awards equitybased awards company’s employees company’s subsidiaries affiliates eligible receive awards 2012 ltip addition company’s nonemployee directors consultants advisors perform services company’s subsidiaries affiliates may receive awards 2012 ltip incentive share options however available company’s employees company reserves total 1600000 shares common stock issuance pursuant 2012 ltip subject certain adjustments set forth 2012 ltip december 31 2012 156000 options outstanding 2012 ltip plan none exercisable addition 125500 shares restricted stock outstanding none vested 2004 long term incentive plan 2004 long term incentive plan “2004 ltip plan” reserves 31 million shares issuance addition shares available future awards june 29 2004 prior plans ii become available future issuance upon expiration forfeiture june 29 2004 awards upon prior plans awards generally vest years service awards fully vesting within three years date grant employees either three five years date grant nonemployee directors awards form stock option restricted stock restricted share unit performance share unit award form determined board directors awards granted 2004 ltip plan expire later ten years date grant 2004 ltip plan provides annual grant nonemployee directors 5000 shares limits future number shares may awarded plan full value awards 100000 shares december 31 2012 1460355 options outstanding 2004 ltip plan 1218693 exercisable addition 35331 shares restricted stock outstanding none vested staff share option plan staff share stock option plan “staff share plan” fixed stock option plan adopted april 1992 staff share plan company granted options employees estimated fair market value options date grant options generally vest based years service options fully vested within five years date grant options granted staff share plan expire ten years date grant options left granted staff plan december 31 2012 29600 options outstanding exercisable staff share plan orthofix international nv notes consolidated financial statements cont employee stock purchase plan orthofix international nv amended restated stock purchase plan “stock purchase plan” provides issuance shares company’s common stock eligible employees directors company subsidiaries elect participate plan acquire shares common stock payroll deductions including executive officers purchase period eligible employees may designate 1 25 compensation deducted purchase common stock plan 25 employees working north america south america asia 15 employees working europe eligible directors designated percentage amount equal annual director compensation paid cash current plan year purchase price shares plan equal 85 fair market value first day plan year calendar year running january 1 december 31 lower last day plan year due compensatory nature plan company recorded related share based compensation consolidated statement operations aggregate number shares reserved issuance employee stock purchase plan 1850000 shares december 31 2012 1362808 shares issued stock purchase plan orthofix international nv notes consolidated financial statements cont sharebased compensation december 31 2012 unamortized compensation expense relating options granted expected recognized 39 million amount expected recognized august 2016 following table shows detail sharebased compensation line item consolidated statements operations years ended december 31 2012 2011 2010 assumptions years grants awarded 1 company grant options 2010 stock option activity summaries status company’s stock option plans december 31 2012 2011 changes year ended december 31 2012 presented orthofix international nv notes consolidated financial statements cont outstanding exercisable price range december 31 2012 weighted average remaining contractual life exercisable options 42 years december 31 2012 total intrinsic value options exercised 72 million 42 million 30 million years ended december 31 2012 2011 2010 respectively aggregate intrinsic value options outstanding options exercisable december 31 2012 calculated difference exercise price underlying options market price company’s common stock shares exercise prices lower 3933 closing price company’s stock december 31 2012 aggregate intrinsic value options outstanding 112 million 108 million 48 million years ended december 31 2012 2011 2010 respectively aggregate intrinsic value options exercisable 98 million 84 million 21 million years ended december 31 2012 2011 2010 respectively restricted stock year ended december 31 2012 company granted employees nonemployee directors 149500 shares restricted stock vest various dates november 2015 year ended december 31 2011 company granted employees 94000 shares restricted stock vest various dates february 2014 compensation expense represents fair value stock measured market price date grant less estimated forfeitures recognized straightline basis vesting period unamortized compensation expense related restricted stock amounted 48 million december 31 2012 orthofix international nv notes consolidated financial statements cont summary status restricted stock december 31 2012 2011 changes year ended december 31 2012 presented 19 earnings per share three years ended december 31 2011 adjustments net income loss purposes calculating basic diluted net income loss available common shareholders following reconciliation weighted average shares used basic diluted net income loss per common share computations adjustment made 2011 common stock equivalents effects would antidilutive 2011 potentially dilutive shares totaled 344168 options purchase shares common stock exercise prices excess average market price common shares included computation diluted earnings per share 789650 1487809 outstanding options included diluted earnings per share computation fiscal years ended december 31 2012 2011 respectively inclusion options antidilutive 20 restructuring charges fourth quarter 2008 part company’s strategic plan strengthen business company initiated restructuring plan improve operations reduce costs blackstone plan involved consolidation substantially blackstone’s operations previously conducted wayne nj springfield facility housing spine stimulation us orthopedics business dallas tx area company completed restructuring consolidation second quarter 2010 recognized total restructuring expense 36 million fourth quarter 2010 company initiated reorganization plan streamline operations lower operating costs within spine orthopedics sports medicine gbu fourth quarter 2010 company recorded restructuring charges 04 million spine 32 million orthopedics related employee severance costs final cash payments made third quarter 2011 charges anticipated orthofix international nv notes consolidated financial statements cont restructuring costs recorded year ended december 31 2010 consolidated statements operations 16 million selling marketing 20 million general administrative expense following table presents changes restructuring liability included within current liabilities company’s consolidated balance sheets december 31 2011 december 31 2010 21 net gain sale vascular operations march 8 2010 company entered asset purchase agreement “apa” company agreed sell substantially assets vascular operations related av impulse system ® related accessories including finished goods inventory tangible assets closing company received payment approximately 277 million amount includes estimated value certain finished goods inventory conveyed closing remains subject postclosing verification pursuant apa company agreed enter certain transition arrangements closing including transition services agreement pursuant among things company would continue provide operational support respect transferred assets certain jurisdictions period five months ii two separate supply agreements certain impads period two years provide products period 90 days second third quarters 2010 company completed transition services agreement one supply agreements supplies products september 2011 company completed amendment supply agreement supply certain impads march 2014 company also agreed enter 5year noncompetition agreement closing respect business assets transferred orthofix international nv notes consolidated financial statements cont following table presents value asset disposition cash proceeds received net litigation settlement costs net gain sale vascular operations shown consolidated statements operations year ended december 31 2010 1 conjunction sale vascular operations company settled outstanding litigation claim former patent holders 35 million 22 quarterly financial data unaudited us dollars thousands except per share data 1 includes 46 million charges related us government resolutions 2 includes 105 million charges related us government resolutions orthofix international nv schedule 1condensed financial information registrant orthofix international nv condensed balance sheets unaudited see accompanying notes condensed financial statements s1 orthofix international nv schedule 1condensed financial information registrant orthofix international nv condensed statements operations unaudited see accompanying notes condensed financial statements s2 orthofix international nv schedule 1condensed financial information registrant orthofix international nv condensed statement cash flows see accompanying notes condensed financial statements s3 orthofix international nv schedule 1condensed financial information registrant orthofix international nv notes condensed financial statements unaudited 1 background basis presentation condensed parent company financial statements prepared accordance rule 1204 schedule 1 regulation sx restricted net assets orthofix holdings inc subsidiaries exceed 25 consolidated net assets orthofix international nv subsidiaries “company” information read conjunction company’s consolidated financial statements included elsewhere filing 2 restricted net assets subsidiaries certain company’s subsidiaries restrictions ability pay dividends make intercompany loans advances pursuant financing arrangements amount restricted net assets company’s subsidiaries held december 31 2012 2011 approximately 2474 million 1860 million respectively restrictions net assets orthofix holdings inc subsidiaries 3 commitments contingencies longterm obligations discussion company’s commitments contingencies long term obligations senior secured credit facility see note 8 note 11 note 16 company’s consolidated financial statements 4 dividends subsidiaries cash dividends received orthofix international nv consolidated subsidiaries accounted equity method 59 million 216 million years ended december 31 2011 2010 respectively orthofix international nv receive cash dividends 2012 s4 orthofix international nv schedule 2valuation qualifying accounts years ended december 31 2012 2011 2010 s5item 15 exhibits financial statement schedules documents filed part report form 10k following documents filed part report form 10k 1 financial statements see “index consolidated financial statements” page form 10k 2 financial statement schedules see “index consolidated financial statements” page form 10k 3 exhibits exhibit number description 21 asset purchase agreement dated march 8 2010 tyco healthcare group lp dba covidien ag mallinckrodt brasilltda kendall de mexico sa de cv novamedix limited novamedix distribution limited novamedix services limited promeca sa de cv orthofix brasil orthofixsrl orthofix sa intavent orthofix limited breg mexico de ri de cv implantes sistemas medicos inc filed exhibit company’s current report form 8k filed march 9 2010 incorporated herein reference 22 stock purchase agreement dated april 23 2012 among breg inc orthofix holdings inc breg acquisition corp filed exhibit company’s current report form 8k filed april 24 2012 incorporated herein reference 31 certificate incorporation company filed exhibit company’s annual report form 20f dated june 29 2001 incorporated herein reference 32 articles association company amended filed exhibit company’s annual report form 10k year ended december 31 2011 incorporated herein reference 101 credit agreement dated august 30 2010 among orthofix holdings inc orthofix international nv certain domestic subsidiaries orthofix international nv several banks financial institutions may time become parties thereunder jpmorgan chase na filed exhibit company’s current report form 8k filed august 31 2010 incorporated herein reference 102 first amendment credit agreement dated may 4 2011 among orthofix holdings inc delaware corporation orthofix international nv “orthofix international” netherlands antilles corporation certain domestic direct indirect subsidiaries orthofix international jpmorgan chase bank na administrative agent certain lender parties thereto filed exhibit company’s current report form 8k filed may 5 2011 incorporated herein reference 103 limited waiver entered august 14 2013 among orthofix international nv orthofix holdings inc certain wholly owned subsidiaries certain lender parties thereto filed exhibit company’s current report form 8k filed august 19 2013 incorporated herein reference 104 matrix commercialization collaboration agreement entered july 24 2008 orthofix holdings inc musculoskeletal transplant foundation filed exhibit company’s annual report form 10k fiscal year ended december 31 2009 incorporated herein reference filed herewith  certain confidential portions exhibit omitted means redacting portion text exhibit filed separately secretary commission without redactions pursuant application requesting confidential treatment securities exchange act 1934 exhibit deemed “filed” purposes section 18 securities exchange act 1934 15 usc 78r otherwise subject liability section signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized orthofix international nv dated march 31 2014 bradley r mason name bradley r mason title president chief executive officer director pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated orthofix international nv statement management’s responsibility financial statements shareholders orthofix international nv management responsible preparation consolidated financial statements related information presented report consolidated financial statements include amounts based management’s estimates judgments prepared conformity accounting principles generally accepted united states financial information report shareholders consistent consolidated financial statements company maintains accounting internal control systems provide reasonable assurance reasonable cost assets safeguarded loss unauthorized use disposition financial records reliable preparing financial statements maintaining accountability assets systems augmented written policies organizational structure providing division responsibilities careful selection training qualified personnel company engaged ernst young llp independent registered public accountants audit render opinion consolidated financial statements accordance auditing standards public company accounting oversight board united states standards include assessment systems internal controls test transactions extent considered necessary support opinion board directors audit committee consisting solely outside directors company meets periodically management independent registered public accountants ensure meeting responsibilities discuss matters concerning internal controls financial reporting ernst young llp full free access audit committee davey scoon chairman audit committee bradley r mason president chief executive officer director emily v buxton chief financial officer orthofix international nv index consolidated financial statements schedules provision made applicable accounting regulation securities exchange commission required related instructions inapplicable therefore omitted report independent registered public accounting firm board directors shareholders orthofix international nv audited accompanying consolidated balance sheets orthofix international nv “the company” december 31 2013 2012 related consolidated statements operations comprehensive income loss changes shareholders’ equity cash flows three years period ended december 31 2013 audits also included financial statement schedules listed index item 15a financial statements schedules responsibility company’s management responsibility express opinion financial statements schedules based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position orthofix international nv december 31 2013 2012 consolidated results operations cash flows three years period ended december 31 2013 conformity us generally accepted accounting principles also opinion related financial statement schedules considered relation basic consolidated financial statements taken whole present fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states orthofix international nv’s internal control financial reporting december 31 2013 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 1992 framework report dated march 31 2014 expressed adverse opinion thereon ernst young llp dallas texas march 31 2014 orthofix international nv consolidated balance sheets december 31 2013 2012 accompanying notes form integral part consolidated financial statements orthofix international nv consolidated statements operations comprehensive income loss years ended december 31 2013 2012 2011 orthofix international nv consolidated statements changes shareholders’ equity years ended december 31 2013 2012 2011 accompanying notes form integral part consolidated financial statements orthofix international nv consolidated statements cash flows years ended december 31 2013 2012 2011 accompanying notes form integral part consolidated financial statements orthofix international nv notes consolidated financial statements description business orthofix international nv “company” diversified global medical device company focused developing delivering innovative repair regenerative technologies spine orthopedic markets company comprised four reportable segments biostim biologics extremity fixation spine fixation supported corporate activities 1 summary significant accounting policies basis consolidation consolidated financial statements include financial statements company wholly owned majorityowned subsidiaries entities company control intercompany accounts transactions profits eliminated consolidated financial statements continuing operations basis unless otherwise noted b reclassifications company reclassified certain line items conform current year presentation reclassifications effect previously reported net earnings shareholders’ equity c use estimates preparation financial statements preparation financial statements conformity gaap requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period ongoing basis evaluate estimates including related recoverability useful lives longlived assets adequacy allowance doubtful accounts inventory obsolescence income taxes base estimates historical experience future expectations relevant assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources actual results could differ estimates foreign currency translation financial statements operations outside united states generally maintained local currency foreign currency denominated balance sheet accounts except shareholders’ equity translated us dollars year end exchange rates revenue expense items translated weighted average rates exchange prevailing year gains losses resulting translation foreign currency recorded accumulated comprehensive income component shareholders’ equity transactional foreign currency gains losses including generated intercompany operations included expense net 07 million loss 05 million loss 16 million loss years ended december 31 2013 2012 2011 respectively e cash equivalents company considers highly liquid investments original maturity three months less date purchase cash equivalents f restricted cash restricted cash consists cash held certain subsidiaries distribution transfer orthofix international nv “parent” subsidiaries parties credit facility described note 9 restricted senior secured credit facility restricts parent subsidiaries parties facility access cash held orthofix holdings inc subsidiaries credit party subsidiaries access cash operational debt repayment purposes g market risk ordinary course business company exposed impact changes interest rates foreign currency fluctuations company’s objective limit impact movements earnings cash flows order achieve objective company seeks balance nonus dollar denominated income expenditures 2013 2012 2011 company made use foreign currency swap agreement manage cash flow exposure generated foreign currency fluctuations company generally require collateral trade receivables h inventories valued lower cost estimated net realizable value provision excess obsolete impaired items reviewed updated periodic basis management inventory procured produced whether internally contract manufacturing arrangements manufacturing facility italy cost determined weightedaverage basis approximates firstin firstout “fifo” method due high turnover rate inventory location inventory procured produced whether internally contract manufacturing arrangements manufacturing facility texas standard costs approximates actual cost fifo method used value inventory standard costs reviewed annually management often event circumstances indicate change cost occurred valuation workinprocess finished products field inventory consignment inventory includes cost materials labor production costs field inventory represents immediately saleable finished products inventory possession company’s direct sales representatives consignment inventory represents immediately saleable finished products located third party customers distributors hospitals longlived assets including intangibles property plant equipment stated cost less accumulated depreciation costs include expenditures necessary place asset service including freight sales use taxes plant equipment also includes instrumentation held customers generally used facilitate implantation company’s products associated cost accumulated depreciation december 31 2013 549 million 337 million respectively depreciation computed straightline basis useful lives assets depreciation leasehold improvements computed shorter lease term useful life asset useful lives follows expenditures maintenance repairs minor renewals improvements extend lives respective assets expensed incurred expenditures renewals improvements capitalized assets related accumulated depreciation adjusted property retirements disposals resulting gain loss included operations fully depreciated assets remain accounts retired service patents intangible assets recorded cost acquired part business combination estimated fair value assets primarily include patents technology agreements “developed technologies” trademarks identifiable intangible assets considered definite lived amortized useful lives using method amortization reflects pattern economic benefit intangible assets consumed company’s weighted average amortization period developed technologies 11 years intangible longlived assets definite lives developed technologies tested impairment adverse conditions exist change circumstances occurred would indicate impairment change remaining useful life impairment indicator exists company tests intangible asset recoverability purposes recoverability test company groups intangible assets liabilities lowest level identifiable cash flows intangible asset generate cash flows independent assets liabilities carrying value intangible asset group exceeds undiscounted cash flows expected result use eventual disposition intangible asset group company write carrying value fair value period identified company generally calculates fair value indefinitelived intangible assets present value estimated future cash flows determining estimated future cash flows associated intangible assets company uses estimates assumptions future revenue contributions cost structures remaining useful lives asset group use alternative assumptions including estimated cash flows discount rates alternative estimated remaining useful lives could result different calculations impairment j goodwill company tests goodwill least annually impairment company tests frequently indicators present changes circumstances suggest impairment may exist indicators include among others declines sales earnings cash flows development material adverse change business climate company assesses goodwill impairment reporting unit level defined operating segment one level operating segment referred component company identified four reporting units consistent company’s reporting segments biostim biologics extremity fixation spine fixation order calculate respective carrying values company initially recorded goodwill based purchase price allocation performed time acquisition corporate assets liabilities directly relate reporting unit’s operations ascribed directly reporting unit corporate assets liabilities directly related specific reporting unit reporting unit benefits allocated based respective contribution measure reporting unit effective july 1 2013 company realigned reporting units consequently reallocated carrying value goodwill previous reporting units new reporting units based relative fair value new reporting unit total enterprise value july 1 2013 result company’s change reportable segments company allocated goodwill reportable segment subsequently evaluated reportable segment possible impairment goodwill indicators impairment completing qualitative analysis result analysis full impairment goodwill allocated extremity fixation spine fixation reportable units totaling 192 million company’s annual goodwill impairment analysis performed qualitatively fourth quarter 2013 result additional impairment charge k derivative instruments company manages exposure fluctuating cash flows resulting changes interest rates foreign exchange within consolidated financial statements according hedging policy company may engage nonleveraged transactions involving various financial derivative instruments manage exposed positions policy requires company formally document relationship hedging instrument hedged item well riskmanagement objective strategy undertaking hedge transaction instruments designated cash flow hedge company formally assesses hedge’s inception ongoing basis whether derivative used hedging transaction effective offsetting changes cash flows hedged item whether derivative may expected remain effective future periods determined derivative ceased effective hedge company discontinue related hedge accounting prospectively determination would made 1 derivative longer effective offsetting changes cash flows hedged item 2 derivative expires sold terminated exercised 3 management determines designating derivative hedging instrument longer appropriate ineffective portions changes fair value cash flow hedges recognized earnings company records derivatives either assets liabilities balance sheet respective fair values cash flow hedge effective portion derivative’s change fair value ie gains losses initially reported component comprehensive income net related taxes subsequently reclassified net earnings hedged exposure longer effective company utilizes cross currency swap manage foreign currency exposure related portion company’s intercompany receivable us dollar functional currency subsidiary denominated euro cross currency swap accounted cash flow hedge accordance asc topic 815 derivatives hedging l accumulated comprehensive income accumulated comprehensive income comprised foreign currency translation adjustments effective portion gain loss company’s crosscurrency swap designated accounted cash flow hedge see note 10 components changes accumulated comprehensive income follows 1 cash generally remains permanently invested non us dollar denominated foreign subsidiaries deferred taxes recognized related foreign currency translation adjustment revenue recognition accounts receivable commercial revenue related sale company’s implant products generally representing hospital customers revenues recognized products utilized confirming purchase order received hospital revenue derived thirdparty payors including commercial insurance carriers health maintenance organizations preferred provider organizations governmental payors medicare connection sale stimulation products revenue recognized stimulation product placed implanted accepted patient amounts paid thirdparty payors generally based fixed allowable reimbursement rates revenues recorded expected preauthorized reimbursement rates net contractual allowances adjustments certain billings subject review thirdparty payors may subject adjustment distributor revenue related primarily implant products company recognizes revenue either sellin sellthrough basis depending specific circumstances distributor cases company recognizes distributor revenue title risk loss passes either shipment company’s facilities receipt distributor’s facility assuming revenue recognition criteria achieved “sellin method” based results independent review company determined cases revenue recognition criteria distributor sales satisfied time shipment receipt specifically existence extracontractual terms arrangements caused company meet fixed determinable criteria revenue recognition cases others collectability established situations unable satisfy requirements recognize revenue sellin method recognize revenue relating distributor arrangements product delivered end customer “sellthrough method” company reliable information distributors sell product end customers company uses cash collection distributors basis revenue recognition sellthrough method although many cases company legally entitled accounts receivable time shipment company recognized accounts receivables corresponding deferred revenues associated distributor transactions revenue recognized sellthrough method effective april 1 2013 distributor revenue recognized sellthrough basis distributors sellin method prior april 1 2013 cost sales recognized upon shipment sellthrough distributors whose revenue recognized upon cash receipt company considers whether match related cost sales expense revenue recognize expense upon shipment making assessment company considers financially viability distributors based creditworthiness determine collectability amounts sufficient realize costs products shipped reasonably assured time shipment distributors instances distributor determined financially viable company defers costs sales revenue recognized biologics revenue primarily related collaborative arrangement mtf 2008 company entered collaborative arrangement mtf develop commercialize trinity evolution ® stem cellbased bone growth biologic matrix development process completed 2009 company mtf operated terms separate commercialization agreement terms 10year agreement mtf sourced tissue processed create bone growth matrix packaged delivered customer accordance orders received company exclusive global marketing rights trinity evolution ® receives marketing fees mtf based total sales marketing fees recorded net basis within net sales 477 million 465 million 368 million 2013 2012 2011 respectively january 10 2012 company announced reached agreement mtf codevelop commercialize new technology use bone grafting applications expand mtf’s trinity evolution ® processing capacity amendment amends term existing agreement later 15 years date certain development milestones achieved existing agreement occurred 2010 ii date certain licensing arrangements company nuvasive inc expire mtf considered primary obligor arrangements therefore company recognizes marketing service fees net basis upon shipment product customer revenues exclude value added local taxes intercompany sales trade discounts shipping handling costs included cost sales process estimating ultimate collection accounts receivable involves significant assumptions judgments historical collection payor reimbursement experience integral part estimation process related reserves doubtful accounts establishment contractual allowances accounts receivable analyzed quarterly basis assess adequacy reserves doubtful accounts contractual allowances revisions allowances doubtful accounts estimates recorded adjustment bad debt expense within sales marketing expenses contractual allowances recorded adjustment revenue estimates periodically tested actual collection experience n sale accounts receivable company generally sell receivables certain italian hospitals year estimated related fee 2013 2012 08 million 06 million respectively recorded interest expense trade accounts receivables sold without recourse removed balance sheet time sale sharebased compensation fair value servicebased stock options determined using blackscholes valuation model value recognized expense service period net estimated forfeitures fair value marketbased stock options determined date grant using monte carlo valuation methodology value recognized expense requisite service period adjusted estimated forfeitures separately vesting tranche award monte carlo methodology use estimate fair value marketbased options incorporates valuation possibility market condition may satisfied expected term options granted estimated based number factors including vesting expiration terms award historical employee exercise behavior options currently outstanding options exercised expired historical volatility company’s common stock employee’s average length service riskfree interest rate determined based upon constant us treasury security rate contractual life approximates expected term option award management estimates expected volatility based historical volatility company’s stock compensation expense recognized equitybased awards net estimated forfeitures estimated based analysis actual option forfeitures p advertising costs company expenses advertising costs incurred advertising expense included sales marketing expense years ended december 31 2013 2012 2011 02 million 03 million 05 million respectively q research development costs expenditures related collaborative arrangement mtf expensed based terms related agreement milestone payments made mtf 2013 2012 totaled 25 million 30 million respectively milestone payments made mtf 2011 expenditures research development expensed incurred r income taxes company subject income taxes us foreign jurisdictions uses estimates determining provision income taxes company accounts income taxes using asset liability method accounting reporting income taxes method deferred tax assets liabilities recognized based temporary differences financial reporting income tax basis assets liabilities using statutory rates process requires company project current tax liability estimate deferred tax assets liabilities including net operating loss tax credit carry forwards assessing need valuation allowance company considered recent operating results future taxable income projections prudent feasible tax planning strategies company accounts uncertain tax positions accordance asc 740 income taxes contains twostep approach recognizing measuring uncertain tax positions first step evaluate tax position taken expected taken tax return determining weight available evidence indicates likely evaluation technical merits tax position sustained audit including resolution related appeals litigation processes second step measure tax benefit largest amount 50 likely realized upon ultimate settlement company reevaluates income tax positions periodically consider factors changes facts circumstances changes interpretations tax law effectively settled issues audit new audit activity change recognition measurement would result recognition tax benefit additional charge tax provision company includes imputed interest applicable penalties related tax issues part income tax expense consolidated financial statements net income loss per common share net income loss per common sharebasic computed using weighted average number common shares outstanding respective years net income loss per common sharediluted computed using weighted average number common equivalent shares outstanding respective years using “treasury stock” method dilutive common equivalent shares represent dilutive effect assumed exercise outstanding share options see note 20 differences basic diluted shares result assumed exercise certain outstanding share options financial instruments concentration credit risk financial instruments could subject company concentration credit risk consist primarily cash equivalents accounts receivable generally cash held large financial institutions cash equivalents consist highly liquid money market funds company performs ongoing credit evaluations customers generally require collateral maintain reserve potential credit losses company believes concentration credit risk related accounts receivable limited customers geographically dispersed end users diversified across several industries net sales customers distributors based europe approximately 52 million 2013 results substantial portion trade accounts receivable balance december 31 2013 least reasonably possible changes global economic conditions andor local operating economic conditions regions distributors operate factors could affect future realization accounts receivable balances u recently issued accounting standards july 2013 financial accounting standards board “fasb” issued accounting standards update “asu” 201311 presentation unrecognized tax benefit net operating loss carryforward similar tax loss tax credit carryforward exists authoritative guidance concludes certain circumstances unrecognized tax benefits presented financial statements reduction deferred tax asset net operating loss carryforward similar tax loss tax credit carryforward adopted guidance early permitted fiscal year ended december 31 2013 adoption guidance material effect consolidated financial statements february 2013 fasb issued asu 201302 comprehensive income topic 220 reporting amounts reclassified accumulated comprehensive income standard requires presentation either single note parenthetically face financial statements effect significant amounts reclassified component accumulated comprehensive income based source income statement line items affected reclassification component required reclassified net income entirety cross reference related footnote additional information required amendments effective prospectively reporting periods beginning december 15 2013 adoption guidance material effect consolidated financial statements june 16 2011 fasb issued asu 201105 presentation comprehensive income asu eliminates current option present comprehensive income components statement changes shareholders’ equity increases prominence comprehensive income statements providing alternative present components net income comprehensive income either one continuous two separate consecutive financial statements companies also required present reclassification adjustments items reclassified comprehensive income net income within statements standard applied retrospectively effective fiscal years beginning december 15 2011 early adoption permitted company adopted asu march 31 2012 material impact company’s consolidated financial statements 2 restatement consolidated financial statements background july 2013 audit committee “audit committee” company’s board directors “board” commenced independent review assistance outside professionals whether company properly recognized revenue us generally accepted accounting principles “gaap” connection certain revenue recorded 2012 2011 “independent review” conjunction independent review company concluded errors existed company’s previously issued financial statements fiscal years ended december 31 2012 2011 interim quarterly period ended march 31 2013 certain prior periods reaching conclusions company considered information obtained independent review including emails data interviews current former employees indicated existence extracontractual terms arrangements onset sale concessions agreed subsequent initial sale extended payment terms return exchange rights sales distributors respect certain transactions ii time sales collection reasonably assured iii certain amounts previously characterized commissions paid related parties applicable customer company assessed information derived independent review making determinations respect accounting adjustments reflected restated consolidated financial statements contained amendments annual report form 10k fiscal year ended december 31 2013 determinations consistent findings independent review addition matters subject independent review certain adjustments identified management including revisions inventory reserves royalties made consolidated financial statements connection restatement correction errors following impact decreased net sales 147 million 282 million years ended december 31 2012 2011 respectively decreased net income continuing operations 89 million 145 million years ended december 31 2012 2011 respectively following include descriptions significant adjustments company’s financial position results operations previously reported consolidated financial statements distributor revenue recognition company determined previously recognized revenue respect certain distributor relationships revenue recognition criteria met specifically company determined fixed determinable sales price exist andor collection reasonably assured respect certain transactions revenue previously recognized time shipment specifically company’s review revealed arrangements extracontractual terms certain company’s distributors regarding extended payment terms return exchange rights contingent payment obligations sales distributors respect certain transactions also concessions made subsequent shipment inventory distributors related revenue recognition based results review determined arrangements appropriately evaluated appropriate revenue recognition criteria applicable gaap distributor sales represented approximately 11 13 company’s net sales prior restatement approximately 462 million 470 million years ended december 31 2012 2011 respectively company previously recognized distributor revenue title risk loss passed either shipment company’s facilities receipt distributor’s facility assuming revenue recognition criteria achieved “sellin method” based review facts circumstances related arrangements described company determined many instances revenue recognition criteria sellin method satisfied time shipment receipt specifically existence extracontractual terms arrangements caused company meet fixed determinable criteria revenue recognition cases others collectability established situations company unable reasonably estimate effects extracontractual terms precluded recognizing revenue relating distributor arrangements product delivered end customer method commonly referred “sellthrough” revenue recognition method vendor recognize revenue transaction consideration fixed determinable coincides selling product distribution channel end customer company reliable information distributors sell product end customers company use cash collection distributors basis revenue recognition sellthrough method although many cases company legally entitled accounts receivable time shipment since revenue recognition criteria met company recognized accounts receivables corresponding deferred revenues associated transactions part review company also considered accounting treatment related cost sales distributor revenue recognized sellthrough basis previously cost sales recognized upon shipment however company believes matching recognition costs sales revenue preferred therefore considered costs deferred revenue recognized sellthrough basis making assessment company considered financial viability distributors based creditworthiness determine collectability amounts sufficient realize costs products shipped reasonably assured time shipment distributors instances distributor determined financially viable company determined costs sales deferred revenue recognized distributors company concluded collectability reasonably assured company expensed related cost sales upon shipment based results independent review company determined distributor transactions transitioned sellthrough method accounting dates described • distributor transactions within company’s orthopedics division company determined sellthrough accounting applied within brazil subsidiary prior periods given frequency company conducted business extracontractual undocumented terms well company’s inability fully access underlying transactional information would necessary evaluate transactions sellin basis distributor transactions within division outside brazil subsidiary also sales four distributors meet fixed determinable collectability revenue recognition criteria therefore sales adjusted sellthrough accounting restatement • distributor transactions within company’s us spine division company determined sellthrough accounting applied beginning january 1 2011 following consideration information provided independent review company believes january 1 2011 date extracontractual terms became pervasive company’s us business unaware circumstances existing prior date would require broadly apply sellthrough accounting distributor transactions within us spine division additionally sales 2012 2011 revenue previously recognized meet fixed determinable criteria product associated sales subsequently returned 2013 terms negotiated agreements whereby company terminated relationships two distributors ii additional distributor returned certain product sold pursuant contingent sales arrangement sales represented approximately 33 million 41 million years ended december 31 2012 2011 respectively due return product revenue recognized transactions • company determined stimulation products sold distributors within company’s us spine division 2012 meet fixed determinable cases collectability revenue recognition criterion time shipment therefore company determined sellthrough accounting applied sales management also determined many distributors affiliates thereof received commission payments part sales transactions company previously recorded sales marketing expense company recorded adjustments restatement net commission expenses revenue represented product discounts • company determined prospectively apply sellthrough accounting remaining distributor arrangements entails arrangements within company’s orthopedics division outside brazil subsidiary beginning april 1 2013 earliest date financial statements previously issued company time determination although independent review provide information indicate extracontractual terms historical revenue recognition inappropriate remaining instances company believes information independent review indicating company history extracontractual arrangements distributor transactions described provides additional information considered reassessing application sellthrough accounting prospective basis particularly given company believes higher risk associated distributor arrangements generally effect adjustments made company’s previously filed consolidated statements operations result matters shown tables adjustments also following effects company’s previously filed consolidated balance sheets • accounts receivable decreased december 31 2012 413 million related derecognition receivables revenue deferred recognized sellthrough basis based cash collections • inventory increased december 31 2012 110 million recognize costs inventory shipments distributors determined financially viable discussed previously inventory reserves company also identified material errors inventory reserves one error related company recording increase 12 million company’s excess obsolete reserve second quarter 2012 related product within spine business subsequently reversed company fourth quarter 2012 company’s review determined removing reserve fourth quarter 2012 correct therefore reserve reinstated company also determined certain inconsistencies existed respect company previously computed recorded inventory reserves result company reviewed methodologies used compute record inventory reserves determined errors application gaap existed prior periods required adjustment financial statements based review company determined previously made reductions previously recorded reserves based changes forecasted demand believes contrary guidance set forth asc topic 330 inventory specifically asc 330103514 states writedown inventory lowerofcostormarket value close fiscal year creates new cost basis subsequently marked based changes underlying circumstances restated consolidated financial statements contain several adjustments reflect recomputed inventory reserves relevant periods adjustments resulted decrease inventory due increase reserves december 31 2012 148 million royalties company also reviewed accounting royalties determined royalties classified sales marketing expense however royalties based sales products paid doctors consulted development products given amounts attributable cost producing company’s products company determined correctly classified cost goods sold adjustments addition adjustments recorded address company’s errors accounting distributor revenue recognition inventory reserves royalties company identified errors generally material individually aggregate recorded connection restatement included adjustments reclassify interest expense continuing operations discontinued operations 39 million year ended december 31 2011 reclassification necessary company used portion proceeds sale breg inc repay full remaining 875 million balance term loan facility pay 575 million amounts outstanding revolving credit facility material impacts statements cash flows items increase operating cash flows decrease financing cash flows 1 million year ended december 31 2012 results adjustments company’s previously filed consolidated statements operations detailed summarized tables tax effect adjustments estimated based company’s effective tax rate effects restatements company’s consolidated balance sheet december 31 2012 follows effects restatements company’s consolidated statement operations comprehensive income year ended december 31 2012 follows effects restatements company’s consolidated statement operations comprehensive loss year ended december 31 2011 follows 3 inventories field inventory represents immediately saleable finished products possession company’s direct sales representatives consignment inventory represents immediately saleable finished products located third party customers distributors hospitals deferred cost sales result transactions company shipped product performed services revenue recognition criteria yet met revenue recognition criteria met revenue previously recorded deferred associated cost sales recognized 4 property plant equipment depreciation expense years ended december 31 2013 2012 2011 200 million 158 million 143 million respectively 5 patents intangible assets amortization expense intangible assets estimated approximately 21 million 18 million 17 million 14 million 05 million 15 million periods ending december 31 2014 2015 2016 2017 2018 2019 thereafter respectively 6 goodwill following table presents changes net carrying value goodwill reportable segment well reallocation july 1 2013 conjunction change reportable segments see note 1 “summary significant accounting policies” goodwill impairment company tests goodwill least annually impairment company tests frequently indicators present changes circumstances suggest impairment may exist indicators include among others declines sales earnings cash flows development material adverse change business climate company assesses goodwill impairment reporting unit level defined operating segment one level operating segment referred reporting unit order calculate respective carrying values company initially recorded goodwill based purchase price allocation performed time acquisition corporate assets liabilities directly relate reporting unit’s operations ascribed directly reporting unit corporate assets liabilities directly related specific reporting unit reporting unit benefits allocated based respective contribution measure reporting unit effective july 1 2013 company realigned segments consequently reallocated carrying value goodwill new reporting units determined company’s segments ie biostim biologics spine fixation extremity fixation based relative fair value new reporting unit total enterprise value july 1 2013 first quarter 2012 asu 201108 “testing goodwill impairment” became effective asu 201108 allows entities testing goodwill impairment option performing qualitative assessment calculating fair value reporting unit ie first step goodwill impairment test entities determine basis qualitative factors fair value reporting unit likely greater carrying amount quantitative calculation would needed result company’s change reportable segments company reallocated goodwill reporting unit estimated fair value reporting unit using weighting fair values derived income approach cost approach market approach level 3 fair value measurements income approach calculated fair value reporting unit based present value estimated future cash flows cash flow projections based estimates revenue growth rates operating margins taking consideration industry market conditions discount rate used based weighted average cost capital adjusted risks associated reporting unit projected cash flows cost approach involves methods determining company’s value analyzing market value company’s assets market approach estimates fair value based market multiples revenue earnings comparable publicly traded companies similar operating investment characteristics reporting units upon estimating fair value reporting units determined less carrying value two reporting units extremity fixation spine fixation result performed step two impairment analysis allocated fair value reporting units estimated fair values assets liabilities reporting units including identifiable intangible assets excess fair value implied goodwill estimating fair value certain assets liabilities requires significant judgment future cash flows implied fair value reporting unit’s goodwill less carrying value recorded full impairment loss goodwill spine fixation extremity fixation reporting units totaling 192 million third quarter 2013 company’s annual goodwill impairment analysis performed qualitatively fourth quarter 2013 result additional impairment charge 7 bank borrowings line credit consist borrowings euros used fund international operations borrowings facility zero 01 million december 31 2013 2012 respectively weighted average interest rate borrowings lines credit december 31 2013 2012 370 company unused available line credit 58 million 80 million 58 million 76 million december 31 2013 2012 respectively italian line credit line credit provides company option borrow amounts italy rates determined time borrowing line credit unsecured 8 current liabilities 9 longterm debt august 30 2010 company’s wholly owned us holding company orthofix holdings inc “orthofix holdings” entered credit agreement “credit agreement” certain domestic direct indirect subsidiaries company “guarantors” jpmorgan chase bank na administrative agent rbs citizens na syndication agent certain lender parties thereto credit agreement provides five year 200 million secured revolving credit facility “revolving credit facility” five year 100 million secured term loan facility “term loan facility” together revolving credit facility “credit facilities” orthofix holdings ability increase amount credit facilities aggregate amount 50 million upon satisfaction certain conditions may 2012 company used portion proceeds sale breg inc “breg” see note 16 repay full remaining 875 million balance term loan facility pay 575 million amounts outstanding revolving credit facility use proceeds required lenders’ consent dated april 23 2012 credit agreement result sale breg ceased subsidiary company therefore breg released credit party credit agreement additionally company paid 20 million june 20 million september 2012 reduce amounts outstanding revolving credit facility result december 31 2012 term loan facility repaid full 20 million outstanding revolving credit facility december 31 2013 2012 borrowings credit facilities bear interest floating rate orthofix holdings’ option either london interbank offered rate “libor” plus applicable margin base rate defined credit agreement plus applicable margin case subject adjustment based financial ratios applicable margin 325 libor borrowings 225 base rate borrowings depending upon measurement consolidated leverage ratio respect immediately preceding four fiscal quarters december 31 2013 2012 entire revolving credit facility libor rate plus margin 250 effective interest rate credit facilities december 31 2013 2012 27 outstanding principal revolving credit facility due august 30 2015 borrowings revolving credit facility may made future used working capital expenditures general corporate purposes orthofix holdings subsidiaries guarantors guaranteed repayment orthofix holdings’ obligations credit agreement obligations orthofix holdings guarantors respect credit facilities secured pledge substantially assets orthofix holdings guarantors credit agreement amended requires orthofix holdings company comply coverage ratios consolidated basis contains affirmative negative covenants including limitations additional debt liens investments acquisitions credit agreement amended also includes events default customary facilities type upon occurrence event default outstanding loans may accelerated andor lenders’ commitments terminated company compliance affirmative negative covenants december 31 2012 events default august 14 2013 company certain required lender parties credit agreement entered limited waiver “limited waiver” limited waiver lenders credit agreement “lenders” collectively waived requirements credit agreement company deliver quarterly financial statements respect fiscal quarters ending june 30 2013 september 30 2013 related financial covenant certificates earlier march 31 2014 ii date one day financial statements publicly filed released addition limited waiver provided restatement company’s financial statements period ending march 31 2013 constitute default event default provided within one business day public release filing restated financial statements company delivers corrected financial statements compliance certificates respect restated periods immediately pay additional interest fees would owed applicable interest fees originally calculated based restated financial statements company compliance affirmative negative covenants december 31 2013 events default certain subsidiaries company restrictions ability pay dividends make intercompany loan advances pursuant company’s credit facilities net assets orthofix holdings subsidiaries restricted distributions parent company domestic subsidiaries company parties credit agreement access net assets operational purposes amount restricted net assets orthofix holdings subsidiaries december 31 2013 2012 1920 million 2134 million respectively addition credit agreement restricts company subsidiaries parties credit facilities access cash held orthofix holdings inc subsidiaries company’s subsidiaries parties credit agreement access cash operational debt repayment purposes amount restricted cash company december 31 2013 2012 238 million 213 million respectively conjunction obtaining credit facilities credit agreement amended company incurred debt issuance costs 5 million includes 08 million costs related may 2011 amendment costs amortized using effective interest method life credit facilities conjunction term loan facility repayment may 2012 company wrote 08 million related debt issuance costs december 31 2013 2012 debt issuance costs net accumulated amortization related credit agreement 11 million 18 million respectively 10 derivative instruments tables disclose types derivative instruments company owns classifications fair values instruments within balance sheet amount gain loss recognized comprehensive income loss “oci” net income loss crosscurrency swap september 30 2010 company entered crosscurrency swap agreement “replacement swap agreement” jpmorgan chase bank royal bank scotland plc “counterparties” manage cash flows related foreign currency exposure portion company’s intercompany receivable us dollar functional currency subsidiary denominated euro terms swap agreement company pays euros based 287 million notional value fixed rate 500 receives us dollars based notional value 39 million fixed rate 4635 expiration date december 30 2016 date upon underlying intercompany debt swap agreement applies matures swap agreement designated cash flow hedge therefore company recognized unrealized gain loss change fair value net tax within comprehensive income 11 fair value measurements fair value defined price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date nonfinancial assets liabilities company measured fair value include longlived assets equity method investments impaired currently reported period authoritative guidance also describes three levels inputs may used measure fair value level 1 quoted prices active markets identical assets liabilities level 2 observable inputs quoted prices active markets identical assets liabilities level 3 unobservable inputs little market data available require reporting entity develop assumptions december 31 2013 company’s financial instruments included cash equivalents restricted cash accounts receivable shortterm bank borrowings accounts payable longterm secured debt crosscurrency derivative contract cash equivalents consist shortterm highly liquid incomeproducing investments original maturities 90 days less including money market funds carrying value restricted cash accounts receivable shortterm bank borrowings accounts payable approximate fair value due shortterm maturities instruments company’s credit facilities carry floating rate interest therefore carrying value considered approximate fair value company’s crosscurrency derivative instrument financial instrument recorded fair value recurring basis instrument consists overthecounter contract traded public exchange fair value swap contract determined based inputs readily available public markets derived information available publicly quoted markets therefore company categorized swap contract level 2 derivative financial instrument company also considers counterparty credit risk credit risk determination estimated fair values company consistently applied valuation techniques periods presented fair value company’s financial assets liabilities recurring basis follows 12 commitments leases company entered operating leases facilities equipment leases noncancellable typically contain renewal options certain leases contain rent escalation clauses company recognizes expense straightline basis rent expense company’s operating leases years ended december 31 2013 2012 2011 approximately 34 million 41 million 48 million respectively future minimum lease payments operating leases net amounts received subleases december 31 2013 follows 13 business segment information july 1 2013 began certain organizational executive leadership changes align chief operating decision maker “codm” reviews performance makes decisions managing company manage business four strategic business units “sbus” comprised biostim biologics extremity fixation spine fixation supported corporate activities sbus represent segments codm reviews financial information makes resource allocation decisions among business units primary metric used chief operating decision maker managing company contribution margin defined gross profit less sales marketing expense company neither discretely allocates assets goodwill operating segments evaluates operating segments using discrete asset information accordingly segment information prepared based four sbus reporting segments four segments discussed biostim sbu manufactures distributes provides support services portfolio market leading devices enhancing bone fusion utilize orthofix’s patented pulsed electromagnetic pemf technology food drug administrationapproved class 3 medical devices indicated adjunctive treatment enhance fusion success cervical lumbar spine fusion well therapeutic treatment nonhealing fractures outside spine nonunions pemf technology supported strong clinical background mechanism action scientific literature current research clinical studies underway identify potential new clinical indications biologics sbu provides portfolio regenerative products allow physicians successfully treat variety spinal orthopedic conditions sbu specializes marketing company’s regeneration tissue forms biologics distributes tissues network distributors sales representatives affiliates market hospitals doctors healthcare providers primarily us partnership mtf allows us exclusively market trinity evolution® trinity elite® tissue forms musculoskeletal defects enhance bony fusion extremity fixation extremity fixation sbu offers products allow physicians successfully treat variety orthopedic conditions unrelated spine sbu specializes design development marketing company’s orthopedic products used fracture repair deformity correction bone reconstruction extremity fixation distributes products network distributors sales representatives affiliates sbu uses distributors direct sales representatives sell orthopedics products hospitals doctors health providers globally spine fixation spine fixation sbu specializes design development marketing portfolio implant products used surgical procedures spine fixation distributes products network distributors affiliates sbu uses distributors direct sales representatives sell spine products hospitals doctors healthcare providers globally corporate activities comprised operating expenses orthofix international nv holding company subsidiaries along activities necessarily identifiable within four sbus external net sales sbu table presents external net sales continuing operations sbu reporting segment net sales include product sales marketing service fees table presents net margin defined gross profit less sales marketing expenses continuing operations sbu reporting segment following table presents depreciation amortization continuing operations sbu reporting segment geographical information following geographic data includes net sales geographic destination analysis property plant equipment geographic area 14 income taxes provision benefit income taxes continuing operations accompanying consolidated statements operations consists following tax effects significant temporary differences comprise deferred tax assets liabilities assets follows valuation allowance december 31 2013 2012 315 million 264 million respectively net increase valuation allowance 51 million year principally relates certain current period foreign losses benefitted certain state net operating losses tax credits valuation allowance attributable net operating loss carryforwards certain temporary differences certain foreign jurisdictions benefit dependent upon generation future taxable income foreign jurisdictions assessing realizability deferred tax assets management considers whether likely portion deferred tax assets realized ultimate realization deferred tax assets dependent upon generation future taxable income periods temporary differences become deductible management considers scheduled reversal deferred tax liabilities projected future taxable income tax planning strategies making assessment based upon level historical taxable income projections future taxable income periods deferred tax assets deductible management believes likely company realize benefits temporary differences net existing valuation allowances december 31 2013 company state net operating loss carryforwards approximately 228 million portion began expire 2013 company net operating losses foreign taxing jurisdictions approximately 1217 million majority foreign losses relates company’s netherlands operations portion began expire 2013 company provided valuation allowance significant portion state foreign net operating loss carryforwards since believe deferred tax asset realized prior expiration rate reconciliation continuing operations presented based us federal income tax rate rather parent company’s country domicile tax rate management believes given large proportion taxable income earned united states disclosure meaningful income tax expense effective tax rate year ended 2013 reflects disproportionate ratio 251 million income tax expense effective tax rate 358 year ended 2012 principal factors affecting company’s effective tax rate company’s mix earnings amongst various tax jurisdictions state taxes impairment 192 million nondeductable goodwill years ended 2012 2011 company record tax benefit certain expenses associated company’s estimate charges related us government resolutions january 2 2013 american taxpayer relief act 2012 “act” enacted act provides tax relief businesses reinstating certain tax benefits credits retroactively january 1 2012 several provisions act impact company notably extension research development credit income tax accounting rules require tax law changes recognized period enactment company recognized tax benefit 03 million provision income taxes first quarter 2013 company’s unrecognized tax benefit 07 million 12 million years ended december 31 2013 2012 respectively company recognizes potential accrued interest penalties related unrecognized tax benefits income tax expense company approximately 05 million 08 million accrued payment interest penalties december 31 2013 2012 respectively entire amount unrecognized tax benefits including interest would favorably impact company’s effective tax rate recognized december 31 2013 company expect amount unrecognized tax benefits change significantly next twelve months reconciliation gross unrecognized tax benefits excluding interest penalties years ended december 31 2013 december 31 2012 follows company files consolidated income tax return us federal jurisdiction uk italy numerous consolidated separate income tax returns many state foreign jurisdictions statute limitations respect federal tax authorities closed years prior december 31 2010 statute limitations various state tax filings closed instances years prior december 31 2009 statute limitations respect major foreign tax filing jurisdictions closed years prior december 31 2008 company’s intention reinvest total amount unremitted foreign earnings residing outside curaçao local jurisdiction extent generated available repatriate earnings taxeffective entity incorporated curaçao “foreign subsidiaries” refer us nonus subsidiaries furthermore income sourced us subject us income tax unremitted foreign earnings increased 2920 million december 31 2012 3452 million december 31 2013 3452 million december 31 2013 includes 3548 million us subsidiaries practicable determine amounts net additional income tax may payable earnings repatriated company anticipate impact income tax liabilities since earnings permanently reinvested us nonus subsidiaries total cash equivalents december 31 2013 542 million 237 million restricted senior secured credit agreement use us therefore classified restricted cash balance sheet company’s us business generates sufficient cash flow borrowing capacity united states fund us operations cash equivalents 305 million december 31 2013 held nonus subsidiaries permanently reinvested use nonus operations 15 related parties 2011 sold 05 million products orthopro inc superior medical equipment independent distributors breg inc owned son former board member 16 sale breg disposition sports medicine sbu april 23 2012 company’s subsidiary orthofix holdings breg entered stock purchase agreement “spa” breg acquisition corp “buyer” newly formed affiliate water street healthcare partners ii lp pursuant buyer agreed acquire orthofix holdings outstanding shares breg subject terms conditions contained therein “transaction” terms spa upon closing sale orthofix holdings company agreed indemnify buyer respect certain specified matters including government investigation product liability matters regarding previously owned infusion pump product line preclosing sales cold therapy units certain postclosing sales cold therapy units see “matters related company’s former breg subsidiary possible indemnification obligations note 17 may 24 2012 “closing date” orthofix holdings completed sale outstanding shares breg 1575 million cash adjustments working capital indebtedness accordance terms spa orthofix holdings used 145 million net proceeds prepay outstanding company indebtedness required lender consent received connection company’s existing credit agreement result closing transaction breg ceased subsidiary company therefore breg released credit party credit agreement company also agreed enter certain transition arrangements closing including transition services agreement pursuant company agreed continue provide administrative operational support period twelve months result sale breg company completed exit sports medicine sbu breg significant component portion indemnification related post closing claims related postclosing sales cold therapy created guarantee asc 460guarantees fair value liability recorded initial recognition criteria amount 2 million closing date transaction company amortizes fair value noncontingent liability ratably period indemnification three years company’s obligations guarantee approximately 09 million 16 million december 31 2013 december 31 2012 respectively gain sale discontinued operations following table presents value asset disposition proceeds received net various working capital adjustments indebtedness net gain sale breg shown condensed consolidated statement operations year ended december 31 2012 sports medicine sbu contributed 44 million 1089 million net sales years ended december 31 2012 2011 respectively sports medicine sbu 29 million operating losses 12 million operating income years ended december 31 2012 2011 respectively financial information includes financial results breg operations date sale company’s consolidated financial statements related footnote disclosures reflect sports medicine sbu discontinued operations income loss associated sports medicine sbu net applicable income taxes shown income loss discontinued operations periods presented 17 contingencies company party outstanding legal proceedings investigations claims described company believes unlikely outcome matters including matters discussed material adverse effect subsidiaries whole notwithstanding unfavorable resolution matter may material effect company’s net earnings particular quarter however company cannot predict certainty final outcome legal proceedings investigations including settlement discussions government seeking resolve investigations claims made described paragraphs assurance ultimate resolution matter material adverse impact company’s consolidated financial position results operations cash flows company records accruals certain outstanding legal proceedings investigations claims probable liability incurred amount loss reasonably estimated company evaluates quarterly basis developments legal proceedings investigations claims could affect amount accrual well developments would make loss contingency probable reasonably estimable loss contingency probable reasonably estimable company accrue loss however loss additional loss excess accrual least reasonable possibility material company discloses reasonable estimate possible loss range loss reasonable estimate made company cannot make reasonable estimate possible loss range loss disclosed assessments whether loss probable reasonable possibility whether loss range loss reasonably estimable often involve series complex judgments future events among factors company considers assessment nature existing legal proceedings investigations claims asserted possible damages loss contingency reasonably estimable progress matter existing law precedent opinions views legal counsel advisers involvement us government agencies proceedings company’s experience similar matters experience companies facts available company time assessment company intends respond responded proceeding investigation claim company’s assessment factors may change time individual proceedings investigations claims progress matters company currently able reasonably estimate range reasonably possible loss factors contributed determination include following damages sought indeterminate investigation manifested filed civil criminal complaint ii matters early stages iii matters involve novel unsettled legal theories large uncertain number actual potential cases parties andor iv discussions government parties matters may expected ultimately resolved negotiation settlement reached point company believes reasonable estimate loss range loss made instances company believes considerable uncertainty regarding timing ultimate resolution matters including possible eventual loss fine penalty business impact addition matters described paragraphs normal course business company involved various lawsuits time may subject certain contingencies extent losses related contingencies probable reasonably estimable company accrues appropriate amounts accompanying financial statements provides disclosures possible range loss excess amount accrued range reasonably estimable company believes losses individually collectively immaterial possible loss range loss matters related audit committee’s review restatement certain company’s consolidated financial statements audit committee review july 2013 audit committee began conducting independent review assistance outside professionals certain accounting matters review resulted decision restate certain company’s previously filed consolidated financial statements result review restatement certain company’s previously filed consolidated financial statements filing company’s quarterly reports form 10q quarterly periods ended june 30 2013 september 30 2013 company’s annual report form 10k fiscal year ended december 31 2013 timely company filed quarterly report form 10q quarterly period ended june 30 2013 march 24 2014 filed quarterly report form 10q quarterly period ended september 30 2013 march 25 2014 company also filed annual report form 10k fiscal year ended december 31 2013 date hereof sec enforcement staff review connection initiation audit committee’s independent review company initiated contact staff division enforcement securities exchange commission “sec enforcement staff” july 2013 advise matters audit committee counsel direct communication sec enforcement staff regarding matters company audit committee cooperating fully sec enforcement staff’s review matters company received requests sec enforcement staff documents information concerning various accounting practices internal controls business practices requests cover years ended december 31 2011 2012 instances prior periods anticipated company may receive additional requests sec enforcement staff future company provided notice concerning matters office inspector general us department health human services “hhsoig” pursuant company’s corporate integrity agreement hhsoig agreement described note 17 company cannot predict matter resolved actions may required take part resolution matters action sec hhsoig governmental agency could result civil criminal sanctions company andor certain current former officers directors employees matter early stage time company cannot reasonably estimate possible loss range loss connection securities class action complaint august 14 2013 securities class action complaint company currently styled tejinder singh v orthofix international nv et al no113cv05696jgk filed united states district court southern district new york arising anticipated restatement prior financial statements matters described addition company alan w milinazzo company’s former president chief executive officer robert vaters company’s former president chief executive officer brian mccollum company’s former chief financial officer bradley r mason company’s current president chief executive officer emily buxton company’s current chief financial officer named defendants operative complaint yet filed action following appointment court lead plaintiff accordingly allegations lead plaintiff ultimately intends make action unknown matter early stage time company cannot reasonably estimate possible loss range loss connection matters related promeca july 10 2012 company entered definitive agreements doj sec agreeing settle selfinitiated selfreported internal investigation mexican subsidiary promeca sa de cv “promeca” regarding noncompliance promeca foreign corrupt practices act “fcpa” terms agreements company voluntarily disgorged profits united states government amount 52 million inclusive prejudgment interest agreed pay fine 22 million company paid 22 million july 2012 52 million september 2012 part settlement company entered threeyear deferred prosecution agreement “dpa” doj consent final judgment “consent” sec doj agreed pursue criminal charges company connection matter company complied terms dpa takes note company’s selfreporting matter doj sec remedial measures including implementation enhanced compliance program previously undertaken company dpa consent collectively require among things respect antibribery compliance matters company shall continue cooperate fully government future matters related corrupt payments false books records inadequate internal controls regard company represented implemented continue implement compliance ethics program designed prevent detect violations fcpa applicable anticorruption laws company periodically report government term dpa regarding remediation implementation compliance measures part settlement company also agreed pursuant consent certain reporting obligations sec regarding status company’s remediation implementation compliance measures event company fails comply obligations could subject criminal prosecution doj fcparelated matters selfreported review potential improper payments involving brazil subsidiary august 2013 company’s internal legal department notified certain allegations involving potential improper payments respect brazilian subsidiary orthofix brasil company engaged outside counsel assist review matters focusing compliance applicable antibribery laws including fcpa review remains ongoing fcpa related provisions law provide potential criminal civil sanctions connection antibribery violations including criminal fines civil penalties disgorgement past profits kinds remedies company currently cannot reasonably estimate possible loss range loss connection review consistent provisions dpa consent described company contacted doj sec august 2013 voluntarily selfreport brazilrelated allegations company counsel remain contact agencies regarding status review event doj sec find matters related company’s brazilian subsidiary could give rise review company’s obligations terms dpa andor consent company currently cannot reasonably estimate possible loss range loss connection review including effects may respect dpa consent corporate integrity agreement hhsoig previously disclosed june 6 2012 company entered definitive settlement agreement united states america acting doj behalf hhsoig tricare management activity general counsel office personnel management capacity administrator federal employees health benefits program united states department veteran affairs qui tam relator pursuant company agreed pay 342 million plus interest rate 3 may 5 2011 day payment made settle criminal civil matters related promotion marketing company’s regenerative stimulator devices company also described past “bone growth stimulator devices” connection settlement agreement orthofix inc company’s wholly owned subsidiary also pled guilty one felony count obstruction june 2008 federal audit §18 usc 1516 paid criminal fine 78 million mandatory special assessment 400 also previously disclosed october 29 2012 company blackstone entered definitive settlement agreement us government qui tam relator pursuant company paid 32 million settle claims covering period prior blackstone’s acquisition company concerning compensation physician consultants related matters 32 million paid pursuant settlement funded proceeds company received escrow fund established connection acquisition blackstone 2006 june 6 2012 connection settlements company also entered fiveyear corporate integrity agreement hhsoig “cia” cia acknowledges existence company’s current compliance program requires company continues maintain term cia compliance program designed promote compliance federal healthcare fda requirements company also required maintain several elements previously existing program term cia including maintaining chief compliance officer compliance committee code conduct cia requires conduct certain additional compliancerelated activities term cia including various training monitoring procedures maintaining disciplinary process compliance obligations pursuant cia company required notify hhsoig writing among things ongoing government investigation legal proceeding involving allegation company committed crime engaged fraudulent activities ii matter reasonable person would consider probable violation applicable criminal civil administrative laws related compliance federal healthcare programs fda requirements iii change location sale closing purchase establishment new business unit location related items services may reimbursed federal healthcare programs company also subject periodic reporting certification requirements attesting provisions cia implemented followed well certain document record retention mandates cia provides event uncured material breach cia company could excluded participation federal healthcare programs andor subject monetary penalties matters related company’s former breg subsidiary possible indemnification obligations may 24 2012 company sold breg affiliate water street healthcare partners ii lp “water street” pursuant stock purchase agreement “breg spa” terms breg spa upon closing sale company subsidiary orthofix holdings inc agreed indemnify water street breg respect certain specified matters including government investigation product liability matters regarding previously owned infusion pump product line described ii preclosing sales cold therapy units certain postclosing sales cold therapy units company established accrual 42 million indemnification obligations connection july 2012 verdict described third paragraph however actual liability case could higher lower amount accrued company established accrual connection indemnification obligations breg spa currently cannot reasonably estimate possible loss range loss connection certain obligations including respect matters described three paragraphs breg engaged manufacturing sale local infusion pumps pain management 1999 2008 since 2008 numerous product liability cases filed united states alleging local anesthetic dispensed infusion pumps inside joint causes rare arthritic condition called “chondrolysis” company incurred losses settlements judgments connection matters 2011 2012 2013 18 million 68 million 67 million respectively addition several cases remain outstanding company currently cannot reasonably estimate possible loss range loss august 2 2010 breg received hipaa subpoena issued doj subpoena seeks documents company subsidiaries period january 1 2000 date subpoena company believes document production response subpoena completed july 2012 believes subpoena relates investigation doj whether breg’s sale marketing labeling local infusion pumps pain management prior breg’s divestiture product line 2008 complied fda regulations federal law company currently cooperating us government connection matter time divestiture company breg currently engaged manufacturing sales motorized cold therapy units used reduce pain swelling several domestic product liability cases filed recent years mostly california state court alleging use cold therapy causes skin andor nerve injury seeking damages behalf individual plaintiffs allegedly injured units majority cases early stage conclusion drawn present time regarding potential outcome however company believes meritorious defenses exist claims july 2012 jury one case related motorized cold therapy unit previously sold breg returned verdict providing approximately 21 million compensatory damages plaintiff breg 7 million exemplary damages case remains subject appeal company believes damages without merit however ultimate outcome uncertain company previously established accrual related charge discontinued operations 42 million compensatory damages exemplary damages indemnification obligations connection july 2012 verdict however actual liability case could higher lower amount accrued 18 pensions deferred compensation orthofix inc sponsors defined contribution plan “orthofix inc 401k plan” covering substantially full time us employees orthofix inc 401k plan allows participants contribute 15 pretax compensation subject certain limitations company matching 100 first 2 employee’s base compensation 50 next 4 employee’s base compensation contributed orthofix inc 401k plan years ended december 31 2013 2012 2011 expenses incurred relating 401k plans including matching contributions approximately 24 million 25 million 25 million respectively company operates defined contribution pension plans international employees described meeting minimum service requirements company’s expenses pension contributions 2013 2012 2011 07 million 07 million 08 million respectively italian law orthofix srl accrues behalf employees deferred compensation paid termination employment year’s provision deferred compensation based percentage employee’s current annual remuneration plus annual charge deferred compensation also accrued leaving indemnity payable agents case dismissal regulated national contract equal approximately 35 total commissions earned company orthofix deferred compensation plan “plan” administered board directors company effective january 1 2007 amended restated effective january 1 2009 plan intended allow select group key management highly compensated employees company defer receipt compensation would otherwise payable terms plan intended comply respects provisions code section 409a code section 457a january 1 2011 company disallowed contributions plan new plan participants distributions made accordance requirements code section 409a company’s expense deferred compensation 2013 2012 2011 approximately 03 million 04 million 01 million respectively deferred compensation payments 01 million 08 million made 2013 2012 respectively deferred compensation payments made 2011 balance december 31 2013 2012 25 23 million represents amount would payable employees agents terminated employment date included longterm liabilities 19 sharebased compensation plans december 31 2013 company stock option award plans employee stock purchase plan described 2012 long term incentive plan board directors adopted orthofix international nv 2012 longterm incentive plan “2012 ltip” april 13 2012 subject shareholder approval subsequently provided shareholder ratification 2012 ltip provides grant options purchase shares company’s common stock awards including restricted stock unrestricted stock units stock appreciation rights performancebased awards equitybased awards company’s employees company’s subsidiaries affiliates eligible receive awards 2012 ltip addition company’s nonemployee directors consultants advisors perform services company’s subsidiaries affiliates may receive awards 2012 ltip incentive share options however available company’s employees company reserves total 1600000 shares common stock issuance pursuant 2012 ltip subject certain adjustments set forth 2012 ltip december 31 2013 515917 options outstanding 2012 ltip plan 22668 exercisable addition 279039 shares restricted stock outstanding none vested 2004 long term incentive plan 2004 long term incentive plan “2004 ltip plan” reserves 31 million shares issuance addition shares available future awards june 29 2004 prior plans ii become available future issuance upon expiration forfeiture june 29 2004 awards upon prior plans awards generally vest years service awards fully vesting within three years date grant employees either three five years date grant nonemployee directors awards form stock option restricted stock restricted share unit performance share unit award form determined board directors awards granted 2004 ltip plan expire later ten years date grant 2004 ltip plan provides annual grant nonemployee directors 5000 shares limits future number shares may awarded plan full value awards 100000 shares december 31 2013 1243262 options outstanding 2004 ltip plan 1179601 exercisable addition 7665 shares restricted stock outstanding none vested staff share option plan staff share stock option plan “staff share plan” fixed stock option plan adopted april 1992 staff share plan company granted options employees estimated fair market value options date grant options generally vest based years service options fully vested within five years date grant options granted staff share plan expire ten years date grant options left granted staff plan december 31 2013 15000 options outstanding exercisable staff share plan stock purchase plan orthofix international nv amended restated stock purchase plan “stock purchase plan” provides issuance shares company’s common stock eligible employees directors company subsidiaries elect participate plan acquire shares common stock payroll deductions including executive officers purchase period eligible employees may designate 1 25 compensation deducted purchase common stock plan 25 employees working north america south america asia 15 employees working europe eligible directors designated percentage amount equal annual director compensation paid cash current plan year purchase price shares plan equal 85 fair market value first day plan year calendar year running january 1 december 31 lower last day plan year due compensatory nature plan company recorded related share based compensation consolidated statement operations aggregate number shares reserved issuance employee stock purchase plan 1850000 shares december 31 2013 1437519 shares issued stock purchase plan sharebased compensation december 31 2013 unamortized compensation expense relating options granted expected recognized 28 million amount expected recognized january 2018 following table shows detail sharebased compensation line item consolidated statements operations years ended december 31 2013 2012 2011 assumptions years grants awarded stock option activity summaries status company’s stock option plans december 31 2013 2012 changes year ended december 31 2013 presented outstanding exercisable price range december 31 2013 weighted average remaining contractual life exercisable options 289 years december 31 2013 total intrinsic value options exercised 04 million 72 million 42 million years ended december 31 2013 2012 2011 respectively aggregate intrinsic value options outstanding options exercisable december 31 2013 calculated difference exercise price underlying options market price company’s common stock shares exercise prices lower 2282 closing price company’s stock december 31 2013 aggregate intrinsic value options outstanding 05 million 112 million 108 million years ended december 31 2013 2012 2011 respectively aggregate intrinsic value options exercisable 02 million 98 million 84 million years ended december 31 2013 2012 2011 respectively restricted stock year ended december 31 2013 company granted employees nonemployee directors 269791 shares restricted stock vest various dates october 2017 year ended december 31 2012 company granted employees nonemployee directors 149500 shares restricted stock vest various dates november 2015 compensation expense represents fair value stock measured market price date grant less estimated forfeitures recognized straightline basis vesting period unamortized compensation expense related restricted stock amounted 67 million december 31 2013 summary status restricted stock december 31 2013 2012 changes year ended december 31 2013 presented 20 earnings per share three years ended december 31 2013 adjustments net income loss purposes calculating basic diluted net income loss available common shareholders following reconciliation weighted average shares used basic diluted net income loss per common share computations adjustment made 2013 2011 common stock equivalents effects would antidilutive 2013 2011 potentially dilutive shares totaled 101672 344168 respectively options purchase shares common stock exercise prices excess average market price common shares included computation diluted earnings per share 1186259 789650 outstanding options included diluted earnings per share computation fiscal year ended december 31 2013 2012 respectively inclusion options antidilutive 21 stock repurchase program may 8 2013 company announced board directors authorized share repurchase program amount 50 million repurchases began may 10 2013 consisting primarily open market transactions prevailing market prices accordance guidelines specified rule 10b18 securities exchange act 1934 amended repurchases made cash hand cash generated operations additional borrowings timing transactions aggregate number shares common stock ultimately repurchased repurchase program depend variety factors including market conditions prices securities repurchased company may discontinue repurchases without prior notice time company determines additional repurchases warranted company made total repurchases 2013 395 million 22 quarterly financial data unaudited restated quarterly periods 2012 well first quarter 2013 reflect restatement described herein see “note 2restatement consolidated financial statements” following tables summarize impacts restatement previously reported condensed consolidated statements operations balance sheets included quarterly reports form 10q respective period condensed consolidated statement operations restated currently reported us dollars thousands except per share data condensed consolidated statement operations previously reported us dollars thousands except per share data 1 q2q4 2013 previously reported condensed consolidated statement operations restatement adjustments us dollars thousands except per share data 1 q2q4 2013 previously reported therefore restatement adjustments condensed consolidated balance sheets restated currently reported condensed consolidated balance sheets previously reported 1 q2q4 2013 previously reported condensed consolidated balance sheets restatement adjustments 1 q2q4 2013 previously reported therefore restatement adjustments orthofix international nv schedule 1condensed financial information registrant orthofix international nv condensed balance sheets unaudited see accompanying notes condensed financial statements s1 orthofix international nv schedule 1condensed financial information registrant orthofix international nv condensed statements operations unaudited see accompanying notes condensed financial statements s2 orthofix international nv schedule 1condensed financial information registrant orthofix international nv condensed statement cash flows unaudited see accompanying notes condensed financial statements s3 orthofix international nv schedule 1condensed financial information registrant orthofix international nv notes condensed financial statements unaudited 1 background basis presentation condensed parent company financial statements prepared accordance rule 1204 schedule 1 regulation sx restricted net assets orthofix holdings inc subsidiaries exceed 25 consolidated net assets orthofix international nv subsidiaries “company” information read conjunction company’s consolidated financial statements included elsewhere filing 2 restricted net assets subsidiaries certain company’s subsidiaries restrictions ability pay dividends make intercompany loans advances pursuant financing arrangements amount restricted net assets company’s subsidiaries held december 31 2013 2012 approximately 1920 million 2134 million respectively restrictions net assets orthofix holdings inc subsidiaries 3 commitments contingencies longterm obligations discussion company’s commitments contingencies long term obligations senior secured credit facility see note 9 note 12 note 17 company’s consolidated financial statements 4 dividends subsidiaries orthofix international nv receive cash dividends 2013 2012 s4 orthofix international nv schedule 2valuation qualifying accounts years ended december 31 2013 2012 2011 s5item 15 exhibits financial statement schedules documents filed part report form 10k following documents filed part annual report form 10k 1 financial statements see “index consolidated financial statements” page form 10k 2 financial statement schedules required either required information present amounts sufficient require submission schedule information required included consolidated financial statements notes thereto 3 exhibits exhibit number description 21 stock purchase agreement dated april 23 2012 among breg inc orthofix holdings inc breg acquisition corp filed exhibit company’s current report form 8k filed april 24 2012 incorporated herein reference 31 certificate incorporation company filed exhibit company’s annual report form 20f dated june 29 2001 incorporated herein reference 32 articles association company amended filed exhibit company’s annual report form 10k fiscal year ended december 31 2011 incorporated herein reference 101 credit agreement dated august 31 2015 among orthofix holdings inc victory medical limited borrowers orthofix international nv certain subsidiaries orthofix international nv party thereto guarantors several banks financial institutions may time become parties thereunder lenders jpmorgan chase na administrative agent filed exhibit company’s current report form 8k filed september 1 2015 incorporated herein reference 102 first amendment credit agreement dated march 7 2016 effective february 29 2016 among orthofix holdings inc victory medical limited borrowers orthofix international nv certain subsidiaries orthofix international nv party thereto guarantors several banks financial institutions may time become parties thereunder lenders jpmorgan chase na administrative agent filed exhibit company’s quarterly report form 10q quarter ended march 31 2016 incorporated herein reference 103 second amendment credit agreement dated december 8 2017 among orthofix holdings inc victory medical limited orthofix international bv borrowers orthofix international nv certain subsidiaries orthofix international nv party thereto guarantors several banks financial institutions may time become parties thereunder lenders jpmorgan chase na administrative agent 104† matrix commercialization collaboration agreement entered july 24 2008 orthofix holdings inc musculoskeletal transplant foundation filed exhibit company’s annual report form 10k fiscal year ended december 31 2009 incorporated herein reference 105 amendment 1 matrix commercialization collaboration agreement dated december 15 2010 musculoskeletal transplant foundation inc orthofix holdings inc filed exhibit company’s annual report form 10k fiscal year ended december 31 2010 incorporated herein reference 106† amendment 2 matrix commercialization collaboration agreement dated january 9 2012 musculoskeletal transplant foundation inc orthofix holdings inc filed exhibit amendment 1 company’s annual report form 10ka year ended december 31 2011 incorporated herein reference exhibit number description 107† amendment 3 matrix commercialization collaboration agreement entered july 1 2013 effective june 25 2013 musculoskeletal transplant foundation inc orthofix holdings inc filed exhibit company’s current report form 8k filed july 8 2013 incorporated herein reference 108 amendment 4 matrix commercialization collaboration agreement entered april 1 2014 musculoskeletal transplant foundation inc orthofix holdings inc filed exhibit company’s current report form 8k filed april 7 2014 incorporated herein reference 109† amendment 5 matrix commercialization collaboration agreement entered march 10 2016 musculoskeletal transplant foundation inc orthofix holdings inc filed exhibit company’s current report form 8k filed march 14 2016 incorporated herein reference 1010† amendment 6 matrix commercialization collaboration agreement entered december 29 2017 musculoskeletal transplant foundation inc orthofix holdings inc 1011 orthofix international nv amended restated stock purchase plan amended filed exhibit company’s quarterly report form 10q quarter ended march 31 2011 incorporated herein reference 1012 orthofix international nv second amended restated stock purchase plan 1013 orthofix international nv 2012 longterm incentive plan filed exhibit company’s quarterly report form 10q quarter ended june 30 2012 incorporated herein reference 1014 amendment 1 orthofix international nv 2012 longterm incentive plan filed exhibit company’s form 10q filed august 4 2015 incorporated herein reference 1015 amended restated orthofix deferred compensation plan filed exhibit company’s current report form 8k filed january 7 2009 incorporated herein reference 1016 form nonemployee director restricted stock unit agreement orthofix international nv 2012 longterm incentive plan filed exhibit company’s form 10q filed august 7 2017 incorporated herein reference 1017 form timebased vesting employee restricted stock grant agreement orthofix international nv 2012 longterm incentive plan filed exhibit company’s current report form 8k filed july 8 2016 incorporated reference 1018 form timebased vesting employee nonqualified stock option agreement orthofix international nv 2012 longterm incentive plan filed exhibit company’s current report form 8k filed july 8 2016 incorporated reference 1019 form timebased vesting nonemployee director restricted stock grant agreement orthofix international nv 2012 longterm incentive plan annual grant filed exhibit company’s current report form 8k filed july 8 2016 incorporated reference 1020 form timebased vesting nonemployee director nonqualified stock option agreement orthofix international nv 2012 longterm incentive plan initial grant filed exhibit company’s current report form 8k filed july 8 2016 incorporated reference 1021 form 2016 employee performance stock unit agreement orthofix international nv 2012 longterm incentive plan filed exhibit company’s current report form 8k filed july 8 2016 incorporated reference 1022 form employee performance vesting restricted stock performance share unit grant agreement orthofix international nv 2012 longterm incentive plan june 2015 grants filed exhibit company’s form 10q filed august 4 2015 incorporated herein reference 1023 form employee nonqualified stock option agreement orthofix international nv 2012 longterm incentive plan july 2014june 2016 timebased vesting filed exhibit company’s quarterly report form 10q quarter ended september 30 2014 incorporated herein reference exhibit number description 1024 form employee restricted stock grant agreement orthofix international nv 2012 longterm incentive plan july 2014june 2016 timebased vesting filed exhibit company’s quarterly report form 10q quarter ended september 30 2014 incorporated herein reference 1025 form employee performance vesting restricted stock grant agreement orthofix international nv 2012 longterm incentive plan june 2014 grants filed exhibit company’s quarterly report form 10q quarter ended september 30 2014 incorporated herein reference 1026 form nonemployee director restricted stock grant agreement orthofix international nv 2012 longterm incentive plan 2014 2015 timebased vesting filed exhibit company’s quarterly report form 10q quarter ended september 30 2014 incorporated herein reference 1027 form employee nonqualified stock option agreement orthofix international nv 2012 longterm incentive plan pre2014 grants filed exhibit company’s annual report form 10k fiscal year ended december 31 2012 incorporated herein reference 1028 form nonemployee director nonqualified stock option agreement orthofix international nv 2012 long term incentive plan filed exhibit company’s annual report form 10k fiscal year ended december 31 2012 incorporated herein reference 1029 form employee restricted stock grant agreement orthofix international nv 2012 long term incentive plan pre2014 grants filed exhibit company’s annual report form 10k fiscal year ended december 31 2012 incorporated herein reference 1030 form nonemployee director restricted stock grant agreement orthofix international nv 2012 long term incentive plan pre2014 grants filed exhibit company’s annual report form 10k fiscal year ended december 31 2012 incorporated herein reference 1031 form restricted stock grant agreement orthofix international nv amended restated 2004 long term incentive plan 2011 2012 grantsvesting 3 years filed exhibit company’s annual report form 10k fiscal year ended december 31 2010 incorporated herein reference 1032 form employee nonqualified stock option agreement orthofix international nv amended restated 2004 longterm incentive plan post2008 grants made 2004 long term incentive plan prior adoption 2012 long term incentive plan filed exhibit company’s current report form 8k filed july 7 2009 incorporated herein reference 1033 form nonemployee director nonqualified stock option agreement orthofix international nv amended restated 2004 longterm incentive plan 2009 2012 grants filed exhibit company’s current report form 8k filed july 7 2009 incorporated herein reference 1034 form nonqualified stock option agreement orthofix international nv amended restated 2004 long term incentive plan pre2009 grantsvesting 3 years filed exhibit company’s current report form 8k filed june 20 2008 incorporated herein reference 1035 form nonqualified stock option agreement orthofix international nv amended restated 2004 long term incentive plan pre2009 grants year cliff vesting filed exhibit company’s current report form 8k filed june 20 2008 incorporated herein reference 1036 form restricted stock grant agreement orthofix international nv amended restated 2004 long term incentive plan pre2011 grantsvesting 3 years filed exhibit company’s current report form 8k filed june 20 2008 incorporated herein reference 1037 form restricted stock grant agreement orthofix international nv amended restated 2004 long term incentive plan 3 year cliff vesting filed exhibit company’s current report form 8k filed june 20 2008 incorporated herein reference exhibit number description 1038 form indemnity agreement filed exhibit company’s annual report form 10k fiscal year ended december 31 2008 incorporated herein reference 1039 change control severance agreement dated july 7 2016 orthofix international nv bradley r mason filed exhibit company’s current report form 8k filed july 8 2016 incorporated reference 1040 amended change control severance agreement dated november 1 2016 orthofix international nv bradley r mason filed exhibit company’s annual report form 10k fiscal year ended december 31 2016 incorporated herein reference 1041 inducement grant nonqualified stock option agreement dated march 13 2013 orthofix international nv bradley r mason filed exhibit company’s current report form 8k filed march 13 2013 incorporated herein reference 1042 restricted stock grant agreement orthofix international nv 2012 longterm incentive plan dated march 13 2013 orthofix international nv bradley r mason filed exhibit company’s current report form 8k filed march 13 2013 incorporated herein reference 1043 change control severance agreement dated july 7 2016 orthofix international nv doug rice filed exhibit company’s current report form 8k filed july 8 2016 incorporated reference 1044 amended change control severance agreement dated november 1 2016 orthofix international nv doug rice filed exhibit company’s annual report form 10k fiscal year ended december 31 2016 incorporated herein reference 1045 change control severance agreement dated july 7 2016 orthofix international nv michael finegan filed exhibit company’s current report form 8k filed july 8 2016 incorporated reference 1046 amended change control severance agreement dated november 1 2016 orthofix international nv michael finegan filed exhibit company’s annual report form 10k fiscal year ended december 31 2016 incorporated herein reference 1047 change control severance agreement dated september 7 2016 orthofix international nv davide bianchi filed exhibit company’s current report form 8k filed september 9 2016 incorporated herein reference 1048 amended employment contract dated september 7 2016 orthofix international nv davide bianchi filed exhibit company’s current report form 8k filed september 9 2016 incorporated herein reference 1049 amended change control severance agreement dated november 1 2016 orthofix international nv robert allen goodwin ii filed exhibit company’s annual report form 10k fiscal year ended december 31 2016 incorporated herein reference 1050 amended change control severance agreement dated november 1 2016 orthofix international nv bradley v niemann filed exhibit company’s annual report form 10k fiscal year ended december 31 2016 incorporated herein reference 1051 amended change control severance agreement dated november 1 2016 orthofix international nv raymond fujikawa filed exhibit company’s annual report form 10k fiscal year ended december 31 2016 incorporated herein reference 1052 change control severance agreement dated november 1 2016 orthofix international nv kimberley elting filed exhibit company’s annual report form 10k fiscal year ended december 31 2016 incorporated herein reference 1053 letter agreement dated july 7 2016 jeffrey schumm orthofix international nv orthofix inc filed exhibit company’s current report form 8k filed july 8 2016 incorporated reference exhibit number description 211 list subsidiaries 231 consent independent registered public accounting firm 311 rule 13a14a15d14a certification chief executive officer 312 rule 13a14a15d14a certification chief financial officer 321 section 1350 certification chief executive officer certification chief financial officer following financial statements orthofix international nv form 10k year ended december 31 2017 filed february 26 2018 formatted xbrl consolidated balance sheets ii consolidated statements operations comprehensive income loss iii consolidated statements changes shareholders’ equity iv consolidated statements cash flows v notes consolidated financial statements filed form 10k † certain confidential portions exhibit omitted means redacting portion text exhibit filed separately secretary commission without redactions pursuant application requesting confidential treatment securities exchange act 1934 item 16 form 10k summary none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated name title date bradley r mason bradley r mason president chief executive officer director principal executive officer february 26 2018 doug rice doug rice chief financial officer principal financial accounting officer february 26 2018 ronald matricaria ronald matricaria chairman board directors february 26 2018 luke faulstick luke faulstick director february 26 2018 james hinrichs james hinrichs director february 26 2018 alexis v lukianov alexis v lukianov director february 26 2018 lilly marks lilly marks director february 26 2018 michael e paolucci director february 26 2018 michael e paolucci maria sainz director february 26 2018 maria sainz orthofix international nv statement management’s responsibility financial statements shareholders orthofix international nv management responsible preparation consolidated financial statements related information presented report consolidated financial statements include amounts based management’s estimates judgments prepared conformity accounting principles generally accepted united states financial information report shareholders consistent consolidated financial statements company maintains accounting internal control systems provide reasonable assurance reasonable cost assets safeguarded loss unauthorized use disposition financial records reliable preparing financial statements maintaining accountability assets systems augmented written policies organizational structure providing division responsibilities careful selection training qualified personnel company engaged ernst young llp independent registered public accountants audit render opinion consolidated financial statements accordance auditing standards public company accounting oversight board united states standards include assessment systems internal controls test transactions extent considered necessary support opinion board directors audit committee consisting solely outside directors company meets periodically management independent registered public accountants ensure meeting responsibilities discuss matters concerning internal controls financial reporting ernst young llp full free access audit committee james f hinrichs chairman audit committee bradley r mason president chief executive officer director doug rice chief financial officer orthofix international nv index consolidated financial statements report independent registered public accounting firm shareholders board directors orthofix international nv opinion financial statements audited accompanying consolidated balance sheets orthofix international nv company december 31 2017 2016 related consolidated statements operations comprehensive income loss changes shareholders equity cash flows three years period ended december 31 2017 related notes collectively referred “consolidated financial statements” opinion consolidated financial statements present fairly material respects financial position company december 31 2017 2016 results operations cash flows three years period ended december 31 2017 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states pcaob companys internal control financial reporting december 31 2017 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated february 26 2018 expressed unqualified opinion thereon basis opinion financial statements responsibility companys management responsibility express opinion company’s financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation financial statements believe audits provide reasonable basis opinion ernst young llp served company’s auditor since 2002 dallas texas february 26 2018 orthofix international nv consolidated balance sheets december 31 2017 2016 accompanying notes form integral part consolidated financial statements orthofix international nv consolidated statements operations comprehensive income loss years ended december 31 2017 2016 2015 accompanying notes form integral part consolidated financial statements orthofix international nv consolidated statements changes shareholders’ equity years ended december 31 2017 2016 2015 accompanying notes form integral part consolidated financial statements orthofix international nv consolidated statements cash flows years ended december 31 2017 2016 2015 accompanying notes form integral part consolidated financial statements orthofix international nv notes consolidated financial statements business basis consolidation orthofix international nv subsidiaries “company” global medical device company focused musculoskeletal healing products valueadded services headquartered lewisville texas company four strategic business units “sbus” biostim extremity fixation spine fixation biologics orthofix products widely distributed via companys sales representatives distributors consolidated financial statements include financial statements company wholly owned subsidiaries intercompany accounts transactions eliminated consolidation 1 significant accounting policies preparation financial statements conformity united states generally accepted accounting principles “us gaap” requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period ongoing basis evaluate estimates including related contractual allowances doubtful accounts inventories goodwill income taxes fair value measurements litigation contingent liabilities sharebased compensation base estimates historical experience future expectations relevant assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources actual results could differ estimates information accounting policies methods used preparation consolidated financial statements included applicable respective footnotes follow following discussion accounting policies methods used consolidated financial statements presented within footnotes market risk ordinary course business company exposed impact changes interest rates foreign currency fluctuations company’s objective limit impact movements earnings cash flows order achieve objective company seeks balance nonus dollar denominated income expenditures 2016 2015 company made use crosscurrency swap agreement manage cash flow exposure generated foreign currency fluctuations crosscurrency swap matured settled december 30 2016 financial statements operations outside united states generally maintained local currency foreign currency denominated balance sheet accounts except shareholders’ equity translated us dollars year end exchange rates revenue expense items translated weighted average rates exchange prevailing year gains losses resulting translation foreign currency recorded accumulated comprehensive income loss component shareholders’ equity transactional foreign currency gains losses including generated intercompany operations included expense net gain 19 million losses less 01 million 35 million years ended december 31 2017 2016 2015 respectively financial instruments concentration credit risk financial instruments could subject company concentration credit risk consist primarily cash equivalents accounts receivable generally cash held large financial institutions cash equivalents consist highly liquid money market funds company performs ongoing credit evaluations customers generally require collateral maintains reserve potential credit losses company believes concentration credit risk related accounts receivable limited customers geographically dispersed end users diversified across several industries net sales customers based europe approximately 57 million 2017 results substantial portion trade accounts receivable balance december 31 2017 least reasonably possible changes global economic conditions andor local operating economic conditions regions distributors operate factors could affect future realization accounts receivable balances cash equivalents restricted cash company considers highly liquid investments original maturity three months less cash equivalents 2016 restricted cash consisted amounts held escrow december 31 2016 fund payment settlement amounts charges related us government resolutions discussed note 11 derivative instruments company manages exposure fluctuating cash flows resulting changes interest rates foreign exchange rates within consolidated financial statements according hedging policy requires company formally document relationship hedging instrument hedged item well riskmanagement objective strategy undertaking hedge transaction instruments designated cash flow hedge company formally assesses hedge’s inception ongoing basis whether derivative used hedging transaction effective offsetting changes cash flows hedged item whether derivative may expected remain effective future periods determined derivative ceased effective hedge company discontinues related hedge accounting prospectively company records derivatives either assets liabilities balance sheet respective fair values cash flow hedge effective portion derivative’s change fair value ie gains losses initially reported component comprehensive income net related taxes subsequently reclassified net earnings period hedged transaction affects earnings september 30 2010 company entered crosscurrency swap agreement manage cash flows related foreign currency exposure portion intercompany note receivable us dollar functional currency subsidiary denominated euro crosscurrency swap related euro denominated intercompany note matured settled december 30 2016 research development costs expenditures related collaborative arrangement mtf biologics “mtf” expensed based terms related agreement expenditures incurred collaborative arrangement mtf totaled 09 million 2017 13 million 2016 expenditures incurred 2015 expenditures research development expensed incurred recently issued income tax accounting guidance december 2017 sec staff issued staff accounting bulletin 118 “sab 118” address application us gaap situations registrant necessary information available prepared analyzed including computations reasonable detail complete accounting certain income tax effects tax cuts jobs act “tax act” see note 17 discussion january 2018 fasb released guidance accounting tax global intangible low taxed income “gilti” provisions tax act gilti provisions impose tax foreign income excess deemed return tangible assets foreign corporations guidance indicated either accounting deferred taxes related gilti inclusion treat taxes gilti inclusion period cost acceptable methods subject accounting policy election company currently evaluating policy decision recently issued accounting standards 2 inventories valued lower cost estimated net realizable value provision excess obsolete impaired items reviewed updated periodic basis management inventory procured produced whether internally contract manufacturing arrangements manufacturing facility italy cost determined weightedaverage basis approximates firstin firstout “fifo” method inventory procured produced whether internally contract manufacturing arrangements manufacturing facility texas standard costs approximates actual cost fifo method used value inventory standard costs reviewed annually management often event circumstances indicate change cost occurred workinprocess finished products field inventory consignment inventory include material labor production overhead costs field inventory represents immediately saleable finished products inventory possession company’s independent sales representatives consignment inventory represents immediately saleable finished products located third party customers distributors hospitals deferred cost sales result transactions company shipped product performed services revenue recognition criteria yet met revenue recognition criteria met revenue associated cost sales recognized company adjusts value inventory extent management determines cost cannot recovered due obsolescence factors order make determinations management uses estimates future demand sales prices product determine appropriate inventory reserves make corresponding adjustments carrying value inventories reflect lower cost market value 3 property plant equipment property plant equipment stated cost less accumulated depreciation costs include expenditures necessary place asset service including freight sales use taxes property plant equipment includes instrumentation held customers generally used facilitate implantation company’s products useful lives assets follows company evaluates useful lives assets annual basis depreciation computed straightline basis useful lives assets depreciation leasehold improvements computed shorter lease term useful life asset total depreciation expense 183 million 190 million 192 million years ended december 31 2017 2016 2015 respectively expenditures maintenance repairs minor renewals improvements extend lives respective assets expensed incurred expenditures renewals improvements capitalized assets related accumulated depreciation adjusted property retirements disposals resulting gain loss included earnings fully depreciated assets remain accounts retired service company capitalizes system development costs related internal use software application development stage costs related preliminary project activities post implementation activities expensed incurred internaluse software amortized straightline basis estimated useful life generally three seven years longlived assets evaluated impairment whenever events changes circumstances occurred would indicate impairment purposes evaluation company groups longlived assets liabilities lowest level identifiable cash flows asset generate cash flows independent assets liabilities carrying value asset group exceeds undiscounted cash flows expected result use eventual disposition asset group company write carrying value fair value period identified company generally determines fair value longlived assets present value estimated future cash flows determining estimated future cash flows associated assets company uses estimates assumptions future revenue contributions cost structures remaining useful lives asset group use alternative assumptions including estimated cash flows discount rates alternative estimated remaining useful lives could result different calculations impairment 4 patents intangible assets patents intangible assets recorded cost acquired part business combination estimated fair value assets amortized straightline basis useful lives assets company’s weighted average amortization period developed technologies 11 years amortization expense intangible assets 18 million 18 million 17 million years ended december 31 2017 2016 2015 respectively future amortization expense intangible assets estimated follows 5 goodwill company tests goodwill least annually impairment company tests frequently indicators present changes circumstances suggest impairment may exist indicators include among others declines sales earnings cash flows development material adverse change business climate company assesses goodwill impairment reporting unit level defined operating segment one level operating segment beginning fourth quarter 2017 company performed qualitative assessments annual goodwill impairment analysis result impairment charge either biostim biologics reporting units reporting units goodwill qualitative analysis considers relevant factors specific reporting units including macroeconomic conditions industry market considerations overall financial performance relevant entityspecific events 2016 company performed quantitative impairment analysis result impairment charge 2015 company performed qualitative assessment result impairment charge following table presents net carrying value goodwill reportable segment 6 longterm investments debt securities march 4 2015 company entered option agreement “option agreement” eneura inc “eneura” privately held medical technology company developing devices treatment migraines option agreement provided company exclusive option acquire eneura “option” 18month period following grant option expired september 2016 without company exercising option consideration option company paid nonrefundable 03 million fee eneura ii company loaned eneura 150 million pursuant convertible promissory note “eneura note” issued company principal amount eneura note 150 million interest accrues 80 eneura note mature march 4 2019 interest due eneura note matures provided change control eneura generally defined third party acquisition fifty percent eneura’s voting equity substantially eneura’s assets occurs prior maturity date eneura note automatically convert preferred stock eneura fixed price equal 730 per share investment recorded longterm assets available sale debt security fair value interest recorded interest income however company discontinued recognition interest eneura note first quarter 2017 march 31 2017 fair value debt security determined 90 million represented 32 million decrease fair value december 31 2016 company recorded decrease fair value comprehensive income loss unrealized loss debt securities based upon company’s best estimate amount expected recover time company recorded otherthantemporary impairment 56 million first quarter 2017 otherthantemporary impairment reclassified accumulated comprehensive loss included within expense see note 9 discussion december 31 2017 fair value debt security 161 million represents net increase 71 million relation balance march 31 2017 compares amortized cost basis 90 million company recorded increase fair value comprehensive income unrealized gain debt securities equity investment warrants december 31 2017 company holds common stock bone biologics inc “bone biologics” totaling 25 million warrants purchase 458 thousand shares weighted average exercise price 118 per share instruments recorded within longterm assets fair value instruments estimated instead recorded cost fair value readily determinable addition events changes circumstances would indicate significant adverse effect fair value instruments terms warrant purchase agreements warrants purchase common stock bone biologics exercisable seven year period expire 2020 2021 transferable holder parties 7 current liabilities extremity fixation restructuring plan december 2016 company approved initiated planned restructuring primarily affects extremity fixation sbu streamline costs improve operational performance wind noncore business extremity fixation restructuring plan consists primarily severance charges professional fees writedown certain assets company expects incur total pretax expense approximately 33 million connection restructuring activity incurred cumulative costs date 33 million largely within cost sales operating expenses company accrual 15 million december 31 2016 current liabilities related planned restructuring 2017 company incurred costs 13 million made payments 21 million relating activities resulting remaining accrual 07 million december 31 2017 us restructuring plan september 2017 company approved executed additional restructuring plan primarily affects entity’s corporate shared services us streamline costs improve operational performance us restructuring plan consists primarily severance charges company estimates total pretax expense approximately 17 million connection restructuring activity incurred 2017 recorded within cost sales operating expenses payments made 2017 06 million relating activities therefore 11 million accrued within current liabilities december 31 2017 8 longterm debt august 31 2015 company subsidiaries orthofix holdings victory medical limited “victory medical” collectively orthofix holdings “borrowers” entered credit agreement “credit agreement” jpmorgan administrative agent certain lenders party thereto credit agreement provides five year 125 million secured revolving credit facility “facility” credit agreement maturity date august 31 2020 december 31 2017 company borrowings outstanding credit agreement borrowings credit agreement may used among things working capital general corporate purposes including share repurchases permitted acquisitions permitted payments dividends distributions company certain subsidiaries facility generally available us dollars 50 million facility also available borrowed euros pounds sterling together us dollars “agreed currencies” credit agreement permits 25 million facility utilized issuance letters credit agreed currencies borrowers ability increase amount facility aggregate amount 50 million increase may take form one increases revolving credit commitments andor issuance one new term loans upon satisfaction certain conditions precedent receipt additional commitments one existing new lenders borrowings facility bear interest floating rate borrowers’ option either libor plus applicable margin ranging 175 25 base rate plus applicable margin ranging 075 15 case subject adjustment based company’s total leverage ratio unused commitment fee ranging 025 04 subject adjustment based company’s total leverage ratio payable quarterly arrears based daily amount undrawn portion lender’s revolving credit commitment facility fees payable outstanding letters credit rate equal applicable margin libor loans plus certain customary fees payable solely issuer letter credit company certain subsidiaries collectively “guarantors” required guarantee repayment borrowers’ obligations credit agreement obligations borrowers guarantors respect credit agreement secured pledge substantially tangible intangible personal property borrowers guarantors including accounts receivable deposit accounts intellectual property investment property inventory equipment equity interests subsidiaries credit agreement contains customary affirmative negative covenants including limitations company’s subsidiaries’ ability incur additional debt grant permit additional liens make investments acquisitions merge consolidate others dispose assets pay dividends distributions repay subordinated indebtedness enter affiliate transactions addition credit agreement contains financial covenants requiring company consolidated basis maintain last day fiscal quarter total leverage ratio 30 10 interest coverage ratio least 30 10 company compliance required financial covenants december 31 2017 credit agreement also includes events default customary facilities type upon occurrence events default subject customary cure rights outstanding loans facility may accelerated andor lenders’ commitments terminated conjunction obtaining facility company incurred debt issuance costs 18 million amortized life facility debt issuance costs included longterm assets net accumulated amortization december 31 2017 2016 debt issuance costs net accumulated amortization 10 million 13 million respectively debt issuance costs amortized expensed related facility amendment totaled 10 million 04 million 06 million years ended december 31 2017 2016 2015 respectively december 8 2017 company amended credit agreement jpmorgan administrative agent certain lenders party thereto primary provision credit agreement amended among things add company’s subsidiary orthofix international bv borrower guarantor loan party addition two company’s subsidiaries orthofix limited orthofix ii bv also added guarantors loan parties company unused available line credit €58 million 70 million 61 million december 31 2017 2016 respectively italian line credit unsecure line credit provides company option borrow amounts italy rates determined time borrowing 9 fair value measurements fair value defined price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date nonfinancial assets liabilities company measured fair value include longlived assets equity method investments impaired currently reported period authoritative guidance also describes three levels inputs may used measure fair value level 1 quoted prices active markets identical assets liabilities level 2 observable inputs quoted prices active markets identical assets liabilities level 3 unobservable inputs little market data available require reporting entity develop assumptions company’s financial instruments include cash equivalents restricted cash foreign certificates deposit treasury securities collective trust funds trade accounts receivable accounts payable longterm secured debt equity securities available sale debt securities common stock warrants deferred compensation plan liabilities carrying value restricted cash trade accounts receivable accounts payable approximate fair value due shortterm maturities instruments company’s credit facilities carry floating rate interest therefore carrying value considered approximate fair value company’s equity securities common stock warrants recorded cost fair value instruments readily available see note 6 discussion company’s collective trust funds treasury securities foreign certificates deposit debt securities deferred compensation plan liabilities financial instruments recorded fair value recurring basis follows fair value treasury securities certificates deposit determined based quoted prices active markets identical assets therefore company categorized instruments level 1 financial instruments certificates deposit held foreign currencies carried contractual maturity two years date purchase matured 2017 fair value company’s collective trust funds deferred compensation plan liabilities determined based inputs readily available public markets derived information available publicly quoted markets therefore company categorized instruments level 2 financial instruments fair value debt security including accrued interest based upon significant unobservable inputs including use discounted cash flows model requiring company develop assumptions therefore company categorized asset level 3 financial asset one significant unobservable inputs used fair value measurement debt security discount rate holding inputs constant changes discount rate could result significant change fair value debt security december 31 2017 fair value debt security 161 million net increase 38 million 2017 company recorded comprehensive income unrealized gain debt securities company evaluates declines fair value quarter determine impairments otherthantemporary based upon company’s best estimate amount expected recover time company recorded otherthantemporary impairment 56 million first quarter 2017 company also recorded otherthantemporary impairment 27 million 2016 otherthantemporary impairments reclassified accumulated comprehensive loss included within expense following table provides reconciliation beginning ending balances debt securities measured fair value using significant unobservable inputs level 3 10 commitments leases company entered operating leases facilities equipment leases noncancellable typically contain renewal options certain leases contain rent escalation clauses company recognizes expense straightline basis rent expense company’s operating leases years ended december 31 2017 2016 2015 approximately 31 million 30 million 30 million respectively future minimum lease payments operating leases december 31 2017 follows inventory purchase commitments company inventory purchase commitments thirdparty manufactures 19 million 12 million december 31 2017 2016 respectively 11 contingencies company records accruals certain outstanding legal proceedings investigations claims probable liability incurred amount loss reasonably estimated company evaluates quarterly basis developments legal proceedings investigations claims could affect amount accrual well developments would make loss contingency probable reasonably estimable loss contingency probable reasonably estimable company accrue loss however loss additional loss excess accrual least reasonable possibility material company discloses reasonable estimate possible loss range loss reasonable estimate made company cannot make reasonable estimate possible loss range loss disclosed addition legal fees directly related costs expensed incurred addition matters described paragraphs normal course business company involved various lawsuits time may subject certain contingencies company believes losses related matters individually collectively immaterial possible loss range loss january 2017 sec settlements january 2017 us securities exchange commission “sec” approved company’s offers settlement connection sec’s investigations accounting matters leading company’s prior restatement financial statements company’s review improper payments respect subsidiary brazil investigations initiated 2013 involved matters selfreported sec company settlements approved sec resolved two matters included payments totaling 144 million company sec amounts previously accrued funded escrow company 2016 connection brazilrelated settlement company agreed retain independent compliance consultant one year review test company’s compliance program related us foreign corrupt practices act company’s engagement independent compliance consultant began march 2017 addition fourth quarter 2017 company received favorable insurance settlement approximately 6 million associated prior costs incurred related matters company recognized within sec fcpa matters related costs line consolidated statement operations comprehensive income loss discontinued operations matters related breg possible indemnification obligations may 24 2012 company sold breg affiliate water street healthcare partners ii lp “water street” terms agreement company indemnified water street breg respect certain specified matters time divestiture company breg engaged manufacturing sales motorized cold therapy units used reduce pain swelling several domestic product liability cases filed mostly california state court september 2014 company entered master settlement agreement resolving pending preclose cold therapy claims currently pending postclose cold therapy claim california state court december 31 2017 company accrual 17 million recorded within current liabilities however actual liability could higher lower amount accrued charges incurred result indemnification reflected discontinued operations consolidated statements operations comprehensive income loss 12 shareholders’ equity dividends company paid dividends holders common stock past certain subsidiaries company restrictions ability pay dividends certain circumstances pursuant credit agreement event company decides pay dividend holders common stock future dividends received subsidiaries company may based prevailing rates taxation required pay additional withholding income tax amounts received subsidiaries share repurchase plan august 2015 company’s board directors authorized share repurchase plan authorizing purchase 75 million company’s common stock including september 2017 company completed share repurchase plan fourth quarter 2016 program common shares repurchased consisted open market transactions prevailing market prices accordance guidelines specified rule 10b18 exchange act amended repurchases made cash hand cash generated operations year ended december 31 2016 company repurchased 1544681 shares common stock 634 million average price per share 4106 retired upon repurchase accumulated comprehensive income loss accumulated comprehensive income loss comprised foreign currency translation adjustments effective portion gain loss company’s crosscurrency swap designated accounted cash flow hedge expired 2016 unrealized gains losses company’s debt security components changes accumulated comprehensive income loss follows 13 revenue recognition accounts receivable table presents net sales includes product sales marketing service fees years ended december 31 2017 2016 2015 product sales primarily consist stimulation devices internal external fixation products marketing service fees received mtf based total sales biologics tissues relates solely biologics sbu revenues exclude value added local taxes intercompany sales trade discounts shipping handling costs products shipped customers included cost sales 30 million 20 million 22 million years ended december 31 2017 2016 2015 respectively biostim revenue largely attributable us comprised thirdparty payor transactions wholesale revenue largest portion biostim revenue derived thirdparty payors includes commercial insurance carriers health maintenance organizations preferred provider organizations governmental payors medicare connection sale company’s stimulation products revenue recognized stimulation product fitted accepted patient applicable documents required thirdparty payor obtained amounts paid thirdparty payors generally based fixed allowable reimbursement rates revenues recorded expected preauthorized reimbursement rates net contractual allowances adjustments certain billings subject review thirdparty payors may subject adjustment wholesale revenue related sale company’s bone growth stimulators directly physicians healthcare providers wholesale revenues typically recognized upon shipment receipt confirming purchase order extremity fixation spine fixation extremity fixation spine fixation products distributed worldwide us sales largely comprised commercial revenue international sales derived commercial sales stocking distributor arrangements commercial revenue related sale company’s internal external fixation products generally representing hospital customers revenues recognized products utilized confirming purchase order received hospital revenue certain government entities recorded cashbasis collectability reasonably assured revenue stocking distributor arrangements company recognizes revenue product delivered end customer “sellthrough method” company reliable information stocking distributors sell product end customers company uses cash collection stocking distributors basis revenue recognition sellthrough method although many cases company legally entitled accounts receivable time shipment company recognized accounts receivables corresponding deferred revenues associated stocking distributor transactions revenue recognized sellthrough method stocking distributor arrangements company also considers whether match related cost sales revenue recognize cost sales upon shipment making assessment company considers financial viability stocking distributors based creditworthiness determine collectability amounts sufficient realize costs products shipped reasonably assured time shipment stocking distributors instances stocking distributor determined financially viable company defers costs sales revenue recognized biologics revenue largely attributable us primarily related collaborative arrangement mtf extends july 28 2027 company markets tissue bone repair reconstruction brand names trinity evolution trinity elite company exclusive global marketing rights trinity evolution well nonexclusive marketing rights products receives marketing fees mtf based total sales mtf considered primary obligor arrangements therefore company recognizes marketing service fees net basis within net sales upon shipment product customer marketing service fees received mtf 603 million approximately 96 total biologics revenues year ended december 31 2017 mtf company’s single supplier trinity evolution trinity eite tissue forms derived human cadaveric donors event circumstance would impact mtf’s continued access donated human cadaveric tissue company’s ability market tissues may adversely impact company’s financial results trade accounts receivable allowances accounts receivable analyzed quarterly basis assess adequacy reserves doubtful accounts contractual allowances revisions allowances doubtful accounts estimates recorded adjustment bad debt expense within sales marketing expenses revisions contractual allowances recorded adjustment net sales company’s estimates periodically tested actual collection experience company generally sell receivables certain italian hospitals year 2017 2016 2015 company sold €98 million €100 million €109 million 112 million 111 million 119 million receivables respectively estimated related fee 2017 2016 2015 03 million 04 million 05 million respectively recorded interest expense trade accounts receivables sold without recourse removed balance sheet time sale 14 business segment information manage business four sbus biostim extremity fixation spine fixation biologics sbus represent operating segments chief executive officer also chief operating decision maker “codm” reviews financial information makes resource allocation decisions among business units primary metric used codm managing company nongaap net margin internal metric company defines gross profit less sales marketing expense company neither discretely allocates assets goodwill operating segments evaluates operating segments using discrete asset information accordingly reporting segment information prepared based four sbus biostim sbu manufactures distributes provides support services market leading bone growth stimulator devices enhance bone fusion class iii medical devices indicated adjunctive noninvasive treatment improve fusion success rates cervical lumbar spine well therapeutic treatment nonspine fractures healed nonunions sbu uses distributors sales representatives sell devices hospitals healthcare providers patients primarily us extremity fixation extremity fixation sbu offers products solutions allow physicians successfully treat variety orthopedic conditions unrelated spine sbu specializes design development marketing company’s orthopedic products used fracture repair deformity correction bone reconstruction procedures extremity fixation distributes products network distributors sales representatives sell orthopedic products hospitals healthcare providers globally spine fixation spine fixation sbu designs develops markets broad portfolio implant products used surgical procedures spine fixation distributes products network distributors sales representatives sell spine products hospitals healthcare providers globally biologics sbu provides portfolio regenerative products tissue forms allow physicians successfully treat variety spinal orthopedic conditions sbu specializes marketing company’s exclusive regeneration tissue forms distributes tissues hospitals healthcare providers primarily us network employed independent sales representatives partnership mtf allows us exclusively market trinity evolution trinity elite tissue forms musculoskeletal defects enhance bony fusion corporate activities comprised operating expenses orthofix international nv holding company subsidiaries along activities necessarily identifiable within four sbus table presents net sales reporting segment following table presents nongaap net margin internal metric company defines gross profit less sales marketing expense reporting segment following table presents depreciation amortization reporting segment geographical information following data includes net sales geographic destination following data includes property plant equipment geographic area 15 sharebased compensation december 31 2017 company stock option award plans employee stock purchase plan 2012 long term incentive plan board directors adopted orthofix international nv 2012 longterm incentive plan “2012 ltip” april 13 2012 subject shareholder approval subsequently provided shareholder ratification 2012 ltip provides grant options purchase shares company’s common stock awards including restricted stock unrestricted stock units stock appreciation rights performancebased awards equitybased awards company’s employees company’s subsidiaries affiliates eligible may receive awards 2012 ltip addition company’s nonemployee directors consultants advisors perform services company’s subsidiaries affiliates may receive awards 2012 ltip incentive share options however available company’s employees awards granted 2012 ltip expire later ten years date grant company reserves total 3200000 shares common stock issuance pursuant 2012 ltip subject certain adjustments set forth 2012 ltip december 31 2017 881322 options outstanding 2012 ltip plan 402820 exercisable addition 381204 shares unvested restricted stock outstanding contain performance conditions 241864 units performance stock units outstanding plan december 31 2017 2004 long term incentive plan 2004 long term incentive plan “2004 ltip plan” reserved 31 million shares issuance addition shares available future awards june 29 2004 prior plans ii become available future issuance upon expiration forfeiture june 29 2004 awards upon prior plans december 31 2017 55500 options outstanding 2004 ltip plan exercisable addition shares unvested restricted stock outstanding stock purchase plan orthofix international nv amended restated stock purchase plan “stock purchase plan” provides issuance shares company’s common stock eligible employees directors company subsidiaries elect participate plan acquire shares common stock payroll deductions including executive officers purchase period eligible employees may designate 1 25 compensation deducted purchase common stock plan percentage order comply regulations applicable employees domiciled resident member state european union eligible directors designated percentage amount equal annual director compensation paid cash current plan year purchase price shares plan equal 85 fair market value first day plan year calendar year running january 1 december 31 lower last day plan year due compensatory nature plan company records related share based compensation consolidated statement operations aggregate number shares reserved issuance stock purchase plan 1850000 december 31 2017 1504445 shares issued sharebased compensation expense sharebased compensation expense recorded line consolidated statements operations employee’s cash compensation following tables present detail sharebased compensation line item consolidated statements operations well award type years ended december 31 2017 2016 2015 income tax benefit related expense 34 million 43 million 16 million years ended december 31 2017 2016 2015 respectively stock options fair value servicebased stock options determined using blackscholes valuation model value recognized expense service period typically four years net actual forfeitures fair value marketbased stock options determined date grant using monte carlo valuation methodology value recognized expense requisite service period adjusted forfeitures occur monte carlo methodology incorporates valuation possibility market condition may satisfied summary company’s assumptions used determining fair value stock options granted year shown following table expected term options granted estimated based number factors including vesting expiration terms award historical employee exercise behavior options currently outstanding options exercised expired historical volatility company’s common stock employee’s average length service riskfree interest rate determined based upon constant us treasury security rate contractual life approximates expected term option award expected volatility estimated based historical volatility company’s stock summaries status company’s stock option plans december 31 2017 2016 changes year ended december 31 2017 presented table summarizes options outstanding exercisable exercise price range december 31 2017 december 31 2017 unamortized compensation expense relating options granted expected recognized 29 million amount expected recognized july 2021 weighted average period approximately 15 years total intrinsic value options exercised 22 million 43 million 07 million years ended december 31 2017 2016 2015 respectively aggregate intrinsic value options outstanding options exercisable december 31 2017 calculated difference exercise price underlying options market price company’s common stock shares exercise prices lower 5470 closing price company’s stock december 31 2017 aggregate intrinsic value options outstanding 187 million 33 million 80 million years ended december 31 2017 2016 2015 respectively aggregate intrinsic value options exercisable 124 million 22 million 43 million years ended december 31 2017 2016 2015 respectively timebased restricted stock awards stock units year ended december 31 2017 company granted employees nonemployee directors 143469 shares restricted stock units vest various dates december 2021 compensation expense represents fair value stock measured market price date grant recognized straightline basis vesting period typically four years net actual forfeitures aggregate fair value restricted stock vested years ended december 31 2017 2016 2015 73 million 72 million 61 million respectively unamortized compensation expense related restricted stock amounted 110 million december 31 2017 expected recognized weighted average period approximately 24 years aggregate intrinsic value restricted stock outstanding 178 million 130 million 149 million years ended december 31 2017 2016 2015 respectively performancebased restricted stock awards fair value performancebased restricted stock awards calculated based upon closing stock price date grant value recognized expense derived requisite service period beginning period deemed probable vest net actual forfeitures vesting probability assessed based upon forecasted earnings financial results years ended december 31 2017 2016 company grant performancebased restricted stock awards employees year ended december 31 2015 company granted employees 110660 shares performancebased restricted stock vest based upon achievement certain earnings return invested capital targets years ended december 31 2016 2017 2018 approximately 05 million 57 million compensation expense recorded years ended december 31 2017 2016 respectively associated performancebased vesting restricted stock awards expense recorded year ended december 31 2015 related performancebased restricted stock fair value performancebased stock awards vested year ended december 31 2017 49 million performancebased stock awards vested years ended december 31 2016 2015 unamortized compensation expense related performancebased restricted stock amounted 04 million december 31 2017 contingent upon meeting certain performancebased vesting criteria expected recognized weighted average period approximately 10 year aggregate intrinsic value performancebased restricted stock awards outstanding 30 million 70 million 76 million years ended december 31 2017 2016 2015 respectively performancebased marketbased restricted stock units company’s performancebased stock units “psus” consist awards contain either market conditions performance conditions requirement vesting fair value marketbased psus determined date grant using monte carlo valuation methodology discounts postvesting restrictions estimated using chaffe model monte carlo methodology incorporates valuation possibility market condition may satisfied value recognized straightline basis vesting period net actual forfeitures years ended december 31 2017 2016 company granted 94902 96245 shares respectively marketbased psus executive officers certain employees awards market conditions achieved settled shares common stock one share common stock issued per psu targets achieved 100 level awards may achieved minimum level 50 maximum 200 market conditions 2016 2017 awards based company’s stock achieving certain total shareholder return targets relative specified index companies 3year performance period beginning july 2016 july 2017 respectively company recorded 29 million 09 million compensation expense years ended december 31 2017 2016 respectively expense year ended december 31 2015 related marketbased psus unamortized compensation expense marketbased psus amounted 59 million december 31 2017 expected recognized weighted average period approximately 20 years aggregate intrinsic value marketbased psus outstanding 102 million 35 million 00 million years ended december 31 2017 2016 2015 respectively fair value performancebased psus calculated based upon closing stock price date grant value recognized expense derived requisite service period beginning period awards deemed probable vest vesting probability assessed based upon forecasted earnings financial results year ended december 31 2015 company granted 55330 shares performancebased psus employees vest based upon achievement certain earnings return invested capital targets year ended december 31 2018 company recorded compensation expense years ended december 31 2017 2016 2015 related 2015 performancebased psus requisite service period yet begun unamortized compensation expense related 2015 performancebased psus amounts 18 million december 31 2017 expected recognized weighted average period approximately 10 year performance conditions met aggregate intrinsic value performancebased psus outstanding 30 million 20 million 22 million years ended december 31 2017 2016 2015 respectively summary status restricted stock units december 31 2017 2016 changes year ended december 31 2017 presented 16 defined contribution plans deferred compensation defined contribution plans orthofix inc sponsors defined contribution plan “401k plan” covering substantially full time us employees 401k plan allows participants contribute 15 pretax compensation subject certain limitations company matching 100 first 2 employee’s base compensation 50 next 4 employee’s base compensation contributed 401k plan years ended december 31 2017 2016 2015 expenses incurred relating 401k plan including matching contributions approximately 20 million 19 million 20 million respectively company also operates defined contribution pension plans international employees meeting minimum service requirements company’s expenses pension contributions years ended december 31 2017 2016 2015 11 million 10 million 11 million respectively deferred compensation plans italian law italian subsidiary accrues behalf employees deferred compensation paid termination employment accrual deferred compensation based percentage employee’s current annual remuneration plus annual charge deferred compensation also accrued leaving indemnity payable agents case dismissal regulated national contract equal approximately 35 total commissions earned company’s relations italian employees represent 215 total employees december 31 2017 governed provisions national collective labor agreement setting forth mandatory minimum standards labor relations metal mechanic workers industry company party collective bargaining agreement orthofix deferred compensation plan administered board directors company effective january 1 2007 amended restated effective january 1 2009 plan intended allow select group key management highly compensated employees company defer receipt compensation would otherwise payable january 1 2011 company disallowed contributions plan new plan participants distributions made accordance requirements code section 409a company’s expense deferred compensation plans described approximately 01 million years ended december 31 2017 2016 2015 02 million deferred compensation payments made 2017 01 million 2016 none 2015 balance longterm liabilities december 31 2017 2016 14 million 15 million respectively represents amount would payable employees agents terminated employment date 17 income taxes income loss continuing operations provision income taxes consisted following provision income taxes continuing operations consists following rate reconciliation continuing operations presented based us federal income tax rate rather company’s country domicile tax rate company believes given large proportion taxable income earned united states disclosure meaningful december 22 2017 tax act signed law making significant changes internal revenue code changes include limited us corporate rate decrease 35 21 effective tax years beginning december 31 2017 transition us international taxation worldwide tax system territorial system onetime transition tax mandatory deemed repatriation cumulative foreign earnings december 31 2017 company calculated best estimate impact tax act 2017 income tax provision accordance understanding tax act guidance available date filing result company recorded 83 million additional income tax expense fourth quarter 2017 period legislation enacted provisional amount related remeasurement certain deferred tax assets liabilities based rates expected reverse future 86 million provisional amount related onetime transition tax mandatory deemed repatriation foreign earnings zero company also recorded benefit 03 million related income tax liability recorded 2016 related repatriation earnings subsidiary puerto rico december 22 2017 staff accounting bulletin 118 “sab 118” issued address application us gaap situations registrant necessary information available prepared analyzed including computations reasonable detail complete accounting certain income tax effects tax act accordance sab 118 determine 86 million deferred tax expense recorded connection remeasurement certain deferred tax assets liabilities zero transition tax mandatory deemed repatriation foreign earnings provisional amount reasonable estimate december 31 2017 additional work necessary detailed analysis company’s deferred tax assets liabilities historical foreign earnings well potential correlative adjustments subsequent adjustment amounts recorded current tax expense quarter 2018 analysis complete 2016 company revised estimate relating deductibility certain compensation expenses change estimate reduced income tax expense increased net income continuing operations 24 million increased earnings per share 013 year ended december 31 2016 company’s deferred tax assets liabilities follows company accounts income taxes using asset liability method deferred tax assets liabilities recognized expected future tax consequences temporary differences financial reporting income tax basis assets liabilities operating losses credit carryforwards deferred tax assets liabilities measured using enacted tax rates effect years items expected realized tax law rate changes recorded period changes enacted company establishes valuation allowance likely certain deferred tax assets realized foreseeable future valuation allowance primarily attributable net operating loss carryforwards temporary differences certain foreign jurisdictions net increase valuation allowance 46 million year principally relates increase valuation allowances net operating loss carryforwards foreign jurisdictions company state net operating loss carryforwards approximately 116 million begin expire 2018 additionally company net operating loss carryforwards various foreign jurisdictions approximately 1673 million begin expire 2018 majority relate company’s netherlands operations 2016 company changed intention related unremitted foreign earnings puerto rico subsidiary certain united kingdom subsidiaries result change intention company recorded 13 million income tax expense remitted unremitted earnings subsidiaries first quarter 2017 company changed intention related unremitted foreign earnings seychelles subsidiary tax impact minimal company’s current intention indefinitely reinvest substantially unremitted foreign earnings residing outside curaçao entity incorporated curaçao “foreign earnings” refer us nonus earnings furthermore income sourced us subject us income tax unremitted foreign earnings decreased 3725 million december 31 2016 3357 million december 31 2017 determining additional income tax may payable earnings repatriated practicable company records benefit uncertain tax positions weight available evidence indicates likely based evaluation technical merits tax position sustained audit tax benefit measured largest amount 50 likely realized upon settlement company reevaluates income tax positions periodically consider changes facts circumstances changes interpretations tax law effectively settled issues audit new audit activity company includes interest applicable penalties related income tax issues part income tax expense consolidated financial statements company’s unrecognized tax benefit 225 million 184 million years ended december 31 2017 2016 respectively company recorded interest penalties unrecognized tax benefits 23 million 21 million 02 million years ended december 31 2017 2016 2015 respectively approximately 53 million 30 million accrued payment interest penalties december 31 2017 2016 respectively entire amount unrecognized tax benefits including interest would favorably impact company’s effective tax rate recognized company believes reasonably possible next 12 months amount unrecognized tax benefits related resolution federal state foreign matters could reduced 24 million 36 million audits close statutes expire reconciliation gross unrecognized tax benefits excluding interest penalties years ended december 31 2017 2016 2015 follows company subsidiaries file income tax returns us federal jurisdiction certain state foreign jurisdictions including italy united kingdom statute limitations respect federal state tax filings closed years prior 2012 statute limitations respect major foreign tax filing jurisdictions closed years prior 2012 third quarter 2015 internal revenue service commenced examination company’s federal income tax return 2012 company reasonably expects conclude examination first half 2018 material impact financial statements october 2016 company notified examination federal income tax return 2013 december 2017 examination 2013 concluded change november 2017 company notified examination federal income tax return 2015 company cannot reasonably determine examination state local tax examinations material impact financial statements cannot predict timing regarding resolution tax examinations 18 earnings per share eps basic eps computed using weighted average number common shares outstanding respective years diluted eps computed using weighted average number common equivalent shares outstanding respective years using treasury stock method difference basic diluted shares largely results common equivalent shares represents dilutive effect assumed exercise certain outstanding share options assumed vesting restricted stock granted employees directors satisfaction certain necessary conditions contingently issuable shares see note 15 three years ended december 31 2017 adjustments made net income loss purposes calculating basic diluted eps following reconciliation weighted average shares used diluted eps computations adjustment made common stock equivalents year ended december 31 2015 effect would antidilutive 418859 542555 1033731 outstanding options restricted stock performancebased marketbased equity awards included diluted earnings per share computation years ended december 31 2017 2016 2015 respectively inclusion awards antidilutive performancebased marketbased awards necessary conditions satisfied end respective period 19 quarterly financial data unauditeditem 15 exhibits financial statement schedules documents filed part report form 10k following documents filed part annual report form 10k 1 financial statements see “index consolidated financial statements” page form 10k 2 financial statement schedules required either required information present amounts sufficient require submission schedule information required included consolidated financial statements notes thereto 3 exhibits exhibit number description 21 agreement plan merger entered march 15 2018 among blackstone medical inc summit development inc spinal kinetics inc filed exhibit company’s quarterly report form 10q quarter ended march 31 2018 incorporated herein reference 31 orthofix medical inc certificate incorporation filed exhibit company’s current report form 8k dated august 1 2018 incorporated herein reference 32 orthofix medical inc bylaws filed exhibit company’s current report form 8k dated august 1 2018 incorporated herein reference 41 form stock certificate filed exhibit company’s current report form 8k dated august 1 2018 incorporated herein reference 101 credit agreement dated august 31 2015 among orthofix holdings inc victory medical limited borrowers orthofix international nv certain subsidiaries orthofix international nv party thereto guarantors several banks financial institutions may time become parties thereunder lenders jpmorgan chase na administrative agent filed exhibit company’s current report form 8k filed september 1 2015 incorporated herein reference 102 first amendment credit agreement dated march 7 2016 effective february 29 2016 among orthofix holdings inc victory medical limited borrowers orthofix international nv certain subsidiaries orthofix international nv party thereto guarantors several banks financial institutions may time become parties thereunder lenders jpmorgan chase na administrative agent filed exhibit company’s quarterly report form 10q quarter ended march 31 2016 incorporated herein reference 103 second amendment credit agreement dated december 8 2017 among orthofix holdings inc victory medical limited orthofix international bv borrowers orthofix international nv certain subsidiaries orthofix international nv party thereto guarantors several banks financial institutions may time become parties thereunder lenders jpmorgan chase na administrative agent filed exhibit company’s annual report form 10k year ended december 31 2018 incorporated herein reference 104 first amended restated credit agreement dated july 31 2018 among orthofix holdings inc victory medical limited orthofix international bv orthofix medical inc certain subsidiaries orthofix medical inc guarantors several banks financial institutions may time become parties thereunder lenders jpmorgan chase na administrative agent filed exhibit company’s current report form 8k filed august 6 2018 incorporated herein reference 105† matrix commercialization collaboration agreement entered july 24 2008 orthofix holdings inc musculoskeletal transplant foundation filed exhibit company’s annual report form 10k fiscal year ended december 31 2009 incorporated herein reference exhibit number description 106 amendment 1 matrix commercialization collaboration agreement dated december 15 2010 musculoskeletal transplant foundation inc orthofix holdings inc filed exhibit company’s annual report form 10k fiscal year ended december 31 2010 incorporated herein reference 107† amendment 2 matrix commercialization collaboration agreement dated january 9 2012 musculoskeletal transplant foundation inc orthofix holdings inc filed exhibit amendment 1 company’s annual report form 10ka year ended december 31 2011 incorporated herein reference 108† amendment 3 matrix commercialization collaboration agreement entered july 1 2013 effective june 25 2013 musculoskeletal transplant foundation inc orthofix holdings inc filed exhibit company’s current report form 8k filed july 8 2013 incorporated herein reference 109 amendment 4 matrix commercialization collaboration agreement entered april 1 2014 musculoskeletal transplant foundation inc orthofix holdings inc filed exhibit company’s current report form 8k filed april 7 2014 incorporated herein reference 1010† amendment 5 matrix commercialization collaboration agreement entered march 10 2016 musculoskeletal transplant foundation inc orthofix holdings inc filed exhibit company’s current report form 8k filed march 14 2016 incorporated herein reference 1011† amendment 6 matrix commercialization collaboration agreement entered december 29 2017 musculoskeletal transplant foundation inc orthofix holdings inc filed exhibit company’s annual report form 10k filed february 26 2018 incorporated herein reference 1012 orthofix medical inc second amended restated stock purchase plan amended 1013 orthofix medical inc amended restated 2012 longterm incentive plan 1014 form nonemployee director restricted stock unit agreement orthofix international nv 2012 longterm incentive plan filed exhibit company’s form 10q filed august 7 2017 incorporated herein reference 1015 form timebased vesting employee restricted stock grant agreement orthofix international nv 2012 longterm incentive plan filed exhibit company’s current report form 8k filed july 8 2016 incorporated reference 1016 form timebased vesting employee nonqualified stock option agreement orthofix international nv 2012 longterm incentive plan filed exhibit company’s current report form 8k filed july 8 2016 incorporated reference 1017 form timebased vesting nonemployee director nonqualified stock option agreement orthofix international nv 2012 longterm incentive plan initial grant filed exhibit company’s current report form 8k filed july 8 2016 incorporated reference 1018 form 2016 employee performance stock unit agreement orthofix international nv 2012 longterm incentive plan filed exhibit company’s current report form 8k filed july 8 2016 incorporated reference 1019 form employee performance vesting restricted stock performance share unit grant agreement orthofix international nv 2012 longterm incentive plan june 2015 grants filed exhibit company’s form 10q filed august 4 2015 incorporated herein reference 1020 form employee nonqualified stock option agreement orthofix international nv 2012 longterm incentive plan july 2014june 2016 timebased vesting filed exhibit company’s quarterly report form 10q quarter ended september 30 2014 incorporated herein reference 1021 form employee restricted stock grant agreement orthofix international nv 2012 longterm incentive plan july 2014june 2016 timebased vesting filed exhibit company’s quarterly report form 10q quarter ended september 30 2014 incorporated herein reference exhibit number description 1022 form employee nonqualified stock option agreement orthofix international nv 2012 longterm incentive plan pre2014 grants filed exhibit company’s annual report form 10k fiscal year ended december 31 2012 incorporated herein reference 1023 form nonemployee director nonqualified stock option agreement orthofix international nv 2012 long term incentive plan filed exhibit company’s annual report form 10k fiscal year ended december 31 2012 incorporated herein reference 1024 employee inducement restricted stock unit agreement beth stevenson filed exhibit company’s form s8 filed february 2 2019 incorporated herein reference 1025 inducement plan spinal kinetics employees filed exhibit company’s form s8 filed april 30 2018 incorporated herein reference 1026 form inducement grant nonqualified stock option agreement filed exhibit company’s form s8 filed april 30 2018 incorporated herein reference 1027 form inducement grant restricted stock agreement filed exhibit company’s form s8 filed april 30 2018 incorporated herein reference 1028 inducement grant nonqualified stock option agreement dated march 13 2013 orthofix international nv bradley r mason filed exhibit company’s current report form 8k filed march 13 2013 incorporated herein reference 1029 amended restated 2004 long term incentive plan filed exhibit company’s quarterly report form 10q quarter ended june 30 2009 incorporated herein reference 1030 form employee nonqualified stock option agreement orthofix international nv amended restated 2004 longterm incentive plan post2008 grants made 2004 long term incentive plan prior adoption 2012 long term incentive plan filed exhibit company’s current report form 8k filed july 7 2009 incorporated herein reference 1031 form indemnification agreement orthofix medical inc directors officers incorporated reference exhibit 101 company’s registration statement form s4 registration 333224407 filed april 23 2018 1032 amended change control severance agreement dated november 1 2016 orthofix international nv bradley r mason filed exhibit company’s annual report form 10k fiscal year ended december 31 2016 incorporated herein reference 1033 amended change control severance agreement dated november 1 2016 orthofix international nv doug rice filed exhibit company’s annual report form 10k fiscal year ended december 31 2016 incorporated herein reference 1034 amended change control severance agreement dated november 1 2016 orthofix international nv michael finegan filed exhibit company’s annual report form 10k fiscal year ended december 31 2016 incorporated herein reference 1035 change control severance agreement dated september 7 2016 orthofix international nv davide bianchi filed exhibit company’s current report form 8k filed september 9 2016 incorporated herein reference 1036 amended restated employment contract dated july 31 2018 orthofix ag davide bianchi filed exhibit company’s current report form 8k filed august 6 2018 incorporated herein reference 1037 amended change control severance agreement dated november 1 2016 orthofix international nv bradley v niemann filed exhibit company’s annual report form 10k fiscal year ended december 31 2016 incorporated herein reference exhibit number description 1038 change control severance agreement dated november 1 2016 orthofix international nv kimberley elting filed exhibit company’s annual report form 10k fiscal year ended december 31 2016 incorporated herein reference 1039 transition retirement agreement dated february 25 2019 bradley r mason orthofix medical inc 211 list subsidiaries 231 consent independent registered public accounting firm 311 rule 13a14a15d14a certification chief executive officer 312 rule 13a14a15d14a certification chief financial officer 321 section 1350 certification chief executive officer certification chief financial officer following financial statements orthofix medical inc form 10k year ended december 31 2018 filed february 25 2019 formatted xbrl consolidated balance sheets ii consolidated statements income comprehensive income iii consolidated statements changes shareholders’ equity iv consolidated statements cash flows v notes consolidated financial statements filed form 10k † certain confidential portions exhibit omitted means redacting portion text exhibit filed separately secretary commission without redactions pursuant application requesting confidential treatment securities exchange act 1934 item 16 form 10k summary none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated name title date bradley r mason bradley r mason president chief executive officer director principal executive officer february 25 2019 doug rice doug rice chief financial officer principal financial accounting officer february 25 2019 ronald matricaria ronald matricaria chairman board directors february 25 2019 luke faulstick luke faulstick director february 25 2019 james hinrichs james hinrichs director february 25 2019 alexis v lukianov alexis v lukianov director february 25 2019 lilly marks lilly marks director february 25 2019 michael e paolucci director february 25 2019 michael e paolucci maria sainz director february 25 2019 maria sainz john sicard director february 25 2019 john sicard orthofix medical inc statement management’s responsibility financial statements shareholders orthofix medical inc management responsible preparation consolidated financial statements related information presented annual report consolidated financial statements include amounts based management’s estimates judgments prepared conformity accounting principles generally accepted united states financial information report shareholders consistent consolidated financial statements company maintains accounting internal control systems provide reasonable assurance reasonable cost assets safeguarded loss unauthorized use disposition financial records reliable preparing financial statements maintaining accountability assets systems augmented written policies organizational structure providing division responsibilities careful selection training qualified personnel company engaged ernst young llp independent registered public accountants audit render opinion consolidated financial statements accordance auditing standards public company accounting oversight board united states standards include assessment systems internal controls test transactions extent considered necessary support opinion board directors audit committee consisting solely outside directors company meets periodically management independent registered public accountants ensure meeting responsibilities discuss matters concerning internal controls financial reporting ernst young llp full free access audit committee james f hinrichs chairman audit committee bradley r mason president chief executive officer director doug rice chief financial officer orthofix medical inc index consolidated financial statements report independent registered public accounting firm shareholders board directors orthofix medical inc opinion financial statements audited accompanying consolidated balance sheets orthofix medical inc formerly orthofix international nv company december 31 2018 2017 related consolidated statements income comprehensive income changes shareholders equity cash flows three years period ended december 31 2018 related notes collectively referred “consolidated financial statements” opinion consolidated financial statements present fairly material respects financial position company december 31 2018 2017 results operations cash flows three years period ended december 31 2018 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states pcaob companys internal control financial reporting december 31 2018 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated february 25 2019 expressed unqualified opinion thereon adoption new accounting standards discussed notes 2 15 consolidated financial statements company changed methods accounting 1 recognition revenue contracts customers 2018 due adoption asu 201409 revenue contracts customers 2 measurement equity investments fair value recognition changes fair value 2018 due adoption asu 201601 financial instruments asu 201803 technical connections improvements financial instruments 3 intraentity transfers assets 2018 2017 due adoption asu 201616 income taxes intraentity transfers assets inventory 4 classification presentation restricted cash including transfers cash restricted cash statement cash flows 2018 2017 due adoption asu 201618 statement cash flows restricted cash basis opinion financial statements responsibility companys management responsibility express opinion company’s financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation financial statements believe audits provide reasonable basis opinion ernst young llp served company’s auditor since 2002 dallas texas february 25 2019 orthofix medical inc consolidated balance sheets december 31 2018 2017 accompanying notes form integral part consolidated financial statements orthofix medical inc consolidated statements income comprehensive income years ended december 31 2018 2017 2016 accompanying notes form integral part consolidated financial statements orthofix medical inc consolidated statements changes shareholders’ equity years ended december 31 2018 2017 2016 accompanying notes form integral part consolidated financial statements orthofix medical inc consolidated statements cash flows years ended december 31 2018 2017 2016 accompanying notes form integral part consolidated financial statements orthofix medical inc notes consolidated financial statements business basis consolidation orthofix medical inc previously orthofix international nv subsidiaries “company” global medical device company focused musculoskeletal products therapies company’s mission improve patients’ lives providing superior reconstruction regenerative musculoskeletal solutions physicians worldwide headquartered lewisville texas company four reporting segments bone growth therapies formerly referred biostim spinal implants formerly referred spine fixation biologics orthofix extremities formerly referred extremity fixation orthofix products widely distributed via companys sales representatives distributors july 31 2018 company completed change jurisdiction organization curaçao state delaware “domestication” accordance conversion procedures articles 304 305 book 2 curaçao civil code domestication procedures section 388 delaware general corporation law company’s shareholders approved authorized domestication company’s 2018 annual general meeting shareholders held july 17 2018 “annual general meeting” affirmative vote shareholders representing absolute majority outstanding common shares company record date annual general meeting upon effectiveness domestication common share orthofix international nv automatically converted one share common stock orthofix medical inc transaction accounted transfer assets liabilities entities common control similar pooling interest result assets liabilities carried forward historical carrying amounts company’s common stock continues traded nasdaq global select market symbol “ofix” consolidated financial statements include financial statements company wholly owned subsidiaries intercompany accounts transactions eliminated consolidation 1 significant accounting policies preparation financial statements conformity united states generally accepted accounting principles “us gaap” requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period ongoing basis evaluate estimates including related contractual allowances doubtful accounts inventories goodwill fair value measurements litigation contingent liabilities income taxes sharebased compensation base estimates historical experience future expectations relevant assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources actual results could differ estimates information accounting policies methods used preparation consolidated financial statements included applicable respective footnotes follow following discussion accounting policies methods used consolidated financial statements presented within footnotes prior period reclassifications amounts previously reported consolidated statements income comprehensive income sec fcpa matters related costs reclassified general administrative expenses conform current period presentation resulting decrease general administrative expense 25 million year ended december 31 2017 increase general administrative expense 20 million year ended december 31 2016 market risk ordinary course business company exposed impact changes interest rates foreign currency fluctuations company’s objective limit impact movements earnings cash flows order achieve objective company seeks balance nonus dollar denominated income expenditures financial statements operations outside united states generally maintained local currency foreign currency denominated balance sheet accounts except shareholders’ equity translated us dollars year end exchange rates revenue expense items translated weighted average rates exchange prevailing year gains losses resulting translation foreign currency recorded accumulated comprehensive income component shareholders’ equity transactional foreign currency gains losses including generated intercompany operations included expense net loss 33 million gain 19 million loss less 01 million years ended december 31 2018 2017 2016 respectively financial instruments concentration credit risk financial instruments could subject company concentration credit risk consist primarily cash equivalents restricted cash accounts receivable generally cash held large financial institutions cash equivalents consist highly liquid money market funds company performs ongoing credit evaluations customers generally require collateral maintains reserve potential credit losses company believes concentration credit risk related accounts receivable limited customers geographically dispersed end users diversified across several industries net sales customers based europe approximately 69 million 2018 results substantial portion trade accounts receivable balance december 31 2018 least reasonably possible changes global economic conditions andor local operating economic conditions regions distributors operate factors could affect future realization accounts receivable balances cash equivalents restricted cash company considers highly liquid investments original maturity three months less cash equivalents 2018 restricted cash related court order affecting company’s local bank accounts office são paulo brazil part investigation 30 companies resulted freezing approximately 26 million company’s cash company reclassified cash balance restricted cash refer note 13 discussion matter research development costs including inprocess research development “iprd” costs expenditures related collaborative arrangement mtf biologics “mtf” expensed based terms related agreement expenditures incurred year ended december 31 2018 collaborative arrangement mtf expenditures totaled 09 million 13 million years ended december 31 2017 2016 respectively expenditures research development expensed incurred part spinal kinetics inc acquisition 2018 company recognized 268 million iprd costs within patents intangible assets net recorded additional costs develop acquired iprd see note 3 details acquired iprd represents fair value assigned acquired research development assets reached technological feasibility value assigned acquired iprd determined estimating costs develop acquired technology commercially viable products estimating resulting revenues projects discounting net cash flows present value revenues costs projections used value acquired iprd applicable reduced based probability success developing asset additionally estimated revenues consider relevant market sizes growth factors expected trends technology nature expected timing new product introductions company competitors rates utilized discount net cash flows present value commensurate stage development project uncertainties economic estimates used projections future costs develop iprd subsequent acquisition recorded research development expense incurred see note 6 additional policy discussion related amortization impairment testing iprd 2 recently adopted accounting standards recently issued accounting pronouncements adoption accounting standards update “asu” 201409 revenue contracts customers topic 606 may 2014 financial accounting standards board “fasb” issued asu 201409 topic 606 supersedes revenue recognition requirements topic 605 revenue recognition requires entities recognize revenue control promised goods services transferred customers amount reflects consideration entity expects entitled exchange goods services company adopted accounting standards codification “asc” 606 january 1 2018 using modified retrospective transition method results prior period amounts adjusted continue reported accordance company’s historic accounting previous revenue recognition standard topic 605 see note 15 details adoption asu 201601 financial instruments overall subtopic 82510 asu 201803 technical corrections improvements financial instruments overall subtopic 82510 january 2016 fasb issued asu 201601 clarified asu 201803 february 2018 guidance requires entities generally measure equity investments fair value recognize changes fair value net income however certain equity investments readily determinable fair values new guidance allows companies measure investments using new measurement alternative values investments cost less impairments plus minus changes resulting observable price changes orderly transactions identical similar investments issuer company prospectively adopted asu 201601 asu 201803 first quarter 2018 uses new measurement alternative company’s equity investments bone biologics inc “bone biologics” historically held cost resulted increase previously recorded value company’s equity investments bone biologics recorded within current assets longterm assets income 16 million 009 per share taxes three months ended march 31 2018 three months ended september 30 2018 bone biologics completed series equity financing activities provided new observable price change orderly transaction result company determined investment impaired recorded charge 44 million expense net third quarter 2018 see note 11 details adoption asu 201616 income taxes topic 740 intraentity transfers assets inventory october 2016 fasb issued asu 201616 reduces diversity practice accounting intraentity transfers assets particularly intraentity transfers intellectual property new standard states entity recognize income tax consequences intraentity transfer occurs opposed historical us gaap guidance prohibited recognition current deferred income taxes intraentity asset transfer asset sold outside party third fourth quarters 2017 company executed two intraentity asset transfers resulted prepaid income taxes 86 million company adopted new standard using modified retrospective approach january 1 2018 resulted reduction prepaid income taxes 86 million increase deferred tax assets 67 million changes offset adjustment companys retained earnings 19 million adoption guidance material impact company’s consolidated statements income comprehensive income consolidated statements cash flows adoption asu 201618 statement cash flows topic 230 restricted cash november 2016 fasb issued asu 201618 reduces diversity classification presentation restricted cash including transfers cash restricted cash statement cash flows company adopted standard january 1 2018 using retrospective transition approach adoption asu resulted increase net cash operating activities 25 million year ended december 31 2018 decrease net cash operating activities 144 million year ended december 31 2017 increase net cash operating activities 144 million year ended december 31 2016 adoption asu 201701 business combinations topic 805 january 2017 fasb issued asu 201701 clarifies definition business amendment states substantially fair value gross assets acquired concentrated single identifiable asset group similar identifiable assets set assets acquired business likely result acquisitions accounted asset acquisitions rather business combinations based upon guidance company adopted january 1 2018 company accounted certain transactions 2018 totaling 34 million asset acquisitions recognized within patents intangible assets net rather business combinations sets assets acquired meet definition business recently issued accounting standards 3 acquisition spinal kinetics inc march 15 2018 company entered definitive merger agreement “merger agreement” acquire 100 outstanding stock spinal kinetics inc “spinal kinetics” privately held developer manufacturer artificial cervical lumbar discs strengthen company’s product portfolio fill strategic gap spinal implants business april 30 2018 “acquisition date” company completed acquisition outstanding shares spinal kinetics’ capital stock converted right receive closing aggregate 450 million net cash subject certain adjustments plus potential milestone payments 600 million cash company made closing payments cash hand april 30 2018 fair value consideration transferred 766 million consisted following contingent consideration consists potential future milestone payments 600 million cash milestone payments include 150 million us food drug administration “fda” grants approval spinal kinetics’ m6c artificial cervical disc “fda milestone” ii revenuebased milestone payments 450 million connection future sales m6c artificial cervical disc m6l artificial lumbar disc milestones must achieved within five years acquisition date trigger applicable payments fair value contingent consideration arrangement acquisition date 255 million increased 286 million december 31 2018 however actual amount ultimately paid could higher lower fair value contingent consideration increase fair value 31 million recorded changes fair value contingent consideration additional discussion regarding valuation contingent consideration see note 11 following table summarizes preliminary estimated fair values assets acquired liabilities assumed final determination allocation purchase price assets acquired liabilities assumed made following considered preliminary final determination subject completion company’s valuation acquired deferred income taxes tax attributes including net operating loss carryforwards expected completed within one year acquisition date purchase price exceeded fair value net tangible identifiable intangible assets acquired spinal kinetics result company recorded goodwill connection acquisition specifically goodwill includes assembled workforce synergies associated combined entity expected deductible tax purposes 188 million goodwill recognized assigned spinal implants reporting segment iprd intangible asset considered indefinitelived asset completion abandonment associated research development efforts accordingly development period acquisition asset amortized instead subject impairment review testing provisions upon completion iprd project occurred february 6 2019 company began amortize intangible company recognized 33 million 08 million acquisition related costs expensed years ended december 31 2018 2017 respectively costs included consolidated statements income comprehensive income within general administrative expenses results operations spinal kinetics included company’s financial results since acquisition date included 87 million revenue net loss 58 million year ended december 31 2018 consolidated statement income comprehensive income following table presents unaudited pro forma results years ended december 31 2018 2017 combines historical results operations company spinal kinetics though companies combined january 1 2017 unaudited pro forma information presented informational purposes indicative results operations would achieved acquisition taken place time 4 inventories valued lower cost estimated net realizable value provision excess obsolete impaired items reviewed updated periodic basis management inventory procured produced whether internally contract manufacturing arrangements manufacturing facility italy cost determined weightedaverage basis approximates firstin firstout “fifo” method inventory procured produced whether internally contract manufacturing arrangements manufacturing facility texas standard costs approximates actual cost fifo method used value inventory standard costs reviewed annually management often event circumstances indicate change cost occurred workinprocess finished products field inventory consignment inventory include material labor production overhead costs field inventory represents immediately saleable finished products inventory possession company’s independent sales representatives located third party customers distributors hospitals prior adoption asu 201409 periods presented prior january 1 2018 deferred cost sales resulted certain transactions company shipped product performed services revenue recognition criteria yet met revenue recognition criteria met revenue associated cost sales recognized subsequent adoption asu 201409 company longer transactions result recognition deferred cost sales see notes 2 15 discussion company’s adoption asu 201409 company adjusts value inventory extent management determines cost cannot recovered due obsolescence factors order make determinations management uses estimates future demand sales prices product determine appropriate inventory reserves make corresponding adjustments carrying value inventories reflect lower cost market value 5 property plant equipment property plant equipment stated cost less accumulated depreciation acquired part business combination estimated fair value costs include expenditures necessary place asset service generally including freight sales use taxes property plant equipment includes instrumentation held customers generally used facilitate implantation company’s products useful lives assets follows company evaluates useful lives assets annual basis depreciation computed straightline basis useful lives assets depreciation leasehold improvements computed shorter lease term useful life asset total depreciation expense 159 million 183 million 190 million years ended december 31 2018 2017 2016 respectively expenditures maintenance repairs minor renewals improvements extend lives respective assets expensed incurred expenditures renewals improvements capitalized assets related accumulated depreciation adjusted property retirements disposals resulting gain loss included earnings fully depreciated assets remain accounts retired service company capitalizes system development costs related internal use software application development stage costs related preliminary project activities post implementation activities expensed incurred internaluse software amortized straightline basis estimated useful life generally three seven years longlived assets evaluated impairment whenever events changes circumstances occurred would indicate impairment purposes evaluation company groups longlived assets liabilities lowest level identifiable cash flows asset generate cash flows independent assets liabilities carrying value asset group exceeds undiscounted cash flows expected result use eventual disposition asset group company write carrying value fair value period identified company generally determines fair value longlived assets present value estimated future cash flows determining estimated future cash flows associated assets company uses estimates assumptions future revenue contributions cost structures remaining useful lives asset group use alternative assumptions including estimated cash flows discount rates alternative estimated remaining useful lives could result different calculations impairment 6 patents intangible assets patents intangible assets recorded cost acquired part business combination estimated fair value assets amortized straightline basis useful lives assets intangible assets related iprd projects considered indefinitelived completion abandonment associated research development efforts period assets considered indefinitelived amortized tested impairment testing performed least annually triggering event occurs could indicate potential impairment development complete generally occurs regulatory approval market product obtained associated assets deemed finitelived amortized period best reflects economic benefits provided assets february 2019 company obtained fda approval m6c artificial cervical disc amortization iprd intangible asset attributable research development activities commence starting february 2019 company expects use 10 year amortization period amortization expense intangible assets 27 million 18 million 18 million years ended december 31 2018 2017 2016 respectively future amortization expense intangible assets including iprd estimated follows 7 goodwill company tests goodwill least annually impairment company tests frequently indicators present changes circumstances suggest impairment may exist indicators include among others declines sales earnings cash flows development material adverse change business climate company assesses goodwill impairment reporting unit level defined operating segment one level operating segment beginning fourth quarters 2018 2017 company performed qualitative assessment annual goodwill impairment analysis result impairment qualitative analysis considers relevant factors specific reporting units including macroeconomic conditions industry market considerations overall financial performance relevant entityspecific events following table presents net carrying value goodwill rollforward balances december 31 2017 reportable segment 8 investments debt security march 4 2015 company entered option agreement “option agreement” eneura inc “eneura” privately held medical technology company developing devices treatment migraines option agreement provided company exclusive option acquire eneura “option” 18month period following grant option expired september 2016 without company exercising option consideration option company paid nonrefundable 03 million fee eneura ii company loaned eneura 150 million pursuant convertible promissory note “eneura note” issued company principal amount eneura note 150 million interest accrues 80 eneura note mature march 4 2019 interest due eneura note matures provided change control eneura generally defined third party acquisition fifty percent eneura’s voting equity substantially eneura’s assets occurs prior maturity date eneura note automatically convert preferred stock eneura fixed price equal 730 per share investment recorded longterm assets available sale debt security fair value interest recorded interest income however company discontinued recognition interest income eneura note first quarter 2017 eneura note collateralized eneura’s intellectual property event default nonpayment event company obtain eneura’s intellectual property company believes value intellectual property equals exceeds value eneura note refer note 11 additional discussion regarding valuation debt security currently company expect collect complete principal interest march 4 2019 negotiations eneura possibly extend andor modify terms eneura note significant changes term eneura note including extending due date could material impact fair value security equity investment warrants december 31 2018 company holds common stock bone biologics warrants purchase approximately 13 thousand shares weighted average exercise price 1432 per share adjusting shares exercise price reverse stock split executed bone biologics 2018 terms warrant purchase agreements warrants purchase common stock bone biologics exercisable seven year period expires 2020 transferable holder parties instruments recorded within longterm assets prior 2018 instruments accounted cost fair value instruments readily determinable effective january 1 2018 company required measure equity investments fair value recognize changes fair value net income result adopting asu 201601 see note 2 guidance company elected account investments using new measurement alternative values investments cost less impairments plus minus changes resulting observable price changes orderly transactions identical similar investments issuer first quarter 2018 company purchased additional 25000 shares bone biologics common stock giving effect reverse stock split bone biolgics subsequent purchase 05 million three months ended september 30 2018 bone biologics executed series equity financing activities significantly diluted company’s ownership interest outstanding stock considering new observable prices equity financing activities giving consideration matters disclosed bone biologics company determined investment impaired recorded impairment charge 44 million relating investments bone biologics changes included expense net refer note 11 additional discussion regarding valuation investment 9 current liabilities orthofix extremities restructuring plan december 2016 company approved initiated planned restructuring primarily affects orthofix extremities reporting segment streamline costs improve operational performance wind noncore business orthofix extremities restructuring plan consisted primarily severance charges professional fees writedown certain assets company incurred total pretax expense approximately 32 million connection restructuring activity largely within cost sales operating expenses 2016 company incurred expenses 20 million including 04 million inventory writedown charges made payments 01 million resulting accrual 15 million december 31 2016 2017 company incurred costs 13 million made payments 21 million resulting accrual 07 million december 31 2017 2018 company made adjustments 01 million decrease accrual payments 05 million resulting remaining accrual 01 million december 31 2018 within current liabilities us restructuring plan september 2017 company approved executed additional restructuring plan primarily affected entity’s corporate shared services us streamline costs improve operational performance us restructuring plan consisted primarily severance charges company incurred total pretax expense approximately 17 million connection restructuring activity recognized 2017 within cost sales operating expenses payments made 2017 06 million resulting accrual 11 million december 31 2017 current liabilities related planned restructuring made payments 11 million 2018 complete us restructuring plan 10 longterm debt august 31 2015 company subsidiaries orthofix holdings inc victory medical limited collectively “borrowers” entered credit agreement “credit agreement” jpmorgan chase na administrative agent certain lenders party thereto credit agreement provides five year 125 million secured revolving credit facility “facility” credit agreement maturity date august 31 2020 december 31 2018 company borrowings outstanding credit agreement borrowings credit agreement may used among things working capital general corporate purposes including share repurchases permitted acquisitions permitted payments dividends distributions company certain subsidiaries facility generally available us dollars 50 million facility also available borrowed euros british pounds together us dollars “agreed currencies” credit agreement permits 25 million facility utilized issuance letters credit agreed currencies borrowers ability increase amount facility aggregate amount 50 million increase may take form one increases revolving credit commitments andor issuance one new term loans upon satisfaction certain conditions precedent receipt additional commitments one existing new lenders borrowings facility bear interest floating rate borrowers’ option either libor plus applicable margin ranging 175 25 base rate plus applicable margin ranging 075 15 case subject adjustment based company’s total leverage ratio unused commitment fee ranging 025 04 subject adjustment based company’s total leverage ratio payable quarterly arrears based daily amount undrawn portion lender’s revolving credit commitment facility fees payable outstanding letters credit rate equal applicable margin libor loans plus certain customary fees payable solely issuer letter credit company certain subsidiaries collectively “guarantors” required guarantee repayment borrowers’ obligations credit agreement obligations borrowers guarantors respect credit agreement secured pledge substantially tangible intangible personal property borrowers guarantors including accounts receivable deposit accounts intellectual property investment property inventory equipment equity interests subsidiaries credit agreement contains customary affirmative negative covenants including limitations company’s subsidiaries’ ability incur additional debt grant permit additional liens make investments acquisitions merge consolidate others dispose assets pay dividends distributions repay subordinated indebtedness enter affiliate transactions addition credit agreement contains financial covenants requiring company consolidated basis maintain last day fiscal quarter total leverage ratio 30 10 interest coverage ratio least 30 10 company compliance required financial covenants december 31 2018 credit agreement also includes events default customary facilities type upon occurrence events default subject customary cure rights outstanding loans facility may accelerated andor lenders’ commitments terminated conjunction obtaining facility company incurred debt issuance costs 18 million amortized life facility debt issuance costs included longterm assets net accumulated amortization december 31 2018 2017 debt issuance costs net accumulated amortization 06 million 10 million respectively debt issuance costs amortized expensed related facility amendment totaled 04 million 10 million 04 million years ended december 31 2018 2017 2016 respectively december 8 2017 company amended credit agreement add company’s subsidiary orthofix international bv borrower guarantor loan party addition two company’s subsidiaries orthofix limited orthofix ii bv also added guarantors loan parties july 31 2018 company amended restated credit agreement pursuant first amended restated credit agreement “amended credit agreement” amended credit agreement substantially previous credit agreement except certain amendments among things effectuate domestication company curaçao company delaware corporation ii limit pledge company domestic subsidiary company equity interests respective first tier foreign subsidiaries 65 voting interests foreign subsidiaries iii limit guarantee joint several obligations subsidiary guarantor foreign subsidiary foreign subsidiary guarantors providing guarantees jointly severally obligated obligations foreign subsidiaries iv limit secured obligations secured collateral provided subsidiary guarantors foreign subsidiaries secured obligations foreign subsidiaries company unused available line credit €58 million 67 million 70 million december 31 2018 2017 respectively italian line credit unsecured line credit provides company option borrow amounts italy interest rates determined time borrowing company paid cash related interest 08 million 08 million 07 million years ended december 31 2018 2017 2016 respectively 11 fair value measurements fair value defined price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date nonfinancial assets liabilities company measured fair value include longlived assets impaired currently reported period equity securities measured observable prices orderly transactions authoritative guidance also describes three levels inputs may used measure fair value level 1 quoted prices active markets identical assets liabilities level 2 observable inputs quoted prices active markets identical assets liabilities level 3 unobservable inputs little market data available require reporting entity develop assumptions company’s financial instruments include cash equivalents restricted cash collective trust funds treasury securities trade accounts receivable accounts payable longterm secured debt equity warrants equity securities available sale debt securities contingent consideration deferred compensation plan liabilities carrying value cash equivalents restricted cash trade accounts receivable accounts payable approximate fair value due shortterm maturities instruments company’s credit facilities carry floating rate interest therefore carrying value longterm debt considered approximate fair value company’s collective trust funds treasury securities equity warrants equity securities debt security contingent consideration deferred compensation plan liabilities financial instruments recorded fair value recurring basis follows fair value treasury securities determined based quoted prices active markets identical assets therefore company categorized instruments level 1 financial instruments fair value company’s collective trust funds equity warrants equity securities deferred compensation plan liabilities determined based inputs readily available public markets derived information available publicly quoted markets therefore company categorized instruments level 2 financial instruments equity warrants securities company holds investments common stock warrants purchase shares common stock bone biologics company’s common stock investments recorded within longterm assets warrants’ value reduced zero 2018 prior reduction value warrants recorded within current assets longterm assets dependent upon expiration date prior 2018 instruments accounted cost fair value instruments readily determinable effective january 1 2018 company required measure equity investments fair value recognize changes fair value net income result adopting asu 201601 however certain equity investments readily determinable fair values new guidance allows entities choose measure investments using new measurement alternative values investments cost less impairments plus minus changes resulting observable price changes orderly transactions identical similar investments issuer changes valuation securities years ended december 31 2018 2017 shown debt security company holds debt security eneura inc privately held medical technology company developing devices treatment migraines debt security matures march 4 2019 fair value debt security including accrued interest based upon significant unobservable inputs including use discounted cash flows model requiring company develop assumptions therefore company categorized asset level 3 financial asset significant unobservable inputs used fair value measurement debt security estimated likelihood conversion equity discount rate holding inputs constant changes assumptions could result significant change fair value debt security december 31 2018 company reassessed estimate fair value based current financial information assumptions resulting fair value 178 million net increase 18 million 2018 company recorded comprehensive income unrealized gain debt securities compares amortized cost basis 90 million company evaluates declines fair value quarter determine impairments otherthantemporary based upon company’s best estimate amount expected recover time company recorded otherthantemporary impairments 56 million 2017 27 million 2016 otherthantemporary impairments reclassified accumulated comprehensive loss included within expense net following table provides reconciliation beginning ending balances debt securities measured fair value using significant unobservable inputs level 3 currently company expect collect complete principal interest march 4 2019 negotiations eneura possibly extend andor modify terms eneura note significant changes term eneura note including extending due date could material impact fair value security contingent consideration contingent consideration consists potential future milestone payments 600 million cash associated spinal kinetics acquisition milestone payments include 150 million fda grants approval spinal kinetics’ m6c artificial cervical disc “fda milestone” ii revenuebased milestone payments 450 million connection future sales m6c artificial cervical disc m6l artificial lumbar disc milestones must achieved within five years april 30 2018 trigger applicable payments approximately 136 million liability included within current liabilities 150 million included within longterm liabilities company estimated fair value contingent consideration attributable fda milestone using probabilityweighted discounted cash flow model fair value based significant inputs observable market thus represents level 3 measurement key assumptions applying probabilityweighted discounted cash flow model include company’s estimation probability timing obtaining fda approval m6c artificial cervical disc company’s expectation december 31 2018 obtain approval fda mid2019 significant changes assumptions could result significantly higher lower fair value company estimated fair value potential future revenuebased milestone payments using monte carlo simulation fair value measurement based significant inputs unobservable market thus represents level 3 measurement key assumptions applying monte carlo valuation model include company’s forecasted future revenues spinal kinetics products discount rate applied assumptions potential volatility company’s forecasted revenue significant changes assumptions could result significantly higher lower fair value following table provides reconciliation beginning ending balances contingent consideration measured fair value using significant unobservable inputs level 3 february 6 2019 company obtained fda approval m6c artificial cervical disc patients suffering cervical disease degeneration approval triggered company’s payment obligation 150 million contingent consideration company accrued liability 136 million within current liabilities december 31 2018 paid 150 million fda milestone payment february 14 2019 difference 14 million payment accrued liability december 31 2018 recognized operating expense first quarter 2019 12 commitments leases company entered operating leases facilities equipment leases noncancellable typically contain renewal options except certain facility leases certain leases contain rent escalation clauses company recognizes expense straightline basis rent expense company’s operating leases years ended december 31 2018 2017 2016 approximately 35 million 31 million 30 million respectively future minimum lease payments operating leases december 31 2018 follows january 2019 subsequent adoption asu 201602 company entered amendment corporate headquarters lease result amendment classification lease changed operating lease finance lease resulting increase lease liability lease asset approximately 8 million first quarter 2019 inventory purchase commitments company inventory purchase commitments thirdparty manufacturers 01 million 19 million december 31 2018 2017 respectively 13 contingencies company records accruals certain outstanding legal proceedings investigations claims probable liability incurred amount loss reasonably estimated company evaluates quarterly basis developments legal proceedings investigations claims could affect amount accrual well developments would make loss contingency probable reasonably estimable loss contingency probable reasonably estimable company accrue loss however loss additional loss excess accrual least reasonable possibility material company discloses reasonable estimate possible loss range loss reasonable estimate made company cannot make reasonable estimate possible loss range loss disclosed addition legal fees directly related costs expensed incurred addition matters described paragraphs normal course business company involved various lawsuits time may subject certain contingencies company believes losses related matters individually collectively immaterial possible loss range loss january 2017 sec settlements january 2017 us securities exchange commission “sec” approved company’s offers settlement connection sec’s investigations accounting matters leading company’s prior restatement financial statements company’s review improper payments respect subsidiary brazil investigations initiated 2013 involved matters selfreported sec company settlements approved sec resolved two matters included payments totaling 144 million company sec amounts previously accrued funded escrow company 2016 connection brazilrelated settlement company agreed retain independent compliance consultant one year review test company’s compliance program related us foreign corrupt practices act company’s engagement independent compliance consultant began first quarter 2017 concluded first quarter 2018 addition fourth quarter 2017 company received favorable insurance settlement approximately 6 million associated prior costs incurred related matters company recognized within general administrative expenses discontinued operations matters related breg possible indemnification obligations may 24 2012 company sold breg inc “breg” former subsidiary company affiliate water street healthcare partners ii lp “water street” terms agreement company indemnified water street breg respect certain specified matters time divestiture company breg engaged manufacturing sales motorized cold therapy units used reduce pain swelling several domestic product liability cases filed mostly california state court september 2014 company entered master settlement agreement resolving pending preclose cold therapy claims may 2018 breg settled resolved postclose cold therapy claim california state court pursuant company’s indemnification obligations breg company obligated make final payment insurer amount 17 million remaining balance company’s selfinsured retention liability insurance policy help fund breg settlement charges incurred result indemnification reflected discontinued operations consolidated statements income comprehensive income following may 2018 settlement company expect additional charges related discontinued operation italian medical device payback “imdp” 2015 italian parliament introduced rules entities supply goods services italian national healthcare system healthcare law expected impact business financial reporting companies operating medical technology sector sell medical devices italy key provision law ‘payback’ measure requiring companies selling medical devices italy make payments italian government medical device expenditures exceed regional maximum ceilings companies required make payments equal percentage expenditures exceeding maximum regional caps considerable uncertainty law operate exact timeline finalization company’s current assessment imdp involves significant judgment regarding expected scope actual implementation terms measure latter clarified date italian authorities company accounts estimated cost imdp sales marketing expense recorded expense €09 million 10 million €08 million 09 million €08 million 09 million years ended december 31 2018 2017 2016 respectively december 31 2018 company accrued €32 million 37 million related imdp classified within longterm liabilities however actual liability could higher lower amount accrued law clarified italian authorities brazil july 2018 federal prosecution service rio de janeiro representatives brazilian antitrust authority inspected offices 30 companies including company’s office são paulo part investigation tender irregularities medical device industry authorities obtained court order affecting company’s companies’ local bank accounts resulting freezing approximately 26 million company’s cash company reclassified restricted cash company contests underlying basis order based information known date company believe brazilian authorities’ investigation result material loss company 14 shareholders’ equity dividends company paid dividends holders common stock past certain subsidiaries company restrictions ability pay dividends certain circumstances pursuant amended credit agreement event company decides pay dividend holders common stock future dividends received subsidiaries company may based prevailing rates taxation required pay additional withholding income tax amounts received subsidiaries share repurchase plan august 2015 company’s board directors authorized share repurchase plan authorizing purchase 75 million company’s common stock company completed share repurchase plan 2016 program common shares repurchased consisted open market transactions prevailing market prices accordance guidelines specified rule 10b18 exchange act amended repurchases made cash hand cash generated operations year ended december 31 2016 company repurchased 1544681 shares common stock 634 million average price per share 4106 retired upon repurchase accumulated comprehensive income accumulated comprehensive income comprised foreign currency translation adjustments unrealized gains losses company’s debt security components changes accumulated comprehensive income follows 15 revenue recognition accounts receivable adoption asu 201409 “revenue contracts customers” effective january 1 2018 company adopted asu 201409 revenue contracts customers topic 606 using modified retrospective transition method applied contracts results year ended december 31 2018 presented topic 606 prior period amounts adjusted continue reported accordance company’s historic accounting previous revenue recognition standard topic 605 company recorded net increase opening retained earnings 48 million january 1 2018 due cumulative impact adopting topic 606 presented table impact primarily related increase trade accounts receivable net company’s stocking distributors revenue historically recognized cash payment received recognition previously deferred cost sales certain stocking distributor transactions historically included within inventory adoption topic 606 impact consolidated statement cash flows table presents impact company’s consolidated statement income year ended december 31 2018 result adoption topic 606 revenue recognition topic 606 company accounts contract approval commitment parties rights parties identified payment terms identified contract commercial substance collectability consideration probable company’s contracts may contain one performance obligations contract contains one performance obligation company allocates total transaction price performance obligations based upon observable standalone selling price promised goods services underlying performance obligation company recognizes revenue control promised goods services transferred customer typically occurs point time upon shipment delivery utilization amount reflects consideration company expects entitled exchange promised goods services amount company expects entitled exchange goods services reflects fixed amount stated per contract estimates variable consideration discounts extent probable significant reversal cumulative revenue recognized occur uncertainty associated variable consideration resolved bone growth therapies bone growth therapies revenue largely attributable us comprised thirdparty payor transactions wholesale revenue largest portion bone growth therapies revenue derived thirdparty payors includes commercial insurance carriers health maintenance organizations preferred provider organizations governmental payors medicare connection sale company’s stimulation products revenue recognized stimulation product fitted accepted patient applicable documents required thirdparty payor obtained amounts paid thirdparty payors generally based fixed allowable reimbursement rates revenues recorded expected preauthorized reimbursement rates net contractual allowances adjustments certain billings subject review thirdparty payors may subject adjustment adoption topic 606 immaterial impact bone growth therapies reporting segment wholesale revenue related sale company’s bone growth stimulators directly durable medical equipment suppliers wholesale revenues typically recognized upon shipment receipt confirming purchase order customer obtains control promised goods biologics revenue largely attributable us primarily related collaborative arrangement mtf extends july 28 2027 company markets tissue bone repair reconstruction brand names trinity evolution trinity elite terms agreement mtf sources tissue processes create bone growth matrix packages delivers customer accordance orders received company exclusive global marketing rights trinity evolution trinity elite tissues well nonexclusive marketing rights products receives marketing fees mtf based total sales mtf considered primary obligor arrangements therefore company recognizes marketing service fees net basis within net sales upon shipment product customer adoption topic 606 immaterial impact biologics reporting segment spinal implants orthofix extremities orthofix extremities spinal implants products distributed worldwide us sales largely comprised commercial sales international sales derived commercial sales stocking distributor arrangements commercial revenue largely related sale company’s spinal implants orthofix extremities products hospital customers customer obtains control revenues recognized products utilized confirming purchase order received hospital certain revenues within spinal implants orthofix extremities reporting segments derived stocking distributors purchase company’s products resell directly customers hospitals revenue stocking distributor arrangements subsequent adoption topic 606 effective january 1 2018 company recognizes revenue upon shipment receipt confirming purchase order distributor obtains control promised goods transaction price stocking distributors estimated based upon company’s historical collection experience stocking distributor derive estimate company analyzes twelve months historical invoices stocking distributor subsequent collections invoices period 24 months subsequent invoice date percentage specific stocking distributor used calculate transaction price cost sales also recorded upon transfer control product customer prior adoption topic 606 periods presented prior january 1 2018 company recognized revenue stocking distributor arrangements product delivered end customer “sellthrough method” company reliable information distributors sold product end customers company used cash collection distributors basis revenue recognition sellthrough method although many cases company legally entitled accounts receivable time shipment company recognize accounts receivables corresponding deferred revenues time shipment associated stocking distributor transactions revenue recognized sellthrough method company also considered whether match related cost sales revenue recognize cost sales upon shipment making assessment company considered financial viability stocking distributors based creditworthiness determine collectability amounts sufficient realize costs products shipped reasonably assured time shipment stocking distributors instances stocking distributor determined financially viable company deferred costs sales revenue recognized product sales marketing service fees table presents net sales includes product sales marketing service fees years ended december 31 2018 2017 2016 product sales primarily consist bone growth stimulation devices internal external fixation products marketing service fees received mtf based total sales biologics tissues relates solely biologics reporting segment marketing service fees received mtf 575 million approximately 96 total biologics revenues year ended december 31 2018 mtf company’s single supplier trinity evolution trinity eite tissue forms derived human cadaveric donors event circumstance would impact mtf’s continued access donated human cadaveric tissue company’s ability market tissues may adversely impact company’s financial results revenues exclude value added local taxes intercompany sales trade discounts shipping handling costs products shipped customers included cost sales 27 million 30 million 20 million years ended december 31 2018 2017 2016 respectively trade accounts receivable allowances payment terms vary type location company’s customers products services offered term invoicing payment due significant accounts receivable analyzed quarterly basis assess adequacy reserves doubtful accounts contractual allowances revisions allowances doubtful accounts estimates recorded adjustment bad debt expense within sales marketing expenses revisions contractual allowances recorded adjustment net sales company’s estimates periodically tested actual collection experience company generally sell receivables certain italian hospitals year 2018 2017 2016 company sold €98 million €98 million €100 million 115 million 112 million 111 million receivables respectively estimated related fee 2018 2017 2016 03 million 03 million 04 million respectively recorded interest expense trade accounts receivables sold without recourse removed balance sheet time sale contract assets company’s contract assets excluding trade accounts receivable “other contract assets” largely consist payments made certain distributors obtain contracts gain access customers certain territories provide benefit exclusive distribution company’s products contract assets included longterm assets 19 million 10 million december 31 2018 2017 respectively contract assets amortized straightline basis term related contract changes treatment result adoption topic 606 impairments incurred contract assets 2018 2017 company applied practical expedient allowed within guidance expense sales commissions incurred amortization period would one year less 16 business segment information manage business four reporting segments bone growth therapies spinal implants biologics orthofix extremities reporting segments represent operating segments chief executive officer also chief operating decision maker “codm” reviews financial information makes resource allocation decisions among businesses primary metric used codm managing company nongaap net margin internal metric company defines gross profit less sales marketing expense company neither discretely allocates assets goodwill operating segments evaluates operating segments using discrete asset information accordingly reporting segment information prepared based four reporting segments bone growth therapies bone growth therapies reporting segment manufactures distributes provides support services market leading bone growth stimulator devices enhance bone fusion class iii medical devices indicated adjunctive noninvasive treatment improve fusion success rates cervical lumbar spine well therapeutic treatment nonspine fractures healed nonunions reporting segment uses distributors sales representatives sell devices hospitals healthcare providers patients primarily us spinal implants spinal implants reporting segment designs develops markets broad portfolio motion preservation implant products used surgical procedures spine spinal implants distributes products network distributors sales representatives sell spine products hospitals healthcare providers globally biologics reporting segment provides portfolio regenerative products tissue forms allow physicians successfully treat variety spinal orthopedic conditions reporting segment specializes marketing company’s exclusive regeneration tissue forms distributes tissues hospitals healthcare providers primarily us network employed independent sales representatives partnership mtf allows us exclusively market trinity evolution trinity elite tissue forms musculoskeletal defects enhance bony fusion orthofix extremities orthofix extremities reporting segment offers products solutions allow physicians successfully treat variety orthopedic conditions unrelated spine reporting segment specializes design development marketing company’s orthopedic products used fracture repair deformity correction bone reconstruction procedures orthofix extremities distributes products network distributors sales representatives sell orthopedic products hospitals healthcare providers globally corporate activities comprised operating expenses activities company necessarily identifiable within four reporting segments table presents net sales reporting segment following table presents nongaap net margin internal metric company defines gross profit less sales marketing expense reporting segment following table presents depreciation amortization reporting segment geographical information following data includes net sales geographic destination table presents net sales geographic destination reporting segment consolidated company following data includes property plant equipment geographic area 17 sharebased compensation december 31 2018 2017 company stock option award plans stock purchase plan 2012 long term incentive plan board directors adopted amended restated 2012 longterm incentive plan “2012 ltip” april 13 2012 subject shareholder approval subsequently provided shareholder ratification 2012 ltip provides grant options purchase shares company’s common stock awards including restricted stock unrestricted stock units stock appreciation rights performancebased awards equitybased awards company’s employees company’s subsidiaries affiliates eligible may receive awards 2012 ltip addition company’s nonemployee directors consultants advisors perform services company’s subsidiaries affiliates may receive awards 2012 ltip incentive share options however available company’s employees awards granted 2012 ltip expire later ten years date grant december 31 2018 company reserves total 4750000 shares common stock issuance pursuant 2012 ltip subject certain adjustments set forth 2012 ltip december 31 2018 971763 options outstanding 2012 ltip 520748 exercisable addition 339452 shares unvested restricted stock outstanding contain performancebased vesting conditions 371676 restricted stock units outstanding contain performancebased marketbased vesting conditions 2012 ltip december 31 2018 2004 long term incentive plan 2004 long term incentive plan “2004 ltip” reserved 31 million shares issuance subject certain adjustments set forth 2004 ltip december 31 2018 25500 options outstanding 2004 ltip exercisable addition shares unvested restricted stock outstanding inducement plan spinal kinetics employees inducement plan spinal kinetics employees “spinal kinetics inducement plan” reserved 51705 shares issuance employees spinal kinetics inducement material individual’s entering continuing employment company december 31 2018 28624 options outstanding spinal kinetics inducement plan none exercisable addition 19914 shares unvested restricted stock outstanding stock purchase plan second amended restated stock purchase plan amended “stock purchase plan” provides issuance shares company’s common stock eligible employees directors company subsidiaries elect participate plan acquire shares common stock payroll deductions including executive officers purchase period eligible employees may designate 1 25 compensation deducted purchase common stock plan percentage order comply regulations applicable employees domiciled resident member state european union eligible directors designated percentage applied amount equal annual director compensation paid cash current plan year purchase price shares plan equal 85 fair market value first day plan year calendar year running january 1 december 31 lower last day plan year due compensatory nature plan company records related sharebased compensation consolidated statement income december 31 2018 aggregate number shares reserved issuance stock purchase plan 2350000 december 31 2018 1628045 shares issued sharebased compensation expense sharebased compensation expense recorded line consolidated statements income employee’s cash compensation following tables present detail sharebased compensation line item consolidated statements income well award type years ended december 31 2018 2017 2016 income tax benefit related expense 38 million 34 million 43 million years ended december 31 2018 2017 2016 respectively stock options fair value timebased stock options determined using blackscholes valuation model value recognized expense service period typically four years net actual forfeitures fair value marketbased stock options determined date grant using monte carlo valuation methodology value recognized expense requisite service period adjusted forfeitures occur monte carlo methodology incorporates valuation possibility market condition may satisfied summary company’s assumptions used determining fair value stock options granted year shown following table expected term options granted estimated based number factors including vesting expiration terms award historical employee exercise behavior options currently outstanding options exercised expired employee’s average length service expected volatility based historical volatility company’s common stock riskfree interest rate determined based upon constant us treasury security rate contractual life approximates expected term option award expected volatility estimated based historical volatility company’s stock summaries status company’s stock option plans december 31 2018 2017 changes year ended december 31 2018 presented december 31 2018 unamortized compensation expense relating options granted expected recognized 30 million amount expected recognized april 2022 weighted average period approximately 14 years total intrinsic value options exercised 32 million 22 million 43 million years ended december 31 2018 2017 2016 respectively year ended december 31 2018 received 28 million cash stock option exercises tax benefit realized tax deductions exercises 08 millionthe aggregate intrinsic value options outstanding options exercisable december 31 2018 calculated difference exercise price underlying options market price company’s common stock shares exercise prices lower 5249 closing price company’s stock december 31 2018 aggregate intrinsic value options outstanding 136 million 187 million 33 million years ended december 31 2018 2017 2016 respectively aggregate intrinsic value options exercisable 110 million 124 million 22 million years ended december 31 2018 2017 2016 respectively timebased restricted stock awards stock units year ended december 31 2018 company granted employees nonemployee directors 172108 shares timebased restricted stock awards stock units vest various dates december 2022 compensation expense represents fair value stock measured market price date grant recognized straightline basis vesting period typically four years net actual forfeitures since 2017 annual grant nonemployee directors made form oneyear vesting restricted stock units deferred delivery “dsus” whereby shares settled director ceases service director december 31 2018 27982 dsus outstanding vested settled aggregate fair value timebased restricted stock awards stock units vested years ended december 31 2018 2017 2016 80 million 73 million 72 million respectively unamortized compensation expense related timebased restricted stock awards stock units amounted 122 million december 31 2018 expected recognized weighted average period approximately 24 years aggregate intrinsic value timebased restricted stock awards stock units outstanding 188 million 178 million 130 million years ended december 31 2018 2017 2016 respectively performancebased restricted stock awards stock units company’s performancebased restricted stock awards stock units contain performancebased vesting conditions fair value performancebased restricted stock awards stock units calculated based upon closing stock price date grant value recognized expense derived requisite service period beginning period deemed probable vest net actual forfeitures vesting probability assessed based upon forecasted earnings financial results years ended december 31 2018 2017 2016 company grant performancebased restricted stock awards stock units employees year ended december 31 2015 company granted employees 110660 shares performancebased restricted stock awards vest based upon achievement certain earnings return invested capital targets years ended december 31 2016 2017 2018 approximately 04 million 05 million 57 million compensation expense recorded years ended december 31 2018 2017 2016 respectively associated performancebased restricted stock awards fair value performancebased restricted stock awards vested year ended december 31 2017 49 million performancebased restricted stock awards vested years ended december 31 2018 2016 unamortized compensation expense related performancebased restricted stock awards remains december 31 2018 aggregate intrinsic value performancebased restricted stock awards outstanding 29 million 30 million 70 million years ended december 31 2018 2017 2016 respectively year ended december 31 2015 company also granted 55330 shares performancebased restricted stock units employees vest based upon achievement certain earnings return invested capital targets year ended december 31 2018 approximately 16 million compensation expense recognized year ended december 31 2018 associated 2015 performancebased restricted stock units company record compensation expense years ended december 31 2017 2016 related 2015 performancebased restricted stock units requisite service period yet begun unamortized compensation expense related 2015 performancebased restricted stock units remains december 31 2018 aggregate intrinsic value performancebased restricted stock units outstanding 25 million 30 million 20 million years ended december 31 2018 2017 2016 respectively marketbased restricted stock units company’s marketbased restricted stock units contain marketbased vesting conditions fair value marketbased restricted stock units determined date grant using monte carlo valuation methodology discounts postvesting restrictions estimated using chaffe model monte carlo methodology incorporates valuation possibility market condition may satisfied value recognized straightline basis vesting period net actual forfeitures years ended december 31 2018 2017 2016 company granted 97420 94902 96245 shares respectively marketbased restricted stock units executive officers certain employees awards market conditions achieved settled shares common stock one share common stock issued per restricted stock unit targets achieved 100 level awards may achieved minimum level 50 maximum 200 market conditions 2018 2017 2016 awards based company’s stock achieving certain total shareholder return targets relative specified index companies 3year performance period beginning april 2018 july 2017 july 2016 respectively company recorded 53 million 29 million 09 million compensation expense years ended december 31 2018 2017 2016 respectively related marketbased restricted stock units unamortized compensation expense marketbased restricted stock units amounted 65 million december 31 2018 expected recognized weighted average period approximately 14 years aggregate intrinsic value marketbased restricted stock units outstanding 142 million 102 million 35 million years ended december 31 2018 2017 2016 respectively summary status timebased performancebased marketbased restricted stock awards stock units december 31 2018 2017 changes year ended december 31 2018 presented 18 defined contribution plans deferred compensation defined contribution plans orthofix inc sponsors defined contribution plan “401k plan” covering substantially full time us employees 401k plan allows participants contribute 80 pretax compensation subject certain limitations company matching 100 first 2 employee’s base compensation 50 next 4 employee’s base compensation contributed 401k plan years ended december 31 2018 2017 2016 expenses incurred relating 401k plan including matching contributions approximately 23 million 20 million 19 million respectively company also operates defined contribution pension plans international employees meeting minimum service requirements company’s expenses pension contributions years ended december 31 2018 2017 2016 11 million 11 million 10 million respectively deferred compensation plans italian law italian subsidiary accrues behalf employees deferred compensation paid termination employment accrual deferred compensation based percentage employee’s current annual remuneration plus annual charge deferred compensation also accrued leaving indemnity payable agents case dismissal regulated national contract equal approximately 35 total commissions earned company’s relations italian employees represent 196 total employees december 31 2018 governed provisions national collective labor agreement setting forth mandatory minimum standards labor relations metal mechanic workers industry company party collective bargaining agreement 01 million deferred compensation payments made 2018 02 million 2017 01 million 2016 balance longterm liabilities december 31 2018 2017 13 million 14 million respectively represents amount would payable employees agents terminated employment date 19 income taxes income loss continuing operations provision income taxes consisted following provision income taxes continuing operations consists following differences income tax provision us federal statutory tax rate company’s effective tax rate years ended december 31 2018 2017 2016 consist following 1 rate reconciliations 2017 2016 based us federal income tax rate rather company’s country domicile rate company believes given large proportion taxable income earned us presentation meaningful december 22 2017 tax act signed law making significant changes internal revenue code changes include limited us corporate rate decrease 35 21 effective tax years beginning december 31 2017 transition us international taxation worldwide tax system territorial system onetime transition tax mandatory deemed repatriation cumulative foreign earnings december 31 2017 company calculated best estimate impact tax act 2017 income tax provision accordance understanding tax act guidance available date filing result company recorded 83 million additional income tax expense fourth quarter 2017 period legislation enacted provisional amount related remeasurement certain deferred tax assets liabilities based rates expected reverse future 86 million provisional amount related onetime transition tax mandatory deemed repatriation foreign earnings zero company also recorded benefit 03 million related income tax liability recorded 2016 related repatriation earnings subsidiary puerto rico december 22 2017 staff accounting bulletin 118 “sab 118” issued address application us gaap situations registrant necessary information available prepared analyzed including computations reasonable detail complete accounting certain income tax effects tax act accordance sab 118 determined 86 million deferred tax expense recorded connection remeasurement certain deferred tax assets liabilities zero transition tax mandatory deemed repatriation foreign earnings provisional amount reasonable estimate december 31 2017 detailed analysis company’s deferred tax assets liabilities historical foreign earnings well potential correlative adjustments completed 2018 resulted additional benefit 06 million first quarter 2018 minimal adjustments fourth quarter 2018 december 31 2018 company completed accounting tax effects enactment tax act january 2018 fasb released guidance accounting tax global intangible low taxed income “gilti” provisions tax act gilti provisions impose tax foreign income excess deemed return tangible assets foreign corporations guidance indicated either accounting deferred taxes related gilti inclusion treat taxes gilti inclusion period cost acceptable methods subject accounting policy election company made policy election treat taxes gilti inclusion period cost company paid cash relating taxes totaling 156 million 33 million 44 million years ended december 31 2018 2017 2016 respectively 2016 company revised estimate relating deductibility certain compensation expenses change estimate reduced income tax expense increased net income continuing operations 24 million increased earnings per share 013 year ended december 31 2016 company’s deferred tax assets liabilities follows company accounts income taxes using asset liability method deferred tax assets liabilities recognized expected future tax consequences temporary differences financial reporting income tax basis assets liabilities operating losses credit carryforwards deferred tax assets liabilities measured using enacted tax rates effect years items expected realized tax law rate changes recorded period changes enacted company establishes valuation allowance likely certain deferred tax assets realized foreseeable future valuation allowance primarily attributable net operating loss carryforwards temporary differences certain foreign jurisdictions net increase valuation allowance 27 million year principally relates increase valuation allowances net operating loss carryforwards foreign jurisdictions company federal net operating loss carryforwards 244 million research development credits 16 million result acquisition spinal kinetics carryforwards subject limitation provisions section 382 begin expire 2026 company state net operating loss carryforwards approximately 490 million 352 million relates spinal kinetics begins expire 2019 additionally company net operating loss carryforwards various foreign jurisdictions approximately 1595 million begin expire 2019 majority relate company’s netherlands brazil operations 2016 company changed intention related unremitted foreign earnings puerto rico subsidiary certain united kingdom subsidiaries result change intention company recorded 13 million income tax expense remitted unremitted earnings subsidiaries first quarter 2017 company changed intention related unremitted foreign earnings seychelles subsidiary tax impact minimal prior domestication entity incorporated curaçao “foreign earnings” referred us nonus earnings result domestication income sourced outside us considered unremitted foreign earnings unremitted foreign earnings decreased 3357 million december 31 2017 504 million december 31 2018 substantial decrease due elimination us accumulated earnings impacts result domestication result 2017 tax act current year earnings deemed repatriated company’s investment foreign subsidiaries continues indefinite nature however company may periodically repatriate portion earnings extent incur additional tax liability company records benefit uncertain tax positions weight available evidence indicates likely based evaluation technical merits tax position sustained audit tax benefit measured largest amount 50 likely realized upon settlement company reevaluates income tax positions periodically consider changes facts circumstances changes interpretations tax law effectively settled issues audit new audit activity company includes interest applicable penalties related income tax issues part income tax expense consolidated financial statements company’s unrecognized tax benefit 214 million 225 million years ended december 31 2018 2017 respectively company recorded net interest penalties unrecognized tax benefits 14 million 23 million 21 million years ended december 31 2018 2017 2016 respectively approximately 67 million 53 million accrued payment interest penalties december 31 2018 2017 respectively entire amount unrecognized tax benefits including interest would favorably impact company’s effective tax rate recognized company believes reasonably possible next 12 months amount unrecognized tax benefits related resolution federal state foreign matters could reduced 33 million 38 million audits close statutes expire reconciliation gross unrecognized tax benefits excluding interest penalties years ended december 31 2018 2017 2016 follows company subsidiaries file income tax returns us federal jurisdiction certain state foreign jurisdictions including italy united kingdom statute limitations respect federal state tax filings closed years prior 2014 statute limitations respect major foreign tax filing jurisdictions closed years prior 2014 third quarter 2015 internal revenue service commenced examination company’s federal income tax return 2012 company concluded examination first quarter 2018 material impact financial statements october 2016 company notified examination federal income tax return 2013 december 2017 examination 2013 concluded change november 2017 company notified examination federal income tax return 2015 february 2019 company reached agreement concluded examination result company expects recognize benefit approximately 20 million 2019 company cannot reasonably determine state local tax foreign examinations material impact financial statements cannot predict timing regarding resolution tax examinations 20 earnings per share eps company uses twoclass method computing basic eps due existence nonvested restricted stock awards nonforfeitable rights dividends dividend equivalents referred participating securities basic eps computed using weighted average number common shares outstanding respective years diluted eps computed using weighted average number common equivalent shares outstanding respective years using dilutive either treasury stock method twoclass method difference basic diluted shares largely results common equivalent shares represents dilutive effect assumed exercise certain outstanding share options assumed vesting restricted stock granted employees directors satisfaction certain necessary conditions contingently issuable shares see note 17 three years ended december 31 2018 significant adjustments made net income purposes calculating basic diluted eps following reconciliation weighted average shares used diluted eps computations 349930 418859 542555 weighted average outstanding options restricted stock performancebased marketbased equity awards included diluted earnings per share computation years ended december 31 2018 2017 2016 respectively inclusion awards antidilutive performancebased marketbased awards necessary conditions satisfied end respective period 21 quarterly financial data unaudited 1 company reclassified 11 million previously reported expense second quarter 2018 related changes fair value contingent consideration table conform current period presentation 2 company reclassified less 10 thousand previously reported net income loss discontinued operations first second third quarters 2018 continuing operations conform current period presentation 22 subsequent events options medical llc acquisition january 31 2019 company acquired certain assets options medical llc “options medical” medical device distributor based florida terms acquisition parties agreed terminate exclusive sales representative agreement employees options medical became employees company acquired customer lists customer information related sale company’s products consideration assets acquired company paid 64 million inducement enter employment company provided 25478 restricted stock units fair value 14 million options medical founder vest onethird annual increments beginning first anniversary grant date contingent upon continued employment fda approval m6c artificial cervical disc february 6 2019 company obtained fda approval m6c artificial cervical disc patients suffering cervical disease degeneration m6c artificial disc developed spinal kinetics company acquired company april 2018 approval triggered company’s payment obligation 150 million contingent consideration attributable spinal kinetics purchase price company accrued liability 136 million within current liabilities december 31 2018 paid 150 million fda milestone payment february 14 2019 cash hand difference 14 million payment liability december 31 2018 recognized operating expense first quarter 2019 retirement company’s president chief executive officer february 25 2019 company entered transition retirement agreement “retirement agreement” company’s president chief executive officer brad mason retirement agreement parties agreed mr mason continue serve current role successor appointed board commences employment “retirement date” parties agreed mr mason provide ongoing transition assistance company pursuant consulting arrangement 12 months following retirement date mr mason paid 40000 per month transition consulting services retirement agreement mr mason eligible retirement date receive full vesting acceleration unvested timebased equity awards continue receive service credit performance based equity awards term consulting arrangement fiscal year 2019 lieu mr mason’s normal annual incentive awards 2012 ltip recognition ongoing transition assistance agreed provide parties agreed granted award restricted stock units grant date fair market value 2000000 vest one year following date grant subject continuing provide transition consulting services retirement dateitem 15 exhibits financial statement schedules documents filed part report form 10k following documents filed part annual report form 10k 1 financial statements see “index consolidated financial statements” page form 10k 2 financial statement schedules required either required information present amounts sufficient require submission schedule information required included consolidated financial statements notes thereto 3 exhibits exhibit number description 21 agreement plan merger entered march 15 2018 among blackstone medical inc summit development inc spinal kinetics inc filed exhibit company’s quarterly report form 10q quarter ended march 31 2018 incorporated herein reference 31 orthofix medical inc certificate incorporation filed exhibit company’s current report form 8k dated august 1 2018 incorporated herein reference 32 orthofix medical inc bylaws filed exhibit company’s current report form 8k dated august 1 2018 incorporated herein reference 41 form stock certificate filed exhibit company’s current report form 8k dated august 1 2018 incorporated herein reference 42 description registrant’s securities registered pursuant section 12 securities exchange act 1934 101 second amended restated credit agreement dated october 25 2019 among orthofix medical inc orthofix inc orthofix spinal implants inc orthofix international bv orthofix iii bv certain subsidiaries orthofix medical inc guarantors several banks financial institutions may time become parties thereunder lenders jpmorgan chase na administrative agent filed exhibit company’s current report form 8k filed november 1 2019 incorporated herein reference 102† matrix commercialization collaboration agreement entered july 24 2008 orthofix holdings inc musculoskeletal transplant foundation filed exhibit company’s annual report form 10k fiscal year ended december 31 2009 incorporated herein reference 103 amendment 1 matrix commercialization collaboration agreement dated december 15 2010 musculoskeletal transplant foundation inc orthofix holdings inc filed exhibit company’s annual report form 10k fiscal year ended december 31 2010 incorporated herein reference 104† amendment 2 matrix commercialization collaboration agreement dated january 9 2012 musculoskeletal transplant foundation inc orthofix holdings inc filed exhibit amendment 1 company’s annual report form 10ka year ended december 31 2011 incorporated herein reference 105† amendment 3 matrix commercialization collaboration agreement entered july 1 2013 effective june 25 2013 musculoskeletal transplant foundation inc orthofix holdings inc filed exhibit company’s current report form 8k filed july 8 2013 incorporated herein reference 106 amendment 4 matrix commercialization collaboration agreement entered april 1 2014 musculoskeletal transplant foundation inc orthofix holdings inc filed exhibit company’s current report form 8k filed april 7 2014 incorporated herein reference exhibit number description 107† amendment 5 matrix commercialization collaboration agreement entered march 10 2016 musculoskeletal transplant foundation inc orthofix holdings inc filed exhibit company’s current report form 8k filed march 14 2016 incorporated herein reference 108† amendment 6 matrix commercialization collaboration agreement entered december 29 2017 musculoskeletal transplant foundation inc orthofix holdings inc filed exhibit company’s annual report form 10k filed february 26 2018 incorporated herein reference 109 orthofix medical inc second amended restated stock purchase plan amended filed exhibit company’s annual report form 10k fiscal year ended december 31 2018 incorporated herein reference 1010 orthofix medical inc amended restated 2012 longterm incentive plan filed exhibit company’s annual report form 10k fiscal year ended december 31 2018 incorporated herein reference 1011 form employee performance stock unit agreement orthofix medical inc amended restated 2012 longterm incentive plan 1012 employee timebased vesting restricted stock unit grant agreement bradley r mason orthofix medical inc amended restated 2012 longterm incentive plan 1013 form timebased vesting employee restricted stock unit grant agreement 2019 executive retention grants orthofix medical inc amended restated 202 longterm incentive plan 1014 form timebased vesting employee restricted stock grant agreement orthofix international nv 2012 longterm incentive plan filed exhibit company’s current report form 8k filed july 8 2016 incorporated reference 1015 form employee restricted stock grant agreement orthofix international nv 2012 longterm incentive plan july 2014june 2016 timebased vesting filed exhibit company’s quarterly report form 10q quarter ended september 30 2014 incorporated herein reference 1016 form timebased vesting employee nonqualified stock option agreement orthofix international nv 2012 longterm incentive plan filed exhibit company’s current report form 8k filed july 8 2016 incorporated reference 1017 form employee nonqualified stock option agreement orthofix international nv 2012 longterm incentive plan july 2014june 2016 timebased vesting filed exhibit company’s quarterly report form 10q quarter ended september 30 2014 incorporated herein reference 1018 form employee nonqualified stock option agreement orthofix international nv 2012 longterm incentive plan pre2014 grants filed exhibit company’s annual report form 10k fiscal year ended december 31 2012 incorporated herein reference 1019 form nonemployee director restricted stock unit agreement orthofix international nv 2012 longterm incentive plan filed exhibit company’s form 10q filed august 7 2017 incorporated herein reference 1020 form timebased vesting nonemployee director nonqualified stock option agreement orthofix international nv 2012 longterm incentive plan initial grant filed exhibit company’s current report form 8k filed july 8 2016 incorporated reference 1021 form nonemployee director nonqualified stock option agreement orthofix international nv 2012 long term incentive plan filed exhibit company’s annual report form 10k fiscal year ended december 31 2012 incorporated herein reference 1022 employee inducement restricted stock unit agreement jon serbousek filed exhibit company’s form s8 filed august 5 2019 incorporated herein reference exhibit number description 1023 employee inducement nonqualified stock option agreement jon serbousek filed exhibit company’s form s8 filed august 5 2019 incorporated herein reference 1024 employee inducement restricted stock unit agreement beth stevenson filed exhibit company’s form s8 filed february 2 2019 incorporated herein reference 1025 employee inducement restricted stock unit agreement beth stevenson filed exhibit company’s form s8 filed february 2 2019 incorporated herein reference 1026 inducement plan spinal kinetics employees filed exhibit company’s form s8 filed april 30 2018 incorporated herein reference 1027 form inducement grant nonqualified stock option agreement filed exhibit company’s form s8 filed april 30 2018 incorporated herein reference 1028 form inducement grant restricted stock agreement filed exhibit company’s form s8 filed april 30 2018 incorporated herein reference 1029 inducement grant nonqualified stock option agreement dated march 13 2013 orthofix international nv bradley r mason filed exhibit company’s current report form 8k filed march 13 2013 incorporated herein reference 1030 amended restated 2004 long term incentive plan filed exhibit company’s quarterly report form 10q quarter ended june 30 2009 incorporated herein reference 1031 form employee nonqualified stock option agreement orthofix international nv amended restated 2004 longterm incentive plan post2008 grants made 2004 long term incentive plan prior adoption 2012 long term incentive plan filed exhibit company’s current report form 8k filed july 7 2009 incorporated herein reference 1032 form indemnification agreement orthofix medical inc directors officers incorporated reference exhibit 101 company’s registration statement form s4 registration 333224407 filed april 23 2018 1033 amended change control severance agreement dated november 1 2016 orthofix international nv bradley r mason filed exhibit company’s annual report form 10k fiscal year ended december 31 2016 incorporated herein reference 1034 transition retirement agreement dated february 25 2019 bradley r mason orthofix medical inc filed exhibit company’s annual report form 10k fiscal year ended december 31 2018 incorporated herein reference 1035 consulting agreement dated november 1 2019 orthofix medical inc bradley r mason filed exhibit company’s current report form 8k filed november 1 2019 incorporated herein reference 1036 change control severance agreement dated november 1 2019 orthofix medical inc jon serbousek filed exhibit company’s current report form 8k filed november 1 2019 incorporated herein reference 1037 letter agreement dated december 4 2019 company kevin kenny 1038 change control severance agreement dated november 1 2019 orthofix medical inc kevin kenny 1039 amended change control severance agreement dated november 1 2016 orthofix international nv doug rice filed exhibit company’s annual report form 10k fiscal year ended december 31 2016 incorporated herein reference 1040 change control severance agreement dated november 1 2016 orthofix international nv kimberley elting filed exhibit company’s annual report form 10k fiscal year ended december 31 2016 incorporated herein reference exhibit number description 1041 amended change control severance agreement dated november 1 2016 orthofix international nv michael finegan filed exhibit company’s annual report form 10k fiscal year ended december 31 2016 incorporated herein reference 1042 change control severance agreement dated september 7 2016 orthofix international nv davide bianchi filed exhibit company’s current report form 8k filed september 9 2016 incorporated herein reference 1043 amended restated employment contract dated july 31 2018 orthofix ag davide bianchi filed exhibit company’s current report form 8k filed august 6 2018 incorporated herein reference 1044 amended change control severance agreement dated november 1 2016 orthofix international nv bradley v niemann filed exhibit company’s annual report form 10k fiscal year ended december 31 2016 incorporated herein reference 211 list subsidiaries 231 consent independent registered public accounting firm 311 rule 13a14a15d14a certification chief executive officer 312 rule 13a14a15d14a certification chief financial officer 321 section 1350 certification chief executive officer certification chief financial officer following financial statements orthofix medical inc form 10k year ended december 31 2019 filed february 24 2020 formatted inline xbrl inline extensible business reporting language consolidated balance sheets ii consolidated statements operations comprehensive income loss iii consolidated statements changes shareholders’ equity iv consolidated statements cash flows v notes consolidated financial statements cover page orthofix medical inc’s annual report form 10k year ended december 31 2019 formatted inline xbrl contained exhibit 101 filed form 10k † certain confidential portions exhibit omitted means redacting portion text exhibit filed separately secretary commission without redactions pursuant application requesting confidential treatment securities exchange act 1934 item 16 form 10k summary none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated name title date jon serbousek jon serbousek president chief executive officer director principal executive officer february 24 2020 doug rice doug rice chief financial officer principal financial accounting officer february 24 2020 ronald matricaria ronald matricaria chairman board directors february 24 2020 james hinrichs james hinrichs director february 24 2020 alexis v lukianov alexis v lukianov director february 24 2020 lilly marks lilly marks director february 24 2020 michael e paolucci director february 24 2020 michael e paolucci maria sainz director february 24 2020 maria sainz john sicard director february 24 2020 john sicard orthofix medical inc statement management’s responsibility financial statements shareholders orthofix medical inc management responsible preparation consolidated financial statements related information presented annual report consolidated financial statements include amounts based management’s estimates judgments prepared conformity accounting principles generally accepted united states financial information report shareholders consistent consolidated financial statements company maintains accounting internal control systems provide reasonable assurance reasonable cost assets safeguarded loss unauthorized use disposition financial records reliable preparing financial statements maintaining accountability assets systems augmented written policies organizational structure providing division responsibilities careful selection training qualified personnel company engaged ernst young llp independent registered public accountants audit render opinion consolidated financial statements accordance auditing standards public company accounting oversight board united states standards include assessment systems internal controls test transactions extent considered necessary support opinion board directors audit committee consisting solely outside directors company meets periodically management independent registered public accountants ensure meeting responsibilities discuss matters concerning internal controls financial reporting ernst young llp full free access audit committee james hinrichs chairman audit committee jon serbousek president chief executive officer director doug rice chief financial officer orthofix medical inc index consolidated financial statements report independent registered public accounting firm shareholders board directors orthofix medical inc opinion financial statements audited accompanying consolidated balance sheets orthofix medical inc company december 31 2019 2018 related consolidated statements operations comprehensive income loss changes shareholders equity cash flows three years period ended december 31 2019 related notes collectively referred “consolidated financial statements” opinion consolidated financial statements present fairly material respects financial position company december 31 2019 2018 results operations cash flows three years period ended december 31 2019 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states pcaob companys internal control financial reporting december 31 2019 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated february 24 2020 expressed unqualified opinion thereon adoption new accounting standards discussed notes 2 8 14 consolidated financial statements company changed methods accounting 1 leases 2019 due adoption asu 201602 leases topic 842 2 recognition revenue contracts customers 2018 due adoption asu 201409 revenue contracts customers 3 measurement equity investments fair value recognition changes fair value 2018 due adoption asu 201601 financial instruments asu 201803 technical connections improvements financial instruments basis opinion financial statements responsibility companys management responsibility express opinion company’s financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation financial statements believe audits provide reasonable basis opinion critical audit matters critical audit matters communicated matters arising current period audit financial statements communicated required communicated audit committee 1 relate accounts disclosures material financial statements 2 involved especially challenging subjective complex judgments communication critical audit matters alter way opinion consolidated financial statements taken whole communicating critical audit matters providing separate opinions critical audit matters accounts disclosures relate contingent consideration spinal kinetics description matter described note 11 consolidated financial statements company’s contingent consideration acquisition date spinal kinetics inc consisted potential milestone payments 150 million achieving fda approval 45 million connection certain future product sales december 31 2019 fair value contingent consideration 427 million auditing company’s accounting fair value contingent consideration involved high degree subjectivity evaluating management’s estimates fair value sensitive changes unobservable inputs forecasted future revenues spinal kinetics inc products discount rate applied assumptions potential volatility forecasted revenues addressed matter audit obtained understanding evaluated design tested operating effectiveness controls address risks material misstatement relating measurement valuation contingent consideration liability example tested controls company’s process estimate fair value contingent consideration management’s review significant estimation assumptions methods used develop fair value estimate accuracy calculations included within fair value model underlying data used model test fair value contingent consideration liability performed audit procedures included among others assessing terms arrangement including criteria required achieve contingent consideration evaluating significant assumptions underlying data used company valuation model addition involved valuation specialist assist evaluating appropriateness valuation model certain valuation model’s assumptions test model’s computational accuracy also tested completeness accuracy underlying data used model inventory excess obsolescence reserves description matter december 31 2019 company’s inventory balance 824 million net management’s estimate inventory excess obsolescence reserves described note 4 consolidated financial statements management adjusts value inventory net realizable value extent determines inventory cost cannot recovered due obsolescence factors order make determinations management estimates future demand sales prices determine appropriate inventory reserves make corresponding adjustments carrying value inventories reflect lower cost net realizable value auditing management’s estimate inventory excess obsolescence reserves involved high degree subjectivity estimate sensitive changes assumptions including forecasted product demand length product life cycles period required evaluate level market acceptance new products assumptions significant effect measurement inventory excess obsolescence reserves addressed matter audit obtained understanding evaluated design tested operating effectiveness controls address risks material misstatement relating measurement valuation inventory excess obsolescence reserves example tested controls company’s processes estimate inventory excess obsolescence reserves management’s review approval model used estimate inventory excess obsolescence reserve including data inputs outputs model management’s qualitative adjustments model test inventory excess obsolescence reserve balance performed audit procedures included among others evaluating significant assumptions qualitative adjustments described underlying data used company analysis audit procedures included testing completeness accuracy underlying data used model evaluating whether data representative current circumstances assessed historical accuracy management’s estimates performed sensitivity analyses significant assumptions evaluate changes inventory excess obsolescence reserves would result changes assumptions revenue recognition asc 606 risk side agreements distributors description matter described note 14 consolidated financial statements company recognizes revenue stocking distributors “distributor revenue” upon shipment receipt confirming purchase order distributor obtains control promised goods revenues based company’s historical collection experience considers potential among things return previously sold products auditing company’s measurement potential variable consideration distributor contracts especially challenging due potential side agreements may allow return previously sold products addressed matter audit obtained understanding evaluated design tested operating effectiveness controls company’s process review approve new distributor agreements ii review approve changes made existing arrangements iii review approve product returns iv identify report potential distributor side agreements inspecting source documentation used management’s review audit procedures included among others confirmation terms conditions material distributor agreements addition evaluated whether company’s actual returns product distributors appropriately approved considered management’s application revenue recognition policy distributor revenue ernst young llp served company’s auditor since 2002 dallas texas february 24 2020 orthofix medical inc consolidated balance sheets december 31 2019 2018 accompanying notes form integral part consolidated financial statements orthofix medical inc consolidated statements operations comprehensive income loss years ended december 31 2019 2018 2017 accompanying notes form integral part consolidated financial statements orthofix medical inc consolidated statements changes shareholders’ equity years ended december 31 2019 2018 2017 accompanying notes form integral part consolidated financial statements orthofix medical inc consolidated statements cash flows years ended december 31 2019 2018 2017 accompanying notes form integral part consolidated financial statements orthofix medical inc notes consolidated financial statements business basis consolidation orthofix medical inc previously orthofix international nv subsidiaries “company” global medical device company focused musculoskeletal products therapies company’s mission improve patients’ lives providing superior reconstruction regenerative musculoskeletal solutions physicians worldwide headquartered lewisville texas company two reporting segments global spine global extremities orthofix products widely distributed via companys sales representatives distributors 2018 company completed change jurisdiction organization curaçao state delaware “domestication” accordance conversion procedures articles 304 305 book 2 curaçao civil code domestication procedures section 388 delaware general corporation law upon effectiveness domestication common share orthofix international nv automatically converted one share common stock orthofix medical inc transaction accounted transfer assets liabilities entities common control similar pooling interest result assets liabilities carried forward historical carrying amounts company’s common stock continues traded nasdaq global select market symbol “ofix” consolidated financial statements include financial statements company wholly owned subsidiaries intercompany accounts transactions eliminated consolidation 1 significant accounting policies preparation financial statements conformity united states generally accepted accounting principles “us gaap” requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period ongoing basis evaluate estimates including related contractual allowances doubtful accounts inventories goodwill fair value measurements litigation contingent liabilities income taxes sharebased compensation base estimates historical experience future expectations relevant assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources actual results could differ estimates information accounting policies methods used preparation consolidated financial statements included applicable respective footnotes follow following discussion accounting policies methods used consolidated financial statements presented within footnotes prior period reclassifications certain amortization expense related intangible assets previously reported general administrative expenses reclassified acquisitionrelated amortization remeasurement based use underlying intangible asset reclassification resulted decrease general administrative expense 13 million year ended december 31 2018 market risk ordinary course business company exposed impact changes interest rates foreign currency fluctuations company’s objective limit impact movements earnings cash flows order achieve objective company seeks balance nonus dollar denominated income expenditures financial statements operations outside united states generally maintained local currency foreign currency denominated balance sheet accounts except shareholders’ equity translated us dollars year end exchange rates revenue expense items translated average rates exchange prevailing year gains losses resulting translation foreign currency recorded accumulated comprehensive income loss component shareholders’ equity transactional foreign currency gains losses including generated intercompany operations included expense net loss 14 million loss 33 million gain 19 million years ended december 31 2019 2018 2017 respectively financial instruments concentration credit risk financial instruments could subject company concentration credit risk consist primarily cash equivalents restricted cash accounts receivable generally cash held large financial institutions cash equivalents consist highly liquid money market funds company performs ongoing credit evaluations customers generally require collateral maintains reserve potential credit losses company believes concentration credit risk related accounts receivable limited customers geographically dispersed end users diversified across several industries net sales customers based europe approximately 69 million 2019 represents substantial portion trade accounts receivable balance december 31 2019 least reasonably possible changes global economic conditions andor local operating economic conditions regions factors could affect future realization accounts receivable balances cash equivalents restricted cash company considers highly liquid investments original maturity three months less cash equivalents restricted cash december 31 2018 related court order affecting company’s local bank accounts office são paulo brazil part investigation 30 companies resulted freezing approximately 26 million company’s cash april 3 2019 company’s appeal regarding freezing local bank accounts heard brazil federal court appeals rio de janeiro court ordered unfreezing company’s cash returned without restrictions april 2019 balance reclassified cash equivalents second quarter 2019 september 2019 approximately 07 million company’s cash brazil frozen upon request satisfy judgment related ongoing legal dispute former brazilian distributor although company appealing judgment cash reclassified restricted cash refer note 12 discussion matter advertising costs advertising costs expensed incurred advertising costs included within sales marketing expense totaled 08 million 06 million 07 million years ended december 31 2019 2018 2017 respectively research development costs including inprocess research development “iprd” costs expenditures research development expensed incurred expenditures related collaborative arrangement mtf biologics “mtf” expensed based terms related agreement research development expenditures incurred years ended december 31 2019 2018 collaborative arrangement mtf research development expenditures totaled 09 million year ended december 31 2017 arrangement mtf connection spinal kinetics inc acquisition 2018 company recognized 268 million iprd costs within patents intangible assets net recorded additional research development costs develop acquired iprd see note 6 details acquired iprd represents fair value assigned acquired research development assets reached technological feasibility fair value assigned acquired iprd determined estimating costs develop acquired technology commercially viable products estimating resulting revenues projects discounting net cash flows present value revenue cost projections used value acquired iprd applicable reduced based probability success developing asset additionally estimated revenues consider relevant market sizes growth factors expected trends technology nature expected timing new product introductions company competitors rates utilized discount net cash flows present value commensurate stage development project uncertainties economic estimates used projections future costs develop iprd subsequent acquisition recorded research development expense incurred see note 6 additional policy discussion related amortization impairment testing iprd 2 recently adopted accounting standards recently issued accounting pronouncements adoption accounting standards update “asu” 201602 leases topic 842 february 2016 financial accounting standards board “fasb” issued asu 201602 changes lessees account leases standard requires liability recorded balance sheet based present value future lease obligations corresponding rightofuse asset leases classified operating leases company required recognize lease costs straightline basis based combined amortization lease obligation rightofuse asset leases accounted finance leases similar capital leases previous accounting standard effective january 1 2019 company adopted asu 201602 using modified retrospective approach upon adoption company elected package practical expedients permitted within new standard elected practical expedients allow company carry forward historical lease classification separate allocate consideration paid lease nonlease components included within contract company also elected optional transition method waives requirement apply asu comparative periods presented within financial statements year adoption therefore results reporting periods beginning january 1 2019 presented topic 842 prior period amounts adjusted continue reported accordance company’s historic accounting policies topic 840 see note 8 additional discussion company’s adoption topic 842 lease accounting policies adoption asu 201802 income statement reporting comprehensive income topic 220 reclassification certain tax effects accumulated comprehensive income february 2018 fasb issued asu 201802 allows entities reclassify stranded tax effects resulting tax cuts jobs act tax act accumulated comprehensive income loss retained earnings company adopted guidance effective january 1 2019 using modified retrospective approach resulted increase accumulated comprehensive income loss decrease retained earnings 09 million adoption asu 201409 revenue contracts customers topic 606 may 2014 fasb issued asu 201409 topic 606 supersedes revenue recognition requirements topic 605 revenue recognition requires entities recognize revenue control promised goods services transferred customers amount reflects consideration entity expects entitled exchange goods services company adopted accounting standards codification “asc” 606 january 1 2018 using modified retrospective transition method applied contracts results prior period amounts adjusted continue reported accordance company’s historic accounting previous revenue recognition standard topic 605 see note 14 discussion company’s revenue recognition policies adoption asu 201601 financial instruments overall subtopic 82510 asu 201803 technical corrections improvements financial instruments overall subtopic 82510 january 2016 fasb issued asu 201601 clarified asu 201803 february 2018 guidance required entities measure equity investments fair value recognize changes fair value net income however certain equity investments readily determinable fair values new guidance allows companies measure investments using new measurement alternative values investments cost less impairments plus minus changes resulting observable price changes orderly transactions identical similar investments issuer company prospectively adopted asu 201601 asu 201803 january 1 2018 uses new measurement alternative company’s equity investments bone biologics inc “bone biologics” historically measured cost see note 11 discussion related investment bone biologics recently issued accounting pronouncements 3 acquisitions april 30 2018 company completed acquisition spinal kinetics inc “spinal kinetics” privately held developer manufacturer artificial cervical lumbar discs 450 million net cash subject certain adjustments plus potential milestone payments 600 million cash results operations spinal kinetics included company’s financial results since acquisition date april 30 2018 fair value consideration transferred 766 million consisted following contingent consideration consists potential future milestone payments 600 million cash milestone payments include 150 million us food drug administration “fda” grants approval spinal kinetics’ m6c artificial cervical disc “fda milestone” ii revenuebased milestone payments 450 million connection future sales m6c artificial cervical disc m6l artificial lumbar disc milestones must achieved within five years acquisition date trigger applicable payments refer note 11 discussion valuation contingent milestone payments following table summarizes fair values assets acquired liabilities assumed acquisition date 176 million goodwill recognized assigned global spine reporting segment february 6 2019 company obtained fda approval m6c artificial cervical disc patients suffering cervical disease degeneration following fda approval company transferred 268 million iprd developed technology began amortization 10 years company recognize acquisition related costs year ended december 31 2019 recorded 33 million 08 million acquisition related costs years ended december 31 2018 december 31 2017 respectively within general administrative expenses company’s results operations included net sales 124 million 87 million related spinal kinetics years ended december 31 2019 2018 respectively additionally company’s results operations included net losses 93 million 58 million related spinal kinetics years ended december 31 2019 2018 respectively options medical llc asset acquisition january 31 2019 company acquired certain assets options medical llc “options medical” medical device distributor based florida terms acquisition parties agreed terminate existing exclusive sales representative agreement employees options medical became employees company acquired customer lists customer information related sale company’s products consideration assets acquired company paid 64 million following table summarizes fair values assets acquired liabilities assumed acquisition date 4 inventories valued lower cost estimated net realizable value provision excess obsolete impaired items reviewed updated periodic basis management inventory procured produced whether internally contract manufacturing arrangements manufacturing facility italy cost determined weightedaverage basis approximates firstin firstout “fifo” method inventory procured produced whether internally contract manufacturing arrangements manufacturing facilities texas california standard costs approximates actual cost fifo method used value inventory standard costs reviewed annually management often event circumstances indicate change cost occurred workinprocess finished products fieldconsignment inventory include material labor production overhead costs fieldconsignment inventory represents immediately saleable finished products inventory possession company’s independent sales representatives located third party customers distributors hospitals company adjusts value inventory extent management determines cost cannot recovered due obsolescence factors order make determinations management uses estimates future demand sales prices product determine appropriate inventory reserves make corresponding adjustments carrying value inventories reflect lower cost market value 5 property plant equipment property plant equipment stated cost less accumulated depreciation acquired part business combination estimated fair value costs include expenditures necessary place asset service generally including freight sales use taxes property plant equipment includes instrumentation held customers generally used facilitate implantation company’s products useful lives assets generally follows company evaluates useful lives assets annual basis depreciation computed straightline basis useful lives assets depreciation leasehold improvements computed shorter lease term useful life asset total depreciation expense 177 million 159 million 183 million years ended december 31 2019 2018 2017 respectively expenditures maintenance repairs minor renewals improvements extend lives respective assets expensed incurred expenditures renewals improvements capitalized assets related accumulated depreciation adjusted property retirements disposals resulting gain loss included earnings fully depreciated assets remain accounts retired service company capitalizes system development costs related internaluse software application development stage costs related preliminary project activities postimplementation activities expensed incurred internaluse software amortized straightline basis estimated useful life generally three seven years first quarter 2019 company entered amendment corporate headquarters lease result classification lease changed operating lease finance lease resulted increase lease liability lease asset approximately 80 million compared original operating lease assets liabilities recorded upon adoption asu 201602 longlived assets evaluated impairment whenever events changes circumstances occurred would indicate impairment purposes evaluation company groups longlived assets liabilities lowest level identifiable cash flows asset generate cash flows independent assets liabilities carrying value asset group exceeds undiscounted cash flows expected result use eventual disposition asset group company write carrying value fair value period identified company generally determines fair value longlived assets present value estimated future cash flows determining estimated future cash flows associated assets company uses estimates assumptions future revenue contributions cost structures remaining useful lives asset group use alternative assumptions including estimated cash flows discount rates alternative estimated remaining useful lives could result different calculations impairment 6 intangible assets intangible assets recorded cost acquired part business combination estimated fair value assets amortized straightline basis useful lives assets intangible assets related iprd projects considered indefinitelived completion abandonment associated research development efforts period assets considered indefinitelived amortized tested impairment testing performed least annually triggering event occurs could indicate potential impairment development complete generally occurs regulatory approval market product obtained associated assets deemed finitelived amortized period best reflects economic benefits provided assets february 6 2019 company obtained fda approval m6c artificial cervical disc patients suffering cervical disease degeneration following fda approval company transferred 268 million iprd developed technology began amortization 10 years amortization expense intangible assets 70 million 27 million 18 million years ended december 31 2019 december 31 2018 2017 respectively future amortization expense intangible assets estimated follows 7 goodwill company tests goodwill least annually impairment company tests frequently indicators present changes circumstances suggest impairment may exist indicators include among others declines sales earnings cash flows development material adverse change business climate company assesses goodwill impairment reporting unit level defined operating segment one level operating segment part change reporting segments occurred first quarter 2019 company performed quantitative assessment goodwill immediately prior subsequently following change reporting segments analysis result impairment addition net carrying value goodwill previously reported prior reporting segments bone growth therapies ii spinal implants iii biologics consolidated included within global spine reporting segment beginning fourth quarters 2019 2018 company performed qualitative assessment annual goodwill impairment analysis result impairment qualitative analysis considers relevant factors specific reporting units including macroeconomic conditions industry market considerations overall financial performance relevant entityspecific events following table presents net carrying value goodwill rollforward balances december 31 2018 reportable segment 8 leases discussed note 2 company adopted asu 201602leases topic 842 january 1 2019 using modified retrospective approach adoption new standard resulted recognition operating lease assets lease liabilities 202 million 205 million respectively january 1 2019 difference lease assets lease liabilities net deferred tax impact elimination historical prepaid deferred rent recorded adjustment retained earnings net impact adoption company’s balance sheet january 1 2019 presented table standard material impact company’s consolidated statements operations comprehensive income loss cash flows company determines arrangement lease inception company’s leases primarily relate facilities vehicles equipment lease assets represent company’s right use underlying asset lease term lease liabilities represent obligation make lease payments arising lease assets liabilities recognized commencement date based present value lease payments lease term company’s leases provide implicit rate company’s incremental borrowing rate used discount rate based information available commencement date determining present value lease payments lease assets also include impact prepayments made reduced impact lease incentives company made accounting policy election shortterm leases company recognize lease liability lease asset balance sheet leases lease term twelve months less commencement date rather shortterm lease payments recognized expense straightline basis lease term current period shortterm lease expense reasonably reflects shortterm lease commitments company made policy election classifications leases combine lease nonlease components account single lease component variable lease payments excluded lease liability recognized period obligation incurred additionally lease terms may include options extend terminate lease reasonably certain company exercise option first quarter 2019 company entered amendment corporate headquarters lease result classification lease changed operating lease finance lease resulting increase lease liability lease asset approximately 80 million summary company’s lease portfolio december 31 2019 presented table components lease costs follows supplemental cash flow information related leases follows summary company’s remaining lease liabilities december 31 2019 included 9 current liabilities december 2019 company approved initiated targeted restructuring plan us streamline costs better align talent company’s strategic initiatives plan consists primarily realignment certain personnel representing extremely limited number positions require severance payments december 31 2019 company recorded liability 32 million connection activity recognized 2019 within general administrative expenses 10 longterm debt october 25 2019 company certain whollyowned subsidiaries collectively company “borrowers” borrowers certain material subsidiaries company guarantors entered second amended restated credit agreement “amended credit agreement” jpmorgan chase bank na “jpmorgan” administrative agent certain lender parties thereto amended credit agreement provides 300 million secured revolving credit facility “facility” amending restating 125 million secured revolving credit facility previously existed lenders credit agreement maturity date october 25 2024 december 31 2019 company borrowings outstanding credit agreement borrowings amended credit agreement may used among things working capital general corporate purposes company subsidiaries including permitted acquisitions permitted payments dividends distributions facility available us dollars 150 million facility available borrowed euros british pounds “agreed currencies” facility permits 50 million facility utilized issuance letters credit agreed currencies borrowers ability increase amount facility increases may take form increases revolving credit commitments issuance new term loans aggregate amount greater 150 million incremental amount total amount facility exceed 350 consolidated ebitda company determined four fiscal quarter period recently ended financial statements available upon satisfaction customary conditions precedent increases incremental loans receipt additional commitments one existing new lenders borrowings facility bear interest floating rate borrowers’ option either libor possibly alternative reference rate used place libor upon occurrence benchmark transition event plus applicable margin ranging 125 225 base rate plus applicable margin ranging 025 125 case subject adjustment based company’s total leverage ratio unused fee ranging 015 025 subject adjustment based company’s total leverage ratio payable quarterly arrears based daily amount undrawn portion lender’s revolving credit commitment facility fees payable outstanding letters credit rate equal applicable margin libor loans plus certain customary fees payable solely issuer letter credit certain company’s existing future material subsidiaries collectively “guarantors” required guarantee repayment borrowers’ obligations amended credit agreement obligations borrowers guarantors respect amended credit agreement secured pledge substantially personal property assets borrowers guarantors including accounts receivables deposit accounts intellectual property investment property inventory equipment equity interests respective subsidiaries amended credit agreement contains customary affirmative negative covenants including limitations company’s subsidiaries ability incur additional debt grant permit additional liens make investments acquisitions merge consolidate others dispose assets pay dividends distributions pay subordinated indebtedness enter affiliate transactions addition amended credit agreement contains financial covenants requiring company consolidated basis maintain last day fiscal quarter total net leverage ratio 35 10 ratio permitted increase 40 10 4 fiscal quarters following material acquisition interest coverage ratio least 30 10 amended credit agreement also includes events default customary facilities type upon occurrence events default subject customary cure rights outstanding loans facility may accelerated andor lenders’ commitments terminated credit agreement also includes events default customary facilities type upon occurrence events default subject customary cure rights outstanding loans facility may accelerated andor lenders’ commitments terminated company compliance required financial covenants december 31 2019 conjunction obtaining facility company paid 15 million debt issuance costs capitalized total 18 million associated facility costs amortized life facility debt issuance costs included longterm assets net accumulated amortization december 31 2019 december 31 2018 debt issuance costs net accumulated amortization 17 million 06 million respectively debt issuance costs amortized expensed totaled 04 million 04 million 10 million years ended december 31 2019 2018 2017 respectively company unused available line credit €55 million 62 million 63 million december 31 2019 2018 respectively italian line credit unsecured line credit provides company option borrow amounts italy interest rates determined time borrowing company paid cash related interest 08 million 08 million 08 million years ended december 31 2019 2018 2017 respectively 11 fair value measurements investments fair value defined price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date nonfinancial assets liabilities company measured fair value include longlived assets impaired currently reported period equity securities measured observable prices orderly transactions authoritative guidance also describes three levels inputs may used measure fair value level 1 quoted prices active markets identical assets liabilities level 2 observable inputs quoted prices active markets identical assets liabilities level 3 unobservable inputs little market data available require reporting entity develop assumptions company’s financial instruments include cash equivalents restricted cash collective trust funds treasury securities trade accounts receivable accounts payable longterm secured debt equity warrants equity securities available sale debt securities contingent consideration deferred compensation plan liabilities carrying value cash equivalents restricted cash trade accounts receivable accounts payable approximate fair value due shortterm maturities instruments company’s credit facilities carry floating rate interest therefore carrying value longterm debt considered approximate fair value company’s collective trust funds treasury securities equity warrants equity securities debt security contingent consideration deferred compensation plan liabilities financial instruments recorded fair value recurring basis follows fair value treasury securities determined based quoted prices active markets identical assets therefore company categorized instruments level 1 financial instruments fair value company’s collective trust funds equity warrants equity securities deferred compensation plan liabilities determined based inputs readily available public markets derived information available publicly quoted markets therefore company categorized instruments level 2 financial instruments equity warrants securities company holds investments common stock warrants purchase shares common stock bone biologics company’s common stock investments recorded within longterm assets although fair value warrants reduced zero 2018 equity securities considered investments readily determinable fair values company measures investments cost less impairments plus minus changes resulting observable price changes orderly transactions identical similar investments issuer 2018 bone biologics completed series equity financing activities provided new observable price change orderly transaction result company determined investment impaired recorded charge 44 million expense net december 31 2019 company holds common stock bone biologics warrants purchase approximately 13 thousand shares weighted average exercise price 1000 per share adjusting shares exercise price reverse stock split executed bone biologics 2018 terms warrant purchase agreements warrants purchase common stock bone biologics exercisable seven year period expires 2020 transferable holder parties changes valuation securities years ended december 31 2019 2018 2017 shown debt security october 2019 company held debt security eneura inc “eneura” privately held medical technology company developing devices treatment migraines principal amount debt security 150 million accrued interest 80 payment due maturity debt security originally set mature march 4 2019 march 1 2019 company entered amended restated senior secured promissory note eneura “restructured debt security” restructure debt security extended maturity date earlier march 4 2022 ii effective date change control iii effective date initial public offering eneura also eliminated conversion feature included within original note consideration extension eneura issued company warrant purchase common stock “warrant” exercisable 001 per share ten year contractual term number shares equal 10 sum outstanding principal accrued interest amended restated debt security march 1 2019 divided 100 subject certain antidilution provisions prior restructuring debt security accounted available sale debt security fair value included within longterm assets fair value based upon significant unobservable inputs including use discounted cash flow model assumptions regarding expected payback period debt security requiring company develop assumptions therefore company categorized asset level 3 financial asset company evaluated declines fair value quarter determine impairments otherthantemporary debt security amortized cost basis 90 million time restructuring december 31 2018 subsequent restructuring debt security longer classified available sale debt security rather held maturity debt security debt security reclassified available sale debt security held maturity debt security fair value date restructuring result unrealized gains included accumulated comprehensive income loss related debt security subsequently amortized interest income remaining term restructured debt security warrant recorded fair value included longterm assets fair value warrant based significant unobservable inputs including use discounted cash flow model optionpricing model requiring company develop assumptions therefore company categorized asset level 3 financial asset warrant considered investment readily determinable fair value company measured warrant cost less impairments plus minus changes resulting observable price changes orderly transactions identical similar investments issuer quarter ended september 30 2019 company engaged negotiations eneura settle restructured debt security october 25 2019 company eneura settled restructured debt security 40 million cash payment agreed transfer warrant eneura company determined restructured debt security warrant impaired adjusted carrying value restructured debt security 40 million settlement value recording net otherthantemporary impairment 65 million expense net included reclassification related unrealized gains included accumulated comprehensive income loss 52 million following table provides reconciliation beginning ending balances debt securities measured fair value using significant unobservable inputs level 3 contingent consideration contingent consideration consists potential future milestone payments 600 million cash associated spinal kinetics acquisition milestone payments include 150 million upon fda approval m6c artificial cervical disc “fda milestone” ii revenuebased milestone payments 450 million connection future sales acquired artificial discs “revenue milestones” milestones must achieved within five years april 30 2018 trigger applicable payments february 6 2019 company obtained fda approval m6c artificial cervical disc approval triggered company’s payment obligation 150 million achievement fda milestone paid february 14 2019 prior payment company estimated fair value fda milestone using probabilityweighted discounted cash flow model fair value based significant unobservable inputs thus represented level 3 measurement key assumptions affecting fair value milestone payment included company’s estimation timing probability fda approval company estimates fair value revenue milestones using monte carlo simulation fair value measurement based significant unobservable inputs thus represents level 3 measurement key assumptions applying monte carlo valuation model include company’s forecasted future revenues spinal kinetics products discount rates applied assumptions potential volatility forecasted revenue significant changes assumptions could result significantly higher lower fair value december 31 2019 estimated fair value remaining revenue milestones 427 million however actual amount ultimately paid could higher lower amount december 31 2019 company classified 147 million liability within current liabilities company expects pay one revenue milestones next twelve months remaining 280 million within longterm liabilities changes fair value related contingent consideration recorded operating expense included within acquisitionrelated amortization remeasurement following table provides reconciliation beginning ending balances contingent consideration measured fair value using significant unobservable inputs level 3 291 million increase fair value 2019 primarily attributable change management’s forecast future net sales artificial discs including acceleration expected timing future sales subsequent company’s launch product us market upon receiving fda approval 12 commitments contingencies policy company records accruals certain outstanding legal proceedings investigations claims probable liability incurred amount loss reasonably estimated company evaluates quarterly basis developments legal proceedings investigations claims could affect amount accrual well developments would make loss contingency probable reasonably estimable loss contingency probable reasonably estimable company accrue loss however loss additional loss excess accrual least reasonable possibility material company discloses reasonable estimate possible loss range loss reasonable estimate made company cannot make reasonable estimate possible loss range loss disclosed addition legal fees directly related costs expensed incurred addition matters described paragraphs normal course business company involved various lawsuits time may subject certain contingencies company believes losses related matters individually collectively immaterial possible loss range loss january 2017 sec settlements january 2017 sec approved company’s offers settlement connection sec’s investigations accounting matters leading company’s prior restatement financial statements company’s review improper payments respect subsidiary brazil settlements approved sec resolved two matters included payments totaling 144 million sec amounts previously accrued funded escrow 2016 addition 2017 company received favorable insurance settlement approximately 6 million associated prior costs incurred related matters recognized within general administrative expenses discontinued operations matters related breg indemnification obligations may 24 2012 company sold breg inc “breg” former subsidiary affiliate water street healthcare partners ii lp “water street” terms agreement company indemnified water street breg respect certain specified matters may 2018 breg settled resolved postclose cold therapy claim california state court pursuant company’s indemnification obligation company made final payment insurer amount 17 million help fund breg settlement charges incurred result indemnification reflected discontinued operations consolidated statements operations comprehensive income loss company expect additional charges related discontinued operation italian medical device payback “imdp” 2015 italian parliament introduced rules entities supply goods services italian national healthcare system healthcare law expected impact business financial reporting companies operating medical technology sector sell medical devices italy key provision law ‘payback’ measure requiring companies selling medical devices italy make payments italian government medical device expenditures exceed regional maximum ceilings companies required make payments equal percentage expenditures exceeding maximum regional caps considerable uncertainty law operate exact timeline finalization company’s current assessment imdp involves significant judgment regarding expected scope actual implementation terms measure latter clarified date italian authorities company accounts estimated cost imdp sales marketing expense recorded expense 13 million 10 million 09 million years ended december 31 2019 2018 2017 respectively december 31 2019 company accrued 49 million related imdp classified within longterm liabilities however actual liability could higher lower amount accrued law clarified italian authorities brazil july 2018 federal prosecution service rio de janeiro representatives brazilian antitrust authority inspected offices 30 companies including company’s office são paulo part investigation tender irregularities medical device industry authorities obtained court order affecting company’s companies’ local bank accounts resulting freezing approximately 25 million company’s cash company reclassified restricted cash april 3 2019 company’s appeal regarding freezing local bank accounts heard brazil federal court appeals rio de janeiro court ordered unfreezing company’s cash returned without restriction april 2019 balance reclassified cash equivalents 2019 september 2019 approximately 07 million company’s cash brazil frozen upon request satisfy judgment related ongoing legal dispute former brazilian distributor although company appealing judgment cash reclassified restricted cash december 31 2019 company accrued 17 million related matter 13 shareholders’ equity dividends company paid dividends holders common stock past certain subsidiaries company restrictions ability pay dividends certain circumstances pursuant amended credit agreement event company decides pay dividend holders common stock future dividends received subsidiaries company may based prevailing rates taxation required pay additional withholding income tax amounts received subsidiaries accumulated comprehensive income loss accumulated comprehensive income loss comprised foreign currency translation adjustments unrealized gains losses company’s debt security settled 2019 components changes accumulated comprehensive income loss follows 14 revenue recognition accounts receivable revenue recognition company accounts contract approval commitment parties rights parties identified payment terms identified contract commercial substance collectability consideration probable company’s contracts may contain one performance obligations contract contains one performance obligation company allocates total transaction price performance obligations based upon observable standalone selling price promised goods services underlying performance obligation company recognizes revenue control promised goods services transferred customer typically occurs point time upon shipment delivery utilization amount reflects consideration company expects entitled exchange promised goods services amount company expects entitled exchange goods services reflects fixed amount stated per contract estimates variable consideration discounts extent probable significant reversal cumulative revenue recognized occur uncertainty associated variable consideration resolved following sections discuss company’s revenue recognition policies significant product category bone growth therapies bone growth therapies revenue largely attributable us comprised thirdparty payor transactions wholesale revenue largest portion bone growth therapies revenue derived thirdparty payors includes commercial insurance carriers health maintenance organizations preferred provider organizations governmental payors medicare revenue recognized product fitted accepted patient applicable documents required thirdparty payor obtained amounts paid thirdparty payors generally based fixed allowable reimbursement rates revenues recorded expected preauthorized reimbursement rates net contractual allowances adjustments certain billings subject review thirdparty payors may subject adjustment wholesale revenue related sale company’s bone growth stimulators directly durable medical equipment suppliers wholesale revenues typically recognized upon shipment receipt confirming purchase order customer obtains control promised goods biologics revenue largely attributable us primarily related collaborative arrangement mtf extends july 28 2027 arrangement company markets tissue bone repair reconstruction brand names trinity evolution trinity elite per terms agreement mtf sources tissue processes create bone growth matrix packages delivers tissue customer accordance orders received company exclusive global marketing rights trinity evolution trinity elite tissues well nonexclusive marketing rights products receives marketing fees mtf based total sales mtf considered primary obligor arrangements therefore company recognizes marketing service fees net basis within net sales upon shipment product customer spinal implants global extremities spinal implants global extremities products distributed worldwide us sales largely comprised commercial sales international sales derived commercial sales stocking distributor arrangements commercial revenue largely related sale company’s spinal implants global extremities products hospital customers customer obtains control revenues recognized products utilized confirming purchase order received hospital revenues within spinal implants global extremities product categories derived stocking distributors purchase company’s products resell directly customers hospitals revenue stocking distributor arrangements subsequent adoption topic 606 effective january 1 2018 company recognizes revenue upon shipment receipt confirming purchase order distributor obtains control promised goods transaction price stocking distributors estimated based upon company’s historical collection experience stocking distributor derive estimate company analyzes twelve months historical invoices stocking distributor subsequent collections invoices period 24 months subsequent invoice date historical collection percentage specific stocking distributor used calculate transaction price cost sales also recorded upon transfer control product customer subsequent adoption topic 606 prior adoption topic 606 periods presented prior january 1 2018 company recognized revenue stocking distributor arrangements product delivered end customer “sellthrough method” company reliable information distributors sold product end customers company used cash collection distributors basis revenue recognition sellthrough method although many cases company legally entitled accounts receivable time shipment company recognize accounts receivables corresponding deferred revenues time shipment associated stocking distributor transactions revenue recognized sellthrough method company also considered whether match related cost sales revenue recognize cost sales upon shipment making assessment company considered financial viability stocking distributors based creditworthiness determine collectability amounts sufficient realize costs products shipped reasonably assured time shipment instances stocking distributor determined financially viable company deferred costs sales revenue recognized product sales marketing service fees table presents net sales includes product sales marketing service fees years ended december 31 2019 2018 2017 product sales primarily consists sale bone growth therapies spinal implants global extremities products marketing service fees received mtf based total sales biologics tissues relates solely biologics product category within global spine reporting segment marketing service fees received mtf 629 million approximately 96 total biologics revenues year ended december 31 2019 mtf company’s single supplier trinity evolution trinity elite tissue forms derived human cadaveric donors event circumstance would impact mtf’s continued access donated human cadaveric tissue company’s ability market tissues may adversely impact company’s financial results revenues exclude value added local taxes intercompany sales trade discounts shipping handling costs products shipped customers included cost sales 28 million 27 million 30 million years ended december 31 2019 2018 2017 respectively trade accounts receivable allowances payment terms vary type location company’s customers products services offered term invoicing payment due significant accounts receivable analyzed quarterly basis assess adequacy reserves doubtful accounts contractual allowances revisions allowances doubtful accounts estimates recorded adjustment bad debt expense within sales marketing expenses revisions contractual allowances recorded adjustment net sales company’s estimates periodically tested actual collection experience company generally sell receivables certain italian hospitals year accelerate cash collections 2019 2018 2017 company sold €98 million €98 million €98 million 109 million 115 million 112 million receivables respectively estimated related fees 2019 2018 2017 03 million 03 million 03 million respectively recorded interest expense trade accounts receivables sold without recourse removed balance sheet time sale puerto rico settlement june 2019 company received payment 14 million administration medical services puerto rico governmentowned corporation settlement approximately 25 million outstanding accounts receivable 25 million outstanding accounts receivable previously fully reserved company’s allowances doubtful accounts contractual allowances result settlement accordance company’s policy company recorded resulting adjustment contractual allowances 04 million within net sales recovery allowance doubtful accounts credit bad debt expense 10 million contract assets company’s contract assets excluding trade accounts receivable “other contract assets” largely consist payments made certain distributors obtain contracts gain access customers certain territories provide benefit exclusive distribution company’s products contract assets included longterm assets 37 million 19 million december 31 2019 2018 respectively contract assets amortized straightline basis term related contract impairments incurred contract assets 2019 2018 company applied practical expedient allowed within topic 606 expense sales commissions incurred applicable amortization period would one year less 15 business segment information company changed reportable business segments beginning first quarter 2019 align changes company manages business reviews operating performance allocates resources company reports results two reportable segments global spine global extremities reporting segments represent operating segments chief executive officer also chief operating decision maker “codm” reviews financial information makes resource allocation decisions among businesses primary metric used codm managing company earnings interest tax depreciation amortization “ebitda” company neither discretely allocates assets goodwill operating segments evaluates operating segments using discrete asset information accordingly reporting segment information prepared based two reporting segments prior periods recast present change reporting segements global spine global spine reporting segment offers three primary product categories bone growth therapies spinal implants biologics bone growth therapies product category manufactures distributes provides support services market leading bone growth stimulator devices enhance bone fusion class iii medical devices indicated adjunctive noninvasive treatment improve fusion success rates cervical lumbar spine well therapeutic treatment nonspine fractures healed nonunions product category uses distributors sales representatives sell devices hospitals healthcare providers patients primarily us spinal implants product category designs develops markets broad portfolio motion preservation fixation implant products used surgical procedures spine spinal implants distributes products network distributors sales representatives sell spine products hospitals healthcare providers globally biologics product category provides portfolio regenerative products tissue forms allow physicians successfully treat variety spinal orthopedic conditions product category specializes marketing company’s exclusive regeneration tissue forms distributes tissues hospitals healthcare providers primarily us network independent distributors sales representatives partnership mtf allows company exclusively market trinity evolution trinity elite tissue forms musculoskeletal defects enhance bony fusion global extremities global extremities reporting segment offers products solutions allow physicians successfully treat variety orthopedic conditions unrelated spine reporting segment specializes design development marketing company’s orthopedic products used fracture repair deformity correction bone reconstruction procedures global extremities distributes products network distributors sales representatives sell orthopedic products hospitals healthcare providers globally corporate activities comprised operating expenses activities company necessarily identifiable within two reporting segments table presents net sales major product category reporting segment following table presents ebitda primary metric used managing company reporting segment following table presents depreciation amortization reporting segment geographical information following data includes net sales geographic destination table presents net sales geographic destination reporting segment consolidated company following data includes property plant equipment geographic area 16 acquisitionrelated amortization remeasurement acquisitionrelated amortization remeasurement consists amortization related intangible assets acquired business combinations asset acquisitions remeasurement related contingent consideration arrangement components acquisitionrelated amortization remeasurement twelve months ended december 31 2019 2018 2017 respectively follows 17 sharebased compensation december 31 2019 2018 company stock option award plans stock purchase plan 2012 long term incentive plan board directors adopted amended restated 2012 longterm incentive plan “2012 ltip” april 13 2012 subsequently provided shareholder ratification 2012 ltip provides grant options purchase shares company’s common stock awards including restricted stock unrestricted stock units stock appreciation rights performancebased awards equitybased awards company’s employees company’s subsidiaries affiliates eligible may receive awards 2012 ltip addition company’s nonemployee directors consultants advisors perform services company subsidiaries affiliates may receive awards 2012 ltip incentive share options however available company’s employees awards granted 2012 ltip expire later ten years date grant december 31 2019 company reserves total 4750000 shares common stock issuance pursuant 2012 ltip subject certain adjustments set forth 2012 ltip december 31 2019 1067947 options outstanding 2012 ltip 714180 exercisable addition 119217 shares unvested restricted stock outstanding 560844 restricted stock units outstanding contain marketbased vesting conditions 2012 ltip december 31 2019 2004 long term incentive plan 2004 long term incentive plan “2004 ltip” reserved 31 million shares issuance subject certain adjustments set forth 2004 ltip december 31 2019 25500 options outstanding 2004 ltip exercisable inducement plans inducement plan spinal kinetics employees “spinal kinetics inducement plan” reserved 51705 shares issuance employees spinal kinetics inducement continue employment company december 31 2019 7156 options outstanding spinal kinetics inducement plan exercisable 5608 shares unvested restricted stock outstanding conjunction options medical acquisition inducement grant 25478 restricted stock units fair value 14 million awarded options medical founder award vests onethird annual increments beginning first anniversary grant date contigent upon continued employment december 31 2019 25478 shares unvested restricted stock outstanding relating inducement august 2019 company appointed new president global spine subsequently promoted president chief executive officer inducement accept employment company individual awarded grant stock options acquire 50711 shares common stock award 14743 restricted stock units awards vest onefourth annual increments beginning first anniversary grant date december 31 2019 50711 options outstanding inducement none exercisable 14743 shares unvested restricted stock outstanding stock purchase plan second amended restated stock purchase plan amended “stock purchase plan” provides issuance shares company’s common stock eligible employees directors company subsidiaries elect participate plan acquire shares common stock payroll deductions including executive officers purchase period eligible employees may designate 1 25 compensation deducted purchase common stock plan percentage order comply regulations applicable employees domiciled resident member state european union eligible directors designated percentage applied amount equal director compensation paid cash current plan period purchase price shares plan equal 85 fair market value first day plan period lower last day plan period due compensatory nature plan company records related sharebased compensation consolidated statement operations compensation expense estimated using blackscholes valuation model value recognized expense plan period december 31 2019 aggregate number shares reserved issuance stock purchase plan 2350000 december 31 2019 1827147 shares issued sharebased compensation expense sharebased compensation expense recorded line consolidated statements operations employee’s cash compensation following tables present detail sharebased compensation line item consolidated statements income well award type years ended december 31 2019 2018 2017 income tax benefit related expense 35 million 32 million 34 million years ended december 31 2019 2018 2017 respectively stock options fair value timebased stock options determined using blackscholes valuation model value recognized expense service period typically four years net actual forfeitures fair value marketbased stock options determined date grant using monte carlo valuation methodology value recognized expense requisite service period adjusted forfeitures occur monte carlo methodology incorporates valuation possibility market condition may satisfied summary company’s assumptions used determining fair value stock options granted year shown following table expected term options granted estimated based number factors including vesting expiration terms award historical employee exercise behavior options currently outstanding options exercised expired employee’s average length service expected volatility based historical volatility company’s common stock riskfree interest rate determined based upon constant us treasury security rate contractual life approximates expected term option summaries status company’s stock option plans december 31 2019 2018 changes year ended december 31 2019 presented december 31 2019 unamortized compensation expense relating options granted expected recognized 37 million amount expected recognized december 2023 weighted average period approximately 17 years total intrinsic value options exercised 14 million 32 million 22 million years ended december 31 2019 2018 2017 respectively year ended december 31 2019 received 28 million cash stock option exercises tax benefit realized tax deductions exercises 03 millionthe aggregate intrinsic value options outstanding options exercisable december 31 2019 calculated difference exercise price underlying options market price company’s common stock options exercise prices lower 4618 closing price company’s stock december 31 2019 aggregate intrinsic value options outstanding 73 million 136 million 187 million years ended december 31 2019 2018 2017 respectively aggregate intrinsic value options exercisable 67 million 110 million 124 million years ended december 31 2019 2018 2017 respectively timebased restricted stock awards stock units year ended december 31 2019 company granted employees nonemployee directors 319189 shares time based restricted stock awards stock units vest various dates december 2023 compensation expense represents fair value stock measured market price date grant recognized straightline basis vesting period typically four years net actual forfeitures since 2017 annual grant nonemployee directors made form oneyear vesting restricted stock units deferred delivery “dsus” whereby shares settled director ceases service director december 31 2019 47077 dsus outstanding vested settled aggregate fair value timebased restricted stock awards stock units vested years ended december 31 2019 2018 2017 95 million 80 million 73 million respectively unamortized compensation expense related timebased restricted stock awards stock units amounted 153 million december 31 2019 expected recognized weighted average period approximately 25 years aggregate intrinsic value timebased restricted stock awards stock units outstanding 216 million 188 million 178 million years ended december 31 2019 2018 2017 respectively performancebased restricted stock awards stock units company’s performancebased restricted stock awards stock units contain performancebased vesting conditions fair value performancebased restricted stock awards stock units calculated based upon closing stock price date grant value recognized expense derived requisite service period beginning period deemed probable vest net actual forfeitures vesting probability assessed based upon forecasted earnings financial results company grant performancebased restricted stock awards stock units employees years ended december 31 2019 2018 2017 year ended december 31 2015 company granted employees 110660 shares performancebased restricted stock awards vested based upon achievement certain earnings return invested capital targets compensation expense recorded awards 2019 performance targets obtained prior years approximately 04 million 05 million compensation expense recorded years ended december 31 2018 2017 respectively associated performancebased restricted stock awards fair value performancebased restricted stock awards vested years ended december 31 2019 2018 2017 32 million 00 million 49 million respectively unamortized compensation expense related performancebased restricted stock awards remains december 31 2019 aggregate intrinsic value performancebased restricted stock awards outstanding 00 million 29 million 30 million years ended december 31 2019 2018 2017 respectively year ended december 31 2015 company also granted 55330 shares performancebased restricted stock units employees vested based upon achievement certain earnings return invested capital targets year ended december 31 2018 company recognized compensation expense 00 million 16 million 00 million associated 2015 performancebased restricted stock units years ended december 31 2019 2018 2017 respectively fair value performancebased restricted stock units vested years ended december 31 2019 2018 2017 27 million 00 million 00 million respectively unamortized compensation expense remains december 31 2019 related 2015 performancebased restricted stock units aggregate intrinsic value performancebased restricted stock units outstanding 00 million 25 million 30 million years ended december 31 2019 2018 2017 respectively marketbased restricted stock units company’s marketbased restricted stock units contain marketbased vesting conditions fair value marketbased restricted stock units determined date grant using monte carlo valuation methodology discounts postvesting restrictions estimated using chaffe model monte carlo methodology incorporates valuation possibility market condition may satisfied value recognized straightline basis vesting period net actual forfeitures awards market conditions achieved settled shares common stock one share common stock issued per restricted stock unit targets achieved 100 level awards may achieved minimum level 50 maximum 200 market conditions awards based company’s stock achieving certain total shareholder return targets relative specified index companies 3year performance period beginning respective grant date company recorded 47 million 53 million 29 million compensation expense years ended december 31 2019 2018 2017 respectively related marketbased restricted stock units unamortized compensation expense marketbased restricted stock units amounted 38 million december 31 2019 expected recognized weighted average period approximately 12 years aggregate intrinsic value marketbased restricted stock units outstanding 119 million 142 million 102 million years ended december 31 2019 2018 2017 respectively summary status timebased performancebased marketbased restricted stock awards stock units december 31 2019 2018 changes year ended december 31 2019 presented retirement company’s president chief executive officer february 25 2019 company entered transition retirement agreement “retirement agreement” company’s president chief executive officer brad mason retirement agreement parties agreed mr mason would continue serve role successor appointed board commenced employment occurred october 31 2019 “retirement date” parties agreed mr mason would provide ongoing transition assistance company pursuant consulting arrangement 12 months following retirement date mr mason paid 40000 per month transition consulting services part retirement agreement certain timebased stock options restricted stock awards modified vest retirement date addition stock options modified extend posttermination exercise period 18 months standard qualified retirement four years dependent upon remaining contractual terms options fiscal year 2019 lieu mr mason’s normal annual incentive awards 2012 ltip recognition ongoing transition assistance agreed provide mr mason granted award rsus april 1 2019 grant date fair market value 20 million vest first anniversary date grant subject continuing provide transition consulting services retirement date full fair value award recorded expense 2019 company recognized approximately 65 million sharebased compensation expense year ended december 31 2019 related retirement agreement charged general administrative expense consolidated statements operations comprehensive income loss 18 defined contribution plans deferred compensation defined contribution plans orthofix inc sponsors defined contribution plan “401k plan” covering substantially full time us employees 401k plan allows participants contribute 80 pretax compensation subject certain limitations company matching 100 first 2 employee’s base compensation 50 next 4 employee’s base compensation contributed 401k plan years ended december 31 2019 2018 2017 expenses incurred relating 401k plan including matching contributions approximately 27 million 23 million 20 million respectively company also operates defined contribution plans international employees meeting minimum service requirements company’s expenses contributions years ended december 31 2019 2018 2017 10 million 11 million 11 million respectively deferred compensation plans italian law italian subsidiary accrues behalf employees deferred compensation paid termination employment accrual deferred compensation based percentage employee’s current annual remuneration plus annual charge deferred compensation also accrued leaving indemnity payable agents case dismissal regulated national contract equal approximately 38 total commissions earned company’s relations italian employees represent 186 total employees december 31 2019 governed provisions national collective labor agreement setting forth mandatory minimum standards labor relations metal mechanic workers industry company party collective bargaining agreement balance longterm liabilities december 31 2019 2018 13 million represents amount would payable employees agents terminated employment date 19 income taxes income loss continuing operations provision income taxes consisted following provision income taxes continuing operations consists following differences income tax provision us federal statutory tax rate company’s effective tax rate years ended december 31 2019 2018 2017 consist following 1 rate reconciliation 2017 based us federal income tax rate rather company’s country domicile rate time company believes given large proportion taxable income earned us presentation meaningful certain items within tables footnote recast previous years conform current year presentation december 22 2017 tax act signed law making significant changes internal revenue code changes include limited us corporate rate decrease 35 21 effective tax years beginning december 31 2017 transition us international taxation worldwide tax system territorial system onetime transition tax mandatory deemed repatriation cumulative foreign earnings december 31 2017 company calculated best estimate impact tax act 2017 income tax provision accordance understanding tax act guidance available date filing result company recorded 83 million additional income tax expense fourth quarter 2017 period legislation enacted provisional amount related remeasurement certain deferred tax assets liabilities based rates expected reverse future 86 million provisional amount related onetime transition tax mandatory deemed repatriation foreign earnings zero company also recorded benefit 03 million related income tax liability recorded 2016 related repatriation earnings subsidiary puerto rico december 22 2017 staff accounting bulletin 118 “sab 118” issued address application us gaap situations registrant necessary information available prepared analyzed including computations reasonable detail complete accounting certain income tax effects tax act accordance sab 118 determined 86 million deferred tax expense recorded connection remeasurement certain deferred tax assets liabilities zero transition tax mandatory deemed repatriation foreign earnings provisional amount reasonable estimate december 31 2017 detailed analysis company’s deferred tax assets liabilities historical foreign earnings well potential correlative adjustments completed 2018 resulted additional benefit 06 million first quarter 2018 minimal adjustments fourth quarter 2018 december 31 2018 company completed accounting tax effects enactment tax act company paid cash relating taxes totaling 81 million 156 million 33 million years ended december 31 2019 2018 2017 respectively company’s deferred tax assets liabilities follows company accounts income taxes using asset liability method deferred tax assets liabilities recognized expected future tax consequences temporary differences financial reporting income tax basis assets liabilities operating losses credit carryforwards deferred tax assets liabilities measured using enacted tax rates effect years items expected realized tax law rate changes recorded period changes enacted company establishes valuation allowance likely certain deferred tax assets realized foreseeable future valuation allowance primarily attributable net operating loss carryforwards temporary differences certain foreign jurisdictions net decrease valuation allowance 103 million year principally relates decrease valuation allowances net operating loss carryforwards foreign jurisdictions due expiration statutory rate changes regarding realizability net deferred tax assets reasonably possible valuation allowance decrease 2020 related expiration foreign net operating losses company federal net operating loss carryforwards 255 million research development credits 16 million result acquisition spinal kinetics carryforwards subject limitation provisions section 382 begin expire 2026 company state net operating loss carryforwards approximately 355 million 220 million relates spinal kinetics begins expire 2020 additionally company net operating loss carryforwards various foreign jurisdictions approximately 1453 million begin expire 2020 majority relate company’s netherlands brazil operations prior domestication entity incorporated curaçao “foreign earnings” referred us nonus earnings result domestication income sourced outside us considered unremitted foreign earnings unremitted foreign earnings decreased 504 million december 31 2018 492 million december 31 2019 decrease due impact currency translation result 2017 tax act current year earnings deemed repatriated foreign subsidiary earnings subject us taxation component global intangible low taxed income gilti tax act included component current tax expense company’s investment foreign subsidiaries continues indefinite nature however company may periodically repatriate portion earnings extent incur significant additional tax liability company records benefit uncertain tax positions weight available evidence indicates likely based evaluation technical merits tax position sustained audit tax benefit measured largest amount 50 likely realized upon settlement company reevaluates income tax positions periodically consider changes facts circumstances changes interpretations tax law effectively settled issues audit new audit activity company includes interest applicable penalties related income tax issues part income tax expense consolidated financial statements company’s unrecognized tax benefit 169 million 214 million years ended december 31 2019 2018 respectively company recorded net interest penalties expense benefit unrecognized tax benefits 01 million 14 million 23 million years ended december 31 2019 2018 2017 respectively approximately 66 million 67 million accrued payment interest penalties december 31 2019 2018 respectively entire amount unrecognized tax benefits including interest would favorably impact company’s effective tax rate recognized company believes reasonably possible next 12 months amount unrecognized tax benefits exclusive interest penalties related resolution federal state foreign matters could reduced 130 million 135 million audits close statutes expire reconciliation gross unrecognized tax benefits excluding interest penalties years ended december 31 2019 2018 2017 follows company subsidiaries file income tax returns us federal jurisdiction certain state foreign jurisdictions including italy united kingdom statute limitations respect federal state tax filings closed years prior 2014 statute limitations respect major foreign tax filing jurisdictions closed years prior 2015 third quarter 2015 internal revenue service commenced examination company’s federal income tax return 2012 company concluded examination first quarter 2018 material impact financial statements october 2016 company notified examination federal income tax return 2013 december 2017 examination 2013 concluded change november 2017 company notified examination federal income tax return 2015 february 2019 company reached agreement concluded examination result company recognized benefit approximately 18 million 2019 company cannot reasonably determine state local foreign examinations material impact financial statements cannot predict timing regarding resolution tax examinations 20 earnings per share eps company uses twoclass method computing basic eps due existence nonvested restricted stock awards nonforfeitable rights dividends dividend equivalents referred participating securities basic eps computed using weighted average number common shares outstanding respective years diluted eps computed using weighted average number common equivalent shares outstanding respective years using dilutive either treasury stock method twoclass method difference basic diluted shares largely results common equivalent shares represents dilutive effect assumed exercise certain outstanding share options assumed vesting restricted stock granted employees directors satisfaction certain necessary conditions contingently issuable shares see note 17 three years ended december 31 2019 2018 2017 significant adjustments made net income purposes calculating basic diluted eps following reconciliation weighted average shares used diluted eps computations 1704708 349930 418859 weighted average outstanding options restricted stock performancebased marketbased equity awards included diluted earnings per share computation years ended december 31 2019 2018 2017 respectively inclusion awards antidilutive performancebased marketbased awards necessary conditions satisfied end respective period 21 quarterly financial data unaudited 1 company reclassified 11 million previously reported expense second quarter 2018 related changes fair value contingent consideration table conform current period presentation 2 company reclassified less 10 thousand previously reported net income loss discontinued operations first second third quarters 2018 continuing operations conform current period presentation 22 subsequent events february 3 2020 company wholly owned subsidiary entered asset purchase agreement “purchase agreement” wittenstein se “wittenstein” privatelyheld germanbased company acquire assets associated fitbone intramedullary lengthening system limb lengthening femur tibia bones terms purchase agreement consideration acquired assets company pay 18 million cash consideration enter manufacturing supply contract wittenstein acquisition anticipated close end first quarter 2020 subject customary closing conditionsitem 15 exhibits financial statement schedules documents filed part report form 10k following documents filed part report form 10k 1 financial statements see “index consolidated financial statements” page form 10k 2 financial statement schedules see “index consolidated financial statements” page form 10k 3 exhibits filed herewith certain confidential portions exhibit omitted means redacting portion text exhibit filed separately secretary commission without redactions pursuant application requesting confidential treatment securities exchange act 1934 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated orthofix international nv index consolidated financial statements schedules provision made applicable accounting regulation securities exchange commission required related instructions inapplicable therefore omitted orthofix international nv statement management’s responsibility financial statements shareholders orthofix international nv management responsible preparation consolidated financial statements related information presented report consolidated financial statements include amounts based management’s estimates judgments prepared conformity accounting principles generally accepted united states financial information report shareholders consistent consolidated financial statements company maintains accounting internal control systems provide reasonable assurance reasonable cost assets safeguarded loss unauthorized use disposition financial records reliable preparing financial statements maintaining accountability assets systems augmented written policies organizational structure providing division responsibilities careful selection training qualified personnel company engaged ernst young llp independent registered public accountants audit render opinion consolidated financial statements accordance auditing standards public company accounting oversight board united states standards include assessment systems internal controls test transactions extent considered necessary support opinion board directors audit committee consisting solely outside directors company meets periodically management independent registered public accountants ensure meeting responsibilities discuss matters concerning internal controls financial reporting ernst young llp full free access audit committee james f gero chairman board directors alan w milinazzo president chief executive officer director brian mccollum chief financial officer senior vice president finance orthofix international nv management’s report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting term defined rule 13a15f exchange act company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements internal control financial reporting designed provide reasonable assurance company’s management board directors regarding preparation reliable financial statements external purposes accordance generally accepted accounting principles internal control financial reporting includes selfmonitoring mechanisms actions taken correct deficiencies identified inherent limitations internal control matter well designed misstatements may occur prevented detected accordingly even effective internal control financial reporting provide reasonable assurance respect financial statement preparation evaluation effectiveness internal control financial reporting made specific date continued effectiveness future periods subject risks controls may become inadequate changes conditions degree compliance policies procedures may decline management conducted evaluation effectiveness company’s system internal control financial reporting december 31 2010 based framework set forth “internal controlintegrated framework” issued committee sponsoring organizations treadway commission based evaluation management concluded december 31 2010 company’s internal control financial reporting effective based specified criteria company’s internal control financial reporting audited company’s independent registered public accounting firm ernst young llp stated reports pages herein james f gero chairman board directors alan w milinazzo president chief executive officer director brian mccollum chief financial officer senior vice president finance report independent registered public accounting firm board directors shareholders orthofix international nv audited accompanying consolidated balance sheets orthofix international nv december 31 2010 2009 related consolidated statements operations changes shareholders’ equity comprehensive income loss cash flows three years period ended december 31 2010 audits also included financial statement schedules listed index item 15a financial statements schedules responsibility company’s management responsibility express opinion financial statements schedules based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position orthofix international nv december 31 2010 2009 consolidated results operations cash flows three years period ended december 31 2010 conformity us generally accepted accounting principles also opinion related financial statement schedules considered relation basic consolidated financial statements taken whole present fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states orthofix international nv’s internal control financial reporting december 31 2010 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated march 3 2011 expressed unqualified opinion thereon ernst young llp boston massachusetts march 3 2011 report independent registered public accounting firm board directors shareholders orthofix international nv audited orthofix international nv’s internal control financial reporting december 31 2010 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria orthofix international nv’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion orthofix international nv maintained material respects effective internal control financial reporting december 31 2010 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets orthofix international nv december 31 2010 2009 related consolidated statements operations changes shareholders’ equity comprehensive income loss cash flows three years period ended december 31 2010 orthofix international nv report dated march 3 2011 expressed unqualified opinion thereon ernst young llp boston massachusetts march 3 2011 orthofix international nv consolidated balance sheets december 31 2010 2009 accompanying notes form integral part consolidated financial statements orthofix international nv consolidated statements operations years ended december 31 2010 2009 2008 accompanying notes form integral part consolidated financial statements orthofix international nv consolidated statements changes shareholders’ equity comprehensive income loss years ended december 31 2010 2009 2008 accompanying notes form integral part consolidated financial statements orthofix international nv consolidated statements cash flows years ended december 31 2010 2009 2008 accompanying notes form integral part consolidated financial statements orthofix international nv notes consolidated financial statements description business orthofix international nv “company” multinational corporation principally involved design development manufacture marketing distribution medical equipment company comprised four reportable segments domestic spinal implants biologics breg international see note 12 description segment 1 summary significant accounting policies basis consolidation consolidated financial statements include financial statements company whollyowned majorityowned subsidiaries entities company control noncontrolling interest component entity immaterial intercompany accounts transactions profits eliminated consolidated financial statements company’s investments significant influence control accounted cost method accounting b reclassifications certain prior year amounts reclassified conform current year presentation reclassifications effect previously reported net earnings shareholders’ equity company reclassified restricted cash operating activities financing activities years ended december 31 2010 2009 2008 company deemed appropriate disclosure since cash restricted use parties included credit facilities see note 8 net cash provided operating activities previously 500 million 268 million years ended december 31 2009 2008 respectively previously reported c use estimates preparation financial statements preparation financial statements conformity accounting principles generally accepted us requires management make estimates assumptions affect amounts reported financial statements accompanying notes ongoing basis company evaluates estimates including related contractual allowances doubtful accounts inventories taxes shared based compensation potential goodwill intangible asset impairment actual results could differ estimates foreign currency translation foreign currency denominated balance sheet accounts except shareholders’ equity translated year end exchange rates revenue expense items translated weighted average rates exchange prevailing year gains losses resulting translation foreign currency recorded accumulated comprehensive income component shareholders’ equity transactional foreign currency gains losses including generated intercompany operations included expense net 01 million 05 million 27 million years ended december 31 2010 2009 2008 respectively e reporting currency reporting currency united states “us” dollar orthofix international nv notes consolidated financial statements cont f cash equivalents company considers highly liquid investments original maturity three months less date purchase cash equivalents g restricted cash restricted cash consists cash held certain subsidiaries distribution transfer orthofix international nv “parent” subsidiaries parties credit facility described note 8 restricted senior secured credit facility restricts parent subsidiaries parties facilities access cash held orthofix holdings inc subsidiaries credit party subsidiaries access cash operational debt repayment purposes h market risk ordinary course business company exposed impact changes interest rates foreign currency fluctuations company’s objective limit impact movements earnings cash flows order achieve objective company seeks balance nondollar denominated income expenditures 2008 company executed interest rate swap agreement manage cash flow exposure generated interest rate fluctuations june 29 2010 company settled interest rate swap 2010 2009 2008 company made use foreign currency swap agreement entered december 2006 manage cash flow exposure generated foreign currency fluctuations foreign currency swap agreement terminated september 30 2010 replaced new foreign currency swap agreement see note 9 additional information company generally require collateral trade receivables inventories valued lower cost estimated net realizable value provision excess obsolete items cost determined weightedaverage basis approximates fifo method valuation workinprocess finished products field inventory consignment inventory includes cost materials labor production field inventory represents immediately saleable finished products inventory possession company’s direct sales representatives consignment inventory represents immediately saleable finished products located third party customers distributors hospitals j longlived assets including intangibles goodwill property plant equipment stated cost less accumulated depreciation costs include expenditures necessary place asset service including freight sales use taxes plant equipment also includes instrumentation held customers used company’s products depreciation computed straightline basis useful lives assets except land depreciated depreciation leasehold improvements computed shorter lease term useful life asset useful lives follows orthofix international nv notes consolidated financial statements cont expenditures maintenance repairs minor renewals improvements extend lives respective assets expensed expenditures renewals improvements capitalized assets related accumulated depreciation adjusted property retirements disposals resulting gain loss included operations fully depreciated assets remain accounts retired service patents intangible assets recorded cost acquired part business combination estimated fair value assets primarily include patents technology agreements “developed technologies” trademarks distribution networks identifiable intangible assets considered definite lived amortized useful lives using method amortization reflects pattern economic benefit intangible assets consumed company’s weighted average amortization period developed technologies distribution networks 11 10 years respectively intangible longlived assets definite lives orthofix’s developed technologies distribution network assets tested impairment adverse conditions exist change circumstances occurred would indicate impairment change remaining useful life impairment indicator exists company tests intangible asset recoverability purposes recoverability test company groups intangible assets liabilities lowest level identifiable cash flows intangible asset generate cash flows independent assets liabilities carrying value intangible asset group exceeds undiscounted cash flows expected result use eventual disposition intangible asset group company write carrying value fair value period identified company generally calculates fair value intangible assets present value estimated future cash flows determining estimated future cash flows associated intangible assets company uses estimates assumptions future revenue contributions cost structures remaining useful lives asset group use alternative assumptions including estimated cash flows discount rates alternative estimated remaining useful lives could result different calculations impairment 2008 company recognized 570 million 1057 million impairment related blackstone’s trademark spinal implants biologics distribution network technologies respectively impairments recorded 2010 2009 company tests goodwill certain indefinite lived trademarks least annually impairment company tests frequently indicators present changes circumstances suggest impairment may exist indicators include among others declines sales earnings cash flows development material adverse change business climate company assesses goodwill impairment reporting unit level defined operating segment one level operating segment referred component consistent prior years company identified four reporting units consistent company’s reporting segments domestic spinal implants biologics breg international see note 12 additional information performing annual impairment test performed fourth quarter frequently impairment indicators exist company utilizes twostep approach prescribed first step requires comparison reporting unit’s carrying value fair value respective unit see additional discussions carrying value exceeds fair value second step performed measure amount impairment loss 2008 company recorded goodwill impairment 1269 million impairments recorded 2010 2009 orthofix international nv notes consolidated financial statements cont carrying value order calculate respective carrying values company records goodwill based purchase price allocation performed time acquisition corporate assets liabilities directly relate reporting unit’s operations ascribed directly reporting unit corporate assets liabilities directly related specific reporting unit reporting unit benefits allocated based respective contribution measure reporting unit fair value fair value reporting unit estimated entirely predominantly using income based approach income approach utilizes discounted cash flow “dcf” estimates aftertax cash flows debt free basis discounted present value using riskadjusted discount rate company believes dcf generally provides meaningful fair value appropriately measures company’s income producing assets company may consider using cost approach generally believes appropriate given inability replicate value specific technologybased assets within reporting units circumstances dcf indicator fair value sufficiently conclusive support carrying value reporting unit measures provide appropriate indicator company may consider market approach determination reporting unit’s fair value performing dcf calculation company required make assumptions amount timing future expected cash flows terminal value growth rates appropriate discount rates connection estimates company considers following • determination expected cash flows based company’s strategic plans longrange planning forecasts extent reasonably possible reflect anticipated changes economy industry revenue growth rates represent estimates based current forecasted market conditions profit margin assumptions projected reporting unit based historical margins current cost structure anticipated net cost reductions • terminal value growth rate used calculate value cash flows beyond last projected period dcf rate reflects company’s estimates stable perpetual growth reporting unit • discount rates based reporting unit’s riskadjusted weighted average cost capital using assumptions consistent publicly traded guideline companies operating within medical device industry well company specific risk factors reporting unit k investments company total investments held cost 03 million december 31 2010 2009 represents minority interest ownership biowave corporation pain therapy company 2010 company assessed cost note impairment carrying value company held investment oped ag sold cost 2009 net proceeds 17 million company also investment orthorx reduced zero 2004 l derivative instruments company manages exposure fluctuating cash flows resulting changes interest rates foreign exchange within consolidated financial statements according hedging policy orthofix international nv notes consolidated financial statements cont company may engage nonleveraged transactions involving various financial derivative instruments manage exposed positions policy requires company formally document relationship hedging instrument hedged item well riskmanagement objective strategy undertaking hedge transaction instruments designated cash flow hedge company formally assesses hedge’s inception ongoing basis whether derivative used hedging transaction effective offsetting changes cash flows hedged item whether derivative may expected remain effective future periods determined derivative ceased effective hedge company discontinue related hedge accounting prospectively determination would made 1 derivative longer effective offsetting changes cash flows hedged item 2 derivative expires sold terminated exercised 3 management determines designating derivative hedging instrument longer appropriate ineffective portions changes fair value cash flow hedges recognized earnings company records derivatives either assets liabilities balance sheet respective fair values cash flow hedge effective portion derivative’s change fair value ie gains losses initially reported component comprehensive income net related taxes subsequently reclassified net earnings hedged exposure longer effective company utilizes cross currency swap manage foreign currency exposure related portion company’s intercompany receivable us dollar functional currency subsidiary denominated euro cross currency swap accounted cash flow hedge accordance asc topic 815 see note 9 description types derivative instruments company utilizes accumulated comprehensive income accumulated comprehensive income comprised foreign currency translation adjustments effective portion gain loss company’s crosscurrency swaps designated accounted cash flow hedge see note 9 components changes accumulated comprehensive income follows 1 cash generally remains permanently invested non us dollar denominated foreign subsidiaries deferred taxes recognized related foreign currency translation adjustment n revenue recognition accounts receivable revenue generally recognized income period title passes products delivered revenues exclude value added local taxes intercompany sales trade discounts shipping handling costs included cost sales royalty revenues recognized royalty earned orthofix international nv notes consolidated financial statements cont bone growth stimulation certain bracing products prescribed physician company recognizes revenue product placed implanted accepted patient domestic spinal implant human cellular tissue based products “hctp products” revenues recognized product utilized confirming purchase order received hospital sales commercial customers including hospitals distributors revenues recognized time shipment unless contractual agreements specify title passes delivery revenues inventory delivered consignment recognized product used consignee 2008 company entered agreement musculoskeletal transplant foundation “mtf” develop commercialize trinity® evolution™ stem cellbased bone growth biologic matrix development process completed 2009 company mtf operate terms separate commercialization agreement terms 10year agreement mtf sources tissue processes create bone growth matrix packages delivers customer accordance orders received company exclusive global marketing rights trinity® evolution™ receives marketing fee mtf based total sales marketing fee recorded net basis within net sales company derives significant amount revenues us thirdparty payors including commercial insurance carriers health maintenance organizations preferred provider organizations governmental payors medicare amounts paid thirdparty payors generally based fixed allowable reimbursement rates revenues recorded expected preauthorized reimbursement rates net contractual allowances adjustments certain billings subject review thirdparty payors may subject adjustment process estimating ultimate collection accounts receivable involves significant assumptions judgments historical collection payor reimbursement experience integral part estimation process related reserves doubtful accounts establishment contractual allowances accounts receivable analyzed quarterly basis assess adequacy reserves doubtful accounts contractual allowances revisions allowances doubtful accounts estimates recorded adjustment bad debt expense within sales marketing expenses revisions contractual allowances recorded adjustment net sales judgment management adequate allowances provided doubtful accounts contractual allowances estimates periodically tested actual collection experience sale accounts receivable company generally sell receivables certain italian hospitals fourth quarter year related fee expensed throughout year trade accounts receivables sold without recourse removed balance sheet time sale p sharebased compensation company recognizes sharebased compensation accordance asc topic 718 “compensationstock compensation” “asc topic 718” fair value stock options determined using blackscholes valuation model value recognized expense service period net estimated forfeitures expected term options granted estimated based number factors including vesting expiration terms award historical employee exercise behavior options currently outstanding options exercised expired expected volatility company’s common stock employee’s average length service riskfree interest rate determined based upon constant us treasury security rate contractual life approximates expected term option orthofix international nv notes consolidated financial statements cont award management estimates expected volatility based historical volatility company’s stock compensation expense recognized equitybased awards net estimated forfeitures estimated based analysis actual option forfeitures q advertising costs company expenses advertising costs incurred advertising expense years ended december 31 2010 2009 2008 06 million 07 million 11 million respectively r research development costs expenditures research development expensed incurred expenditures related collaborative arrangements expensed based terms related agreements years ended december 31 2009 2008 company expensed 79 million 39 million related collaborative agreements mtf intelligent implant systems llc “iis” milestone payments mtf agreement paid based terms iis agreement company may pay additional 27 million certain milestones met income taxes company subject income taxes us foreign jurisdictions uses estimates determining provision income taxes company accounts income taxes using asset liability method accounting reporting income taxes method deferred tax assets liabilities recognized based temporary differences financial reporting income tax basis assets liabilities using statutory rates process requires company project current tax liability estimate deferred tax assets liabilities including net operating loss tax credit carryforwards assessing need valuation allowance company considered recent operating results future taxable income projections prudent feasible tax planning strategies company also recognizes tax benefit uncertain tax position “more likely not” position sustainable based solely technical merits december 31 2010 december 31 2009 company 10 million 08 million respectively inclusive interest penalties unrecognized tax benefits net income loss per common share net income loss per common sharebasic computed using weighted average number common shares outstanding respective years net income loss per common sharediluted computed using weighted average number common equivalent shares outstanding respective years using “treasury stock” method common equivalent shares represent dilutive effect assumed exercise outstanding share options see note 18 differences basic diluted shares result assumed exercise certain outstanding share options u recently issued accounting standards january 21 2010 financial accounting standard board “fasb” issued accounting standards update “asu” 201006 “improving disclosures fair value measurements” “asu 201006” codified within asc topic 820“fair value measurements disclosures” guidance requires new disclosures clarifies existing disclosure requirements fair value measurement asu 201006 orthofix international nv notes consolidated financial statements cont requires reporting entity disclose significant transfers levels 1 2 fair value measurements present separately information purchases sales issuances settlements reconciliation level 3 fair value measurements addition fasb clarified existing fair value disclosures level disaggregation inputs valuation techniques used measure fair value asu 201006 effective interim annual periods beginning december 15 2009 level 1 2 disclosure requirements company adopted first quarter 2010 december 15 2010 level 3 disclosure requirements company adopt first quarter 2011 assets valued level 3 method adoption guidance material effect company’s consolidated financial statements february 24 2010 fasb issued asu 201009 “amendments certain recognition disclosure requirements” update removes requirement sec filer disclose date subsequent events evaluated became effective immediately adoption guidance material impact company’s consolidated financial statements july 21 2010 fasb issued asu 201020 “disclosures credit quality financing receivables allowance credit losses” update requires increased disclosures credit quality financing receivables allowances credit losses including disclosure credit quality indicators past due information modifications finance receivables company adopted amendments require disclosures end reporting period december 31 2010 company adopt amendments require disclosures activity occurs reporting period remainder asu first quarter 2011 adoption material impact company’s consolidated financial statements 2 inventories field inventory represents immediately saleable finished products possession company’s direct sales representatives consignment inventory represents immediately saleable finished products located third party customers distributors hospitals orthofix international nv notes consolidated financial statements cont 3 property plant equipment depreciation expense years ended december 31 2010 2009 2008 168 million 153 million 142 million respectively 4 patents intangible assets 1 connection sale vascular operations see note 20 company disposed patents development technology net carrying value 05 million amortization expense intangible assets estimated approximately 63 million 50 million 21 million 16 million 11 million 23 million periods ending december 31 2011 2012 2013 2014 2015 2016 thereafter respectively orthofix international nv notes consolidated financial statements cont 5 goodwill following table presents changes net carrying value goodwill reportable segment 1 connection sale vascular operations see note 20 company disposed goodwill amounting 70 million 6 bank borrowings line credit consist borrowings euros used fund international operations borrowings facility 38 million 22 million december 31 2010 2009 respectively weighted average interest rate borrowings lines credit december 31 2010 2009 357 515 respectively company unused available line credit 44 million 59 million 58 million 82 million december 31 2010 2009 respectively italian line credit line credit provides company option borrow amounts italy rates determined time borrowing line credit unsecured 7 current liabilities 1 discussed note 9 company terminated interest rate swap 48 million second quarter 2010 8 longterm debt august 30 2010 company’s whollyowned us holding company subsidiary orthofix holdings inc “orthofix holdings” entered credit agreement “new credit agreement” certain domestic direct indirect subsidiaries company “guarantors” jpmorgan chase bank na administrative agent rbs citizens na syndication agent certain lender parties thereto orthofix international nv notes consolidated financial statements cont connection new credit agreement previously existing credit agreement terminated related obligations 2324 million august 31 2010 repaid full using proceeds new credit agreement new credit agreement provides five year 2000 million secured revolving credit facility “revolving credit facility” five year 1000 million secured term loan facility “term loan facility” together revolving credit facility “credit facilities” orthofix holdings ability increase amount credit facilities aggregate amount 500 million upon satisfaction certain conditions increased borrowings may provided either one existing lenders upon orthofix holdings obtaining agreement lenders increase commitments new lenders added credit facilities december 31 2010 company 988 million outstanding term loan facility 1174 million outstanding revolving credit facility borrowings credit facilities bear interest floating rate orthofix holdings’ option either london interbank offered rate “libor” plus applicable margin base rate defined new credit agreement plus applicable margin case subject adjustment based financial ratios applicable margin 325 libor borrowings 225 base rate borrowings depending upon measurement consolidated leverage ratio respect immediately preceding four fiscal quarters december 31 2010 entire term loan facility 988 million libor rate plus margin 300 addition december 31 2010 1000 million revolving credit facility libor rate plus margin 300 remaining 174 million revolving credit facility base rate defined new credit agreement plus margin 200 effective interest rate credit facilities december 31 2010 34 effective interest rate including impact interest rate swap see note 9 previous agreement december 31 2009 88 borrowings revolving credit facility may made future used working capital expenditures general corporate purposes orthofix holdings subsidiaries guarantors guaranteed repayment orthofix holdings’ obligations new credit agreement obligations orthofix holdings guarantors respect credit facilities secured pledge substantially assets orthofix holdings guarantors principal amount term loan facility amortizes rate 5 15 25 30 year 1 2 3 4 5 respectively amortization payments began december 31 2010 end december 31 2015 aggregate maturities longterm debt contractual obligations december 31 2010 follows 201175 million 2012175 million 2013250 million 2014263 million 20151399 million outstanding principal revolving credit facility due december 31 2015 new credit agreement requires orthofix holdings company comply leverage fixed charge coverage ratios contains affirmative negative covenants including limitations additional debt liens investments acquisitions new credit agreement also includes events default customary facilities type upon occurrence event default outstanding loans may accelerated andor lenders’ commitments terminated management believes company compliance december 31 2010 events default certain subsidiaries company restrictions ability pay dividends make intercompany loan advances pursuant company’s credit facilities net assets orthofix holdings subsidiaries restricted distributions parent company domestic subsidiaries company orthofix international nv notes consolidated financial statements cont parties credit agreement access net assets operational purposes amount restricted net assets orthofix holdings subsidiaries december 31 2010 1785 million compared 1431 million december 31 2009 addition new credit agreement restricts company subsidiaries parties credit facilities access cash held orthofix holdings inc subsidiaries credit party subsidiaries access cash operational debt repayment purposes amount restricted cash company december 31 2010 229 million compared 116 million december 31 2009 conjunction obtaining credit facilities company incurred debt issuance costs 43 million amortized using effective interest method life credit facilities capitalized debt issuance costs related previous agreement 06 million august 31 2010 costs included longterm assets expensed result payoff previous agreement december 31 2010 debt issuance costs net accumulated amortization related new credit agreement 39 million 9 derivative instruments tables disclose types derivative instruments company owns classifications fair values instruments within balance sheet amount gain loss recognized comprehensive income loss “oci” net income loss crosscurrency swap 2006 company entered crosscurrency swap agreement wells fargo manage cash flows related foreign currency exposure portion company’s intercompany receivable us dollar functional currency subsidiary denominated euro derivative instrument tenyear fully amortizable agreement initial notional amount 630 million scheduled expire december 30 2016 upon executing company’s new credit agreement see note 8 company terminated crosscurrency swap agreement september 30 2010 also september 30 2010 company entered new crosscurrency swap agreement jpmorgan chase bank royal bank scotland plc “counterparties” “replacement swap agreement” upon termination crosscurrency swap agreement wells fargo september 30 2010 amount representing current fair value terminated crosscurrency swap 450000 “cash orthofix international nv notes consolidated financial statements cont settlement amount” cash settlement amount recorded current liabilities amortized remaining life underlying transaction assuming payments remain probable december 31 2010 value cash settlement amount 04 million terms replacement swap agreement company pays euros based 407 million notional value fixed rate 500 receives us dollars based notional value 552 million fixed rate 4635 expiration date december 30 2016 date upon underlying intercompany debt replacement swap agreement applies matures replacement swap agreement designated cash flow hedge therefore company recognized unrealized gain loss change fair value net tax within comprehensive income interest rate swap june 2008 company entered threeyear fully amortizable interest rate swap agreement “swap” notional amount 1500 million expiration date june 30 2011 fourth quarter 2008 result declining interest rates libor floor company’s former credit facility swap longer deemed highly effective special hedge accounting longer applied fair value adjustments reported current earnings june 29 2010 company settled swap financial institution holder derivative instrument part terms buyout swap company paid 48 million financial institution holder instrument fair value 61 million december 31 2009 transaction resulted 13 million gain 2010 10 fair value measurements company adopted accounting guidance fair value measurements january 1 2008 fair value defined price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date nonfinancial assets liabilities company measured fair value include longlived assets equity method investments impaired currently reported period authoritative guidance also describes three levels inputs may used measure fair value level 1 quoted prices active markets identical assets liabilities level 2 observable inputs quoted prices active markets identical assets liabilities level 3 unobservable inputs little market data available require reporting entity develop assumptions december 31 2010 company’s financial instruments included cash equivalents restricted cash accounts receivable shortterm bank borrowings accounts payable longterm secured debt cross currency derivative contract cash equivalents consist shortterm highly liquid incomeproducing investments original maturities 90 days less including money market funds carrying value restricted cash accounts receivable shortterm bank borrowings accounts payable approximate fair value due shortterm maturities instruments company’s credit facilities carry floating rate interest therefore carrying value considered approximate fair value company’s crosscurrency derivative instrument financial instrument recorded fair value recurring basis instrument consists overthecounter contract traded public exchange fair value swap contract determined based inputs readily available public markets derived information available publicly quoted markets therefore company orthofix international nv notes consolidated financial statements cont categorized swap contract level 2 derivative financial instrument company also considers counterparty credit risk credit risk determination estimated fair values company consistently applied valuation techniques periods presented fair value company’s financial assets liabilities recurring basis follows 1 see note 9 “derivative instruments” 11 commitments leases company entered operating leases facilities equipment leases noncancellable typically contain renewal options certain leases contain rent escalation clauses company recognizes expense straightline basis rent expense company’s operating leases years ended december 31 2010 2009 2008 approximately 68 million 62 million 56 million respectively future minimum lease payments operating leases net amounts received subleases december 31 2010 follows 12 business segment information company’s segment information prepared basis company’s management reviews financial information operational decision making purposes company comprised following segments domestic “domestic” consists operations orthofix inc within us domestic designs manufactures distributes stimulation orthopedic biologics products domestic uses direct distributor sales representatives sell spine orthopedic products hospitals doctors healthcare providers us market orthofix international nv notes consolidated financial statements cont spinal implants biologics spinal implants biologics “spinal implants biologics” consists blackstone two subsidiaries blackstone gmbh goldstone gmbh spinal implants biologics specializes design development marketing spinal implant related hctp products spinal implants biologics distributes products network domestic international distributors sales representatives affiliates breg inc “breg” based vista california designs manufactures distributes orthopedic products postoperative reconstruction rehabilitative patient use sells products network domestic international distributors sales representatives affiliates international “international” consists international operations located europe mexico brazil puerto rico well independent distributors located outside us international uses direct distributor sales representatives sell spine orthopedics sports medicine products hospitals doctors healthcare providers group activities group activities comprised operating expenses orthofix international nv us holding company subsidiary orthofix holdings inc tables present information reportable segment 1 includes sales divested vascular business see note 20 disposal march 2010 also includes vascular sales postmarch 2010 related transition supply agreement 1 includes charge related employee termination benefits 36 million associated internal reorganization 2010 13 million domestic 04 million spinal implants biologics 19 million international year ended december 31 2010 see note 19 orthofix international nv notes consolidated financial statements cont 2 includes patent dispute settlement charge 20 million concerning trinity® evolution™ tissue allograft 05 million recorded domestic 15 million recorded spinal implants biologics year ended december 31 2010 3 includes 57 million research development expense collaborative arrangements 36 million restructuring charges year ended december 31 2009 includes impairment charges goodwill certain intangible assets 2895 million year ended december 31 2008 includes increase reserve obsolescence 109 million year ended december 31 2008 due reduced projections revenue distributor terminations new products replacement one product successor product 4 includes net gain sale vascular operations 120 million year ended december 31 2010 see note 20 following table presents identifiable assets segment excluding intercompany balances investments consolidated subsidiaries following table presents depreciation amortization income tax expense benefit income expense segment capital expenditures tangible intangible assets segment follows orthofix international nv notes consolidated financial statements cont geographical information analysis net sales geographic destination analysis property plant equipment geographic area 1 reflects reduction sales sue disposal vascular operations see note 20 march 2010 orthofix international nv notes consolidated financial statements cont beginning january 1 2011 company began managing business three global business units spine orthopedics sports medicine 13 income taxes income loss provision benefit income taxes consisted provision benefit income taxes accompanying consolidated statements operations consists following orthofix international nv notes consolidated financial statements cont tax effects significant temporary differences comprise deferred tax assets liabilities assets follows valuation allowance december 31 2010 2009 210 million 172 million respectively net increase valuation allowance 38 million year relates current period foreign losses benefitted valuation allowance attributable net operating loss carryforwards certain temporary differences certain foreign jurisdictions benefit dependent upon generation future taxable income location assessing realizability deferred tax assets management considers whether likely portion deferred tax assets realized ultimate realization deferred tax assets dependent upon generation future taxable income periods temporary differences become deductible management considers scheduled reversal deferred tax liabilities projected future taxable income tax planning strategies making assessment based upon level historical taxable income projections future taxable income periods deferred tax assets deductible management believes likely company realize benefits deductible differences net existing valuation allowances december 31 2010 company tax net operating loss carryforwards various taxing jurisdictions approximately 785 million majority losses related company’s netherlands operations expiring various amounts tax years beginning 2011 company provided valuation allowance significant portion net operating loss carryforwards since believe deferred tax asset realized prior expiration orthofix international nv notes consolidated financial statements cont rate reconciliation presented based us federal income tax rate rather parent company’s country domicile tax rate management believes given large proportion taxable income earned united states disclosure meaningful company’s gross unrecognized tax benefit 06 million 04 million years ended december 31 2010 2009 respectively company recognizes potential accrued interest penalties related unrecognized tax benefits within global operations income tax expenses company approximately 04 million 04 million accrued payment interest penalties december 31 2010 2009 respectively entire amount unrecognized tax benefits including interest would favorably impact company’s effective tax rate recognized december 31 2010 company expect amount unrecognized tax benefits change significantly next twelve months reconciliation gross unrecognized tax benefits excluding interest years ended december 31 2010 december 31 2009 follows company files consolidated income tax return us federal jurisdiction numerous consolidated separate income tax returns many state foreign jurisdictions statute limitations respect federal tax authorities closed years prior december 31 2007 statute limitations various state tax filings closed instances years prior december 31 2006 statute limitations respect major foreign tax filing jurisdictions closed years prior december 31 2006 company’s intention reinvest total amount unremitted foreign earnings residing outside netherland antilles local jurisdiction extent generated available repatriate orthofix international nv notes consolidated financial statements cont earnings taxeffective company provided tax expense 3074 million unremitted earnings foreign subsidiaries practicable determine amounts net additional income tax may payable earnings repatriated 14 related parties 2010 company purchased components related av impulse® system company sold asset unrelated party march 2010see note 20 bought laryngeal mask company terminated distribution agreement june 2010 companies former board member beneficial minority interest addition orthopro inc superior medical equipment independent distributors breg inc owned son one company’s former board members company sells bracing products orthorx entity company minority interest equity ownership accounted cost method following table summaries related party balances transactions years ended december 31 2010 2009 2008 15 contingencies litigation july 23 2007 company’s subsidiary blackstone medical inc “blackstone” received subpoena issued department health human services office inspector general authority federal healthcare antikickback false claims statutes subpoena seeks documents period january 1 2000 july 31 2006 prior blackstone’s acquisition company believes subpoena concerns compensation physician consultants related matters september 17 2007 company submitted claim indemnification escrow fund established connection agreement plan merger company new era medical corp blackstone dated august 4 2006 “blackstone merger agreement” losses company resulting matter company’s indemnification rights blackstone merger agreement described company subsequently notified legal counsel former shareholders representative former shareholders blackstone objected indemnification claim intends contest accordance terms blackstone merger agreement january 7 2008 company received federal grand jury subpoena us attorney’s office district massachusetts subpoena seeks documents company period january 1 2000 july 15 2007 company believes subpoena concerns compensation physician consultants related matters believes associated department health human services office inspector general’s investigation matters september 18 2008 company submitted claim indemnification escrow fund established connection blackstone merger agreement losses company resulting matter april 29 2009 counsel company received hipaa subpoena issued us department justice subpoena seeks documents company period january 1 2000 july 15 2007 orthofix international nv notes consolidated financial statements cont company believes subpoena concerns compensation physician consultants related matters believes associated department health human services office inspector general’s investigation matters well january 7 2008 federal grand jury subpoena august 26 2010 counsel orthofix inc blackstone executed tolling agreement us attorney’s office district massachusetts “tolling agreement” extends agreement tolling statute limitations applicable criminal civil administrative proceedings government might later initiate include period december 1 2008 including october 31 2010 february 1 2011 parties extended tolling statute limitations including may 31 2011 respect criminal proceedings government might later initiate december 5 2008 company obtained copy qui tam complaint filed susan hutcheson philip brown blackstone company us district court district massachusetts qui tam action civil lawsuit brought individual alleged violation federal statute us department justice right intervene take prosecution lawsuit option november 21 2008 us department justice filed notice nonintervention case complaint served blackstone march 24 2009 counsel plaintiffs filed amended complaint june 4 2009 amended complaint sets forth cause action blackstone false claims act alleged inappropriate payments items value conferred physician consultants orthofix named defendant amended complaint company believes lawsuit related matters described involving department health human services office inspector general us attorney’s office district massachusetts us department justice company intends defend vigorously lawsuit september 18 2008 informed existence lawsuit representatives us department justice prior unsealing complaint unsealed court november 24 2008 company submitted claim indemnification escrow fund established connection blackstone merger agreement losses company resulting matter march 12 2010 united states district court district massachusetts granted blackstone’s motion dismiss march 15 2010 entered judgment favor blackstone april 9 2010 qui tam relators filed notice appeal district court decision united states court appeals first circuit september 27 2007 blackstone received federal grand jury subpoena issued us attorney’s office district nevada “usaonevada subpoena” subpoena seeks documents period january 1999 date issuance subpoena company believes subpoena concerns payments gifts made blackstone certain physicians february 29 2008 blackstone received civil investigative demand “cid” massachusetts attorney general’s office public protection advocacy bureau healthcare division cid seeks documents period march 2004 date issuance cid company believes cid concerns blackstone’s financial relationships certain physicians related matters ohio attorney general’s office health care fraud section issued criminal subpoena dated august 8 2008 orthofix inc “ohio ag subpoena” ohio ag subpoena seeks documents period january 1 2000 date issuance subpoena company believes ohio ag subpoena arises government investigation concerns compensation physician consultants related matters september 18 2008 company submitted claim indemnification escrow fund established connection blackstone merger agreement losses us resulting usaonevada subpoena massachusetts cid ohio ag subpoena order entered january 4 2007 us district court eastern district arkansas unsealed qui tam complaint captioned thomas v chan et al 406cv00465jlh filed dr patrick chan blackstone defendants including another device manufacturer amended complaint thomas action alleges causes action false claims act alleged inappropriate payments items orthofix international nv notes consolidated financial statements cont value conferred dr chan another provider company believes blackstone meritorious defenses claims alleged company intends defend vigorously lawsuit may 10 2010 court granted parties’ joint motion stay proceedings six months stay subsequently extended indefinitely september 17 2007 company submitted claim indemnification escrow fund established connection blackstone merger agreement losses us resulting matter company subsequently notified legal counsel former shareholders representative former shareholders blackstone objected indemnification claim intends contest accordance terms blackstone merger agreement blackstone merger agreement former shareholders blackstone agreed indemnify company breaches representations warranties agreement well certain specified matters postclosing indemnification obligations former blackstone shareholders limited cumulative aggregate amount 666 million closing escrow fund established pursuant terms blackstone merger agreement fund timely submitted indemnification claims initial amount escrow fund 500 million december 31 2010 escrow fund subsequently accrued interest contained 52 million company also entitled seek direct personal recourse certain principal shareholders blackstone monies deposit escrow fund paid released subject pending unresolved indemnification claims period six years closing date merger amount equal 666 million less indemnification claims previously paid addition foregoing claims company submitted claims indemnification escrow fund losses resulted may result certain civil actions filed blackstone well certain claims blackstone alleging rights payments blackstone stock options reflected blackstone’s corporate ledger time acquisition company shares stock options subject claims improperly diluted blackstone date representative former shareholders blackstone objected approximately 15 million claims escrow fund certain claims remaining pending although company believes amounts submitted escrow fund net reserve represent valid claims realizable outcome escrow claims described preceding paragraphs difficult predict consequently estimate amount may ultimately returned company escrow fund certain assurance losses company matters exceed amount escrow fund expenses incurred company relating matters recorded escrow receivable company’s financial statements extent company believes among things collection claims reasonably assured expenditures related matters company believes collection doubtful recognized earnings incurred december 31 2010 december 31 2009 escrow receivable approximately 149 million 129 million respectively related blackstone matters described amounts include among things attorneys’ fees costs related government investigations manifested subpoenas described stock optionrelated claims described costs related qui tam actions described reimbursement claims generally contested representative former shareholders blackstone mitigate risk reimbursement claims collected company records reserve escrow receivable period reimbursement claims recognized effective october 29 2007 blackstone entered settlement agreement patent infringement lawsuit brought certain affiliates medtronic sofamor danek usa inc lawsuit medtronic plaintiffs alleged exclusive licensees certain us patents blackstone’s making selling offering sale using blackstone anterior cervical plate 3 degree anterior cervical plate hallmark orthofix international nv notes consolidated financial statements cont anterior cervical plate reliant cervical plate pillar peek construx mini peek vbr system products within us willfully infringed subject patents blackstone denied infringement asserted patents invalid settlement agreement expected material impact company’s consolidated financial position results operations cash flows july 20 2007 company submitted claim indemnification escrow fund established connection blackstone merger agreement losses company resulting matter company subsequently notified legal counsel former shareholders representative former shareholders blackstone objected indemnification claim intends contest accordance terms blackstone merger agreement april 10 2009 company received hipaa subpoena “hipaa subpoena” issued us attorney’s office district massachusetts “boston usao” subpoena sought documents concerning among things company’s promotion marketing bone growth stimulator devices boston usao issued supplemental subpoenas seeking documents matter dated september 21 2009 december 16 2009 october 13 2010 october 14 2010 october 18 2010 december 3 2010 january 13 2011 respectively subpoenas seek documents period january 1 1995 date respective subpoenas document production response subpoenas ongoing boston usao also issued two supplemental subpoenas requiring testimony matter dated july 23 2009 june 3 2010 office excused performance july 23 2009 subpoena indefinitely boston usao provided company grand jury subpoenas testimony certain current former employees connection ongoing investigation company intends cooperate government’s requests meetings company attorneys regarding matter boston usao informed company investigating possible criminal civil violations federal law related company’s promotion marketing bone growth stimulator devices april 14 2009 company obtained copy qui tam complaint filed jeffrey j bierman us district court district massachusetts orthofix inc company companies allegedly manufactured bone growth stimulation devices including orthologic corp djo incorporated reable therapeutics inc blackstone group lp biomet inc ebi lp ebi holdings inc ebi medical systems inc bioelectron inc lbv acquisition inc smith nephew inc order entered march 24 2009 court unsealed case company orthofix inc served september 8 2009 leave court relator’s second amended complaint filed june 11 2010 complaint alleges various causes action federal false claims act state city false claims acts premised contention defendants improperly promoted sale opposed rental bone growth stimulation devices complaint also includes claims defendants among things allegedly misleading physicians purportedly causing file false claims allegedly violating antikickback act providing free products physicians waiving patients’ insurance copayments providing inducements independent sales agents generate business company believes lawsuit related matter described involving hipaa subpoena december 4 2010 us district court district massachusetts denied company’s motion dismiss company intends defend vigorously lawsuit july 2 2009 company obtained copy qui tam complaint filed marcus laughlin pending us district court district massachusetts company complaint consolidated complaint described immediately preceding paragraph unsealed june 30 2009 company served complaint september 9 2009 leave court relator filed second amended complaint june 23 2010 complaint alleges violations federal false claims act various state local false claims acts fraudulent billing illegal kickbacks conspiracy wrongful termination based allegations company promoted sale rather orthofix international nv notes consolidated financial statements cont rental bone growth stimulation devices systematically overcharged products provided physicians kickbacks form free units referral fees fitting fees complaint also alleges tricare reimbursing company cervical stim® product without approval november 4 2010 us district court district massachusetts granted part denied part company’s motion dismiss company intends defend vigorously lawsuit company’s subsidiary breg inc “breg” engaged manufacturing sale local infusion pumps pain management 1999 2008 product line divested since 2008 numerous product liability cases filed united states alleging local anesthetic dispensed infusion pumps inside joint causes rare arthritic condition called “chondrolysis” company believes meritorious defenses exist claims breg intends vigorously defend cases august 2 2010 breg received hipaa subpoena issued us department justice company believes relates matter subpoena seeks documents company subsidiaries period january 1 2000 date subpoena document production response subpoena ongoing breg currently engaged manufacturing sales motorized cold therapy units used reduce pain swelling beginning 2010 several domestic product liability cases filed mostly california state court alleging use cold therapy causes skin andor nerve injury seeking damages behalf individual plaintiffs allegedly injured units cases early stage conclusion drawn present time regarding potential outcome however company believes meritorious defenses exist claims april 22 2010 company obtained copy complaint filed nuvasive inc “nuvasive” osiris therapeutics inc “osiris” us district court district new jersey orthofix international nv orthofix inc orthofix holdings inc orthofix biologics orthofix spinal implants musculoskeletal transplant foundation complaint alleged company’s trinity® evolution™ allograft product infringed us patent owned osiris licensed nuvasive complaint requested court enjoin sale trinity® evolution™ award damages nuvasive osiris alleged infringement december 15 2010 company entered agreement nuvasive osiris settling claims related matter connection settlement company recorded charge 20 million 13 million net income taxes 2010 company also required make certain royalty payments nuvasive future connection sale trinity® evolution™ allograft product second quarter 2010 internal management review promeca sa de cv “promeca” one mexican subsidiaries company received allegations improper payments allegedly made certain promeca’s local employees mexico employees mexican governmental healthcare entity company engaged hogan lovells us llp deloitte financial advisory services llp conduct internal investigation focusing compliance foreign corrupt practices act “fcpa” voluntarily contacted us securities exchange commission “sec” united states department justice “doj” advise agencies internal investigation underway 2009 promeca accounted approximately one percent company’s consolidated net sales consolidated total assets internal investigation ongoing conclusions drawn time outcome however fcpa related statutes regulations provide potential criminal civil sanctions connection fcpa violations including criminal fines civil penalties disgorgement past profits november 16 2010 company received subpoena sec doj seeking documents related matter company cooperating sec doj connection subpoena orthofix international nv notes consolidated financial statements cont company cannot predict certainty outcome proceedings claims made company subsidiaries described preceding paragraphs assurance ultimate resolution claim material adverse impact consolidated financial position results operations cash flows addition foregoing normal course business company involved various lawsuits time may subject certain contingencies extent losses related contingencies probable estimable company provides appropriate amounts accompanying financial statements constitutional reform kingdom netherlands dissolution netherlands antilles company organized laws netherlands antilles 1987 principal executive offices located island curaçao prior october 10 2010 netherlands antilles together aruba netherlands formed kingdom netherlands curaçao island territory netherlands antilles constitutional reform kingdom netherlands agreed upon among netherlands antilles aruba netherlands antilles dissolved effective october 10 2010 also effective october 10 2010 curaçao became individual constitutional entity within kingdom netherlands government laws result constitutional reform dissolution netherlands antilles netherlands antilles law ceased exist orthofix curaçao legal entity subject curaçao law although curaçao become separate autonomous country laws regulations civil corporate netherlands antilles law applied company october 10 2010 change constitutional reform effect curaçao adopted netherlands antilles civil corporate law company subject effect prior october 10 2010 concentrations credit risk financial instruments potentially subject company concentrations credit risk primarily cash investments accounts receivable cash investments primarily money market funds deposited major financial center banks concentrations credit risk respect accounts receivable limited due large number entities comprising company’s customer base company performs ongoing credit evaluations customers generally require collateral certain customers rely third party healthcare payers private insurance companies governments make payments company behalf accounts receivable countries government funds medical spending primarily located north africa middle east south america asia europe company considered special situations establishing allowances potentially uncollectible accounts receivable countries india egypt turkey company also records reserves bad debts customers based variety factors including length time receivables past due financial condition customer macroeconomic conditions historical experiences company maintains reserves potential credit losses within management’s expectations company sells via direct sales force distributors customers accounted 5 net sales 2010 2009 2008 orthofix international nv notes consolidated financial statements cont 16 pensions deferred compensation orthofix inc sponsors defined contribution plan “orthofix inc 401k plan” covering substantially full time us employees orthofix inc 401k plan allows participants contribute 15 pretax compensation subject certain limitations company matching 100 first 2 employee’s base compensation 50 next 4 employee’s base compensation contributed orthofix inc 401k plan breg also sponsors 401k plan “breg 401k plan” breg 401k plan allows participants contribute 100 compensation subject certain limitations company matching 100 first 1000 deferred blackstone also sponsors 401k plan “blackstone 401k plan” blackstone 401k plan allows participants contribute 75 compensation subject certain limitations company matching 50 first 6 employee’s compensation deferred blackstone 401k plan merged orthofix inc 401k plan beginning 2010 years ended december 31 2010 2009 2008 expenses incurred relating 401k plans including matching contributions approximately 28 million 19 million 18 million respectively company operates defined contribution pension plans international employees described meeting minimum service requirements company’s expenses pension contributions 2010 2009 2008 07 million 10 million 10 million respectively italian law orthofix srl accrues behalf employees deferred compensation paid termination employment year’s provision deferred compensation based percentage employee’s current annual remuneration plus annual charge deferred compensation also accrued leaving indemnity payable agents case dismissal regulated national contract equal approximately 35 total commissions earned company’s expense deferred compensation 2010 2009 2008 approximately 01 million 06 million 05 million respectively deferred compensation payments 02 million 06 million 05 million made 2010 2009 2008 respectively balance december 31 2010 2009 15 million 17 million respectively represents amount would payable employees agents terminated employment date included longterm liabilities orthofix deferred compensation plan “plan” administered board directors company effective january 1 2007 amended restated effective january 1 2009 plan intended allow select group key management highly compensated employees company defer receipt compensation would otherwise payable terms plan intended comply respects provisions code section 409a code section 457a plan employees company subsidiaries eligible participate employee management highly compensated employee named board directors participant plan directors eligible participate plan effective january 1 2009 prohibited participation unless director performs services employee attributable tax purposes us subsidiary company eligible employee may elect enter salary deferral commitment andor director’s fees deferral commitment respect plan year submitting participation agreement plan administrator december 31 calendar year immediately preceding plan year eligible employee may elect enter bonus deferral commitment respect bonus compensation earned plan year submitting participation agreement plan administrator december 31 calendar year immediately preceding plan year deferral commitments stated percentage flat dollar amount allowed plan administrator participant’s participation agreement remain effect immediately succeeding plan year distributions made accordance requirements code section 409a orthofix international nv notes consolidated financial statements cont 17 sharebased compensation plans december 31 2010 company three stock option award plans one stock purchase plan described 2004 long term incentive plan 2004 long term incentive plan “2004 ltip plan” long term incentive plan originally adopted april 2004 ltip plan approved shareholders june 29 2004 20 million shares reserved issuance plan addition shares available future awards june 29 2004 prior plans ii become available future issuance upon expiration forfeiture june 29 2004 awards upon prior plans awards generally vest years service awards fully vesting within three years date grant employees either three five years date grant nonemployee directors awards form stock option restricted stock restricted share unit performance share unit award form determined board directors awards granted 2004 ltip plan expire later 10 years date grant june 20 2007 company’s shareholders approved amendments restatement 2004 ltip plan providing following major changes increase number shares available grant 20 million shares 28 million shares specific allowance grants restricted stock awards provision fixed awards nonemployee directors date first election board subsequent reelection june 19 2008 company’s shareholders approved amendments 2004 ltip plan increase number shares available grant 28 million shares 31 million shares increase annual grant nonemployee directors 3000 shares 5000 shares limit future number shares may awarded plan full value awards 100000 shares december 31 2010 2512177 options outstanding 2004 ltip plan 1909464 exercisable addition 16647 shares restricted stock outstanding none vested staff share option plan staff stock option plan “staff plan” fixed stock option plan adopted april 1992 staff plan company granted options employees estimated fair market value options date grant options generally vest based years service options fully vested within five years date grant options granted staff plan expire ten years date grant options left granted staff plan december 31 2010 110625 options outstanding exercisable staff plan performance accelerated stock option inducement grants december 30 2003 company granted inducement stock option awards two key executives breg conjunction acquisition breg exercise price fixed 3800 per share november 20 2003 company announced entered agreement acquire breg inducement grants included servicebased performancebased vesting provisions inducement grants became 100 vested fourth anniversary grant date subject certain exercisability limitations following vesting december 30 2007 original inducement grants limited executives’ ability exercise specific numbers options years 2008 2012 prior options fully vesting inducement executives extend term employment agreements one year november 2007 company entered amended award agreements two executives amended agreements change vesting date options provided options granted thereunder exercisable fixed period beginning january 1 2009 ending december 31 2010 december 2008 order meet certain requirements code section 409a treasury regulations orthofix international nv notes consolidated financial statements cont promulgated thereunder fulfill company’s desire extend executives’ terms employment company executives entered second amended restated award agreements second amended agreements provided election executives respective periods exercise options bradley mason elected exercise 50000 options following periods april 1 2010 december 31 2010 january 1 2011 december 31 2011 january 1 2012 december 31 2012 william hopson elected exercise 50000 options period january 1 2011 december 31 2011 subject certain termination employment provisions notwithstanding provisions second amended agreements portion options exercised respective exercise periods exercisable thereafter lapse cancelled december 31 2010 200000 options outstanding exercisable inducement grants stock purchase plan orthofix international nv amended restated stock purchase plan “stock purchase plan” provides issuance shares company’s common stock eligible employees directors company subsidiaries elect participate plan acquire shares common stock payroll deductions including executive officers june 20 2008 company’s shareholders approved amendment restatement plan providing following major change allow officers directors orthofix inc participate plan basis employees ii provide company assume adopt plan amended lieu orthofix inc acting sponsor plan iii allow nonemployee directors company participate plan iv increase 500000 shares maximum number shares available issuance plan v provide determination value common stock plan determined either first last day plan year whichever date renders lower value changes generally effective plan year starting january 1 2009 june 2009 company’s shareholders approved amendment stock purchase plan increase number shares available grant 950000 shares 1400000 shares may 2010 company’s shareholders approved additional increase 450000 shares available grant total 1850000 shares purchase period eligible employees may designate 1 25 compensation deducted purchase common stock plan 25 employees working north america south america asia 15 employees working europe eligible directors designated percentage amount equal annual director compensation paid cash current plan year purchase price shares plan equal 85 fair market value first day plan year calendar year running january 1st december 31st lower last day plan year due compensatory nature plan company recorded related share based compensation consolidated statement operations aggregate number shares reserved issuance employee stock purchase plan 1850000 shares december 31 2010 1099371 shares issued stock purchase plan inducement stock option agreement year ended december 31 2009 50000 stock options granted pursuant standalone inducement stock option agreement terms substantially grants made company’s amended restated 2004 long term incentive plan employee’s departure company 2010 16667 50000 stock options granted remain outstanding exercisable december 31 2010 stock option grants vest onethird increments annually stock options granted 2010 orthofix international nv notes consolidated financial statements cont sharebased compensation december 31 2010 unamortized compensation expense relating options granted expected recognized 20 million amount expected recognized june 30 2012 following table shows detail sharebased compensation line item consolidated statements operations years ended december 31 2010 2009 2008 assumptions years grants awarded 1 company grant options 2010 stock option activity summaries status company’s stock option plans december 31 2010 2009 changes year ended december 31 2010 presented orthofix international nv notes consolidated financial statements cont outstanding exercisable price range december 31 2010 weighted average remaining contractual life exercisable options 519 years december 31 2010 total intrinsic value options exercised 30 million 01 million 01 million years ended december 31 2010 2009 2008 respectively aggregate intrinsic value options outstanding options exercisable december 31 2010 calculated difference exercise price underlying options market price company’s common stock shares exercise prices lower 2900 closing price company’s stock december 31 2010 aggregate intrinsic value options outstanding 48 million 109 million 05 million years ended december 31 2010 2009 2008 respectively aggregate intrinsic value options exercisable 21 million 19 million 10000 years ended december 31 2010 2009 2008 respectively restricted stock year ended december 31 2008 company granted employees 83434 shares restricted stock vest various dates december 2011 compensation expense represents fair value stock measured market price date grant less estimated forfeitures recognized straightline basis vesting period unamortized compensation expense related restricted stock amounted 02 million december 31 2010 shares restricted stock granted 2010 2009 orthofix international nv notes consolidated financial statements cont summary status restricted stock december 31 2010 2009 changes year ended december 31 2010 presented 18 earnings per share three years ended december 31 2010 adjustments net income loss purposes calculating basic diluted net income loss available common shareholders following reconciliation weighted average shares used basic diluted net income loss per common share computations year ended december 31 2008 effects potentially dilutive options excluded computation diluted earnings per share company net loss therefore effect would antidilutive options purchase shares common stock exercise prices excess average market price common shares included computation diluted earnings per share 1750213 3220357 outstanding options included diluted earnings per share computation fiscal years ended december 31 2010 2009 respectively inclusion options antidilutive 19 restructuring charges fourth quarter 2008 part company’s strategic plan strengthen business company initiated restructuring plan improve operations reduce costs blackstone plan involved consolidation substantially blackstone’s operations previously conducted wayne nj springfield facility housing spine stimulation us orthopedics business dallas tx area company completed restructuring consolidation second quarter 2010 recognized total restructuring expense 36 million fourth quarter 2010 company initiated reorganization plan streamline operations lower operating costs within spine orthopedics sports medicine global business units employee severance payments extend third quarter 2011 year ended december 31 2010 company recorded restructuring charges 36 million related employee severance costs restructuring costs anticipated approximately 19 million 13 million 04 million orthofix international nv notes consolidated financial statements cont classified company’s international domestic spinal implants biologics segments respectively restructuring costs recorded year ended december 31 2010 consolidated statements operations 16 million selling marketing 20 million general administrative expense following table presents changes restructuring liability included within current liabilities company’s consolidated balance sheets december 31 2010 december 31 2009 charges incurred 2008 20 sale noncore operations march 2008 company sold intellectual property business assets distribution rights pain care® line ambulatory infusion pumps previously designed manufactured distributed sports medicine reporting unit company received cash proceeds 60 million recognized gain sale 16 million march 8 2010 company entered asset purchase agreement “apa” company agreed sell substantially assets vascular operations related av impulse system® related accessories including finished goods inventory tangible assets closing company received payment approximately 277 million amount includes estimated value certain finished goods inventory conveyed closing remains subject postclosing verification pursuant apa company agreed enter certain transition arrangements closing including transition services agreement pursuant among things company would continue provide operational support respect transferred assets certain jurisdictions period five months ii two separate supply agreements pursuant among things company would provide manufacturing logistics services respect certain impads period two years provide products period 90 days second third quarters 2010 company completed transition services agreement one supply agreements supplies products company also agreed enter 5year noncompetition agreement closing respect business assets transferred due continuing contractual involvement agreements transaction presented discontinued operations orthofix international nv notes consolidated financial statements cont following table presents value asset disposition cash purchase price cash proceeds received net certain litigation costs gain sale vascular operations shown consolidated statements operations year ended december 31 2010 1 conjunction sale vascular operations company settled outstanding litigation claim former patent holders 35 million 21 quarterly financial data unaudited us dollars thousands except per share data 1 includes 120 million gain sale divested vascular business see note 20 2 sum per share earnings quarter may equal earnings per share year due change average share calculations accordance prescribed reporting requirements orthofix international nv schedule 1condensed financial information registrant orthofix international nv condensed balance sheets see accompanying notes condensed financial statements s1 orthofix international nv schedule 1condensed financial information registrant orthofix international nv condensed statements operations see accompanying notes condensed financial statements s2 orthofix international nv schedule 1condensed financial information registrant orthofix international nv condensed statement cash flows see accompanying notes condensed financial statements s3 orthofix international nv schedule 1condensed financial information registrant orthofix international nv notes condensed financial statements 1 background basis presentation condensed parent company financial statements prepared accordance rule 1204 schedule 1 regulation sx restricted net assets orthofix holdings inc subsidiaries exceed 25 consolidated net assets orthofix international nv subsidiaries “company” information read conjunction company’s consolidated financial statements included elsewhere filing 2 restricted net assets subsidiaries certain company’s subsidiaries restrictions effective date august 30 2010 ability pay dividends make intercompany loans advances pursuant financing arrangements amount restricted net assets company’s subsidiaries held december 31 2010 2009 approximately 1785 million 1431 million respectively restrictions net assets orthofix holdings inc subsidiaries 3 commitments contingencies longterm obligations discussion company’s commitments contingencies long term obligations senior secured credit facility see note 8 note 11 note 15 company’s consolidated financial statements 4 dividends subsidiaries cash dividends received orthofix international nv consolidated subsidiaries accounted equity method 216 million 132 million 111 million years ended december 31 2010 2009 2008 respectively s4 orthofix international nv schedule 2valuation qualifying accounts years ended december 31 2010 2009 2008 1 year ended december 31 2008 due reduced projections revenue distributor terminations new products replacement one product successor product company changed estimates regarding inventory allowance spinal implants biologics primarily based estimated net realizable value using assumptions future demand market conditions change estimate resulted increase reserve obsolescence approximately 109 million s5item 15 exhibits financial statement schedules documents filed part report form 10k following documents filed part report form 10k 1 financial statements see “index consolidated financial statements” page form 10k 2 financial statement schedules see “index consolidated financial statements” page form 10k 3 exhibits exhibit number description 21 asset purchase agreement dated march 8 2010 tyco healthcare group lp dba covidien ag mallinckrodt brasilltda kendall de mexico sa de cv novamedix limited novamedix distribution limited novamedix services limited promeca sa de cv orthofix brasil orthofixsrl orthofix sa intavent orthofix limited breg mexico de ri de cv implantes sistemas medicos inc filed exhibit company’s current report form 8k filed march 9 2010 incorporated herein reference 22 stock purchase agreement dated april 23 2012 among breg inc orthofix holdings inc breg acquisition corp filed exhibit company’s current report form 8k filed april 24 2012 incorporated herein reference 31 certificate incorporation company filed exhibit company’s annual report form 20f dated june 29 2001 incorporated herein reference 32 articles association company amended filed exhibit company’s annual report form 10k fiscal year ended december 31 2011 incorporated herein reference 101 credit agreement dated august 30 2010 among orthofix holdings inc orthofix international nv certain domestic subsidiaries orthofix international nv several banks financial institutions may time become parties thereunder jpmorgan chase na filed exhibit company’s current report form 8k filed august 31 2010 incorporated herein reference 102 first amendment credit agreement dated may 4 2011 among orthofix holdings inc delaware corporation orthofix international nv “orthofix international” netherlands antilles corporation certain domestic direct indirect subsidiaries orthofix international jpmorgan chase bank na administrative agent certain lender parties thereto filed exhibit company’s current report form 8k filed may 5 2011 incorporated herein reference 103 limited waiver entered august 14 2013 among orthofix international nv orthofix holdings inc certain wholly owned subsidiaries certain lender parties thereto filed exhibit company’s current report form 8k filed august 19 2013 incorporated herein reference 104 limited waiver entered august 14 2014 among orthofix international nv orthofix holdings inc certain wholly owned subsidiaries certain lender parties thereto filed exhibit company’s current report form 8k filed august 19 2014 incorporated herein reference 105 limited waiver entered september 30 2014 among orthofix international nv orthofix holdings inc certain wholly owned subsidiaries certain lender parties thereto filed exhibit company’s current report form 8k filed october 6 2014 incorporated herein reference 106 commitment reduction limited waiver dated january 15 2015 among orthofix international nv orthofix holdings inc certain wholly owned subsidiaries certain lender parties thereto filed exhibit company’s current report form 8k filed january 16 2015 incorporated herein reference 107 limited waiver dated february 26 2015 among orthofix international nv orthofix holdings inc certain wholly owned subsidiaries certain lender parties thereto filed exhibit company’s current report form 8k filed february 27 2015 incorporated herein reference exhibit number description 108† matrix commercialization collaboration agreement entered july 24 2008 orthofix holdings inc musculoskeletal transplant foundation filed exhibit company’s annual report form 10k fiscal year ended december 31 2009 incorporated herein reference 109 amendment 1 matrix commercialization collaboration agreement dated december 15 2010 musculoskeletal transplant foundation inc orthofix holdings inc filed exhibit company’s annual report form 10k fiscal year ended december 31 2010 incorporated herein reference 1010† amendment 2 matrix commercialization collaboration agreement dated january 9 2012 musculoskeletal transplant foundation inc orthofix holdings inc filed exhibit amendment 1 company’s annual report form 10ka year ended december 31 2011 incorporated herein reference 1011† amendment 3 matrix commercialization collaboration agreement entered july 1 2013 effective june 25 2013 musculoskeletal transplant foundation inc orthofix holdings inc filed exhibit company’s current report form 8k filed july 8 2013 incorporated herein reference 1012 amendment 4 matrix commercialization collaboration agreement entered april 1 2014 musculoskeletal transplant foundation inc orthofix holdings inc filed exhibit company’s current report form 8k filed april 7 2014 incorporated herein reference 1013 orthofix international nv amended restated stock purchase plan amended filed exhibit company’s quarterly report form 10q quarter ended march 31 2011 incorporated herein reference 1014 orthofix international nv 2012 longterm incentive plan filed exhibit company’s quarterly report form 10q quarter ended june 30 2012 incorporated herein reference 1015 amended restated orthofix deferred compensation plan filed exhibit company’s current report form 8k filed january 7 2009 incorporated herein reference 1016 form employee nonqualified stock option agreement orthofix international nv 2012 longterm incentive plan july 2014present grants timebased vesting filed exhibit company’s quarterly report form 10q quarter ended september 30 2014 incorporated herein reference 1017 form employee restricted stock grant agreement orthofix international nv 2012 longterm incentive plan july 2014present grants timebased vesting filed exhibit company’s quarterly report form 10q quarter ended september 30 2014 incorporated herein reference 1018 form employee performance vesting restricted stock grant agreement orthofix international nv 2012 longterm incentive plan july 2014 grants filed exhibit company’s quarterly report form 10q quarter ended september 30 2014 incorporated herein reference 1019 form nonemployee director restricted stock grant agreement orthofix international nv 2012 longterm incentive plan july 2014present grants timebased vesting filed exhibit company’s quarterly report form 10q quarter ended september 30 2014 incorporated herein reference 1020 form employee nonqualified stock option agreement orthofix international nv 2012 longterm incentive plan pre2014 grants filed exhibit company’s annual report form 10k fiscal year ended december 31 2012 incorporated herein reference 1021 form nonemployee director nonqualified stock option agreement orthofix international nv 2012 long term incentive plan filed exhibit company’s annual report form 10k fiscal year ended december 31 2012 incorporated herein reference 1022 form employee restricted stock grant agreement orthofix international nv 2012 long term incentive plan pre2014 grants filed exhibit company’s annual report form 10k fiscal year ended december 31 2012 incorporated herein reference 1023 form nonemployee director restricted stock grant agreement orthofix international nv 2012 long term incentive plan pre2014 grants filed exhibit company’s annual report form 10k fiscal year ended december 31 2012 incorporated herein reference 1024 form employee nonqualified stock option agreement orthofix international nv amended restated 2004 longterm incentive plan post2008 grants filed exhibit company’s current report form 8k filed july 7 2009 incorporated herein reference exhibit number description 1025 form nonemployee director nonqualified stock option agreement orthofix international nv amended restated 2004 longterm incentive plan post2008 grants filed exhibit company’s current report form 8k filed july 7 2009 incorporated herein reference 1026 form nonqualified stock option agreement orthofix international nv amended restated 2004 long term incentive plan pre2009 grantsvesting 3 years filed exhibit company’s current report form 8k filed june 20 2008 incorporated herein reference 1027 form nonqualified stock option agreement orthofix international nv amended restated 2004 long term incentive plan pre2009 grants year cliff vesting filed exhibit company’s current report form 8k filed june 20 2008 incorporated herein reference 1028 form restricted stock grant agreement orthofix international nv amended restated 2004 long term incentive plan pre2011 grantsvesting 3 years filed exhibit company’s current report form 8k filed june 20 2008 incorporated herein reference 1029 form restricted stock grant agreement orthofix international nv amended restated 2004 long term incentive plan post2010 grantsvesting 3 years filed exhibit company’s annual report form 10k fiscal year ended december 31 2010 incorporated herein reference 1030 form restricted stock grant agreement orthofix international nv amended restated 2004 long term incentive plan 3 year cliff vesting filed exhibit company’s current report form 8k filed june 20 2008 incorporated herein reference 1031 form indemnity agreement filed exhibit company’s annual report form 10k fiscal year ended december 31 2008 incorporated herein reference 1032 amended restated employment agreement entered effective july 1 2009 orthofix inc michael finegan filed exhibit company’s current report form 8k filed july 7 2009 incorporated herein reference 1033 amendment 1 amended restated employment agreement dated august 4 2009 orthofix inc michael finegan filed exhibit company’s quarterly report form 10q quarter ended september 30 2009 incorporated herein reference 1034 amendment 2 amended restated employment agreement dated october 1 2011 orthofix inc michael finegan filed exhibit company’s current report form 8k filed october 4 2011 incorporated herein reference 1035 amendment 3 amended restated employment agreement dated august 29 2012 orthofix inc michael finegan filed exhibit company’s current report form 8k filed august 31 2012 incorporated herein reference 1036 employment agreement entered december 9 2010 orthofix inc jeffrey schumm filed exhibit company’s annual report form 10k fiscal year ended december 31 2010 incorporated herein reference 1037 employment agreement entered january 7 2013 orthofix inc emily buxton filed exhibit company’s current report form 8k filed january 11 2013 incorporated herein reference 1038 amendment 1 employment agreement dated february 27 2014 orthofix emily buxton filed exhibit company’s current report form 8k filed march 4 2014 incorporated herein reference 1039 form amendment stock option agreements robert vaters michael finegan filed exhibit company’s current report form 8k filed july 7 2009 incorporated herein reference 1040 employment agreement effective march 13 2013 orthofix inc bradley r mason filed exhibit company’s current report form 8k filed march 13 2013 incorporated herein reference 1041 inducement grant nonqualified stock option agreement dated march 13 2013 orthofix international nv bradley r mason filed exhibit company’s current report form 8k filed march 13 2013 incorporated herein reference exhibit number description 1042 restricted stock grant agreement orthofix international nv 2012 longterm incentive plan dated march 13 2013 orthofix international nv bradley r mason filed exhibit company’s current report form 8k filed march 13 2013 incorporated herein reference 1043 letter agreement dated may 9 2013 orthofix inc vicente trelles filed exhibit company’s current report form 8k filed may 14 2013 incorporated herein reference 1044 letter agreement entered june 18 2013 orthofix inc brian mccollum filed exhibit company’s current report form 8k filed june 20 2013 incorporated herein reference 1045 consulting letter agreement dated november 5 2013 orthofix international nv james f gero filed exhibit company’s current report form 8k filed november 6 2013 incorporated herein reference 1046 employment agreement dated november 26 2013 orthofix ag davide bianchi filed exhibit company’s quarterly report form 10q quarter ended march 31 2014 incorporated herein reference 1047 amended restated employment agreement effective november 20 2014 orthofix international nv davide bianchi solely purposes certain specified provisions orthofix ag filed exhibit company’s current report form 8k filed november 28 2014 incorporated herein reference 1048 employment agreement entered effective may 5 2014 orthofix inc mark heggestad filed exhibit company’s current report form 8k filed may 8 2014 incorporated herein reference 1049 inducement grant nonqualified stock option agreement dated may 5 2014 orthofix international nv mark heggestad filed exhibit company’s current report form 8k filed may 8 2014 incorporated herein reference 1050 inducement grant restricted stock agreement dated may 8 2014 orthofix international nv mark heggestad filed exhibit company’s current report form 8k filed may 8 2014 incorporated herein reference 1051 employment agreement entered effective september 4 2014 orthofix inc doug rice filed exhibit company’s current report form 8k filed september 8 2014 incorporated herein reference 1052 amendment 1 employment agreement entered effective october 3 2014 orthofix inc doug rice filed exhibit company’s current report form 8k filed october 6 2014 incorporated herein reference 1053 settlement agreement entered june 6 2012 among united states america acting united states department justice behalf office inspector general department health human services tricare management activity general counsel office personnel management capacity administrator federal employees health benefits program united states department veteran affairs orthofix international nv relator jeffrey j bierman filed exhibit company’s current report form 8ka filed june 7 2012 incorporated herein reference 1054 amended plea agreement entered december 14 2012 among united states attorney district massachusetts department justice orthofix inc filed exhibit company’s current report form 8k filed december 19 2012 incorporated herein reference 1055 corporate integrity agreement entered june 6 2012 office inspector general department health human services orthofix international nv filed exhibit company’s current report form 8ka filed june 7 2012 incorporated herein reference 211 list subsidiaries 231 consent independent registered public accounting firm 311 rule 13a14a15d14a certification chief executive officer 312 rule 13a14a15d14a certification chief financial officer 321 section 1350 certification chief executive officer certification chief financial officer exhibit number description following financial statements orthofix international nv form 10k year ended december 31 2014 filed april 29 2015 formatted xbrl consolidated balance sheets ii consolidated statements operations comprehensive income loss iii consolidated statements changes shareholders’ equity iv consolidated statements cash flows v notes consolidated financial statements filed form 10k † certain confidential portions exhibit omitted means redacting portion text exhibit filed separately secretary commission without redactions pursuant application requesting confidential treatment securities exchange act 1934 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated name title date bradley r mason bradley r mason president chief executive officer director principal executive officer april 29 2015 doug rice doug rice chief financial officer principal financial accounting officer april 29 2015 ronald matricaria ronald matricaria chairman board directors april 29 2015 luke faulstick luke faulstick director april 29 2015 james hinrichs james hinrichs director april 29 2015 guy jordan guy jordan director april 29 2015 anthony martin anthony martin director april 29 2015 maria sainz maria sainz director april 29 2015 davey scoon davey scoon director april 29 2015 orthofix international nv statement management’s responsibility financial statements shareholders orthofix international nv management responsible preparation consolidated financial statements related information presented report consolidated financial statements include amounts based management’s estimates judgments prepared conformity accounting principles generally accepted united states financial information report shareholders consistent consolidated financial statements company maintains accounting internal control systems provide reasonable assurance reasonable cost assets safeguarded loss unauthorized use disposition financial records reliable preparing financial statements maintaining accountability assets systems augmented written policies organizational structure providing division responsibilities careful selection training qualified personnel company engaged ernst young llp independent registered public accountants audit render opinion consolidated financial statements accordance auditing standards public company accounting oversight board united states standards include assessment systems internal controls test transactions extent considered necessary support opinion board directors audit committee consisting solely outside directors company meets periodically management independent registered public accountants ensure meeting responsibilities discuss matters concerning internal controls financial reporting ernst young llp full free access audit committee james f hinrichs chairman audit committee bradley r mason president chief executive officer director doug rice chief financial officer orthofix international nv index consolidated financial statements schedules provision made applicable accounting regulation securities exchange commission required related instructions inapplicable therefore omitted report independent registered public accounting firm board directors shareholders orthofix international nv audited accompanying consolidated balance sheets orthofix international nv “the company” december 31 2014 2013 related consolidated statements operations comprehensive income loss changes shareholders’ equity cash flows three years period ended december 31 2014 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position orthofix international nv december 31 2014 2013 consolidated results operations cash flows three years period ended december 31 2014 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states orthofix international nv’s internal control financial reporting december 31 2014 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 1992 framework report dated april 29 2015 expressed adverse opinion thereon ernst young llp dallas texas april 29 2015 orthofix international nv consolidated balance sheets december 31 2014 2013 accompanying notes form integral part consolidated financial statements orthofix international nv consolidated statements operations comprehensive income loss years ended december 31 2014 2013 2012 accompanying notes form integral part consolidated financial statements orthofix international nv consolidated statements changes shareholders’ equity years ended december 31 2014 2013 2012 accompanying notes form integral part consolidated financial statements orthofix international nv consolidated statements cash flows years ended december 31 2014 2013 2012 accompanying notes form integral part consolidated financial statements orthofix international nv notes consolidated financial statements description business orthofix international nv diversified global medical device company focused improving patients lives providing superior reconstructive regenerative orthopedic spine solutions physicians worldwide headquartered lewisville tx company four strategic business units include biostim biologics extremity fixation spine fixation orthofix products widely distributed via companys sales representatives distributors subsidiaries addition orthofix collaborating research development activities leading clinical organizations musculoskeletal transplant foundation texas scottish rite hospital children 1 summary significant accounting policies basis consolidation consolidated financial statements include financial statements company wholly owned majorityowned subsidiaries entities company control intercompany accounts transactions eliminated consolidation b use estimates preparation financial statements preparation financial statements conformity united states generally accepted accounting principles “us gaap” requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period ongoing basis evaluate estimates including related contractual allowances doubtful accounts inventories potential intangible assets goodwill impairment income taxes sharebased compensation base estimates historical experience future expectations relevant assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources actual results could differ estimates c foreign currency translation financial statements operations outside united states generally maintained local currency foreign currency denominated balance sheet accounts except shareholders’ equity translated us dollars year end exchange rates revenue expense items translated weighted average rates exchange prevailing year gains losses resulting translation foreign currency recorded accumulated comprehensive income component shareholders’ equity transactional foreign currency gains losses including generated intercompany operations included expense net 24 million loss 05 million loss 04 million loss years ended december 31 2014 2013 2012 respectively cash equivalents company considers highly liquid investments original maturity three months less date purchase cash equivalents e restricted cash restricted cash consists cash held certain subsidiaries distribution transfer orthofix international nv “parent” subsidiaries parties credit facility described note 7 restricted senior secured credit facility restricts parent subsidiaries parties facility access cash held orthofix holdings inc subsidiaries credit party subsidiaries access cash operational debt repayment purposes f market risk ordinary course business company exposed impact changes interest rates foreign currency fluctuations company’s objective limit impact movements earnings cash flows order achieve objective company seeks balance nonus dollar denominated income expenditures 2014 2013 2012 company made use foreign currency swap agreement manage cash flow exposure generated foreign currency fluctuations company generally require collateral trade receivables g inventories valued lower cost estimated net realizable value provision excess obsolete impaired items reviewed updated periodic basis management inventory procured produced whether internally contract manufacturing arrangements manufacturing facility italy cost determined weightedaverage basis approximates firstin firstout “fifo” method inventory procured produced whether internally contract manufacturing arrangements manufacturing facility texas standard costs approximates actual cost fifo method used value inventory standard costs reviewed annually management often event circumstances indicate change cost occurred valuation workinprocess finished products field inventory consignment inventory includes cost materials labor production costs field inventory represents immediately saleable finished products inventory possession company’s independent sales representatives consignment inventory represents immediately saleable finished products located third party customers distributors hospitals company adjusts value inventory extent management determines cost cannot recovered due obsolescence factors order make determinations management uses estimates future demand sales prices product determine appropriate inventory reserves make corresponding adjustments carrying value inventories reflect lower cost market value event decrease demand company’s products higher incidence inventory obsolescence company could required increase inventory reserves would increase cost sales decrease gross profit workinprocess finished products field inventory consignment inventory include material labor production overhead costs deferred cost sales result transactions company shipped product performed services revenue recognition criteria yet met revenue recognition criteria met revenue previously recorded deferred associated cost sales recognized h longlived assets including intangibles property plant equipment stated cost less accumulated depreciation costs include expenditures necessary place asset service including freight sales use taxes plant equipment also includes instrumentation held customers generally used facilitate implantation company’s products associated cost accumulated depreciation december 31 2014 620 million 462 million respectively depreciation computed straightline basis useful lives assets depreciation leasehold improvements computed shorter lease term useful life asset useful lives follows expenditures maintenance repairs minor renewals improvements extend lives respective assets expensed incurred expenditures renewals improvements capitalized assets related accumulated depreciation adjusted property retirements disposals resulting gain loss included earnings fully depreciated assets remain accounts retired service patents intangible assets recorded cost acquired part business combination estimated fair value assets primarily include patents technology agreements trademarks identifiable intangible assets considered definite lived amortized useful lives using method amortization reflects pattern economic benefit intangible assets consumed company’s weighted average amortization period developed technologies 11 years intangible longlived assets finite lives patents technology agreements tested impairment whenever events changes circumstances occurred would indicate impairment change remaining useful life impairment indicator exists company tests asset recoverability purposes recoverability test company groups longlived intangible assets liabilities lowest level identifiable cash flows asset generate cash flows independent assets liabilities carrying value asset group exceeds undiscounted cash flows expected result use eventual disposition asset group company write carrying value fair value period identified company generally calculates fair value longlived intangible assets present value estimated future cash flows determining estimated future cash flows associated assets company uses estimates assumptions future revenue contributions cost structures remaining useful lives asset group use alternative assumptions including estimated cash flows discount rates alternative estimated remaining useful lives could result different calculations impairment goodwill company tests goodwill least annually impairment company tests frequently indicators present changes circumstances suggest impairment may exist indicators include among others declines sales earnings cash flows development material adverse change business climate company assesses goodwill impairment reporting unit level defined operating segment one level operating segment referred reporting unit company identified four reporting units consistent company’s reporting segments biostim biologics extremity fixation spine fixation order calculate respective carrying values company initially records goodwill based purchase price allocation performed time acquisition corporate assets liabilities directly relate reporting unit’s operations ascribed directly reporting unit corporate assets liabilities directly related specific reporting unit reporting unit benefits allocated based respective contribution measure reporting unit effective july 1 2013 company realigned reporting structure consequently reallocated carrying value goodwill previous reporting units new reporting units based relative fair value new reporting unit total enterprise value july 1 2013 result company’s change reporting structure july 1 2013 company reallocated goodwill reporting unit estimated fair value reporting unit using weighting fair values derived income approach cost approach market approach level 3 fair value measurements income approach calculated fair value reporting unit based present value estimated future cash flows cash flow projections based estimates revenue growth rates operating margins taking consideration industry market conditions discount rate used based weighted average cost capital adjusted risks associated reporting unit projected cash flows cost approach involves methods determining company’s value analyzing market value company’s assets market approach estimates fair value based market multiples revenue earnings comparable publicly traded companies similar operating investment characteristics reporting units upon estimating fair value reporting units determined less carrying value two reporting units extremity fixation spine fixation result performed step two impairment analysis allocated fair value reporting units estimated fair values assets liabilities reporting units including identifiable intangible assets excess fair value implied goodwill estimating fair value certain assets liabilities requires significant judgment future cash flows implied fair value reporting unit’s goodwill less carrying value recorded full impairment loss goodwill spine fixation extremity fixation reporting units totaling 192 million third quarter 2013 company’s annual goodwill impairment analysis performed qualitatively fourth quarter 2014 result additional impairment charge either biostim biologics reporting units reporting units remaining goodwill qualitative analysis referred step zero considered relevant factors specific reporting units including macroeconomic conditions industry market considerations overall financial performance relevant entityspecific events j derivative instruments company manages exposure fluctuating cash flows resulting changes interest rates foreign exchange within consolidated financial statements according hedging policy company may engage nonleveraged transactions involving various financial derivative instruments manage exposed positions policy requires company formally document relationship hedging instrument hedged item well riskmanagement objective strategy undertaking hedge transaction instruments designated cash flow hedge company formally assesses hedge’s inception ongoing basis whether derivative used hedging transaction effective offsetting changes cash flows hedged item whether derivative may expected remain effective future periods determined derivative ceased effective hedge company discontinue related hedge accounting prospectively determination would made 1 derivative longer effective offsetting changes cash flows hedged item 2 derivative expires sold terminated exercised 3 management determines designating derivative hedging instrument longer appropriate ineffective portions changes fair value cash flow hedges recognized earnings company records derivatives either assets liabilities balance sheet respective fair values cash flow hedge effective portion derivative’s change fair value ie gains losses initially reported component comprehensive income net related taxes subsequently reclassified net earnings period hedged transaction affects earnings company utilizes cross currency swap manage foreign currency exposure related portion company’s intercompany receivable us dollar functional currency subsidiary denominated euro cross currency swap accounted cash flow hedge accordance asc topic 815 derivatives hedging k accumulated comprehensive income loss accumulated comprehensive income loss comprised foreign currency translation adjustments effective portion gain loss company’s crosscurrency swap designated accounted cash flow hedge see note 9 unrealized gain loss warrants components changes accumulated comprehensive income loss follows 1 cash generally remains indefinitely reinvested non us dollar denominated foreign subsidiaries deferred taxes recognized related foreign currency translation adjustment l revenue recognition accounts receivable commercial revenue related sale implant products generally representing hospital customers revenues recognized products utilized confirming purchase order received hospital revenue also derived thirdparty payors including commercial insurance carriers health maintenance organizations preferred provider organizations governmental payors medicare connection sale stimulation products revenue recognized stimulation product placed implanted accepted patient amounts paid thirdparty payors generally based fixed allowable reimbursement rates revenues recorded expected preauthorized reimbursement rates net contractual allowances adjustments certain billings subject review thirdparty payors may subject adjustment distributor revenue primarily related implant products recognize revenue sellthrough basis effective april 1 2013 prior date recognized revenue either sellin sellthrough basis depending specific circumstances distributor cases recognized distributor revenue title risk loss passes either shipment facilities receipt distributor’s facility assuming revenue recognition criteria achieved “sellin method” cases revenue recognition criteria distributor sales satisfied time shipment receipt specifically existence extracontractual terms arrangements caused us meet fixed determinable criteria revenue recognition cases others collectability established situations unable satisfy requirements recognize revenue sellin method recognize revenue relating distributor arrangements product delivered end customer “sellthrough method” reliable information distributors sell product end customers use cash collection distributors basis revenue recognition sellthrough method although many cases legally entitled accounts receivable time shipment recognized accounts receivables corresponding deferred revenues associated distributor transactions revenue recognized sellthrough method distributors sellin method prior april 1 2013 cost sales recognized upon shipment sellthrough distributors whose revenue recognized upon cash receipt consider whether match related cost sales expense revenue recognize expense upon shipment making assessment consider financial viability distributors based creditworthiness determine collectability amounts sufficient realize costs products shipped reasonably assured time shipment distributors instances distributor determined financially viable defer costs sales revenue recognized biologics revenue primarily related collaborative arrangement mtf 2008 company entered collaborative arrangement mtf develop commercialize trinity evolution® stem cellbased bone growth biologic matrix development process completed 2009 company mtf operated terms separate commercialization agreement terms 10year agreement mtf sourced tissue processed create bone growth matrix packaged delivered customer accordance orders received company exclusive global marketing rights trinity evolution® well nonexclusive marketing rights products receives marketing fees mtf based total sales mtf considered primary obligor arrangements therefore company recognizes marketing service fees net basis within net sales upon shipment product customer marketing fees 504 million 477 million 465 million 2014 2013 2012 respectively january 10 2012 company announced reached agreement mtf codevelop commercialize new technology use bone grafting applications expand mtf’s trinity evolution® processing capacity amendment amends term existing agreement later 15 years date certain development milestones achieved existing agreement occurred 2010 ii date certain licensing arrangements company nuvasive inc expire revenues exclude value added local taxes intercompany sales trade discounts shipping handling costs included cost sales process estimating ultimate collection accounts receivable involves significant assumptions judgments historical collection payor reimbursement experience integral part estimation process related reserves doubtful accounts establishment contractual allowances accounts receivable analyzed quarterly basis assess adequacy reserves doubtful accounts contractual allowances revisions allowances doubtful accounts estimates recorded adjustment bad debt expense within sales marketing expenses revisions contractual allowances recorded adjustment net sales estimates periodically tested actual collection experience sale accounts receivable company generally sell receivables certain italian hospitals year estimated related fee 2014 2013 2012 04 million 08 million 06 million respectively recorded interest expense trade accounts receivables sold without recourse removed balance sheet time sale n sharebased compensation fair value servicebased stock options determined using blackscholes valuation model value recognized expense service period net estimated forfeitures fair value marketbased stock options determined date grant using monte carlo valuation methodology value recognized expense requisite service period adjusted estimated forfeitures separately vesting tranche award monte carlo methodology use estimate fair value marketbased options incorporates valuation possibility market condition may satisfied expected term options granted estimated based number factors including vesting expiration terms award historical employee exercise behavior options currently outstanding options exercised expired historical volatility company’s common stock employee’s average length service riskfree interest rate determined based upon constant us treasury security rate contractual life approximates expected term option award management estimates expected volatility based historical volatility company’s stock compensation expense recognized equitybased awards net estimated forfeitures estimated based analysis actual option forfeitures june 30 2014 company granted performance based restricted share awards executive employees vesting based achieving earnings targets two consecutive rolling four quarter periods fair value performancebased restricted stock awards recognized net estimated forfeitures derived requisite vesting period beginning period deemed probable vest shipping handling costs shipping handling costs products shipped customers included cost sales 23 million 28 million 29 million years ended december 31 2014 2013 2012 respectively p advertising costs company expenses advertising costs incurred advertising expenses included sales marketing expense insignificant years ended december 31 2014 2013 2012 q research development costs expenditures related collaborative arrangement mtf expensed based terms related agreement payments made mtf 2014 2013 2012 totaled 03 million 25 million 30 million respectively expenditures research development expensed incurred r income taxes company subject income taxes us foreign jurisdictions uses estimates determining provision income taxes company accounts income taxes using asset liability method accounting reporting income taxes method deferred tax assets liabilities recognized based temporary differences financial reporting income tax basis assets liabilities using statutory rates process requires company project current tax liability estimate deferred tax assets liabilities including net operating loss tax credit carry forwards assessing need valuation allowance company considers recent operating results availability taxable income carryback years future reversals taxable temporary differences future taxable income projections exclusive reversing temporary differences prudent feasible tax planning strategies company accounts uncertain tax positions accordance asc topic 740 income taxes contains twostep approach recognizing measuring uncertain tax positions first step evaluate tax position taken expected taken tax return determining weight available evidence indicates likely evaluation technical merits tax position sustained audit including resolution related appeals litigation processes second step measure tax benefit largest amount 50 likely realized upon ultimate settlement company reevaluates income tax positions periodically consider factors changes facts circumstances changes interpretations tax law effectively settled issues audit new audit activity change recognition measurement would result recognition tax benefit additional charge tax provision company includes imputed interest applicable penalties related tax issues part income tax expense consolidated financial statements net income loss per common share net income loss per common sharebasic computed using weighted average number common shares outstanding respective years net income loss per common sharediluted computed using weighted average number common equivalent shares outstanding respective years using “treasury stock” method dilutive common equivalent shares represent dilutive effect assumed exercise outstanding share options see note 18 differences basic diluted shares result assumed exercise certain outstanding share options financial instruments concentration credit risk financial instruments could subject company concentration credit risk consist primarily cash equivalents accounts receivable generally cash held large financial institutions cash equivalents consist highly liquid money market funds company performs ongoing credit evaluations customers generally require collateral maintain reserve potential credit losses company believes concentration credit risk related accounts receivable limited customers geographically dispersed end users diversified across several industries net sales customers based europe approximately 59 million 2014 results substantial portion trade accounts receivable balance december 31 2014 least reasonably possible changes global economic conditions andor local operating economic conditions regions distributors operate factors could affect future realization accounts receivable balances u recently issued accounting standards may 2014 financial accounting standards board “fasb” issued accounting standards update “asu” 201409 revenue contracts customers asu 201409 supersedes revenue recognition requirements revenue recognition topic 605 requires entities recognize revenue way depicts transfer promised goods services customers amount reflects consideration entity expects entitled exchange goods services asu 201409 effective company fiscal year beginning january 1 2017 including interim periods within reporting period applied retrospectively early application permitted april 1 2015 fasb proposed deferring effective date one year december 15 2017 annual reporting periods beginning date fasb also proposed permitting early adoption standard original effective date december 15 2016 company currently evaluating effect adopting new accounting guidance consolidated results operations cash flows financial position april 2014 fasb issued asu 201408 reporting discontinued operations disclosures components entity asu amends definition discontinued operation also provides new disclosure requirements disposals meeting definition meet definition discontinued operation new guidance discontinued operation may include component group components entity business nonprofit activity disposed classified held sale represents strategic shift major effect entitys operations financial results asu also expands scope include disposals equity method investments acquired businesses held sale guidance effective prospectively interim annual periods beginning december 15 2014 early adoption permitted adoption guidance company expected material impact consolidated financial statements 2 inventories field inventory represents immediately saleable finished products possession company’s direct sales representatives consignment inventory represents immediately saleable finished products located third party customers distributors hospitals workinprocess finished products field inventory consignment inventory include material labor production overhead costs deferred cost sales result transactions company shipped product performed services revenue recognition criteria yet met revenue recognition criteria met revenue previously recorded deferred associated cost sales recognized 3 property plant equipment included within plant equipment instrumentation capitalized computer software 90 million 66 million net accumulated amortization december 31 2014 2013 respectively amortization computer software years ended december 31 2014 2013 2012 30 million 27 million 20 million respectively total depreciation expense years ended december 31 2014 2013 2012 206 million 200 million 158 million respectively 4 patents intangible assets amortization expense intangible assets 23 million 27 million 23 million periods ending december 31 2014 2013 2012 respectively estimated approximately 22 million 15 million 11 million 05 million 05 million 13 million periods ending december 31 2015 2016 2017 2018 2019 2020 thereafter respectively 5 goodwill following table presents changes net carrying value goodwill reportable segment well reallocation july 1 2013 conjunction change reporting structure see note 1 “summary significant accounting policies” 6 current liabilities 7 longterm debt august 30 2010 company’s wholly owned us holding company orthofix holdings inc “orthofix holdings” entered credit agreement “credit agreement” certain us direct indirect subsidiaries company “guarantors” jpmorgan chase bank na administrative agent rbs citizens na syndication agent certain lender parties thereto credit agreement provides five year 200 million secured revolving credit facility “revolving credit facility” five year 100 million secured term loan facility “term loan facility” together revolving credit facility “credit facilities” january 15 2015 company’s request lenders agreed reduce available capacity revolving credit facility 100 million may 2012 company used portion proceeds sale breg inc “breg” see note 14 repay full remaining 875 million balance term loan facility pay 575 million amounts outstanding revolving credit facility use proceeds required lenders’ consent dated april 23 2012 credit agreement result sale breg ceased subsidiary company therefore breg released credit party credit agreement additionally company paid 20 million june 20 million september 2012 reduce amounts outstanding revolving credit facility result december 31 2012 term loan facility repaid full 20 million outstanding revolving credit facility december 31 2013 2012 paid entirety along applicable interest december 31 2014 borrowings credit facilities bear interest floating rate orthofix holdings’ option either london interbank offered rate “libor” plus applicable margin base rate defined credit agreement plus applicable margin case subject adjustment based financial ratios applicable margin 325 libor borrowings 225 base rate borrowings depending upon measurement consolidated leverage ratio respect immediately preceding four fiscal quarters december 31 2013 2012 entire revolving credit facility libor rate plus margin 250 effective interest rate credit facilities december 31 2014 2013 27 company annual contractual maturities longterm debt december 31 2014 outstanding principal revolving credit facility due august 30 2015 borrowings revolving credit facility may made future may used working capital expenditures general corporate purposes orthofix holdings subsidiaries guarantors guaranteed repayment orthofix holdings’ obligations credit agreement obligations orthofix holdings guarantors respect credit facilities secured pledge substantially assets orthofix holdings guarantors credit agreement amended requires orthofix holdings company comply coverage ratios consolidated basis contains affirmative negative covenants including limitations additional debt liens investments acquisitions credit agreement amended also includes events default customary facilities type upon occurrence event default outstanding loans may accelerated andor lenders’ commitments terminated company compliance affirmative negative covenants december 31 2012 events default august 14 2013 company certain required lender parties credit agreement entered limited waiver “original limited waiver” original limited waiver lenders credit agreement “lenders” collectively waived requirements credit agreement company deliver quarterly financial statements respect fiscal quarters ending june 30 2013 september 30 2013 related financial covenant certificates earlier march 31 2014 ii date one day financial statements publicly filed released addition original limited waiver provided restatement company’s financial statements period ending march 31 2013 would constitute default event default provided within one business day public release filing restated financial statements company delivered corrected financial statements compliance certificates respect restated periods immediately paid additional interest fees would owed applicable interest fees originally calculated based restated financial statements august 14 2014 lenders company entered subsequent limited waiver extended september 30 2014 january 15 2015 february 26 2015 “subsequent limited waivers” subsequent limited waivers lenders collectively waived requirements credit agreement company deliver quarterly financial statements respect fiscal quarters ended june 30 2014 september 30 2014 related financial covenant certificates earlier march 31 2015 ii date one day financial statements publicly filed released subsequent limited waivers also extend date company required provide certain 2014 fiscal year financial statements earlier one business day following date company files annual report form 10k fiscal year ended december 31 2014 ii april 30 2015 addition subsequent limited waivers provided restatement would constitute default event default provided within one business day public release filing restated financial statements company delivered corrected financial statements compliance certificates respect restated periods immediately paid additional interest fees would owed applicable interest fees originally calculated based restated financial statements company compliance affirmative negative covenants december 31 2014 events default certain subsidiaries company restrictions ability pay dividends make intercompany loan advances pursuant company’s credit facilities net assets orthofix holdings subsidiaries restricted distributions parent company us subsidiaries company parties credit agreement access net assets operational purposes amount restricted net assets orthofix holdings subsidiaries december 31 2014 2013 1818 million 1685 million respectively addition credit agreement restricts company subsidiaries parties credit facilities access cash held orthofix holdings inc subsidiaries company’s subsidiaries parties credit agreement access cash operational debt repayment purposes amount restricted cash company december 31 2014 2013 344 million 238 million respectively conjunction obtaining credit facilities credit agreement amended company incurred debt issuance costs 5 million includes 08 million costs related may 2011 amendment costs amortized using effective interest method life credit facilities conjunction term loan facility repayment may 2012 company wrote 08 million related debt issuance costs december 31 2014 2013 debt issuance costs net accumulated amortization related credit agreement 04 million 11 million respectively company unused available line credit €58 million 70 million €58 million 80 million december 31 2014 2013 respectively italian line credit line credit provides company option borrow amounts italy rates determined time borrowing line credit unsecured 8 stockholders’ equity company paid dividends holders common stock past company currently intends retain consolidated earnings finance credit agreement obligations finance continued growth business certain subsidiaries company restrictions ability pay dividends certain circumstances pursuant credit agreement company present intentions pay dividends foreseeable future event company decides pay dividend holders common stock future dividends received subsidiaries company may based prevailing rates taxation required pay additional withholding income tax amounts received subsidiaries 9 derivative instruments tables disclose types derivative instruments company owns classifications fair values instruments within balance sheet amount gain loss recognized comprehensive income loss “oci” net income loss crosscurrency swap september 30 2010 company entered crosscurrency swap agreement “replacement swap agreement” jpmorgan chase bank royal bank scotland plc “counterparties” manage cash flows related foreign currency exposure portion company’s intercompany receivable us dollar functional currency subsidiary denominated euro terms swap agreement company pays euros based €287 million notional value fixed rate 500 receives us dollars based notional value 35 million fixed rate 4635 expiration date december 30 2016 date upon underlying intercompany debt swap agreement applies matures swap agreement designated cash flow hedge therefore company recognized unrealized gain loss change fair value net tax 03 million recognized comprehensive income loss warrants december 31 2014 company purchased notes receivable bone biologics inc “bone biologics” totaling 750 thousand issued detachable warrants purchase common stock bone biologics december 31 2014 company held warrants 125 thousand shares bone biologics exercise price 100 per share terms note warrant purchase agreements warrants purchase common stock bone biologics detachable note exercisable seven year period transferable holder parties 10 fair value measurements fair value defined price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date nonfinancial assets liabilities company measured fair value include longlived assets equity method investments impaired currently reported period authoritative guidance also describes three levels inputs may used measure fair value level 1 quoted prices active markets identical assets liabilities level 2 observable inputs quoted prices active markets identical assets liabilities level 3 unobservable inputs little market data available require reporting entity develop assumptions company’s financial instruments include cash equivalents restricted cash certificates deposit treasury securities collective trust funds trade accounts receivable accounts payable longterm secured debt deferred compensation plan liabilities derivative securities carrying value restricted cash accounts receivable accounts payable approximate fair value due shortterm maturities instruments company’s credit facilities carry floating rate interest therefore carrying value considered approximate fair value company’s collective trust funds treasury securities certificates deposit deferred compensation plan liabilities derivative securities financial instruments recorded fair value recurring basis fair value treasury securities certificates deposit determined based quoted prices active markets identical assets therefore company categorized instruments level 1 financial instruments crosscurrency derivative instrument consists overthecounter contract traded public exchange fair value derivative swap contract common stock warrants company’s collective trust funds company’s deferred compensation plan liabilities determined based inputs readily available public markets derived information available publicly quoted markets therefore company categorized instruments level 2 financial instruments changes fair value collective trust funds deferred compensation plan liabilities recorded income expense company also considers counterparty credit risk credit risk determination estimated fair values company consistently applied valuation techniques periods presented fair value company’s financial assets liabilities recurring basis follows 11 commitments leases company entered operating leases facilities equipment leases noncancellable typically contain renewal options certain leases contain rent escalation clauses company recognizes expense straightline basis rent expense company’s operating leases years ended december 31 2014 2013 2012 approximately 34 million 34 million 41 million respectively future minimum lease payments operating leases net amounts received subleases december 31 2014 follows inventory purchase commitments company inventory purchase commitments thirdparty manufactures 25 million 30 million 14 million december 31 2014 2013 2012 respectively 12 business segment information july 1 2013 began certain organizational executive leadership changes align chief executive officer also chief operating decision maker “codm” reviews performance makes decisions managing company manage business four strategic business units “sbus” comprised biostim biologics extremity fixation spine fixation supported corporate activities sbus represent segments codm reviews financial information makes resource allocation decisions among business units primary metric used codm managing company net margin defined gross profit less sales marketing expense company neither discretely allocates assets goodwill operating segments evaluates operating segments using discrete asset information accordingly segment information prepared based four sbus reporting segments four segments discussed biostim sbu manufactures distributes provides support services market leading devices enhance bone fusion class iii medical devices indicated adjunctive noninvasive treatment improve fusion success rates cervical lumbar spine well therapeutic treatment nonspine fractures healed nonunions devices utilize orthofix’s patented pulsed electromagnetic field “pemf” technology supported strong basic mechanism action data scientific literature well strong level one randomized controlled clinical trials medical literature current research clinical studies also underway identify potential new clinical indications sbu uses distributors independent sales representatives sell devices hospitals doctors healthcare providers primarily us biologics sbu provides portfolio regenerative products tissue forms allow physicians successfully treat variety spinal orthopedic conditions sbu specializes marketing company’s regeneration tissue forms biologics markets tissues network distributors independent sales representatives affiliates supply hospitals doctors healthcare providers primarily us partnership musculoskeletal transplant foundation “mtf” allows us exclusively market trinity evolution® trinity elite® tissue forms musculoskeletal defects enhance bony fusion extremity fixation extremity fixation sbu offers products solutions allow physicians successfully treat variety orthopedic conditions unrelated spine sbu specializes design development marketing company’s orthopedic products used fracture repair deformity correction bone reconstruction procedures extremity fixation distributes products network distributors independent sales representatives affiliates sbu uses independent distributors direct sales representatives sell orthopedic products hospitals doctors health providers globally spine fixation spine fixation sbu specializes design development marketing broad portfolio implant products used surgical procedures spine fixation distributes products network distributors affiliates sbu uses distributors independent sales representatives sell spine products hospitals doctors healthcare providers globally corporate activities comprised operating expenses including sharebased compensation orthofix international nv holding company subsidiaries along activities necessarily identifiable within four sbus net sales sbu table presents net sales continuing operations sbu reporting segment net sales include product sales marketing service fees table presents net margin defined gross profit less sales marketing expenses continuing operations sbu reporting segment following table presents depreciation amortization continuing operations sbu reporting segment geographical information following data includes net sales geographic destination following data includes property plant equipment geographic area 13 income taxes income continuing operations provision income taxes consisted provision benefit income taxes continuing operations accompanying consolidated statements operations consists following deferred income taxes provided primarily net operating loss carryforwards temporary differences resulting items recognized different years financial statement income tax reporting purposes deferred tax assets liabilities follows valuation allowance december 31 2014 2013 374 million 318 million respectively net increase valuation allowance 56 million year principally relates certain current period foreign losses without benefit valuation allowance attributable net operating loss carryforwards certain temporary differences certain foreign jurisdictions likely portion deferred tax asset realized company state net operating loss carryforwards approximately 140 million begin expire 2015 company net operating losses foreign taxing jurisdictions approximately 1337 million majority relate company’s netherlands operations begin expire 2015 company provided valuation allowance significant portion net operating loss carryforwards since believe likely deferred tax asset realized prior expiration rate reconciliation continuing operations presented based us federal income tax rate rather parent company’s country domicile tax rate management believes given large proportion taxable income earned united states disclosure meaningful january 2 2013 american taxpayer relief act 2012 “act” enacted act provides tax relief business reinstating certain tax benefits credits retroactively january 1 2012 several provisions act impact company notably extension research development credit income tax accounting rules require tax law changes recognized period enactment company recognized tax benefit 03 million provision income taxes first quarter 2013 company’s unrecognized tax benefit 156 million 07 million years ended december 31 2014 2013 respectively company recognizes potential accrued interest penalties related unrecognized tax benefits within global operations income tax expense company approximately 05 million accrued payment interest penalties december 31 2014 2013 entire amount unrecognized tax benefits including interest would favorably impact company’s effective tax rate recognized december 31 2014 company expect amount unrecognized tax benefits change significantly next twelve months reconciliation gross unrecognized tax benefits excluding interest penalties years ended december 31 2014 december 31 2013 follows company files consolidated income tax return us federal jurisdiction uk italy numerous consolidated separate income tax returns many state foreign jurisdictions statute limitations respect federal tax authorities closed years prior december 31 2011 statute limitations various state tax filings closed instances years prior december 31 2010 statute limitations respect major foreign tax filing jurisdictions closed years prior december 31 2009 company’s current intention indefinitely reinvest total amount unremitted foreign earnings residing outside curaçao local jurisdiction extent generated available entity incorporated curaçao “foreign subsidiaries” refers us nonus subsidiaries furthermore income sourced us subject us income tax unremitted foreign earnings increased 3297 million december 31 2013 3741 million december 31 2014 3741 million includes 3911 million us subsidiaries practicable determine amounts net additional income tax may payable earnings repatriated total cash equivalents december 31 2014 712 million 344 million restricted senior secured credit agreement use us therefore classified restricted cash balance sheet company’s us business generates sufficient cash flow borrowing capacity united states fund us operations cash equivalents 368 million december 31 2014 held nonus subsidiaries indefinitely reinvested use nonus operations 14 sale breg disposition sports medicine business april 23 2012 company’s subsidiary orthofix holdings breg entered stock purchase agreement “spa” breg acquisition corp “buyer” newly formed affiliate water street healthcare partners ii lp pursuant buyer agreed acquire orthofix holdings outstanding shares breg subject terms conditions contained therein “transaction” terms spa upon closing sale orthofix holdings company agreed indemnify buyer respect certain specified matters including government investigation product liability matters regarding previously owned infusion pump product line preclosing sales cold therapy units certain postclosing sales cold therapy units see “matters related company’s former breg subsidiary possible indemnification obligations note 15 may 24 2012 “closing date” orthofix holdings completed sale outstanding shares breg 1575 million cash adjustments working capital indebtedness accordance terms spa orthofix holdings used 145 million net proceeds prepay outstanding company indebtedness required lender consent received connection company’s existing credit agreement result closing transaction breg ceased subsidiary company therefore breg released credit party credit agreement company also agreed enter certain transition arrangements closing including transition services agreement pursuant company agreed continue provide administrative operational support period twelve months result sale breg company completed exit sports medicine business portion indemnification related post closing claims related postclosing sales cold therapy created guarantee asc 460guarantees fair value liability recorded initial recognition criteria amount 2 million closing date transaction company amortizes fair value liability ratably period indemnification three years company’s obligations guarantee approximately 03 million 09 million 16 million december 31 2014 2013 2012 respectively gain sale discontinued operations following table presents value asset disposition proceeds received net various working capital adjustments indebtedness net gain sale breg shown condensed consolidated statement operations year ended december 31 2012 discontinued sports medicine business contributed 44 million net sales years ended december 31 2012 sports medicine business 29 million operating losses year ended december 31 2012 financial information includes financial results breg operations date sale company’s consolidated financial statements related footnote disclosures reflect sports medicine business discontinued operations income loss associated sports medicine business net applicable income taxes shown income loss discontinued operations periods presented 15 contingencies company party outstanding legal proceedings investigations claims described company believes unlikely outcome matters including matters discussed material adverse effect subsidiaries whole notwithstanding unfavorable resolution matter may material effect company’s net earnings particular quarter however company cannot predict certainty final outcome legal proceedings investigations including settlement discussions government seeking resolve investigations claims made described paragraphs assurance ultimate resolution matter material adverse impact company’s consolidated financial position results operations cash flows company records accruals certain outstanding legal proceedings investigations claims probable liability incurred amount loss reasonably estimated company evaluates quarterly basis developments legal proceedings investigations claims could affect amount accrual well developments would make loss contingency probable reasonably estimable loss contingency probable reasonably estimable company accrue loss however loss additional loss excess accrual least reasonable possibility material company discloses reasonable estimate possible loss range loss reasonable estimate made company cannot make reasonable estimate possible loss range loss disclosed assessments whether loss probable reasonable possibility whether loss range loss reasonably estimable often involve series complex judgments future events among factors company considers assessment nature existing legal proceedings investigations claims asserted possible damages loss contingency reasonably estimable progress matter existing law precedent opinions views legal counsel advisers involvement us government agencies proceedings company’s experience similar matters experience companies facts available company time assessment company intends respond responded proceeding investigation claim company’s assessment factors may change time individual proceedings investigations claims progress matters company currently able reasonably estimate range reasonably possible loss factors contributed determination include following damages sought indeterminate investigation manifested filed civil criminal complaint ii matters early stages iii matters involve novel unsettled legal theories large uncertain number actual potential cases parties andor iv discussions government parties matters may expected ultimately resolved negotiation settlement reached point company believes reasonable estimate loss range loss made instances company believes considerable uncertainty regarding timing ultimate resolution matters including possible eventual loss fine penalty business impact addition company accrue estimated legal fees directly related costs expensed incurred addition matters described paragraphs normal course business company involved various lawsuits time may subject certain contingencies extent losses related contingencies probable reasonably estimable company accrues appropriate amounts accompanying financial statements provides disclosures possible range loss excess amount accrued range reasonably estimable company believes losses individually collectively immaterial possible loss range loss matters related audit committee’s review restatement certain consolidated financial statements audit committee review july 2013 audit committee board directors began conducting independent review assistance outside professionals certain accounting matters review resulted restatement previously filed consolidated financial statements fiscal years ended december 31 2012 2011 2010 fiscal quarter ended march 31 2013 well restatement certain financial information fiscal years ended december 31 2009 2008 2007 restatement completed filed march 2014 referred herein “original restatement” connection company’s preparation consolidated interim quarterly financial statements fiscal quarter ended june 30 2014 company determined certain entries respect previously filed financial statements contained filings containing original restatement properly accounted us gaap result company determined august 2014 restate previously filed consolidated financial statements fiscal years ended december 31 2013 2012 2011 quarterly reporting periods contained within fiscal years ended december 31 2013 2012 well fiscal quarter ended march 31 2014 restatement completed march 2015 referred herein “further restatement” sec investigation connection initiation audit committee’s independent review initiated contact staff division enforcement sec “sec enforcement staff” july 2013 advise matters audit committee company respective counsel direct communication sec enforcement staff regarding matters sec conducting formal investigation matters company audit committee cooperating fully sec connection abovereferenced communications company received requests sec documents information concerning various accounting practices internal controls business practices related matters requests cover years ended december 31 2011 2012 instances prior periods anticipated may receive additional requests sec future including respect restatement previously provided notice concerning communications sec office inspector general us department health human services “hhsoig” pursuant corporate integrity agreement hhsoig agreement described item 3 cannot predict matter resolved actions may required take part resolution matters action sec hhsoig governmental agency could result civil criminal sanctions us andor certain current former officers directors employees stage matter cannot reasonably estimate possible loss range loss connection securities class action complaint august 14 2013 securities class action complaint company currently styled tejinder singh v orthofix international nv et al no113cv05696jgk filed united states district court southern district new york arising anticipated restatement prior financial statements matters described since date original filing complaint amended lead plaintiff’s complaint amended purports bring claims behalf persons purchased company’s common stock march 2 2010 july 29 2013 complaint asserts company four former executive officers alan w milinazzo robert vaters brian mccollum emily v buxton collectively “individual defendants” violated section 10b securities exchange act 1934 amended “exchange act” securities exchange commission rule 10b5 “rule 10b5” making false misleading statements relating company’s financial statements complaint asserts individual defendants liable control persons section 20a exchange act violation company section 10b exchange act rule 10b5 relief complaint requests compensatory damages behalf proposed class lead plaintiff’s attorneys’ fees costs march 6 2015 court granted defendants’ motion dismiss mr milinazzo denied respect company individual defendants matter remains early stage date form 10k cannot reasonably estimate possible loss range loss connection matters related promeca july 10 2012 company entered definitive agreements doj sec agreeing settle selfinitiated selfreported internal investigation mexican subsidiary promeca sa de cv “promeca” regarding noncompliance promeca foreign corrupt practices act “fcpa” terms agreements company voluntarily disgorged profits united states government amount 52 million inclusive prejudgment interest agreed pay fine 22 million company paid 22 million july 2012 52 million september 2012 part settlement company entered threeyear deferred prosecution agreement “dpa” doj consent final judgment “consent” sec doj agreed pursue criminal charges company connection matter company complied terms dpa takes note company’s selfreporting matter doj sec remedial measures including implementation enhanced compliance program previously undertaken company dpa consent collectively require among things respect antibribery compliance matters company shall continue cooperate fully government future matters related corrupt payments false books records inadequate internal controls regard company represented implemented continue implement compliance ethics program designed prevent detect violations fcpa applicable anticorruption laws company periodically report government term dpa regarding remediation implementation compliance measures part settlement company also agreed pursuant consent certain reporting obligations sec regarding status company’s remediation implementation compliance measures event company fails comply obligations could subject criminal prosecution doj fcparelated matters selfreported review potential improper payments involving brazil subsidiary august 2013 company’s internal legal department notified certain allegations involving potential improper payments respect brazilian subsidiary orthofix brasil company engaged outside counsel assist review matters focusing compliance applicable antibribery laws including fcpa review remains ongoing fcpa related provisions law provide potential criminal civil sanctions connection antibribery violations including criminal fines civil penalties disgorgement past profits kinds remedies company currently cannot reasonably estimate possible loss range loss connection review consistent provisions dpa consent described company contacted doj sec august 2013 voluntarily selfreport brazilrelated allegations company counsel remain contact agencies regarding status review event doj sec find matters related company’s brazilian subsidiary could give rise review company’s obligations terms dpa andor consent company currently cannot reasonably estimate possible loss range loss connection review including effects may respect dpa consent corporate integrity agreement hhsoig previously disclosed june 6 2012 company entered definitive settlement agreement united states america acting doj behalf hhsoig tricare management activity general counsel office personnel management capacity administrator federal employees health benefits program united states department veteran affairs qui tam relator pursuant company agreed pay 342 million plus interest rate 3 may 5 2011 day payment made settle criminal civil matters related promotion marketing company’s regenerative stimulator devices company also described past “bone growth stimulator devices” connection settlement agreement orthofix inc company’s wholly owned subsidiary also pled guilty one felony count obstruction june 2008 federal audit §18 usc 1516 paid criminal fine 78 million mandatory special assessment 400 also previously disclosed october 29 2012 company subsidiary blackstone medical inc entered definitive settlement agreement us government qui tam relator pursuant company paid 32 million settle claims covering period prior blackstone’s acquisition company concerning compensation physician consultants related matters 32 million paid pursuant settlement funded proceeds company received escrow fund established connection acquisition blackstone 2006 june 6 2012 connection settlements company also entered fiveyear corporate integrity agreement hhsoig “cia” cia acknowledges existence company’s current compliance program requires company continues maintain term cia compliance program designed promote compliance federal healthcare fda requirements company also required maintain several elements previously existing program term cia including maintaining chief compliance officer compliance committee code conduct cia requires conduct certain additional compliancerelated activities term cia including various training monitoring procedures maintaining disciplinary process compliance obligations pursuant cia company required notify hhsoig writing among things ongoing government investigation legal proceeding involving allegation company committed crime engaged fraudulent activities ii matter reasonable person would consider probable violation applicable criminal civil administrative laws related compliance federal healthcare programs fda requirements iii change location sale closing purchase establishment new business unit location related items services may reimbursed federal healthcare programs company also subject periodic reporting certification requirements attesting provisions cia implemented followed well certain document record retention mandates cia provides event uncured material breach cia company could excluded participation federal healthcare programs andor subject monetary penalties matters related company’s former breg subsidiary possible indemnification obligations may 24 2012 sold breg affiliate water street healthcare partners ii lp “water street” pursuant stock purchase agreement “breg spa” terms breg spa upon closing sale company subsidiary orthofix holdings inc agreed indemnify water street breg respect certain specified matters including following ● breg engaged manufacturing sale local infusion pumps pain management 1999 2008 since 2008 numerous product liability cases filed united states alleging local anesthetic dispensed infusion pumps inside joint causes rare arthritic condition called “chondrolysis” company incurred losses settlements judgments connection matters 2014 2013 2012 38 million 67 million 68 million respectively addition several cases remain outstanding company currently cannot reasonably estimate possible loss range loss ● august 2 2010 breg received hipaa subpoena issued doj subpoena sought documents us subsidiaries period january 1 2000 date subpoena believe subpoena relates investigation doj whether breg’s sale marketing labeling local infusion pumps pain management prior breg’s divestiture product line 2008 complied fda regulations federal law believe document production response subpoena completed july 2012 currently expect liability result matter ● time divestiture us breg currently engaged manufacturing sales motorized cold therapy units used reduce pain swelling several domestic product liability cases filed recent years mostly california state court alleging use cold therapy causes skin andor nerve injury seeking damages behalf individual plaintiffs allegedly injured units would purchased units known could injured september 2014 company entered master settlement agreement resolving pending preclose claims pursuant terms settlement agreement company paid approximately 13 million additional amounts owed settlement paid directly company’s insurance providers amounts paid company recorded expense discontinued operations fiscal quarter ended june 30 2014 remaining cold therapy claims include putative consumer class individuals suffer physical harm following use devices appeal adverse july 2012 california jury verdict postclose cold therapy claim pending california state court established accrual 57 million july 2012 verdict postclose cold therapy liabilities however actual liability could higher lower amount accrued putative class action early stage company currently cannot reasonably estimate possible loss range loss 16 pensions deferred compensation orthofix inc sponsors defined contribution plan “orthofix inc 401k plan” covering substantially full time us employees orthofix inc 401k plan allows participants contribute 15 pretax compensation subject certain limitations company matching 100 first 2 employee’s base compensation 50 next 4 employee’s base compensation contributed orthofix inc 401k plan years ended december 31 2014 2013 2012 expenses incurred relating 401k plans including matching contributions approximately 17 million 24 million 25 million respectively company operates defined contribution pension plans international employees described meeting minimum service requirements company’s expenses pension contributions years ended 2014 2013 2012 08 million 07 million 07 million respectively italian law orthofix srl accrues behalf employees deferred compensation paid termination employment year’s provision deferred compensation based percentage employee’s current annual remuneration plus annual charge deferred compensation also accrued leaving indemnity payable agents case dismissal regulated national contract equal approximately 35 total commissions earned company relations italian employees represent 176 total employees december 31 2014 governed provisions national collective labor agreement setting forth mandatory minimum standards labor relations metal mechanic workers industry party collective bargaining agreement orthofix deferred compensation plan “plan” administered board directors company effective january 1 2007 amended restated effective january 1 2009 plan intended allow select group key management highly compensated employees company defer receipt compensation would otherwise payable terms plan intended comply respects provisions code section 409a code section 457a january 1 2011 company disallowed contributions plan new plan participants distributions made accordance requirements code section 409a company’s expense deferred compensation plans described 2014 2013 2012 approximately 01 million 03 million 04 million respectively deferred compensation payments 03 million 01 million 08 million made 2014 2013 2012 respectively balance longterm liabilities december 31 2014 2013 19 25 million represents amount would payable employees agents terminated employment date 17 sharebased compensation plans december 31 2014 company stock option award plans employee stock purchase plan described 2012 long term incentive plan board directors adopted orthofix international nv 2012 longterm incentive plan “2012 ltip” april 13 2012 subject shareholder approval subsequently provided shareholder ratification 2012 ltip provides grant options purchase shares company’s common stock awards including restricted stock unrestricted stock units stock appreciation rights performancebased awards equitybased awards company’s employees company’s subsidiaries affiliates eligible may receive awards 2012 ltip addition company’s nonemployee directors consultants advisors perform services company’s subsidiaries affiliates may receive awards 2012 ltip incentive share options however available company’s employees company reserves total 1600000 shares common stock issuance pursuant 2012 ltip subject certain adjustments set forth 2012 ltip december 31 2014 648675 options outstanding 2012 ltip plan 81899 exercisable addition 460976 shares unvested restricted stock outstanding 2004 long term incentive plan 2004 long term incentive plan “2004 ltip plan” reserves 31 million shares issuance addition shares available future awards june 29 2004 prior plans ii become available future issuance upon expiration forfeiture june 29 2004 awards upon prior plans awards generally vest years service awards fully vesting within three years date grant employees either three five years date grant nonemployee directors awards form stock option restricted stock restricted share unit performance share unit award form determined board directors awards granted 2004 ltip plan expire later ten years date grant 2004 ltip plan provides annual grant nonemployee directors 5000 shares limits future number shares may awarded plan full value awards 100000 shares december 31 2014 879161 options outstanding 2004 ltip plan 854662 exercisable addition shares unvested restricted stock outstanding stock purchase plan orthofix international nv amended restated stock purchase plan “stock purchase plan” provides issuance shares company’s common stock eligible employees directors company subsidiaries elect participate plan acquire shares common stock payroll deductions including executive officers purchase period eligible employees may designate 1 25 compensation deducted purchase common stock plan 25 employees working north america south america asia 15 employees working europe eligible directors designated percentage amount equal annual director compensation paid cash current plan year purchase price shares plan equal 85 fair market value first day plan year calendar year running january 1 december 31 lower last day plan year due compensatory nature plan company recorded related share based compensation consolidated statement operations aggregate number shares reserved issuance employee stock purchase plan 1850000 shares december 31 2014 1517313 shares issued stock purchase plan sharebased compensation december 31 2014 unamortized compensation expense relating options granted expected recognized 28 million amount expected recognized january 2018 following tables show detail sharebased compensation line item consolidated statements operations well grant type years ended december 31 2014 2013 2012 assumptions years grants awarded stock option activity summaries status company’s stock option plans december 31 2014 2013 changes year ended december 31 2014 presented outstanding exercisable price range december 31 2014 weighted average remaining contractual life exercisable options 272 years december 31 2014 total intrinsic value options exercised 21 million 04 million 72 million years ended december 31 2014 2013 2012 respectively aggregate intrinsic value options outstanding options exercisable december 31 2014 calculated difference exercise price underlying options market price company’s common stock shares exercise prices lower 3006 closing price company’s stock december 31 2014 aggregate intrinsic value options outstanding 24 million 05 million 112 million years ended december 31 2014 2013 2012 respectively aggregate intrinsic value options exercisable 10 million 02 million 98 million years ended december 31 2014 2013 2012 respectively restricted stock year ended december 31 2014 company granted employees nonemployee directors 358450 shares restricted stock 99600 performance based vest various dates december 2018 year ended december 31 2013 company granted employees nonemployee directors 269791 shares restricted stock vest various dates october 2017 compensation expense represents fair value stock measured market price date grant less estimated forfeitures recognized straightline basis vesting period aggregate fair value restricted stock vested years ended december 31 2014 2013 2012 25 million 21 million 12 million respectively unamortized compensation expense related restricted stock amounted 114 million december 31 2014 31 million related performance based restricted stock contingent upon meeting certain performance based vesting criteria expected recognized weighted average period approximately 23 years aggregate intrinsic value restricted stock outstanding 319 million 65 million 63 million years ended december 31 2014 2013 2012 respectively summary status restricted stock december 31 2014 2013 changes year ended december 31 2013 presented 18 earnings per share three years ended december 31 2014 adjustments net income loss purposes calculating basic diluted net income loss available common shareholders following reconciliation weighted average shares used basic diluted net income loss per common share computations adjustment made 2014 2013 common stock equivalents effects would antidilutive 2013 potentially dilutive shares totaled 101672 options purchase shares common stock exercise prices excess average market price common shares included computation diluted earnings per share 1062198 1186259 789650 outstanding options included diluted earnings per share computation fiscal year ended december 31 2014 2013 2012 respectively inclusion options antidilutive 19 quarterly financial data unaudited condensed consolidated statement operations us dollars thousands except per share data condensed consolidated balance sheets 20 subsequent events january 2015 company completed sale tempus™ cervical plate product line part company’s spine fixation sbu sale included transfer net assets 21 million consisting intellectual property associated inventory exchange consideration 48 million cash march 4 2015 company entered option agreement “option agreement” eneura inc “eneura” privately held medical technology company developing devices treatment migraines option agreement provides company exclusive option acquire eneura “option” 18month period following grant option consideration option company paid nonrefundable 250 thousand fee eneura ii eneura issued convertible promissory note “eneura note” company principal amount eneura note 150 million interest accrue 80 eneura note mature earlier march 4 2019 ii consummation acquisition described unless converted prepaid earlier date company entitled designate one representative appointment board directors eneura 18month option period pursuant agreement plan merger company eneura certain parties company exercises option acquire eneura company pay former eneura shareholders 65 million subject certain positive negative adjustments based assets liabilities eneura addition 4year period following closing acquisition company may required pay additional cash consideration eneura shareholders upon satisfaction certain milestones orthofix international nv schedule 1condensed financial information registrant orthofix international nv condensed balance sheets unaudited see accompanying notes condensed financial statements s1 orthofix international nv schedule 1condensed financial information registrant orthofix international nv condensed statements operations unaudited see accompanying notes condensed financial statements s2 orthofix international nv schedule 1condensed financial information registrant orthofix international nv condensed statement cash flows unaudited see accompanying notes condensed financial statements s3 orthofix international nv schedule 1condensed financial information registrant orthofix international nv notes condensed financial statements unaudited 1 background basis presentation condensed parent company financial statements prepared accordance rule 1204 schedule 1 regulation sx restricted net assets orthofix holdings inc subsidiaries exceed 25 consolidated net assets orthofix international nv subsidiaries “company” information read conjunction company’s consolidated financial statements included elsewhere filing 2 restricted net assets subsidiaries certain company’s subsidiaries restrictions ability pay dividends make intercompany loans advances pursuant financing arrangements amount restricted net assets company’s subsidiaries held december 31 2014 2013 approximately 1818 million 1685 million respectively restrictions net assets orthofix holdings inc subsidiaries 3 commitments contingencies longterm obligations discussion company’s commitments contingencies long term obligations senior secured credit facility see note 5 note 7 note 15 company’s consolidated financial statements 4 dividends subsidiaries orthofix international nv receive cash dividends 2014 2013 s4 orthofix international nv schedule 2valuation qualifying accounts years ended december 31 2014 2013 2012 s5item 15 exhibits financial statement schedules documents filed part report form 10k following documents filed part report form 10k 1 financial statements see “index consolidated financial statements” page form 10k 2 financial statement schedules required either required information present amounts sufficient require submission schedule information required included consolidated financial statements notes thereto 3 exhibits exhibit number description 21 asset purchase agreement dated march 8 2010 tyco healthcare group lp dba covidien ag mallinckrodt brasilltda kendall de mexico sa de cv novamedix limited novamedix distribution limited novamedix services limited promeca sa de cv orthofix brasil orthofixsrl orthofix sa intavent orthofix limited breg mexico de ri de cv implantes sistemas medicos inc filed exhibit company’s current report form 8k filed march 9 2010 incorporated herein reference 22 stock purchase agreement dated april 23 2012 among breg inc orthofix holdings inc breg acquisition corp filed exhibit company’s current report form 8k filed april 24 2012 incorporated herein reference 31 certificate incorporation company filed exhibit company’s annual report form 20f dated june 29 2001 incorporated herein reference 32 articles association company amended filed exhibit company’s annual report form 10k fiscal year ended december 31 2011 incorporated herein reference 101 credit agreement dated august 30 2010 among orthofix holdings inc orthofix international nv certain domestic subsidiaries orthofix international nv several banks financial institutions may time become parties thereunder jpmorgan chase na filed exhibit company’s current report form 8k filed august 31 2010 incorporated herein reference 102 first amendment credit agreement dated may 4 2011 among orthofix holdings inc delaware corporation orthofix international nv “orthofix international” netherlands antilles corporation certain domestic direct indirect subsidiaries orthofix international jpmorgan chase bank na administrative agent certain lender parties thereto filed exhibit company’s current report form 8k filed may 5 2011 incorporated herein reference 103 limited waiver entered august 14 2013 among orthofix international nv orthofix holdings inc certain wholly owned subsidiaries certain lender parties thereto filed exhibit company’s current report form 8k filed august 19 2013 incorporated herein reference 104 limited waiver entered august 14 2014 among orthofix international nv orthofix holdings inc certain wholly owned subsidiaries certain lender parties thereto filed exhibit company’s current report form 8k filed august 19 2014 incorporated herein reference 105 limited waiver entered september 30 2014 among orthofix international nv orthofix holdings inc certain wholly owned subsidiaries certain lender parties thereto filed exhibit company’s current report form 8k filed october 6 2014 incorporated herein reference 106 commitment reduction limited waiver dated january 15 2015 among orthofix international nv orthofix holdings inc certain wholly owned subsidiaries certain lender parties thereto filed exhibit company’s current report form 8k filed january 16 2015 incorporated herein reference exhibit number description 107 limited waiver dated february 26 2015 among orthofix international nv orthofix holdings inc certain wholly owned subsidiaries certain lender parties thereto filed exhibit company’s current report form 8k filed february 27 2015 incorporated herein reference 108 credit agreement dated august 31 2015 among orthofix holdings inc victory medical limited borrowers orthofix international nv certain subsidiaries orthofix international nv party thereto guarantors several banks financial institutions may time become parties thereunder lenders jpmorgan chase na administrative agent filed exhibit company’s current report form 8k filed september 1 2015 incorporated herein reference 109† matrix commercialization collaboration agreement entered july 24 2008 orthofix holdings inc musculoskeletal transplant foundation filed exhibit company’s annual report form 10k fiscal year ended december 31 2009 incorporated herein reference 1010 amendment 1 matrix commercialization collaboration agreement dated december 15 2010 musculoskeletal transplant foundation inc orthofix holdings inc filed exhibit company’s annual report form 10k fiscal year ended december 31 2010 incorporated herein reference 1011† amendment 2 matrix commercialization collaboration agreement dated january 9 2012 musculoskeletal transplant foundation inc orthofix holdings inc filed exhibit amendment 1 company’s annual report form 10ka year ended december 31 2011 incorporated herein reference 1012† amendment 3 matrix commercialization collaboration agreement entered july 1 2013 effective june 25 2013 musculoskeletal transplant foundation inc orthofix holdings inc filed exhibit company’s current report form 8k filed july 8 2013 incorporated herein reference 1013 amendment 4 matrix commercialization collaboration agreement entered april 1 2014 musculoskeletal transplant foundation inc orthofix holdings inc filed exhibit company’s current report form 8k filed april 7 2014 incorporated herein reference 1014 orthofix international nv amended restated stock purchase plan amended filed exhibit company’s quarterly report form 10q quarter ended march 31 2011 incorporated herein reference 1015 orthofix international nv 2012 longterm incentive plan filed exhibit company’s quarterly report form 10q quarter ended june 30 2012 incorporated herein reference 1016 amendment 1 orthofix international nv 2012 longterm incentive plan filed exhibit company’s form 10q filed august 4 2015 incorporated herein reference 1017 amended restated orthofix deferred compensation plan filed exhibit company’s current report form 8k filed january 7 2009 incorporated herein reference 1018 form employee nonqualified stock option agreement orthofix international nv 2012 longterm incentive plan july 2014present grants timebased vesting filed exhibit company’s quarterly report form 10q quarter ended september 30 2014 incorporated herein reference 1019 form employee restricted stock grant agreement orthofix international nv 2012 longterm incentive plan july 2014present grants timebased vesting filed exhibit company’s quarterly report form 10q quarter ended september 30 2014 incorporated herein reference 1020 form employee performance vesting restricted stock grant agreement orthofix international nv 2012 longterm incentive plan july 2014 grants filed exhibit company’s quarterly report form 10q quarter ended september 30 2014 incorporated herein reference 1021 form employee performance vesting restricted stock performance share unit grant agreement orthofix international nv 2012 longterm incentive plan june 2015 grants filed exhibit company’s form 10q filed august 4 2015 incorporated herein reference 1022 form nonemployee director restricted stock grant agreement orthofix international nv 2012 longterm incentive plan july 2014present grants timebased vesting filed exhibit company’s quarterly report form 10q quarter ended september 30 2014 incorporated herein reference exhibit number description 1023 form employee nonqualified stock option agreement orthofix international nv 2012 longterm incentive plan pre2014 grants filed exhibit company’s annual report form 10k fiscal year ended december 31 2012 incorporated herein reference 1024 form nonemployee director nonqualified stock option agreement orthofix international nv 2012 long term incentive plan filed exhibit company’s annual report form 10k fiscal year ended december 31 2012 incorporated herein reference 1025 form employee restricted stock grant agreement orthofix international nv 2012 long term incentive plan pre2014 grants filed exhibit company’s annual report form 10k fiscal year ended december 31 2012 incorporated herein reference 1026 form nonemployee director restricted stock grant agreement orthofix international nv 2012 long term incentive plan pre2014 grants filed exhibit company’s annual report form 10k fiscal year ended december 31 2012 incorporated herein reference 1027 form employee nonqualified stock option agreement orthofix international nv amended restated 2004 longterm incentive plan post2008 grants filed exhibit company’s current report form 8k filed july 7 2009 incorporated herein reference 1028 form nonemployee director nonqualified stock option agreement orthofix international nv amended restated 2004 longterm incentive plan post2008 grants filed exhibit company’s current report form 8k filed july 7 2009 incorporated herein reference 1029 form nonqualified stock option agreement orthofix international nv amended restated 2004 long term incentive plan pre2009 grantsvesting 3 years filed exhibit company’s current report form 8k filed june 20 2008 incorporated herein reference 1030 form nonqualified stock option agreement orthofix international nv amended restated 2004 long term incentive plan pre2009 grants year cliff vesting filed exhibit company’s current report form 8k filed june 20 2008 incorporated herein reference 1031 form restricted stock grant agreement orthofix international nv amended restated 2004 long term incentive plan pre2011 grantsvesting 3 years filed exhibit company’s current report form 8k filed june 20 2008 incorporated herein reference 1032 form restricted stock grant agreement orthofix international nv amended restated 2004 long term incentive plan post2010 grantsvesting 3 years filed exhibit company’s annual report form 10k fiscal year ended december 31 2010 incorporated herein reference 1033 form restricted stock grant agreement orthofix international nv amended restated 2004 long term incentive plan 3 year cliff vesting filed exhibit company’s current report form 8k filed june 20 2008 incorporated herein reference 1034 form indemnity agreement filed exhibit company’s annual report form 10k fiscal year ended december 31 2008 incorporated herein reference 1035 amended restated employment agreement entered effective july 1 2009 orthofix inc michael finegan filed exhibit company’s current report form 8k filed july 7 2009 incorporated herein reference 1036 amendment 1 amended restated employment agreement dated august 4 2009 orthofix inc michael finegan filed exhibit company’s quarterly report form 10q quarter ended september 30 2009 incorporated herein reference 1037 amendment 2 amended restated employment agreement dated october 1 2011 orthofix inc michael finegan filed exhibit company’s current report form 8k filed october 4 2011 incorporated herein reference 1038 amendment 3 amended restated employment agreement dated august 29 2012 orthofix inc michael finegan filed exhibit company’s current report form 8k filed august 31 2012 incorporated herein reference 1039 employment agreement entered december 9 2010 orthofix inc jeffrey schumm filed exhibit company’s annual report form 10k fiscal year ended december 31 2010 incorporated herein reference exhibit number description 1040 form amendment stock option agreements robert vaters michael finegan filed exhibit company’s current report form 8k filed july 7 2009 incorporated herein reference 1041 employment agreement effective march 13 2013 orthofix inc bradley r mason filed exhibit company’s current report form 8k filed march 13 2013 incorporated herein reference 1042 inducement grant nonqualified stock option agreement dated march 13 2013 orthofix international nv bradley r mason filed exhibit company’s current report form 8k filed march 13 2013 incorporated herein reference 1043 restricted stock grant agreement orthofix international nv 2012 longterm incentive plan dated march 13 2013 orthofix international nv bradley r mason filed exhibit company’s current report form 8k filed march 13 2013 incorporated herein reference 1044 amended restated employment agreement effective november 20 2014 orthofix international nv davide bianchi solely purposes certain specified provisions orthofix ag filed exhibit company’s current report form 8k filed november 28 2014 incorporated herein reference 1045 employment agreement entered effective may 5 2014 orthofix inc mark heggestad filed exhibit company’s current report form 8k filed may 8 2014 incorporated herein reference 1046 inducement grant nonqualified stock option agreement dated may 5 2014 orthofix international nv mark heggestad filed exhibit company’s current report form 8k filed may 8 2014 incorporated herein reference 1047 inducement grant restricted stock agreement dated may 8 2014 orthofix international nv mark heggestad filed exhibit company’s current report form 8k filed may 8 2014 incorporated herein reference 1048 employment agreement entered effective september 4 2014 orthofix inc doug rice filed exhibit company’s current report form 8k filed september 8 2014 incorporated herein reference 1049 amendment 1 employment agreement entered effective october 3 2014 orthofix inc doug rice filed exhibit company’s current report form 8k filed october 6 2014 incorporated herein reference 1050 employment agreement effective april 24 2015 orthofix inc doug rice filed exhibit company’s current report form 8k filed april 29 2015 incorporated herein reference 1051 settlement agreement entered june 6 2012 among united states america acting united states department justice behalf office inspector general department health human services tricare management activity general counsel office personnel management capacity administrator federal employees health benefits program united states department veteran affairs orthofix international nv relator jeffrey j bierman filed exhibit company’s current report form 8ka filed june 7 2012 incorporated herein reference 1052 amended plea agreement entered december 14 2012 among united states attorney district massachusetts department justice orthofix inc filed exhibit company’s current report form 8k filed december 19 2012 incorporated herein reference 1053 corporate integrity agreement entered june 6 2012 office inspector general department health human services orthofix international nv filed exhibit company’s current report form 8ka filed june 7 2012 incorporated herein reference 211 list subsidiaries 231 consent independent registered public accounting firm 311 rule 13a14a15d14a certification chief executive officer 312 rule 13a14a15d14a certification chief financial officer 321 section 1350 certification chief executive officer certification chief financial officer exhibit number description following financial statements orthofix international nv form 10k year ended december 31 2015 filed february 29 2016 formatted xbrl consolidated balance sheets ii consolidated statements operations comprehensive loss iii consolidated statements changes shareholders’ equity iv consolidated statements cash flows v notes consolidated financial statements filed form 10k † certain confidential portions exhibit omitted means redacting portion text exhibit filed separately secretary commission without redactions pursuant application requesting confidential treatment securities exchange act 1934 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated name title date bradley r mason bradley r mason president chief executive officer director principal executive officer february 29 2016 doug rice doug rice chief financial officer principal financial accounting officer february 29 2016 ronald matricaria ronald matricaria chairman board directors february 29 2016 luke faulstick luke faulstick director february 29 2016 james hinrichs james hinrichs director february 29 2016 guy jordan guy jordan director february 29 2016 lilly marks lilly marks director february 29 2016 anthony martin anthony martin director february 29 2016 maria sainz maria sainz director february 29 2016 orthofix international nv statement management’s responsibility financial statements shareholders orthofix international nv management responsible preparation consolidated financial statements related information presented report consolidated financial statements include amounts based management’s estimates judgments prepared conformity accounting principles generally accepted united states financial information report shareholders consistent consolidated financial statements company maintains accounting internal control systems provide reasonable assurance reasonable cost assets safeguarded loss unauthorized use disposition financial records reliable preparing financial statements maintaining accountability assets systems augmented written policies organizational structure providing division responsibilities careful selection training qualified personnel company engaged ernst young llp independent registered public accountants audit render opinion consolidated financial statements accordance auditing standards public company accounting oversight board united states standards include assessment systems internal controls test transactions extent considered necessary support opinion board directors audit committee consisting solely outside directors company meets periodically management independent registered public accountants ensure meeting responsibilities discuss matters concerning internal controls financial reporting ernst young llp full free access audit committee james f hinrichs chairman audit committee bradley r mason president chief executive officer director doug rice chief financial officer orthofix international nv index consolidated financial statements report independent registered public accounting firm board directors shareholders orthofix international nv audited accompanying consolidated balance sheets orthofix international nv “the company” december 31 2015 2014 related consolidated statements operations comprehensive loss changes shareholders’ equity cash flows three years period ended december 31 2015 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position orthofix international nv december 31 2015 2014 consolidated results operations cash flows three years period ended december 31 2015 conformity us generally accepted accounting principles discussed note 1 consolidated financial statements company changed classification deferred tax assets liabilities result early adoption amendments fasb accounting standards codification resulting accounting standards update 201517 “balance sheet classification deferred taxes” also audited accordance standards public company accounting oversight board united states orthofix international nv’s internal control financial reporting december 31 2015 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated february 29 2016 expressed unqualified opinion thereon ernst young llp dallas texas february 29 2016 orthofix international nv consolidated balance sheets december 31 2015 2014 accompanying notes form integral part consolidated financial statements orthofix international nv consolidated statements operations comprehensive loss years ended december 31 2015 2014 2013 accompanying notes form integral part consolidated financial statements orthofix international nv consolidated statements changes shareholders’ equity years ended december 31 2015 2014 2013 accompanying notes form integral part consolidated financial statements orthofix international nv consolidated statements cash flows years ended december 31 2015 2014 2013 accompanying notes form integral part consolidated financial statements orthofix international nv notes consolidated financial statements description business orthofix international nv diversified global medical device company focused improving patients lives providing superior reconstructive regenerative orthopedic spine solutions physicians worldwide headquartered lewisville tx company four strategic business units include biostim biologics extremity fixation spine fixation orthofix products widely distributed via companys sales representatives distributors subsidiaries addition orthofix collaborating research development activities leading clinical organizations musculoskeletal transplant foundation “mtf” texas scottish rite hospital children 1 summary significant accounting policies basis consolidation consolidated financial statements include financial statements company wholly owned majorityowned subsidiaries entities company control intercompany accounts transactions eliminated consolidation b recently adopted accounting standards november 2015 fasb issued asu 201517 income taxes topic 740 balance sheet classification deferred taxes asu requires entities classify deferred tax liabilities assets noncurrent classified statement financial position order simplify presentation deferred income taxes company elected adopt guidance early effective year ended december 31 2015 accordingly deferred tax assets amount 374 million formerly classified current assets december 31 2014 reclassified noncurrent assets consolidated balance sheet april 2014 financial accounting standards board “fasb” issued accounting standards update “asu” 201408 reporting discontinued operations disclosures components entity asu amends definition discontinued operation also provides new disclosure requirements disposals meeting definition meet definition discontinued operation new guidance discontinued operation may include component group components entity business nonprofit activity disposed classified held sale represents strategic shift major effect entitys operations financial results asu also expands scope include disposals equity method investments acquired businesses held sale adopting guidance 2015 material impact consolidated financial statements april 2015 fasb issued asu 201503 interest imputation interest subtopic 83530 simplifying presentation debt issuance costs later clarified asu 201515 interest imputation interest subtopic 83530 presentation subsequent measurement debt issuance costs associated lineofcredit arrangements asu requires debt issuance costs related recognized debt liability presented balance sheet direct reduction carrying amount debt liability consistent debt discounts premiums debt issuance costs related lineofcredit arrangements may continue presented asset guidance effective retroactively interim annual periods beginning december 15 2015 early adoption permitted adopting guidance 2015 material impact consolidated financial statements c use estimates preparation financial statements preparation financial statements conformity united states generally accepted accounting principles “us gaap” requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period ongoing basis evaluate estimates including related contractual allowances doubtful accounts inventories potential intangible assets goodwill impairment income taxes sharebased compensation base estimates historical experience future expectations relevant assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources actual results could differ estimates foreign currency translation financial statements operations outside united states generally maintained local currency foreign currency denominated balance sheet accounts except shareholders’ equity translated us dollars year end exchange rates revenue expense items translated weighted average rates exchange prevailing year gains losses resulting translation foreign currency recorded accumulated comprehensive income component shareholders’ equity transactional foreign currency gains losses including generated intercompany operations included expense net losses 35 million 24 million 05 million years ended december 31 2015 2014 2013 respectively e cash equivalents company considers highly liquid investments original maturity three months less date purchase cash equivalents f restricted cash restricted cash consisted cash held certain subsidiaries distribution transfer orthofix international nv “parent” subsidiaries parties company’s previous 2010 credit facility matured replaced 2015 described note 7 restricted company’s previous 2010 senior secured credit facility restricted parent subsidiaries parties facility access cash held orthofix holdings inc subsidiaries credit party subsidiaries access cash operational debt repayment purposes g market risk ordinary course business company exposed impact changes interest rates foreign currency fluctuations company’s objective limit impact movements earnings cash flows order achieve objective company seeks balance nonus dollar denominated income expenditures 2015 2014 2013 company made use foreign crosscurrency swap agreement manage cash flow exposure generated foreign currency fluctuations company generally require collateral trade receivables h inventories valued lower cost estimated net realizable value provision excess obsolete impaired items reviewed updated periodic basis management inventory procured produced whether internally contract manufacturing arrangements manufacturing facility italy cost determined weightedaverage basis approximates firstin firstout “fifo” method inventory procured produced whether internally contract manufacturing arrangements manufacturing facility texas standard costs approximates actual cost fifo method used value inventory standard costs reviewed annually management often event circumstances indicate change cost occurred valuation workinprocess finished products field inventory consignment inventory includes cost materials labor production costs field inventory represents immediately saleable finished products inventory possession company’s independent sales representatives consignment inventory represents immediately saleable finished products located third party customers distributors hospitals company adjusts value inventory extent management determines cost cannot recovered due obsolescence factors order make determinations management uses estimates future demand sales prices product determine appropriate inventory reserves make corresponding adjustments carrying value inventories reflect lower cost market value event decrease demand company’s products higher incidence inventory obsolescence company could required increase inventory reserves would increase cost sales decrease gross profit workinprocess finished products field inventory consignment inventory include material labor production overhead costs deferred cost sales result transactions company shipped product performed services revenue recognition criteria yet met revenue recognition criteria met revenue associated cost sales recognized longlived assets including intangible assets property plant equipment stated cost less accumulated depreciation costs include expenditures necessary place asset service including freight sales use taxes plant equipment also includes instrumentation held customers generally used facilitate implantation company’s products capitalize system development costs related internal use software application development stage costs related preliminary project activities post implementation activities expensed incurred internaluse software amortized straightline basis estimated useful life generally three seven years management evaluates useful lives assets annual basis depreciation computed straightline basis useful lives assets depreciation leasehold improvements computed shorter lease term useful life asset useful lives follows expenditures maintenance repairs minor renewals improvements extend lives respective assets expensed incurred expenditures renewals improvements capitalized assets related accumulated depreciation adjusted property retirements disposals resulting gain loss included earnings fully depreciated assets remain accounts retired service patents intangible assets recorded cost acquired part business combination estimated fair value assets primarily include patents technology agreements trademarks amortized useful lives using method amortization reflects pattern economic benefit assets consumed company’s weighted average amortization period developed technologies 11 years intangible longlived assets finite lives tested impairment whenever events changes circumstances occurred would indicate impairment change remaining useful life impairment indicator exists company tests asset recoverability purposes recoverability test company groups longlived intangible assets liabilities lowest level identifiable cash flows asset generate cash flows independent assets liabilities carrying value asset group exceeds undiscounted cash flows expected result use eventual disposition asset group company write carrying value fair value period identified company generally calculates fair value longlived intangible assets present value estimated future cash flows determining estimated future cash flows associated assets company uses estimates assumptions future revenue contributions cost structures remaining useful lives asset group use alternative assumptions including estimated cash flows discount rates alternative estimated remaining useful lives could result different calculations impairment j goodwill company tests goodwill least annually impairment company tests frequently indicators present changes circumstances suggest impairment may exist indicators include among others declines sales earnings cash flows development material adverse change business climate company assesses goodwill impairment reporting unit level defined operating segment one level operating segment referred reporting unit company identified four reporting units biostim biologics extremity fixation spine fixation order calculate respective carrying values company initially records goodwill based purchase price allocation performed time acquisition corporate assets liabilities directly relate reporting unit’s operations ascribed directly reporting unit corporate assets liabilities directly related specific reporting unit reporting unit benefits allocated based respective contribution measure reporting unit effective july 1 2013 company realigned reporting structure consequently reallocated carrying value goodwill previous reporting units new reporting units based relative fair value new reporting unit total enterprise value july 1 2013 upon estimating fair value reporting units determined fair value two reporting units extremity fixation spine fixation less respective carrying values result recorded impairment goodwill 192 million third quarter 2013 including 98 million extremity fixation reporting unit 94 million spine fixation reporting unit company’s annual goodwill impairment analysis performed qualitatively fourth quarters 2014 2015 result additional impairment charge either biostim biologics reporting units reporting units remaining goodwill qualitative analysis referred step zero considered relevant factors specific reporting units including macroeconomic conditions industry market considerations overall financial performance relevant entityspecific events k derivative instruments company manages exposure fluctuating cash flows resulting changes interest rates foreign exchange within consolidated financial statements according hedging policy company may engage nonleveraged transactions involving various financial derivative instruments manage exposed positions policy requires company formally document relationship hedging instrument hedged item well riskmanagement objective strategy undertaking hedge transaction instruments designated cash flow hedge company formally assesses hedge’s inception ongoing basis whether derivative used hedging transaction effective offsetting changes cash flows hedged item whether derivative may expected remain effective future periods determined derivative ceased effective hedge company discontinue related hedge accounting prospectively determination would made 1 derivative longer effective offsetting changes cash flows hedged item 2 derivative expires sold terminated exercised 3 management determines designating derivative hedging instrument longer appropriate ineffective portions changes fair value cash flow hedges recognized earnings company records derivatives either assets liabilities balance sheet respective fair values cash flow hedge effective portion derivative’s change fair value ie gains losses initially reported component comprehensive income net related taxes subsequently reclassified net earnings period hedged transaction affects earnings company utilizes crosscurrency swap manage foreign currency exposure related portion company’s intercompany receivable us dollar functional currency subsidiary denominated euro crosscurrency swap accounted cash flow hedge accordance us gaap l fair value measurements fair value defined price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date nonfinancial assets liabilities company measured fair value include longlived assets equity method investments impaired currently reported period authoritative guidance also describes three levels inputs may used measure fair value level 1 quoted prices active markets identical assets liabilities level 2 observable inputs quoted prices active markets identical assets liabilities level 3 unobservable inputs little market data available require reporting entity develop assumptions company’s financial instruments include cash equivalents restricted cash certificates deposit treasury securities collective trust funds trade accounts receivable accounts payable longterm secured debt available sale equity debt securities common stock warrants derivative securities deferred compensation plan liabilities carrying value restricted cash trade accounts receivable accounts payable approximate fair value due shortterm maturities instruments company’s credit facilities carry floating rate interest therefore carrying value considered approximate fair value company’s available sale equity securities common stock warrants recorded cost currently impracticable estimate fair value instruments without incurring excessive costs given size asset since events changes circumstances would indicate significant adverse effect fair value instruments see note 10 discussion accumulated comprehensive income loss accumulated comprehensive income loss comprised foreign currency translation adjustments effective portion gain loss company’s crosscurrency swap designated accounted cash flow hedge see note 9 unrealized gain loss warrants unrealized gain loss company’s debt securities components changes accumulated comprehensive income loss follows 1 earnings generally remain indefinitely reinvested non us dollar denominated foreign subsidiaries deferred taxes recognized related currency translation adjustment n revenue recognition accounts receivable commercial revenue related sale implant products generally representing hospital customers revenues recognized products utilized confirming purchase order received hospital revenue also derived thirdparty payors including commercial insurance carriers health maintenance organizations preferred provider organizations governmental payors medicare connection sale stimulation products revenue recognized stimulation product placed accepted patient amounts paid thirdparty payors generally based fixed allowable reimbursement rates revenues recorded expected preauthorized reimbursement rates net contractual allowances adjustments certain billings subject review thirdparty payors may subject adjustment revenue certain government entities recorded cashbasis collectability reasonably assured distributor revenue primarily related implant products recognize revenue sellthrough basis effective april 1 2013 prior date recognized revenue either sellin sellthrough basis depending specific circumstances distributor cases recognized distributor revenue title risk loss passes either shipment facilities receipt distributor’s facility assuming revenue recognition criteria achieved “sellin method” cases revenue recognition criteria distributor sales satisfied time shipment receipt specifically existence extracontractual terms arrangements caused us meet fixed determinable criteria revenue recognition cases others collectability established situations unable satisfy requirements recognize revenue sellin method recognize revenue relating distributor arrangements product delivered end customer “sellthrough method” reliable information distributors sell product end customers use cash collection distributors basis revenue recognition sellthrough method although many cases legally entitled accounts receivable time shipment recognized accounts receivables corresponding deferred revenues associated distributor transactions revenue recognized sellthrough method distributors sellin method prior april 1 2013 cost sales recognized upon shipment sellthrough distributors whose revenue recognized upon cash receipt consider whether match related cost sales expense revenue recognize cost sales expense upon shipment making assessment consider financial viability distributors based creditworthiness determine collectability amounts sufficient realize costs products shipped reasonably assured time shipment distributors instances distributor determined financially viable defer costs sales revenue recognized biologics revenue primarily related collaborative arrangement mtf 2008 company entered collaborative arrangement mtf develop commercialize trinity evolution® stem cellbased bone growth biologic matrix development process completed 2009 company mtf operated terms separate commercialization agreement terms 10year agreement mtf sourced tissue processed create bone growth matrix packaged delivered customer accordance orders received company exclusive global marketing rights trinity evolution® well nonexclusive marketing rights products receives marketing fees mtf based total sales mtf considered primary obligor arrangements therefore company recognizes marketing service fees net basis within net sales upon shipment product customer marketing fees 554 million 508 million 481 million 2015 2014 2013 respectively january 10 2012 company announced reached agreement mtf codevelop commercialize new technology use bone grafting applications expand mtf’s trinity evolution® processing capacity amendment amends term existing agreement later 15 years date certain development milestones achieved existing agreement occurred 2010 ii date certain licensing arrangements company nuvasive inc expire revenue excludes value added local taxes intercompany sales trade discounts shipping handling costs included cost sales process estimating ultimate collection accounts receivable involves significant assumptions judgments historical collection payor reimbursement experience integral part estimation process related reserves doubtful accounts establishment contractual allowances accounts receivable analyzed quarterly basis assess adequacy reserves doubtful accounts contractual allowances revisions allowances doubtful accounts estimates recorded adjustment bad debt expense within sales marketing expenses revisions contractual allowances recorded adjustment net sales estimates periodically tested actual collection experience sale accounts receivable company generally sell receivables certain italian hospitals year 2015 2014 2013 company sold €109 million €98 million €120 million 119 million 128 million 160 million receivables respectively estimated related fee 2015 2014 2013 05 million 04 million 08 million respectively recorded interest expense trade accounts receivables sold without recourse removed balance sheet time sale p sharebased compensation fair value servicebased stock options determined using blackscholes valuation model value recognized expense service period net estimated forfeitures fair value marketbased stock options determined date grant using monte carlo valuation methodology value recognized expense requisite service period adjusted estimated forfeitures separately vesting tranche award monte carlo methodology use estimate fair value marketbased options incorporates valuation possibility market condition may satisfied expected term options granted estimated based number factors including vesting expiration terms award historical employee exercise behavior options currently outstanding options exercised expired historical volatility company’s common stock employee’s average length service riskfree interest rate determined based upon constant us treasury security rate contractual life approximates expected term option award management estimates expected volatility based historical volatility company’s stock compensation expense recognized equitybased awards net estimated forfeitures estimated based analysis actual option forfeitures grant performancebased restricted stock awards executive employees vesting based upon achieving certain targets various financial measures fair value performancebased restricted stock awards recognized net estimated forfeitures derived requisite vesting period beginning period deemed probable vest q shipping handling costs shipping handling costs products shipped customers included cost sales 22 million 23 million 28 million years ended december 31 2015 2014 2013 respectively r research development costs expenditures related collaborative arrangement mtf expensed based terms related agreement payments made mtf 2015 payments totaled 03 million 25 million 2014 2013 respectively expenditures research development expensed incurred income taxes company subject income taxes us foreign jurisdictions uses estimates determining provision income taxes company accounts income taxes using asset liability method accounting reporting income taxes method deferred tax assets liabilities recognized based temporary differences financial reporting income tax basis assets liabilities using statutory rates process requires company project current tax liability estimate deferred tax assets liabilities including net operating loss tax credit carry forwards assessing need valuation allowance company considers recent operating results availability taxable income carryback years future reversals taxable temporary differences future taxable income projections exclusive reversing temporary differences prudent feasible tax planning strategies company accounts uncertain tax positions accordance us gaap contains twostep approach recognizing measuring uncertain tax positions first step evaluate tax position taken expected taken tax return determining weight available evidence indicates likely evaluation technical merits tax position sustained audit including resolution related appeals litigation processes second step measure tax benefit largest amount 50 likely realized upon ultimate settlement company reevaluates income tax positions periodically consider factors changes facts circumstances changes interpretations tax law effectively settled issues audit new audit activity change recognition measurement would result recognition tax benefit additional charge tax provision company includes interest applicable penalties related tax issues part income tax expense consolidated financial statements net income loss per common share net income loss per common sharebasic computed using weighted average number common shares outstanding respective years net income loss per common sharediluted computed using weighted average number common equivalent shares outstanding respective years using “treasury stock” method dilutive common equivalent shares represent dilutive effect assumed exercise outstanding share options see note 17 difference basic diluted shares results assumed exercise certain outstanding share options u financial instruments concentration credit risk financial instruments could subject company concentration credit risk consist primarily cash equivalents accounts receivable generally cash held large financial institutions cash equivalents consist highly liquid money market funds company performs ongoing credit evaluations customers generally require collateral maintains reserve potential credit losses company believes concentration credit risk related accounts receivable limited customers geographically dispersed end users diversified across several industries net sales customers based europe approximately 53 million 2015 results substantial portion trade accounts receivable balance december 31 2015 least reasonably possible changes global economic conditions andor local operating economic conditions regions distributors operate factors could affect future realization accounts receivable balances v recently issued accounting standards may 2014 fasb issued asu 201409 revenue contracts customers asu 201409 supersedes revenue recognition requirements revenue recognition topic 605 requires entities recognize revenue way depicts transfer promised goods services customers amount reflects consideration entity expects entitled exchange goods services standard originally effective public entities annual interim periods beginning december 15 2016 july 9 2015 fasb agreed defer effective date one year december 15 2017 annual reporting periods beginning date fasb also agreed permit early adoption standard original effective date december 15 2016 standard applied either retrospectively cumulative effect adjustment adoption date company currently evaluating effect adopting new accounting guidance consolidated results operations cash flows financial position july 2015 fasb issued asu 201511 simplifying measurement inventory asu requires entity measure inventory unless accounted lastin firstout “lifo” retail inventory methods lower cost net realizable value net realizable value estimated selling price ordinary course business less reasonably predictable costs completion disposal transportation guidance effective prospectively interim annual periods beginning december 15 2016 early adoption permitted company currently evaluating new guidance expect material impact consolidated financial statements january 2016 fasb issued asu 201601 financial instruments overall subtopic 82510 recognition measurement financial assets financial liabilities asu requires entities measure equity investments except accounted equity method accounting result consolidation investee fair value recognize changes fair value net income unless investments qualify new practicability exception guidance effective prospectively annual periods beginning december 15 2017 including interim periods within fiscal years early adoption permitted company currently evaluating new guidance expect material impact consolidated financial statements 2 inventories 3 property plant equipment included within plant equipment instrumentation capitalized computer software 76 million 90 million net accumulated amortization december 31 2015 2014 respectively amortization computer software years ended december 31 2015 2014 2013 44 million 30 million 27 million respectively total depreciation expense years ended december 31 2015 2014 2013 192 million 206 million 200 million respectively 4 patents intangible assets amortization expense intangible assets 17 million 23 million 27 million years ended december 31 2015 2014 2013 respectively future amortization expense intangibles estimated follows 5 goodwill following table presents net carrying value goodwill reportable segment 6 current liabilities 7 longterm debt august 30 2010 company’s wholly owned us holding company orthofix holdings inc “orthofix holdings” entered credit agreement “2010 credit agreement” certain us direct indirect subsidiaries company “2010 guarantors” jpmorgan chase bank na “jpmorgan” administrative agent rbs citizens na syndication agent certain lender parties thereto 2010 credit agreement provided five year 200 million secured revolving credit facility “2010 revolving credit facility” five year 100 million secured term loan facility “2010 term loan facility” together 2010 revolving credit facility “2010 credit facilities” january 15 2015 company’s request lenders agreed reduce available capacity 2010 revolving credit facility 100 million december 2014 company repaid full along applicable interest outstanding balance 20 million held 2010 revolving credit facility effective interest rate 2010 credit facility december 31 2014 27 2010 credit agreement restricted company subsidiaries parties 2010 credit facilities access cash held orthofix holdings subsidiaries company’s subsidiaries parties 2010 credit agreement access cash operational debt repayment purposes amount restricted cash company december 31 2014 344 million august 31 2015 company subsidiaries orthofix holdings victory medical limited “victory medical” collectively orthofix holdings “borrowers” entered credit agreement “2015 credit agreement” jpmorgan administrative agent certain lenders party thereto 2015 credit agreement provides five year 125 million secured revolving credit facility “facility” replaces company’s 2010 credit facility expired matured pursuant terms august 30 2015 amounts outstanding 2015 credit agreement maturity date august 31 2020 december 31 2015 company made borrowings 2015 credit agreement borrowings 2015 credit agreement may used among things working capital general corporate purposes including share repurchases permitted acquisitions permitted payments dividends distributions company certain subsidiaries facility generally available us dollars 50 million facility also available borrowed euros pounds sterling together us dollars “agreed currencies” 2015 credit agreement permits 25 million facility utilized issuance letters credit agreed currencies borrowers ability increase amount facility aggregate amount 50 million increase may take form one increases revolving credit commitments andor issuance one new term loans upon satisfaction certain conditions precedent receipt additional commitments one existing new lenders borrowings facility bear interest floating rate borrowers’ option either libor plus applicable margin ranging 175 25 base rate plus applicable margin ranging 075 15 case subject adjustment based company’s total leverage ratio unused commitment fee ranging 025 04 subject adjustment based company’s total leverage ratio payable quarterly arrears based daily amount undrawn portion lender’s revolving credit commitment facility fees payable outstanding letters credit rate equal applicable margin libor loans plus certain customary fees payable solely issuer letter credit company certain subsidiaries collectively “guarantors” required guarantee repayment borrowers’ obligations 2015 credit agreement obligations borrowers guarantors respect 2015 credit agreement secured pledge substantially tangible intangible personal property borrowers guarantors including accounts receivable deposit accounts intellectual property investment property inventory equipment equity interests subsidiaries 2015 credit agreement contains customary affirmative negative covenants including limitations company’s subsidiaries’ ability incur additional debt grant permit additional liens make investments acquisitions merge consolidate others dispose assets pay dividends distributions repay subordinated indebtedness enter affiliate transactions addition 2015 credit agreement contains financial covenants requiring company consolidated basis maintain last day fiscal quarter total leverage ratio 30 10 interest coverage ratio least 30 10 company compliance required financial covenants december 31 2015 credit agreement also includes events default customary facilities type upon occurrence events default subject customary cure rights outstanding loans facility may accelerated andor lenders’ commitments terminated conjunction obtaining facility company incurred debt issuance costs 18 million amortized life facility debt issuance costs included longterm assets net accumulated amortization debt issuance costs related 2010 credit facility fully amortized upon maturity 2010 credit facility august 30 2015 december 31 2015 2014 debt issuance costs net accumulated amortization related 2015 credit agreement 2010 credit agreement 17 million 04 million respectively company unused available line credit €58 million 63 million 70 million december 31 2015 2014 respectively italian line credit line credit provides company option borrow amounts italy rates determined time borrowing line credit unsecured 8 stockholders’ equity company paid dividends holders common stock past company currently intends retain consolidated earnings finance credit agreement obligations finance continued growth business certain subsidiaries company restrictions ability pay dividends certain circumstances pursuant credit agreement company present intentions pay dividends foreseeable future event company decides pay dividend holders common stock future dividends received subsidiaries company may based prevailing rates taxation required pay additional withholding income tax amounts received subsidiaries company’s board directors authorized share repurchase plan fourth quarter 2015 authorizing purchase 75 million company’s common stock including september 2017 program common share repurchases expected consist primarily open market transactions prevailing market prices accordance guidelines specified rule 10b18 securities exchange act 1934 amended though company may also make repurchases block trades privately negotiated transactions repurchases may made cash hand cash generated operations andor borrowings company’s new secured revolving credit facility program obligate company acquire specific number shares may discontinued time year ended december 31 2015 company repurchased 293991 shares common stock 116 million average price per share 3937 retired upon repurchase december 31 2015 634 million remaining share repurchase authorization 9 derivative instruments tables disclose types derivative instruments company owns classifications fair values instruments within balance sheet amount gain loss recognized comprehensive income loss “oci” net income loss crosscurrency swap september 30 2010 company entered crosscurrency swap agreement “replacement swap agreement” jpmorgan chase bank royal bank scotland plc “counterparties” manage cash flows related foreign currency exposure portion company’s intercompany receivable us dollar functional currency subsidiary denominated euro terms swap agreement company pays euros based €96 million notional value fixed rate 500 receives us dollars based notional value 130 million fixed rate 4635 expiration date december 30 2016 date upon underlying intercompany debt swap agreement applies matures swap agreement designated cash flow hedge therefore company recognizes unrealized gain loss change fair value comprehensive income loss warrants december 31 2015 company held warrants 458 thousand shares bone biologics inc “bone biologics” weighted average exercise price 118 per share common stock bone biologics totaling 15 million converted notes receivable fair value instruments estimated instead recorded cost fair value readily determinable addition events changes circumstances would indicate significant adverse effect fair value instruments terms note warrant purchase agreements warrants purchase common stock bone biologics detachable note exercisable seven year period transferable holder parties 10 fair value measurements company’s collective trust funds treasury securities certificates deposit derivative securities debt securities deferred compensation plan liabilities financial instruments recorded fair value recurring basis follows fair value treasury securities certificates deposit determined based quoted prices active markets identical assets therefore company categorized instruments level 1 financial instruments certificates deposit held foreign currencies carry contractual maturity two years date purchase crosscurrency derivative instrument consists overthecounter contract traded public exchange fair value derivative swap contract common stock warrants company’s collective trust funds company’s deferred compensation plan liabilities determined based inputs readily available public markets derived information available publicly quoted markets therefore company categorized instruments level 2 financial instruments fair value company’s debt securities based upon significant unobservable inputs requiring company develop assumptions therefore company categorized asset level 3 financial asset march 4 2015 company entered option agreement “option agreement” eneura inc “eneura” privately held medical technology company developing devices treatment migraines option agreement provides company exclusive option acquire eneura “option” 18month period following grant option consideration option company paid nonrefundable 03 million fee eneura ii eneura issued convertible promissory note “eneura note” company principal amount eneura note 150 million interest accrues 80 eneura note mature earlier march 4 2019 ii exercise option interest due note matures forgiven company exercises option investment recorded longterm assets available sale debt security interest recorded interest income fair value debt security based upon significant unobservable inputs including use discounted cash flows model requiring company develop assumptions therefore company categorized asset level 3 financial asset one significant unobservable inputs used fair value measurement debt security discount rate holding inputs constant changes discount rate could result significant change fair value debt security december 31 2015 company believes fair value debt security 127 million resulting impairment 33 million company recorded comprehensive income unrealized loss debt securities company classified impairment temporary nature company intend sell debt security believe recoverability investment occur following table provides reconciliation beginning ending balances debt securities measured fair value using significant unobservable inputs level 3 11 commitments leases company entered operating leases facilities equipment leases noncancellable typically contain renewal options certain leases contain rent escalation clauses company recognizes expense straightline basis rent expense company’s operating leases years ended december 31 2015 2014 2013 approximately 30 million 34 million 34 million respectively future minimum lease payments operating leases december 31 2015 follows inventory purchase commitments company inventory purchase commitments thirdparty manufactures 11 million 25 million 30 million december 31 2015 2014 2013 respectively 12 business segment information manage business four strategic business units “sbus” comprised biostim biologics extremity fixation spine fixation supported corporate activities sbus represent segments chief executive officer also chief operating decision maker “codm” reviews financial information makes resource allocation decisions among business units primary metric used codm managing company net margin defined gross profit less sales marketing expense company neither discretely allocates assets goodwill operating segments evaluates operating segments using discrete asset information accordingly segment information prepared based four sbus reporting segments four segments discussed biostim sbu manufactures distributes provides support services market leading devices enhance bone fusion class iii medical devices indicated adjunctive noninvasive treatment improve fusion success rates cervical lumbar spine well therapeutic treatment nonspine fractures healed nonunions devices utilize orthofix’s patented pulsed electromagnetic field “pemf” technology supported strong basic mechanism action data scientific literature well strong level one randomized controlled clinical trials medical literature current research clinical studies also underway identify potential new clinical indications sbu uses distributors sales representatives sell devices hospitals doctors healthcare providers primarily us biologics sbu provides portfolio regenerative products tissue forms allow physicians successfully treat variety spinal orthopedic conditions sbu specializes marketing company’s regeneration tissue forms biologics markets tissues network distributors independent sales representatives affiliates supply hospitals doctors healthcare providers primarily us partnership mtf allows us exclusively market trinity evolution® trinity elite® tissue forms musculoskeletal defects enhance bony fusion extremity fixation extremity fixation sbu offers products solutions allow physicians successfully treat variety orthopedic conditions unrelated spine sbu specializes design development marketing company’s orthopedic products used fracture repair deformity correction bone reconstruction procedures extremity fixation distributes products network distributors sales representatives affiliates sell orthopedic products hospitals doctors health providers globally spine fixation spine fixation sbu specializes design development marketing broad portfolio implant products used surgical procedures spine fixation distributes products network distributors sales representatives affiliates sell spine products hospitals doctors healthcare providers globally corporate activities comprised operating expenses including sharebased compensation orthofix international nv holding company subsidiaries along activities necessarily identifiable within four sbus net sales sbu table presents net sales sbu reporting segment net sales include product sales marketing service fees table presents net margin defined gross profit less sales marketing expenses sbu reporting segment following table presents depreciation amortization sbu reporting segment geographical information following data includes net sales geographic destination following data includes property plant equipment geographic area 13 income taxes income loss continuing operations provision income taxes consisted provision benefit income taxes continuing operations accompanying consolidated statements operations consists following deferred income taxes provided primarily net operating loss carryforwards temporary differences resulting items recognized different years financial statement income tax reporting purposes company’s deferred tax assets liabilities follows increase valuation allowance 59 million year principally relates certain current year foreign losses incurred without income tax benefit valuation allowance attributable net operating loss carryforwards certain temporary differences certain foreign jurisdictions likely portion deferred tax asset realized company state net operating loss carryforwards approximately 119 million begin expire 2016 additionally company net operating losses foreign taxing jurisdictions approximately 1545 million majority relate company’s netherlands operations begin expire 2016 company provided valuation allowance significant portion net operating loss carryforwards since believe likely deferred tax asset realized prior expiration rate reconciliation continuing operations presented based us federal income tax rate rather parent company’s country domicile tax rate management believes given large proportion taxable income earned united states disclosure meaningful company’s unrecognized tax benefit 158 million 156 million years ended december 31 2015 2014 respectively company recognizes potential accrued interest penalties related unrecognized tax benefits within global operations income tax expense company approximately 08 million 05 million accrued payment interest penalties december 31 2015 2014 respectively entire amount unrecognized tax benefits including interest would favorably impact company’s effective tax rate recognized december 31 2015 company expect amount unrecognized tax benefits change significantly next twelve months reconciliation gross unrecognized tax benefits excluding interest penalties years ended december 31 2015 december 31 2014 follows company files consolidated income tax return us federal jurisdiction uk italy numerous consolidated separate income tax returns many state foreign jurisdictions statute limitations respect federal tax authorities closed years prior december 31 2012 statute limitations various state tax filings closed instances years prior december 31 2011 statute limitations respect major foreign tax filing jurisdictions closed years prior december 31 2010 third quarter 2015 internal revenue service commenced examination federal income tax return 2012 company cannot reasonably determine examination state local tax examinations material impact financial statements cannot predict timing regarding resolution tax examinations company’s current intention indefinitely reinvest total amount unremitted foreign earnings residing outside curaçao local jurisdiction entity incorporated curaçao “foreign subsidiaries” refer us nonus subsidiaries furthermore income sourced us subject us income tax unremitted foreign earnings increased 3741 million december 31 2014 4392 million december 31 2015 4392 million includes 4488 million us subsidiaries practicable determine amounts net additional income tax may payable earnings repatriated 14 contingencies company party outstanding legal proceedings investigations claims described company believes unlikely outcome matters including matters discussed material adverse effect subsidiaries whole notwithstanding unfavorable resolution matter may material effect company’s net earnings particular quarter however company cannot predict certainty final outcome legal proceedings investigations including settlement discussions government seeking resolve investigations claims made described paragraphs assurance ultimate resolution matter material adverse impact company’s consolidated financial position results operations cash flows company records accruals certain outstanding legal proceedings investigations claims probable liability incurred amount loss reasonably estimated company evaluates quarterly basis developments legal proceedings investigations claims could affect amount accrual well developments would make loss contingency probable reasonably estimable loss contingency probable reasonably estimable company accrue loss however loss additional loss excess accrual least reasonable possibility material company discloses reasonable estimate possible loss range loss reasonable estimate made company cannot make reasonable estimate possible loss range loss disclosed assessments whether loss probable reasonable possibility whether loss range loss reasonably estimable often involve series complex judgments future events among factors company considers assessment nature existing legal proceedings investigations claims asserted possible damages loss contingency reasonably estimable progress matter existing law precedent opinions views legal counsel advisers involvement us government agencies proceedings company’s experience similar matters experience companies facts available company time assessment company intends respond responded proceeding investigation claim company’s assessment factors may change time individual proceedings investigations claims progress matters company currently able reasonably estimate range reasonably possible loss factors contributed determination include following damages sought indeterminate investigation manifested filed civil criminal complaint ii matters early stages iii matters involve novel unsettled legal theories large uncertain number actual potential cases parties andor iv discussions government parties matters may expected ultimately resolved negotiation settlement reached point company believes reasonable estimate loss range loss made instances company believes considerable uncertainty regarding timing ultimate resolution matters including possible eventual loss fine penalty business impact addition company accrue estimated legal fees directly related costs expensed incurred addition matters described paragraphs normal course business company involved various lawsuits time may subject certain contingencies extent losses related contingencies probable reasonably estimable company accrues appropriate amounts accompanying financial statements provides disclosures possible range loss excess amount accrued range reasonably estimable company believes losses individually collectively immaterial possible loss range loss matters related audit committee’s review restatement certain consolidated financial statements audit committee review july 2013 audit committee board directors began conducting independent review assistance outside professionals certain accounting matters review resulted restatement previously filed consolidated financial statements fiscal years ended december 31 2012 2011 2010 fiscal quarter ended march 31 2013 well restatement certain financial information fiscal years ended december 31 2009 2008 2007 restatement completed filed march 2014 referred herein “original restatement” connection company’s preparation consolidated interim quarterly financial statements fiscal quarter ended june 30 2014 company determined certain entries respect previously filed financial statements contained filings containing original restatement properly accounted us gaap result company determined august 2014 restate previously filed consolidated financial statements fiscal years ended december 31 2013 2012 2011 quarterly reporting periods contained within fiscal years ended december 31 2013 2012 well fiscal quarter ended march 31 2014 restatement completed march 2015 referred herein “further restatement” sec investigation connection initiation audit committee’s independent review initiated contact staff division enforcement sec “sec enforcement staff” july 2013 advise matters audit committee company respective counsel direct communication sec enforcement staff regarding matters sec conducting formal investigation matters company audit committee cooperating fully sec connection abovereferenced communications company received requests sec documents information concerning various accounting practices internal controls business practices related matters requests cover years ended december 31 2011 2012 instances prior periods anticipated may receive additional requests sec future including respect restatement previously provided notice concerning communications sec office inspector general us department health human services “hhsoig” pursuant corporate integrity agreement hhsoig agreement described item 3 cannot predict matter resolved actions may required take part resolution matters action sec hhsoig governmental agency could result civil criminal sanctions us andor certain current former officers directors employees stage matter cannot reasonably estimate possible loss range loss connection securities class action complaint august 14 2013 securities class action complaint company currently styled tejinder singh v orthofix international nv et al no113cv05696jgk filed united states district court southern district new york arising anticipated restatement prior financial statements matters described since date original filing complaint amended lead plaintiff’s complaint amended purports bring claims behalf persons purchased company’s common stock march 2 2010 july 29 2013 complaint asserts company four former executive officers alan w milinazzo robert vaters brian mccollum emily v buxton collectively “individual defendants” violated section 10b securities exchange act 1934 amended “exchange act” securities exchange commission rule 10b5 “rule 10b5” making false misleading statements relating company’s financial statements complaint asserts individual defendants liable control persons section 20a exchange act violation company section 10b exchange act rule 10b5 relief complaint requests compensatory damages behalf proposed class lead plaintiff’s attorneys’ fees costs march 6 2015 court granted defendants’ motion dismiss mr milinazzo denied respect company individual defendants october 22 2015 following negotiations facilitated independent mediator company remaining individual defendants insurers reached agreement principle plaintiff individually behalf class purports represent settle release claims respect matter dismiss action prejudice subject final court approval terms agreement principle company insurers would make payment plaintiff class purports represent resolve claims related matter including claims plaintiff counsel’s fees expenses december 7 2015 parties action executed filed court proposed settlement agreement whose terms consistent abovedescribed agreement principle december 18 2015 court entered preliminary approval order among things preliminarily approved terms proposed settlement agreement subject final approval hearing scheduled april 28 2016 company previously incurred expensed fees expenses connection matter exceeding insurance policy deductible insurers undertaken cover full amount settlement payment proposed settlement finally approved court company accrued amount settlement payment agreement principle corresponding insurance receivable insurers respect matters deferred prosecution agreement review potential improper payments involving brazil subsidiary 2012 company entered definitive agreements us department justice “doj” sec agreeing settle selfinitiated selfreported internal investigation mexican subsidiary promeca sa de cv “promeca” regarding noncompliance promeca foreign corrupt practices act “fcpa” part settlement entered threeyear deferred prosecution agreement “dpa” doj consent final judgment “consent” sec doj agreed pursue criminal charges us connection promeca matter comply terms dpa takes note selfreporting matter doj sec remedial measures including implementation enhanced compliance program previously undertaken us dpa consent collectively require among things respect antibribery compliance matters shall continue cooperate fully government future matters related corrupt payments false books records inadequate internal controls regard represented implemented continue implement compliance ethics program designed prevent detect violations fcpa applicable anticorruption laws periodically reporting government term dpa regarding remediation implementation compliance measures august 2013 company’s internal legal department notified certain allegations involving potential improper payments respect brazilian subsidiary orthofix brasil ltda company engaged outside counsel assist review matters focusing compliance applicable antibribery laws including fcpa consistent provisions agreements company contacted doj sec august 2013 voluntarily selfreport brazilrelated allegations june 15 2015 company doj agreed extend term dpa two months september 17 2015 permit doj additional time evaluate company’s compliance internal controls compliance undertakings dpa investigate brazilrelated allegations september 17 2015 doj extended term dpa additional ten months july 17 2016 stating company’s efforts comply internal controls compliance requirements dpa first eighteen months dpa insufficient event doj determine future criminally prosecute us fcparelated matters selfreported could subject penalties amount range currently cannot reasonably estimate imss matter basing claims similar events resulted dpa consent instituto mexicano del seguro social “imss” brought legal action company october 2014 february 2016 company reached settlement agreement imss whereby company agreed pay 10 million cash regulatory hurdles cleared inkind payment form products training valued 30 million combined settlement 40 million accrued december 31 2015 within general administrative expense company made admission liability wrongdoing imss agreed portion payments characterized payment fines penalties punitive assessment corporate integrity agreement hhsoig previously disclosed june 6 2012 company entered definitive settlement agreement united states america acting doj behalf hhsoig tricare management activity general counsel office personnel management capacity administrator federal employees health benefits program united states department veteran affairs qui tam relator pursuant company agreed pay 342 million plus interest rate 3 may 5 2011 day payment made settle criminal civil matters related promotion marketing company’s regenerative stimulator devices company also described past “bone growth stimulator devices” connection settlement agreement orthofix inc company’s wholly owned subsidiary also pled guilty one felony count obstruction june 2008 federal audit §18 usc 1516 paid criminal fine 78 million mandatory special assessment 400 also previously disclosed october 29 2012 company subsidiary blackstone medical inc entered definitive settlement agreement us government qui tam relator pursuant company paid 32 million settle claims covering period prior blackstone’s acquisition company concerning compensation physician consultants related matters 32 million paid pursuant settlement funded proceeds company received escrow fund established connection acquisition blackstone 2006 june 6 2012 connection settlements company also entered fiveyear corporate integrity agreement hhsoig “cia” cia acknowledges existence company’s current compliance program requires company continues maintain term cia compliance program designed promote compliance federal healthcare fda requirements company also required maintain several elements previously existing program term cia including maintaining chief compliance officer compliance committee code conduct cia requires conduct certain additional compliancerelated activities term cia including various training monitoring procedures maintaining disciplinary process compliance obligations pursuant cia company required notify hhsoig writing among things ongoing government investigation legal proceeding involving allegation company committed crime engaged fraudulent activities ii matter reasonable person would consider probable violation applicable criminal civil administrative laws related compliance federal healthcare programs fda requirements iii change location sale closing purchase establishment new business unit location related items services may reimbursed federal healthcare programs company also subject periodic reporting certification requirements attesting provisions cia implemented followed well certain document record retention mandates cia provides event uncured material breach cia company could excluded participation federal healthcare programs andor subject monetary penalties matters related company’s former breg subsidiary possible indemnification obligations may 24 2012 sold breg affiliate water street healthcare partners ii lp “water street” pursuant stock purchase agreement “breg spa” terms breg spa upon closing sale company subsidiary orthofix holdings inc agreed indemnify water street breg respect certain specified matters including following ● breg engaged manufacturing sale local infusion pumps pain management 1999 2008 since 2008 numerous product liability cases filed united states alleging local anesthetic dispensed infusion pumps inside joint causes rare arthritic condition called “chondrolysis” company incurred losses settlements judgments connection matters 2015 2014 2013 03 million 38 million 67 million respectively addition several cases remain outstanding company currently cannot reasonably estimate possible loss range loss ● time divestiture us breg currently engaged manufacturing sales motorized cold therapy units used reduce pain swelling several domestic product liability cases filed recent years mostly california state court alleging use cold therapy causes skin andor nerve injury seeking damages behalf individual plaintiffs allegedly injured units would purchased units known could injured september 2014 company entered master settlement agreement resolving pending preclose claims pursuant terms settlement agreement company paid approximately 13 million additional amounts owed settlement paid directly company’s insurance providers amounts paid company recorded expense discontinued operations fiscal quarter ended june 30 2014 remaining cold therapy claims include putative consumer class individuals suffer physical harm following use devices appeal adverse july 2012 california jury verdict postclose cold therapy claim pending california state court established accrual 57 million july 2012 verdict postclose cold therapy liabilities however actual liability could higher lower amount accrued putative class action early stage company currently cannot reasonably estimate possible loss range loss charges incurred result indemnification reflected discontinued operations consolidated statements operations comprehensive loss 15 pensions deferred compensation orthofix inc sponsors defined contribution plan “orthofix inc 401k plan” covering substantially full time us employees orthofix inc 401k plan allows participants contribute 15 pretax compensation subject certain limitations company matching 100 first 2 employee’s base compensation 50 next 4 employee’s base compensation contributed orthofix inc 401k plan years ended december 31 2015 2014 2013 expenses incurred relating 401k plans including matching contributions approximately 20 million 17 million 24 million respectively company operates defined contribution pension plans international employees described meeting minimum service requirements company’s expenses pension contributions years ended december 31 2015 2014 2013 11 million 08 million 07 million respectively italian law italian subsidiary accrues behalf employees deferred compensation paid termination employment year’s provision deferred compensation based percentage employee’s current annual remuneration plus annual charge deferred compensation also accrued leaving indemnity payable agents case dismissal regulated national contract equal approximately 35 total commissions earned company relations italian employees represent 183 total employees december 31 2015 governed provisions national collective labor agreement setting forth mandatory minimum standards labor relations metal mechanic workers industry party collective bargaining agreement orthofix deferred compensation plan “plan” administered board directors company effective january 1 2007 amended restated effective january 1 2009 plan intended allow select group key management highly compensated employees company defer receipt compensation would otherwise payable terms plan intended comply respects provisions code section 409a code section 457a january 1 2011 company disallowed contributions plan new plan participants distributions made accordance requirements code section 409a company’s expense deferred compensation plans described 2015 2014 2013 approximately 01 million 01 million 03 million respectively deferred compensation payments made 2015 deferred compensation payments totaled 03 million 01 million 2014 2013 respectively balance longterm liabilities december 31 2015 2014 15 19 million represents amount would payable employees agents terminated employment date 16 sharebased compensation plans december 31 2015 company stock option award plans employee stock purchase plan described 2012 long term incentive plan board directors adopted orthofix international nv 2012 longterm incentive plan “2012 ltip” april 13 2012 subject shareholder approval subsequently provided shareholder ratification 2012 ltip provides grant options purchase shares company’s common stock awards including restricted stock unrestricted stock units stock appreciation rights performancebased awards equitybased awards company’s employees company’s subsidiaries affiliates eligible may receive awards 2012 ltip addition company’s nonemployee directors consultants advisors perform services company’s subsidiaries affiliates may receive awards 2012 ltip incentive share options however available company’s employees company reserves total 3200000 shares common stock issuance pursuant 2012 ltip subject certain adjustments set forth 2012 ltip december 31 2015 653040 options outstanding 2012 ltip plan 185788 exercisable addition 571488 shares unvested restricted stock outstanding 2004 long term incentive plan 2004 long term incentive plan “2004 ltip plan” reserves 31 million shares issuance addition shares available future awards june 29 2004 prior plans ii become available future issuance upon expiration forfeiture june 29 2004 awards upon prior plans awards generally vest years service awards fully vesting within three years date grant employees either three five years date grant nonemployee directors awards form stock option restricted stock restricted share unit performance share unit award form determined board directors awards granted 2004 ltip plan expire later ten years date grant 2004 ltip plan provides annual grant nonemployee directors 5000 shares limits future number shares may awarded plan full value awards 100000 shares december 31 2015 609562 options outstanding 2004 ltip plan 609562 exercisable addition shares unvested restricted stock outstanding stock purchase plan orthofix international nv amended restated stock purchase plan “stock purchase plan” provides issuance shares company’s common stock eligible employees directors company subsidiaries elect participate plan acquire shares common stock payroll deductions including executive officers purchase period eligible employees may designate 1 25 compensation deducted purchase common stock plan percentage order comply regulations applicable employees domiciled resident member state european union eligible directors designated percentage amount equal annual director compensation paid cash current plan year purchase price shares plan equal 85 fair market value first day plan year calendar year running january 1 december 31 lower last day plan year due compensatory nature plan company recorded related share based compensation consolidated statement operations aggregate number shares reserved issuance employee stock purchase plan 1850000 shares december 31 2015 1617827 shares issued stock purchase plan sharebased compensation following tables show detail sharebased compensation line item consolidated statements operations well grant type years ended december 31 2015 2014 2013 assumptions years grants awarded stock option activity summaries status company’s stock option plans december 31 2015 2014 changes year ended december 31 2015 presented table summarizes options outstanding exercisable exercise price range december 31 2015 december 31 2015 unamortized compensation expense relating options granted expected recognized 26 million amount expected recognized june 2019 weighted average remaining contractual life exercisable options 296 years december 31 2015 total intrinsic value options exercised 07 million 21 million 04 million years ended december 31 2015 2014 2013 respectively aggregate intrinsic value options outstanding options exercisable december 31 2015 calculated difference exercise price underlying options market price company’s common stock shares exercise prices lower 3921 closing price company’s stock december 31 2015 aggregate intrinsic value options outstanding 80 million 24 million 05 million years ended december 31 2015 2014 2013 respectively aggregate intrinsic value options exercisable 43 million 10 million 02 million years ended december 31 2015 2014 2013 respectively restricted stock year ended december 31 2015 company granted employees nonemployee directors 314278 shares restricted stock 110660 performance based vest various dates august 2019 year ended december 31 2014 company granted employees nonemployee directors 358450 shares restricted stock 99600 performance based vest various dates december 2018 compensation expense represents fair value stock measured market price date grant less estimated forfeitures recognized straightline basis vesting period compensation expense recorded date related performancebased restricted stock awards granted 2014 2015 vest based upon achievement certain earnings targets achievement targets considered probable december 31 2015 aggregate fair value restricted stock vested years ended december 31 2015 2014 2013 56 million 25 million 21 million respectively unamortized compensation expense related restricted stock amounted 161 million december 31 2015 66 million related performance based restricted stock contingent upon meeting certain performance based vesting criteria expected recognized weighted average period approximately 24 years aggregate intrinsic value restricted stock outstanding 224 million 139 million 65 million years ended december 31 2015 2014 2013 respectively summary status restricted stock december 31 2015 2014 changes year ended december 31 2015 presented 17 earnings per share adjustments made three years ended december 31 2015 2014 2013 common stock equivalents effects would antidilutive purposes calculating basic diluted net loss available common shareholders potentially dilutive shares totaled 221036 167583 101672 2015 2014 2013 respectively additionally options purchase shares common stock exercise prices excess average market price common shares included computation diluted earnings per share 812695 1062198 1186259 outstanding options included diluted earnings per share computation year ended december 31 2015 2014 2013 respectively inclusion options antidilutive period january 1 2016 february 24 2016 company repurchased additional 417078 shares common stock 159 million would changed number common shares potential common shares outstanding period ended december 31 2015 transactions occurred prior date 18 quarterly financial data unaudited condensed consolidated statement operationsitem 15 exhibits financial statement schedules documents filed part report form 10k following documents filed part report form 10k 1 financial statements see “index consolidated financial statements” page form 10k 2 financial statement schedules required either required information present amounts sufficient require submission schedule information required included consolidated financial statements notes thereto 3 exhibits exhibit number description 21 stock purchase agreement dated april 23 2012 among breg inc orthofix holdings inc breg acquisition corp filed exhibit company’s current report form 8k filed april 24 2012 incorporated herein reference 31 certificate incorporation company filed exhibit company’s annual report form 20f dated june 29 2001 incorporated herein reference 32 articles association company amended filed exhibit company’s annual report form 10k fiscal year ended december 31 2011 incorporated herein reference 101 credit agreement dated august 31 2015 among orthofix holdings inc victory medical limited borrowers orthofix international nv certain subsidiaries orthofix international nv party thereto guarantors several banks financial institutions may time become parties thereunder lenders jpmorgan chase na administrative agent filed exhibit company’s current report form 8k filed september 1 2015 incorporated herein reference 102 first amendment credit agreement dated march 7 2016 effective february 29 2016 among orthofix holdings inc victory medical limited borrowers orthofix international nv certain subsidiaries orthofix international nv party thereto guarantors several banks financial institutions may time become parties thereunder lenders jpmorgan chase na administrative agent filed exhibit company’s quarterly report form 10q quarter ended march 31 2016 incorporated herein reference 103† matrix commercialization collaboration agreement entered july 24 2008 orthofix holdings inc musculoskeletal transplant foundation filed exhibit company’s annual report form 10k fiscal year ended december 31 2009 incorporated herein reference 104 amendment 1 matrix commercialization collaboration agreement dated december 15 2010 musculoskeletal transplant foundation inc orthofix holdings inc filed exhibit company’s annual report form 10k fiscal year ended december 31 2010 incorporated herein reference 105† amendment 2 matrix commercialization collaboration agreement dated january 9 2012 musculoskeletal transplant foundation inc orthofix holdings inc filed exhibit amendment 1 company’s annual report form 10ka year ended december 31 2011 incorporated herein reference 106† amendment 3 matrix commercialization collaboration agreement entered july 1 2013 effective june 25 2013 musculoskeletal transplant foundation inc orthofix holdings inc filed exhibit company’s current report form 8k filed july 8 2013 incorporated herein reference exhibit number description 107 amendment 4 matrix commercialization collaboration agreement entered april 1 2014 musculoskeletal transplant foundation inc orthofix holdings inc filed exhibit company’s current report form 8k filed april 7 2014 incorporated herein reference 108† amendment 5 matrix commercialization collaboration agreement entered march 10 2016 musculoskeletal transplant foundation inc orthofix holdings inc filed exhibit company’s current report form 8k filed march 14 2016 incorporated herein reference 109 orthofix international nv amended restated stock purchase plan amended filed exhibit company’s quarterly report form 10q quarter ended march 31 2011 incorporated herein reference 1010 orthofix international nv 2012 longterm incentive plan filed exhibit company’s quarterly report form 10q quarter ended june 30 2012 incorporated herein reference 1011 amendment 1 orthofix international nv 2012 longterm incentive plan filed exhibit company’s form 10q filed august 4 2015 incorporated herein reference 1012 amended restated orthofix deferred compensation plan filed exhibit company’s current report form 8k filed january 7 2009 incorporated herein reference 1013 form timebased vesting employee restricted stock grant agreement orthofix international nv 2012 longterm incentive plan filed exhibit company’s current report form 8k filed july 8 2016 incorporated reference 1014 form timebased vesting employee nonqualified stock option agreement orthofix international nv 2012 longterm incentive plan filed exhibit company’s current report form 8k filed july 8 2016 incorporated reference 1015 form timebased vesting nonemployee director restricted stock grant agreement orthofix international nv 2012 longterm incentive plan annual grant filed exhibit company’s current report form 8k filed july 8 2016 incorporated reference 1016 form timebased vesting nonemployee director nonqualified stock option agreement orthofix international nv 2012 longterm incentive plan initial grant filed exhibit company’s current report form 8k filed july 8 2016 incorporated reference 1017 form 2016 employee performance stock unit agreement orthofix international nv 2012 longterm incentive plan filed exhibit company’s current report form 8k filed july 8 2016 incorporated reference 1018 form employee performance vesting restricted stock performance share unit grant agreement orthofix international nv 2012 longterm incentive plan june 2015 grants filed exhibit company’s form 10q filed august 4 2015 incorporated herein reference 1019 form employee nonqualified stock option agreement orthofix international nv 2012 longterm incentive plan july 2014june 2016 timebased vesting filed exhibit company’s quarterly report form 10q quarter ended september 30 2014 incorporated herein reference 1020 form employee restricted stock grant agreement orthofix international nv 2012 longterm incentive plan july 2014june 2016 timebased vesting filed exhibit company’s quarterly report form 10q quarter ended september 30 2014 incorporated herein reference 1021 form employee performance vesting restricted stock grant agreement orthofix international nv 2012 longterm incentive plan july 2014 grants filed exhibit company’s quarterly report form 10q quarter ended september 30 2014 incorporated herein reference 1022 form nonemployee director restricted stock grant agreement orthofix international nv 2012 longterm incentive plan 2014 2015 timebased vesting filed exhibit company’s quarterly report form 10q quarter ended september 30 2014 incorporated herein reference exhibit number description 1023 form employee nonqualified stock option agreement orthofix international nv 2012 longterm incentive plan pre2014 grants filed exhibit company’s annual report form 10k fiscal year ended december 31 2012 incorporated herein reference 1024 form nonemployee director nonqualified stock option agreement orthofix international nv 2012 long term incentive plan filed exhibit company’s annual report form 10k fiscal year ended december 31 2012 incorporated herein reference 1025 form employee restricted stock grant agreement orthofix international nv 2012 long term incentive plan pre2014 grants filed exhibit company’s annual report form 10k fiscal year ended december 31 2012 incorporated herein reference 1026 form nonemployee director restricted stock grant agreement orthofix international nv 2012 long term incentive plan pre2014 grants filed exhibit company’s annual report form 10k fiscal year ended december 31 2012 incorporated herein reference 1027 form restricted stock grant agreement orthofix international nv amended restated 2004 long term incentive plan 2011 2012 grantsvesting 3 years filed exhibit company’s annual report form 10k fiscal year ended december 31 2010 incorporated herein reference 1028 form employee nonqualified stock option agreement orthofix international nv amended restated 2004 longterm incentive plan post2008 grants made 2004 long term incentive plan prior adoption 2012 long term incentive plan filed exhibit company’s current report form 8k filed july 7 2009 incorporated herein reference 1029 form nonemployee director nonqualified stock option agreement orthofix international nv amended restated 2004 longterm incentive plan 2009 2012 grants filed exhibit company’s current report form 8k filed july 7 2009 incorporated herein reference 1030 form nonqualified stock option agreement orthofix international nv amended restated 2004 long term incentive plan pre2009 grantsvesting 3 years filed exhibit company’s current report form 8k filed june 20 2008 incorporated herein reference 1031 form nonqualified stock option agreement orthofix international nv amended restated 2004 long term incentive plan pre2009 grants year cliff vesting filed exhibit company’s current report form 8k filed june 20 2008 incorporated herein reference 1032 form restricted stock grant agreement orthofix international nv amended restated 2004 long term incentive plan pre2011 grantsvesting 3 years filed exhibit company’s current report form 8k filed june 20 2008 incorporated herein reference 1033 form restricted stock grant agreement orthofix international nv amended restated 2004 long term incentive plan 3 year cliff vesting filed exhibit company’s current report form 8k filed june 20 2008 incorporated herein reference 1034 form indemnity agreement filed exhibit company’s annual report form 10k fiscal year ended december 31 2008 incorporated herein reference 1035 change control severance agreement dated july 7 2016 orthofix international nv bradley r mason filed exhibit company’s current report form 8k filed july 8 2016 incorporated reference 1036 amended change control severance agreement dated november 1 2016 orthofix international nv bradley r mason 1037 inducement grant nonqualified stock option agreement dated march 13 2013 orthofix international nv bradley r mason filed exhibit company’s current report form 8k filed march 13 2013 incorporated herein reference exhibit number description 1038 restricted stock grant agreement orthofix international nv 2012 longterm incentive plan dated march 13 2013 orthofix international nv bradley r mason filed exhibit company’s current report form 8k filed march 13 2013 incorporated herein reference 1039 change control severance agreement dated july 7 2016 orthofix international nv doug rice filed exhibit company’s current report form 8k filed july 8 2016 incorporated reference 1040 amended change control severance agreement dated november 1 2016 orthofix international nv doug rice 1041 employment agreement effective april 24 2015 orthofix inc doug rice filed exhibit company’s current report form 8k filed april 29 2015 incorporated herein reference 1042 change control severance agreement dated july 7 2016 orthofix international nv michael finegan filed exhibit company’s current report form 8k filed july 8 2016 incorporated reference 1043 amended change control severance agreement dated november 1 2016 orthofix international nv michael finegan 1044 form amendment stock option agreements michael finegan filed exhibit company’s current report form 8k filed july 7 2009 incorporated herein reference 1045 change control severance agreement dated september 7 2016 orthofix international nv davide bianchi filed exhibit company’s current report form 8k filed september 9 2016 incorporated herein reference 1046 amended employment contract dated september 7 2016 orthofix international nv davide bianchi filed exhibit company’s current report form 8k filed september 9 2016 incorporated herein reference 1047 amended restated employment agreement effective november 20 2014 orthofix international nv davide bianchi solely purposes certain specified provisions orthofix ag filed exhibit company’s current report form 8k filed november 28 2014 incorporated herein reference 1048 employment agreement effective april 15 2015 blackstone medical inc robert allen goodwin ii filed exhibit company’s quarterly report form 10q quarter ended march 31 2016 incorporated herein reference 1049 amended change control severance agreement dated november 1 2016 orthofix international nv robert allen goodwin ii 1050 amended change control severance agreement dated november 1 2016 orthofix international nv bradley v niemann 1051 amended change control severance agreement dated november 1 2016 orthofix international nv raymond fujikawa 1052 change control severance agreement dated november 1 2016 orthofix international nv kimberley elting 1053 letter agreement dated july 7 2016 jeffrey schumm orthofix international nv orthofix inc filed exhibit company’s current report form 8k filed july 8 2016 incorporated reference 1054 employment agreement entered december 9 2010 orthofix inc jeffrey schumm filed exhibit company’s annual report form 10k fiscal year ended december 31 2010 incorporated herein reference exhibit number description 1055 settlement agreement entered june 6 2012 among united states america acting united states department justice behalf office inspector general department health human services tricare management activity general counsel office personnel management capacity administrator federal employees health benefits program united states department veteran affairs orthofix international nv relator jeffrey j bierman filed exhibit company’s current report form 8ka filed june 7 2012 incorporated herein reference 1056 amended plea agreement entered december 14 2012 among united states attorney district massachusetts department justice orthofix inc filed exhibit company’s current report form 8k filed december 19 2012 incorporated herein reference 1057 corporate integrity agreement entered june 6 2012 office inspector general department health human services orthofix international nv filed exhibit company’s current report form 8ka filed june 7 2012 incorporated herein reference 211 list subsidiaries 231 consent independent registered public accounting firm 311 rule 13a14a15d14a certification chief executive officer 312 rule 13a14a15d14a certification chief financial officer 321 section 1350 certification chief executive officer certification chief financial officer following financial statements orthofix international nv form 10k year ended december 31 2016 filed february 27 2017 formatted xbrl consolidated balance sheets ii consolidated statements operations comprehensive income loss iii consolidated statements changes shareholders’ equity iv consolidated statements cash flows v notes consolidated financial statements filed form 10k † certain confidential portions exhibit omitted means redacting portion text exhibit filed separately secretary commission without redactions pursuant application requesting confidential treatment securities exchange act 1934 item 16 form 10k summary none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated name title date bradley r mason bradley r mason president chief executive officer director principal executive officer february 27 2017 doug rice doug rice chief financial officer principal financial accounting officer february 27 2017 ronald matricaria ronald matricaria chairman board directors february 27 2017 luke faulstick luke faulstick director february 27 2017 james hinrichs james hinrichs director february 27 2017 guy jordan guy jordan director february 27 2017 alexis v lukianov alexis v lukianov director february 27 2017 lilly marks lilly marks director february 27 2017 anthony martin anthony martin director february 27 2017 michael e paolucci director february 27 2017 michael e paolucci maria sainz director february 27 2017 maria sainz orthofix international nv statement management’s responsibility financial statements shareholders orthofix international nv management responsible preparation consolidated financial statements related information presented report consolidated financial statements include amounts based management’s estimates judgments prepared conformity accounting principles generally accepted united states financial information report shareholders consistent consolidated financial statements company maintains accounting internal control systems provide reasonable assurance reasonable cost assets safeguarded loss unauthorized use disposition financial records reliable preparing financial statements maintaining accountability assets systems augmented written policies organizational structure providing division responsibilities careful selection training qualified personnel company engaged ernst young llp independent registered public accountants audit render opinion consolidated financial statements accordance auditing standards public company accounting oversight board united states standards include assessment systems internal controls test transactions extent considered necessary support opinion board directors audit committee consisting solely outside directors company meets periodically management independent registered public accountants ensure meeting responsibilities discuss matters concerning internal controls financial reporting ernst young llp full free access audit committee james f hinrichs chairman audit committee bradley r mason president chief executive officer director doug rice chief financial officer orthofix international nv index consolidated financial statements report independent registered public accounting firm board directors shareholders orthofix international nv audited accompanying consolidated balance sheets orthofix international nv “the company” december 31 2016 2015 related consolidated statements operations comprehensive income loss changes shareholders’ equity cash flows three years period ended december 31 2016 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position orthofix international nv december 31 2016 2015 consolidated results operations cash flows three years period ended december 31 2016 conformity us generally accepted accounting principles discussed note 1 consolidated financial statements company changed method accounting sharebased payments employees result early adoption amendments fasb accounting standards codification resulting accounting standards update 201609 “improvements employee sharebased payment accounting” effective january 1 2016 also audited accordance standards public company accounting oversight board united states orthofix international nv’s internal control financial reporting december 31 2016 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated february 27 2017 expressed unqualified opinion thereon ernst young llp dallas texas february 27 2017 orthofix international nv consolidated balance sheets december 31 2016 2015 accompanying notes form integral part consolidated financial statements orthofix international nv consolidated statements operations comprehensive income loss years ended december 31 2016 2015 2014 accompanying notes form integral part consolidated financial statements orthofix international nv consolidated statements changes shareholders’ equity years ended december 31 2016 2015 2014 accompanying notes form integral part consolidated financial statements orthofix international nv consolidated statements cash flows years ended december 31 2016 2015 2014 accompanying notes form integral part consolidated financial statements orthofix international nv notes consolidated financial statements business basis consolidation orthofix international nv diversified global medical device company focused improving patients lives providing superior reconstructive regenerative orthopedic spine solutions physicians worldwide headquartered lewisville texas company four strategic business units “sbus” biostim biologics extremity fixation spine fixation orthofix products widely distributed via companys sales representatives distributors addition orthofix collaborating research development activities clinical organizations brown university sinai hospital baltimore cleveland clinic texas scottish rite hospital children musculoskeletal transplant foundation “mtf” consolidated financial statements include financial statements company wholly owned subsidiaries intercompany accounts transactions eliminated consolidation 1 significant accounting policies preparation financial statements conformity united states generally accepted accounting principles “us gaap” requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period ongoing basis evaluate estimates including related contractual allowances doubtful accounts inventories goodwill income taxes fair value measurements litigation contingent liabilities sharebased compensation base estimates historical experience future expectations relevant assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources actual results could differ estimates information accounting policies methods used preparation consolidated financial statements included applicable respective footnotes follow following discussion accounting policies methods used consolidated financial statements presented within footnotes market risk ordinary course business company exposed impact changes interest rates foreign currency fluctuations company’s objective limit impact movements earnings cash flows order achieve objective company seeks balance nonus dollar denominated income expenditures 2016 2015 2014 company made use crosscurrency swap agreement manage cash flow exposure generated foreign currency fluctuations financial statements operations outside united states generally maintained local currency foreign currency denominated balance sheet accounts except shareholders’ equity translated us dollars year end exchange rates revenue expense items translated weighted average rates exchange prevailing year gains losses resulting translation foreign currency recorded accumulated comprehensive loss component shareholders’ equity transactional foreign currency gains losses including generated intercompany operations included expense net losses less 01 million 35 million 24 million years ended december 31 2016 2015 2014 respectively financial instruments concentration credit risk financial instruments could subject company concentration credit risk consist primarily cash equivalents accounts receivable generally cash held large financial institutions cash equivalents consist highly liquid money market funds company performs ongoing credit evaluations customers generally require collateral maintains reserve potential credit losses company believes concentration credit risk related accounts receivable limited customers geographically dispersed end users diversified across several industries net sales customers based europe approximately 60 million 2016 results substantial portion trade accounts receivable balance december 31 2016 least reasonably possible changes global economic conditions andor local operating economic conditions regions distributors operate factors could affect future realization accounts receivable balances cash equivalents restricted cash company considers highly liquid investments original maturity three months less cash equivalents 2016 restricted cash consists amounts held escrow december 31 2016 fund payment settlement amounts charges related us government resolutions discussed note 12in 2015 restricted cash consisted cash held certain subsidiaries distribution transfer restricted company’s previous 2010 credit facility 2010 credit facility matured replaced 2015 described note 8 credit party subsidiaries access cash operational debt repayment purposes research development costs expenditures related collaborative arrangement mtf expensed based terms related agreement payments mtf totaled 13 million 2016 payments made 2015 totaled 03 million 2014 expenditures research development expensed incurred recently adopted accounting standards update “asu” recently issued accounting standards 2 inventories valued lower cost estimated net realizable value provision excess obsolete impaired items reviewed updated periodic basis management inventory procured produced whether internally contract manufacturing arrangements manufacturing facility italy cost determined weightedaverage basis approximates firstin firstout “fifo” method inventory procured produced whether internally contract manufacturing arrangements manufacturing facility texas standard costs approximates actual cost fifo method used value inventory standard costs reviewed annually management often event circumstances indicate change cost occurred workinprocess finished products field inventory consignment inventory include material labor production overhead costs field inventory represents immediately saleable finished products inventory possession company’s independent sales representatives consignment inventory represents immediately saleable finished products located third party customers distributors hospitals deferred cost sales result transactions company shipped product performed services revenue recognition criteria yet met revenue recognition criteria met revenue associated cost sales recognized company adjusts value inventory extent management determines cost cannot recovered due obsolescence factors order make determinations management uses estimates future demand sales prices product determine appropriate inventory reserves make corresponding adjustments carrying value inventories reflect lower cost market value 3 property plant equipment property plant equipment stated cost less accumulated depreciation costs include expenditures necessary place asset service including freight sales use taxes property plant equipment includes instrumentation held customers generally used facilitate implantation company’s products useful lives assets follows company evaluates useful lives assets annual basis depreciation computed straightline basis useful lives assets depreciation leasehold improvements computed shorter lease term useful life asset total depreciation expense 190 million 192 million 206 million years ended december 31 2016 2015 2014 respectively expenditures maintenance repairs minor renewals improvements extend lives respective assets expensed incurred expenditures renewals improvements capitalized assets related accumulated depreciation adjusted property retirements disposals resulting gain loss included earnings fully depreciated assets remain accounts retired service company capitalizes system development costs related internal use software application development stage costs related preliminary project activities post implementation activities expensed incurred internaluse software amortized straightline basis estimated useful life generally three seven years company capitalized computer software net accumulated amortization 213 million 76 million december 31 2016 2015 respectively amortization computer software included within total depreciation expense property plant equipment 64 million 44 million 30 million years ended december 31 2016 2015 2014 respectively longlived assets evaluated impairment whenever events changes circumstances occurred would indicate impairment purposes evaluation company groups longlived assets liabilities lowest level identifiable cash flows asset generate cash flows independent assets liabilities carrying value asset group exceeds undiscounted cash flows expected result use eventual disposition asset group company write carrying value fair value period identified company generally determines fair value longlived assets present value estimated future cash flows determining estimated future cash flows associated assets company uses estimates assumptions future revenue contributions cost structures remaining useful lives asset group use alternative assumptions including estimated cash flows discount rates alternative estimated remaining useful lives could result different calculations impairment 4 patents intangible assets patents intangible assets recorded cost acquired part business combination estimated fair value assets amortized straightline basis useful lives assets company’s weighted average amortization period developed technologies 11 years amortization expense intangible assets 18 million 17 million 23 million years ended december 31 2016 2015 2014 respectively future amortization expense intangible assets estimated follows 5 goodwill company tests goodwill least annually impairment company tests frequently indicators present changes circumstances suggest impairment may exist indicators include among others declines sales earnings cash flows development material adverse change business climate company assesses goodwill impairment reporting unit level defined operating segment one level operating segment 2016 company voluntarily changed annual goodwill testing date end fourth quarter december 31 beginning fourth quarter october 1 company believes change method applying accounting principle preferable closely aligns annual impairment testing date current information budgeting strategic planning process provides management additional time complete annual assessment advance yearend reporting change delay accelerate avoid impairment charge change applied retrospectively impracticable retrospective application would require application significant estimates assumptions use hindsight accordingly change applied prospectively fourth quarter 2016 company performed quantitative impairment analysis result impairment charge either biostim biologics reporting units reporting units goodwill 2015 2014 company performed qualitative assessments annual goodwill impairment analysis result impairment charge qualitative analysis considered relevant factors specific reporting units including macroeconomic conditions industry market considerations overall financial performance relevant entityspecific events following table presents net carrying value goodwill reportable segment 6 longterm investments debt securities march 4 2015 company entered option agreement “option agreement” eneura inc “eneura” privately held medical technology company developing devices treatment migraines option agreement provided company exclusive option acquire eneura “option” 18month period following grant option expired september 2016 without company exercising option consideration option company paid nonrefundable 03 million fee eneura ii company loaned eneura 150 million pursuant convertible promissory note “eneura note” issued company principal amount eneura note 150 million interest accrues 80 eneura note mature march 4 2019 interest due eneura note matures provided change control eneura generally defined third party acquisition fifty percent eneura’s voting equity substantially eneura’s assets occurs prior maturity date eneura note automatically convert preferred stock eneura fixed price equal 730 per share investment recorded longterm assets available sale debt security fair value interest recorded interest income december 31 2016 fair value debt security 122 million decrease 17 million 2016 company recorded comprehensive income unrealized loss debt securities based upon company’s best estimate amount expects recover company recorded otherthantemporary impairment 27 million otherthantemporary impairment reclassified accumulated comprehensive loss included within expense see note 10 discussion equity investment warrants december 31 2016 company holds common stock bone biologics inc “bone biologics” totaling 25 million warrants purchase 458 thousand shares weighted average exercise price 118 per share instruments recorded within longterm assets fair value instruments estimated instead recorded cost fair value readily determinable addition events changes circumstances would indicate significant adverse effect fair value instruments terms warrant purchase agreements warrants purchase common stock bone biologics exercisable seven year period expire 2020 2021 transferable holder parties 7 current liabilities december 2016 company approved initiated planned restructuring primarily affects extremity fixation sbu streamline costs improve operational performance wind noncore business restructuring plan consists primarily severance charges writedown certain assets company expects incur total pretax expense approximately 30 million 2016 2017 connection restructuring activity 20 million incurred december 2016 including 15 million severance charges included operating expenses 04 million inventory writedown charges included cost sales company made payments 01 million 2016 accrual 15 million december 31 2016 current liabilities related planned restructuring 8 longterm debt august 30 2010 company’s wholly owned us holding company orthofix holdings inc “orthofix holdings” entered credit agreement “2010 credit agreement” certain us direct indirect subsidiaries company jpmorgan chase bank na “jpmorgan” administrative agent rbs citizens na syndication agent certain lender parties thereto 2010 credit agreement initially provided five year 200 million secured revolving credit facility “2010 revolving credit facility” five year 100 million secured term loan facility december 2014 company repaid full along applicable interest outstanding balance 20 million held 2010 revolving credit facility august 31 2015 company subsidiaries orthofix holdings victory medical limited “victory medical” collectively orthofix holdings “borrowers” entered credit agreement “2015 credit agreement” jpmorgan administrative agent certain lenders party thereto 2015 credit agreement provides five year 125 million secured revolving credit facility “facility” replaced company’s 2010 credit facility expired matured pursuant terms august 30 2015 amounts outstanding 2015 credit agreement maturity date august 31 2020 december 31 2016 company borrowings outstanding 2015 credit agreement borrowings 2015 credit agreement may used among things working capital general corporate purposes including share repurchases permitted acquisitions permitted payments dividends distributions company certain subsidiaries facility generally available us dollars 50 million facility also available borrowed euros pounds sterling together us dollars “agreed currencies” 2015 credit agreement permits 25 million facility utilized issuance letters credit agreed currencies borrowers ability increase amount facility aggregate amount 50 million increase may take form one increases revolving credit commitments andor issuance one new term loans upon satisfaction certain conditions precedent receipt additional commitments one existing new lenders borrowings facility bear interest floating rate borrowers’ option either libor plus applicable margin ranging 175 25 base rate plus applicable margin ranging 075 15 case subject adjustment based company’s total leverage ratio unused commitment fee ranging 025 04 subject adjustment based company’s total leverage ratio payable quarterly arrears based daily amount undrawn portion lender’s revolving credit commitment facility fees payable outstanding letters credit rate equal applicable margin libor loans plus certain customary fees payable solely issuer letter credit company certain subsidiaries collectively “guarantors” required guarantee repayment borrowers’ obligations 2015 credit agreement obligations borrowers guarantors respect 2015 credit agreement secured pledge substantially tangible intangible personal property borrowers guarantors including accounts receivable deposit accounts intellectual property investment property inventory equipment equity interests subsidiaries 2015 credit agreement contains customary affirmative negative covenants including limitations company’s subsidiaries’ ability incur additional debt grant permit additional liens make investments acquisitions merge consolidate others dispose assets pay dividends distributions repay subordinated indebtedness enter affiliate transactions addition 2015 credit agreement contains financial covenants requiring company consolidated basis maintain last day fiscal quarter total leverage ratio 30 10 interest coverage ratio least 30 10 company compliance required financial covenants december 31 2016 2015 credit agreement also includes events default customary facilities type upon occurrence events default subject customary cure rights outstanding loans facility may accelerated andor lenders’ commitments terminated conjunction obtaining facility company incurred debt issuance costs 18 million amortized life facility debt issuance costs included longterm assets net accumulated amortization december 31 2016 2015 debt issuance costs net accumulated amortization 13 million 17 million respectively company unused available line credit €58 million 61 million 63 million december 31 2016 2015 respectively italian line credit unsecure line credit provides company option borrow amounts italy rates determined time borrowing 9 derivative instruments company manages exposure fluctuating cash flows resulting changes interest rates foreign exchange rates within consolidated financial statements according hedging policy requires company formally document relationship hedging instrument hedged item well riskmanagement objective strategy undertaking hedge transaction instruments designated cash flow hedge company formally assesses hedge’s inception ongoing basis whether derivative used hedging transaction effective offsetting changes cash flows hedged item whether derivative may expected remain effective future periods determined derivative ceased effective hedge company discontinues related hedge accounting prospectively company records derivatives either assets liabilities balance sheet respective fair values cash flow hedge effective portion derivative’s change fair value ie gains losses initially reported component comprehensive income net related taxes subsequently reclassified net earnings period hedged transaction affects earnings september 30 2010 company entered crosscurrency swap agreement jpmorgan chase bank royal bank scotland plc manage cash flows related foreign currency exposure portion company’s intercompany note receivable us dollar functional currency subsidiary denominated euro terms swap agreement company paid euros based original €407 million notional value fixed rate 500 received us dollars based original notional value 552 million fixed rate 4635 crosscurrency swap related euro denominated intercompany note matured settled december 30 2016 tables disclose types derivative instruments company owns classifications fair values instruments within balance sheet amount gain loss recognized comprehensive income loss “oci” net income loss 10 fair value measurements fair value defined price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date nonfinancial assets liabilities company measured fair value include longlived assets equity method investments impaired currently reported period authoritative guidance also describes three levels inputs may used measure fair value level 1 quoted prices active markets identical assets liabilities level 2 observable inputs quoted prices active markets identical assets liabilities level 3 unobservable inputs little market data available require reporting entity develop assumptions company’s financial instruments include cash equivalents restricted cash foreign certificates deposit treasury securities collective trust funds trade accounts receivable accounts payable longterm secured debt equity securities available sale debt securities common stock warrants derivative securities deferred compensation plan liabilities carrying value restricted cash trade accounts receivable accounts payable approximate fair value due shortterm maturities instruments company’s credit facilities carry floating rate interest therefore carrying value considered approximate fair value company’s equity securities common stock warrants recorded cost fair value instruments readily available see note 6 discussion company’s collective trust funds treasury securities foreign certificates deposit derivative securities debt securities deferred compensation plan liabilities financial instruments recorded fair value recurring basis follows fair value treasury securities certificates deposit determined based quoted prices active markets identical assets therefore company categorized instruments level 1 financial instruments certificates deposit held foreign currencies carry contractual maturity two years date purchase crosscurrency derivative instrument consisted overthecounter contract traded public exchange fair value derivative swap contract company’s collective trust funds company’s deferred compensation plan liabilities determined based inputs readily available public markets derived information available publicly quoted markets therefore company categorized instruments level 2 financial instruments fair value debt security including accrued interest based upon significant unobservable inputs including use discounted cash flows model requiring company develop assumptions therefore company categorized asset level 3 financial asset one significant unobservable inputs used fair value measurement debt security discount rate holding inputs constant changes discount rate could result significant change fair value debt security december 31 2016 fair value debt security 122 million decrease 17 million 2016 company recorded comprehensive income unrealized loss debt securities company evaluated decline fair value determine impairment otherthantemporary based upon company’s best estimate amount expects recover company recorded otherthantemporary impairment 27 million 2016 otherthantemporary impairment reclassified accumulated comprehensive loss included within expense company continues classify remainder accumulated impairment 24 million included accumulated comprehensive loss temporary nature company intend sell debt security believe recoverability portion investment occur following table provides reconciliation beginning ending balances debt securities measured fair value using significant unobservable inputs level 3 11 commitments leases company entered operating leases facilities equipment leases noncancellable typically contain renewal options certain leases contain rent escalation clauses company recognizes expense straightline basis rent expense company’s operating leases years ended december 31 2016 2015 2014 approximately 30 million 30 million 34 million respectively future minimum lease payments operating leases december 31 2016 follows inventory purchase commitments company inventory purchase commitments thirdparty manufactures 12 million 21 million 25 million december 31 2016 2015 2014 respectively 12 contingencies company records accruals certain outstanding legal proceedings investigations claims probable liability incurred amount loss reasonably estimated company evaluates quarterly basis developments legal proceedings investigations claims could affect amount accrual well developments would make loss contingency probable reasonably estimable loss contingency probable reasonably estimable company accrue loss however loss additional loss excess accrual least reasonable possibility material company discloses reasonable estimate possible loss range loss reasonable estimate made company cannot make reasonable estimate possible loss range loss disclosed addition legal fees directly related costs expensed incurred addition matters described paragraphs normal course business company involved various lawsuits time may subject certain contingencies company believes losses related matters individually collectively immaterial possible loss range loss commercial litigation settlement third quarter 2016 company entered agreement settle outstanding commercial litigation matter whereby company became entitled receive 30 million cash payment made company fourth quarter 2016 recorded credit general administrative expense audit committee review sec investigation july 2013 audit committee board directors began conducting independent review assistance outside professionals certain accounting matters review resulted restatements previously filed consolidated financial statements connection audit committee’s review company initiated contact staff division enforcement sec “sec enforcement staff” july 2013 sec conducted formal investigation matters company audit committee cooperated fully sec discussions sec enforcement staff company reached agreement principle sec enforcement staff negotiated resolution would include civil money penalty approximately 825 million company recorded charge amount 2016 matter december 2016 company formally submitted offer settlement sec deposited 825 million escrow restricted subsequent distribution sec january 2017 sec approved company’s offer settlement pursuant company consented entry sec administrative order instituting cease desist proceedings pursuant section 8a securities act 1933 section 21c securities exchange act 1934 pursuant order company agreed pay 825 million previously accrued full amount payment released sec january 2017 deferred prosecution agreement review potential improper payments involving brazil subsidiary 2012 company entered definitive agreements us department justice “doj” sec agreeing settle selfinitiated selfreported internal investigation former mexican subsidiary promeca sa de cv “promeca” regarding noncompliance promeca us foreign corrupt practices act “fcpa” part settlement company entered threeyear deferred prosecution agreement “dpa” doj consent final judgment “consent” sec company periodically reported government terms dpa consent regarding remediation measures implementation compliance measures august 2013 terms dpa consent company’s internal legal department notified certain allegations involving potentially improper payments respect brazilian subsidiary orthofix brasil ltda promptly contacted doj sec enforcement staff voluntarily selfreport allegations following selfreport company cooperated fully doj’s investigation allegations june 15 2015 company doj agreed extend term dpa two months september 17 2015 permit doj additional time evaluate company’s compliance internal controls compliance undertakings dpa investigate brazilrelated allegations september 17 2015 doj extended term dpa additional ten months july 17 2016 stating company’s efforts comply internal controls compliance requirements dpa first eighteen months dpa insufficient july 17 2016 dpa expired july 29 2016 doj filed court dismissal underlying promecarelated case august 1 2016 court entered order granting doj’s motion dismiss case without prejudice company also fully cooperated sec’s investigation allegations brazil discussions sec enforcement staff company reached agreement principle sec enforcement staff company accrued collective charges approximately 61 million second third quarters 2016 december 2016 company formally submitted offer settlement sec deposited accrued amount escrow restricted subsequent distribution sec january 2017 sec approved company’s offer settlement pursuant company consented entry sec administrative order instituting ceaseanddesist proceedings pursuant section 21c securities exchange act 1934 pursuant order company agreed pay disgorgement interest penalties amount previously accrued full amount payment released sec january 2017 pursuant offer settlement related order company agreed retain independent compliance consultant one year review test company’s fcpa compliance program corporate integrity agreement hhsoig june 6 2012 connection settlement us government investigation related qui tam complaint related regenerative stimulation business settlement us government investigation related qui tam complaint related blackstone medical inc “blackstone” entered fiveyear corporate integrity agreement “cia” office inspector general department health human services “hhsoig” cia requires continue maintain term cia compliance program designed promote compliance federal healthcare fda requirements cia requires conduct certain compliancerelated activities term cia including various training monitoring procedures maintaining disciplinary process compliance obligations also subject periodic reporting certification requirements attesting provisions cia implemented followed well certain document record retention mandates cia provides event uncured material breach cia could excluded participation federal healthcare programs andor subject prosecution subject monetary penalties connection settlement guilty plea subsidiary orthofix inc one felony count obstruction federal audit court imposed fiveyear term probation orthofix inc special conditions mandate certain nondisparagement obligations order orthofix inc continue complying terms cia expiration term event fail satisfy terms probation could subject additional criminal penalties prosecution could material adverse effect business financial condition results operations cash flows discontinued operations matters related breg possible indemnification obligations may 24 2012 company sold breg affiliate water street healthcare partners ii lp “water street” terms agreement company indemnified water street breg respect certain specified matters including following • breg engaged manufacturing sale local infusion pumps pain management 1999 2008 since 2008 numerous product liability cases filed united states alleging local anesthetic dispensed infusion pumps inside joint causes rare arthritic condition called “chondrolysis” company incurred losses settlements judgments connection matters 2016 2015 2014 09 million 03 million 38 million respectively addition several cases remain outstanding company currently cannot reasonably estimate possible loss range loss • time sale breg engaged manufacturing sales motorized cold therapy units used reduce pain swelling several domestic product liability cases filed recent years mostly california state court alleging use cold therapy causes skin andor nerve injury seeking damages behalf individual plaintiffs allegedly injured units would purchased units known could injured september 2014 company entered master settlement agreement resolving pending preclose claims pursuant terms settlement agreement company paid approximately 13 million additional amounts owed settlement paid directly company’s insurance providers remaining cold therapy claims include plaintiff’s appeal california supreme court intermediate appellate court reduced adverse july 2012 jury verdict postclose cold therapy claim pending california state court december 31 2016 company accrual 24 million recorded within current liabilities july 2012 verdict postclose cold therapy liabilities however actual liability could higher lower amount accrued charges incurred result indemnification reflected discontinued operations consolidated statements operations comprehensive income loss 13 shareholders’ equity dividends company paid dividends holders common stock past certain subsidiaries company restrictions ability pay dividends certain circumstances pursuant credit agreement event company decides pay dividend holders common stock future dividends received subsidiaries company may based prevailing rates taxation required pay additional withholding income tax amounts received subsidiaries share repurchase plan august 2015 company’s board directors authorized share repurchase plan authorizing purchase 75 million company’s common stock including september 2017 company completed share repurchase plan fourth quarter 2016 program common shares repurchased consisted open market transactions prevailing market prices accordance guidelines specified rule 10b18 exchange act amended repurchases made cash hand cash generated operations year ended december 31 2016 company repurchased 1544681 shares common stock 634 million average price per share 4106 retired upon repurchase accumulated comprehensive loss accumulated comprehensive loss comprised foreign currency translation adjustments effective portion gain loss company’s crosscurrency swap designated accounted cash flow hedge see note 9 unrealized loss company’s debt securities components changes accumulated comprehensive loss follows 14 revenue recognition accounts receivable table presents net sales includes product sales marketing service fees years ended december 31 2016 2015 2014 product sales primarily consist stimulation devices implant products marketing service fees received mtf based total sales biologics tissues revenues exclude value added local taxes intercompany sales trade discounts shipping handling costs products shipped customers included cost sales 20 million 22 million 23 million years ended december 31 2016 2015 2014 respectively biostim revenue comprised thirdparty payor transactions wholesale revenue largest portion biostim revenue derived thirdparty payors includes commercial insurance carriers health maintenance organizations preferred provider organizations governmental payors medicare connection sale company’s stimulation products revenue recognized stimulation product placed accepted patient amounts paid thirdparty payors generally based fixed allowable reimbursement rates revenues recorded expected preauthorized reimbursement rates net contractual allowances adjustments certain billings subject review thirdparty payors may subject adjustment wholesale revenue related sale company’s bone growth stimulators directly physicians healthcare providers wholesale revenues recognized upon shipment receipt confirming purchase order biologics revenue primarily related collaborative arrangement mtf company markets tissue bone repair reconstruction brand names trinity evolution trinity elite company exclusive global marketing rights trinity evolution well nonexclusive marketing rights products receives marketing fees mtf based total sales mtf considered primary obligor arrangements therefore company recognizes marketing service fees net basis within net sales upon shipment product customer 2008 company mtf entered agreement develop commercialize trinity evolution tissue stem cellbased bone growth biologic matrix development process completed 2009 company mtf operated terms separate commercialization agreement terms 10year agreement mtf sourced tissue processed create bone growth matrix packaged delivered customer accordance orders received company january 10 2012 company announced reached agreement mtf codevelop commercialize new technology use bone grafting applications expand mtf’s trinity evolution processing capacity collaborative agreement company mtf extends july 28 2025 july 2013 company collaboration mtf released next generation trinity elite allograft viable cells unlike predecessor unique graft containment properties fully moldable user extremity fixation spine fixation revenue within extremity fixation spine fixation comprised commercial revenue distributor arrangements commercial revenue related sale company’s implant products generally representing hospital customers revenues recognized products utilized confirming purchase order received hospital revenue certain government entities recorded cashbasis collectability reasonably assured revenue distributor arrangements company recognizes revenue product delivered end customer “sellthrough method” company reliable information distributors sell product end customers company uses cash collection distributors basis revenue recognition sellthrough method although many cases company legally entitled accounts receivable time shipment company recognized accounts receivables corresponding deferred revenues associated distributor transactions revenue recognized sellthrough method distributor arrangements company also considers whether match related cost sales revenue recognize cost sales upon shipment making assessment company considers financial viability distributors based creditworthiness determine collectability amounts sufficient realize costs products shipped reasonably assured time shipment distributors instances distributor determined financially viable company defers costs sales revenue recognized trade accounts receivable allowances accounts receivable analyzed quarterly basis assess adequacy reserves doubtful accounts contractual allowances revisions allowances doubtful accounts estimates recorded adjustment bad debt expense within sales marketing expenses revisions contractual allowances recorded adjustment net sales company’s estimates periodically tested actual collection experience company generally sell receivables certain italian hospitals year 2016 2015 2014 company sold €100 million €109 million €98 million 111 million 119 million 128 million receivables respectively estimated related fee 2016 2015 2014 04 million 05 million 04 million respectively recorded interest expense trade accounts receivables sold without recourse removed balance sheet time sale 15 business segment information manage business four sbus biostim biologics extremity fixation spine fixation sbus represent operating segments chief executive officer also chief operating decision maker “codm” reviews financial information makes resource allocation decisions among business units primary metric used codm managing company net margin defined gross profit less sales marketing expense company neither discretely allocates assets goodwill operating segments evaluates operating segments using discrete asset information accordingly reporting segment information prepared based four sbus biostim sbu manufactures distributes provides support services market leading bone growth stimulator devices enhance bone fusion class iii medical devices indicated adjunctive noninvasive treatment improve fusion success rates cervical lumbar spine well therapeutic treatment nonspine fractures healed nonunions sbu uses distributors sales representatives sell devices hospitals healthcare providers patients primarily us biologics sbu provides portfolio regenerative products tissue forms allow physicians successfully treat variety spinal orthopedic conditions sbu specializes marketing company’s exclusive regeneration tissue forms biologics markets tissues network distributors independent sales representatives supply hospitals doctors healthcare providers primarily us partnership mtf allows us exclusively market trinity evolution trinity elite tissue forms musculoskeletal defects enhance bony fusion extremity fixation extremity fixation sbu offers products solutions allow physicians successfully treat variety orthopedic conditions unrelated spine sbu specializes design development marketing company’s orthopedic products used fracture repair deformity correction bone reconstruction procedures extremity fixation distributes products network distributors sales representatives sell orthopedic products hospitals doctors health providers globally spine fixation spine fixation sbu specializes design development marketing broad portfolio implant products used surgical procedures spine fixation distributes products network distributors sales representatives sell spine products hospitals doctors healthcare providers globally corporate activities comprised operating expenses orthofix international nv holding company subsidiaries along activities necessarily identifiable within four sbus table presents net sales reporting segment following table presents net margin reporting segment following table presents depreciation amortization reporting segment geographical information following data includes net sales geographic destination following data includes property plant equipment geographic area 16 sharebased compensation december 31 2016 company stock option award plans employee stock purchase plan 2012 long term incentive plan board directors adopted orthofix international nv 2012 longterm incentive plan “2012 ltip” april 13 2012 subject shareholder approval subsequently provided shareholder ratification 2012 ltip provides grant options purchase shares company’s common stock awards including restricted stock unrestricted stock units stock appreciation rights performancebased awards equitybased awards company’s employees company’s subsidiaries affiliates eligible may receive awards 2012 ltip addition company’s nonemployee directors consultants advisors perform services company’s subsidiaries affiliates may receive awards 2012 ltip incentive share options however available company’s employees awards granted 2012 ltip expire later ten years date grant company reserves total 3200000 shares common stock issuance pursuant 2012 ltip subject certain adjustments set forth 2012 ltip december 31 2016 787646 options outstanding 2012 ltip plan 264673 exercisable addition 551229 shares unvested restricted stock outstanding contain performance conditions 151575 units performance stock units outstanding plan december 31 2016 2004 long term incentive plan 2004 long term incentive plan “2004 ltip plan” reserved 31 million shares issuance addition shares available future awards june 29 2004 prior plans ii become available future issuance upon expiration forfeiture june 29 2004 awards upon prior plans december 31 2016 199533 options outstanding 2004 ltip plan 199533 exercisable addition shares unvested restricted stock outstanding stock purchase plan orthofix international nv amended restated stock purchase plan “stock purchase plan” provides issuance shares company’s common stock eligible employees directors company subsidiaries elect participate plan acquire shares common stock payroll deductions including executive officers purchase period eligible employees may designate 1 25 compensation deducted purchase common stock plan percentage order comply regulations applicable employees domiciled resident member state european union eligible directors designated percentage amount equal annual director compensation paid cash current plan year purchase price shares plan equal 85 fair market value first day plan year calendar year running january 1 december 31 lower last day plan year due compensatory nature plan company records related share based compensation consolidated statement operations aggregate number shares reserved issuance stock purchase plan 1850000 december 31 2016 1385169 shares issued sharebased compensation expense following tables present detail sharebased compensation line item consolidated statements operations well award type years ended december 31 2016 2015 2014 income tax benefit related expense 43 million 16 million 13 million years ended december 31 2016 2015 2014 respectively stock options fair value servicebased stock options determined using blackscholes valuation model value recognized expense service period net actual forfeitures fair value marketbased stock options determined date grant using monte carlo valuation methodology value recognized expense requisite service period adjusted forfeitures occur monte carlo methodology incorporates valuation possibility market condition may satisfied summary company’s assumptions used determining fair value stock options granted year shown following table expected term options granted estimated based number factors including vesting expiration terms award historical employee exercise behavior options currently outstanding options exercised expired historical volatility company’s common stock employee’s average length service riskfree interest rate determined based upon constant us treasury security rate contractual life approximates expected term option award expected volatility estimated based historical volatility company’s stock summaries status company’s stock option plans december 31 2016 2015 changes year ended december 31 2016 presented table summarizes options outstanding exercisable exercise price range december 31 2016 december 31 2016 unamortized compensation expense relating options granted expected recognized 32 million amount expected recognized december 2020 weighted average period approximately 16 years total intrinsic value options exercised 43 million 07 million 21 million years ended december 31 2016 2015 2014 respectively aggregate intrinsic value options outstanding options exercisable december 31 2016 calculated difference exercise price underlying options market price company’s common stock shares exercise prices lower 3618 closing price company’s stock december 31 2016 aggregate intrinsic value options outstanding 33 million 80 million 24 million years ended december 31 2016 2015 2014 respectively aggregate intrinsic value options exercisable 22 million 43 million 10 million years ended december 31 2016 2015 2014 respectively timebased restricted stock awards year ended december 31 2016 company granted employees nonemployee directors 186515 shares restricted stock vest various dates november 2020 year ended december 31 2015 company granted employees nonemployee directors 203618 shares restricted stock vest various dates august 2019 compensation expense represents fair value stock measured market price date grant recognized straightline basis vesting period net actual forfeitures aggregate fair value restricted stock vested years ended december 31 2016 2015 2014 55 million 56 million 25 million respectively unamortized compensation expense related restricted stock amounted 106 million december 31 2016 expected recognized weighted average period approximately 24 years aggregate intrinsic value restricted stock outstanding 130 million 149 million 113 million years ended december 31 2016 2015 2014 respectively performancebased restricted stock awards fair value performancebased restricted stock awards calculated based upon closing stock price date grant value recognized expense derived requisite service period beginning period deemed probable vest net actual forfeitures vesting probability assessed based upon forecasted earnings financial results year ended december 31 2016 company grant performancebased restricted stock awards employees year ended december 31 2015 company granted employees 110660 shares performancebased restricted stock vest based upon achievement certain earnings return invested capital targets years ended december 31 2016 2017 2018 approximately 57 million compensation expense recorded year ended december 31 2016 associated determination 2016 probable performance criteria related certain grants company’s performancebased vesting restricted stock achieved expense recorded years ended december 31 2015 2014 related performancebased restricted stock unamortized compensation expense related performancebased restricted stock amounted 09 million december 31 2016 contingent upon meeting certain performancebased vesting criteria expected recognized weighted average period approximately 20 years aggregate intrinsic value performancebased restricted stock awards outstanding 70 million 76 million 26 million years ended december 31 2016 2014 respectively performancebased marketbased restricted stock units company’s performancebased stock units “psus” consist awards contain either market conditions performance conditions requirement vesting fair value marketbased psus determined date grant using monte carlo valuation methodology discounts postvesting restrictions estimated using chaffe model monte carlo methodology incorporates valuation possibility market condition may satisfied value recognized straightline basis vesting period net actual forfeitures year ended december 31 2016 company granted 96245 shares marketbased psus executive officers certain employees awards market conditions achieved settled shares common stock one share common stock issued per psu targets achieved 100 level awards may achieved minimum level 50 maximum 200 market conditions based company’s stock achieving certain total shareholder return targets relative specified index companies 3year performance period beginning july 1 2016 company recorded 09 million compensation expense year ended december 31 2016 expense years ended december 31 2015 2014 respectively related marketbased psus unamortized compensation expense marketbased psus amounted 38 million december 31 2016 expected recognized weighted average period approximately 25 years aggregate intrinsic value marketbased psus outstanding 35 million 00 million 00 million years ended december 31 2016 2015 2014 respectively fair value performancebased psus calculated based upon closing stock price date grant value recognized expense derived requisite service period beginning period awards deemed probable vest vesting probability assessed based upon forecasted earnings financial results year ended december 31 2015 company granted 55330 shares performancebased psus employees vest based upon achievement certain earnings return invested capital targets year ended december 31 2018 company recorded compensation expense years ended december 31 2016 2015 2014 related performancebased psus performance conditions currently considered probable vest unamortized compensation expense related performance based psus amounts 18 million december 31 2016 expected recognized weighted average period approximately 20 years performance conditions met aggregate intrinsic value performancebased psus outstanding 20 million 22 million 00 million years ended december 31 2016 2015 2014 respectively summary status restricted stock units december 31 2016 2015 changes year ended december 31 2016 presented 17 pensions deferred compensation defined contribution plans orthofix inc sponsors defined contribution plan “401k plan” covering substantially full time us employees 401k plan allows participants contribute 15 pretax compensation subject certain limitations company matching 100 first 2 employee’s base compensation 50 next 4 employee’s base compensation contributed 401k plan years ended december 31 2016 2015 2014 expenses incurred relating 401k plan including matching contributions approximately 19 million 20 million 17 million respectively company also operates defined contribution pension plans international employees meeting minimum service requirements company’s expenses pension contributions years ended december 31 2016 2015 2014 10 million 11 million 08 million respectively deferred compensation plans italian law italian subsidiary accrues behalf employees deferred compensation paid termination employment accrual deferred compensation based percentage employee’s current annual remuneration plus annual charge deferred compensation also accrued leaving indemnity payable agents case dismissal regulated national contract equal approximately 38 total commissions earned company’s relations italian employees represent 193 total employees december 31 2016 governed provisions national collective labor agreement setting forth mandatory minimum standards labor relations metal mechanic workers industry company party collective bargaining agreement orthofix deferred compensation plan administered board directors company effective january 1 2007 amended restated effective january 1 2009 plan intended allow select group key management highly compensated employees company defer receipt compensation would otherwise payable january 1 2011 company disallowed contributions plan new plan participants distributions made accordance requirements code section 409a company’s expense deferred compensation plans described approximately 01 million years ended december 31 2016 2015 2014 01 million deferred compensation payments made 2016 none 2015 03 million 2014 balance longterm liabilities december 31 2016 2015 15 million respectively represents amount would payable employees agents terminated employment date 18 income taxes income loss continuing operations provision income taxes consisted following company accounts income taxes using asset liability method deferred tax assets liabilities recognized expected future tax consequences temporary differences financial reporting income tax basis assets liabilities operating losses credit carryforwards deferred tax assets liabilities measured using enacted tax rates effect years items expected realized tax law rate changes recorded period changes enacted company establishes valuation allowance likely certain deferred tax assets realized foreseeable future provision income taxes continuing operations consists following rate reconciliation continuing operations presented based us federal income tax rate rather company’s country domicile tax rate company believes given large proportion taxable income earned united states disclosure meaningful 2016 company revised estimate relating deductibility certain compensation expenses change estimate reduced income tax expense increased net income continuing operations 24 million increased earnings per share 013 year ended december 31 2016 company’s deferred tax assets liabilities follows valuation allowance primarily attributable net operating loss carryforwards temporary differences certain foreign jurisdictions net decrease valuation allowance 16 million year principally relates reduction valuation allowances expiring net operating loss carryforwards offset current year losses benefit recognized company us federal net operating loss carryforwards approximately 41 million expire 2036 state net operating loss carryforwards approximately 151 million begin expire 2018 additionally company net operating loss carryforwards various foreign jurisdictions approximately 1555 million begin expire 2017 majority relate company’s netherlands operations 2016 company changed intention related unremitted foreign earnings puerto rico subsidiary certain united kingdom subsidiaries result change intention company recorded 13 million income tax expense remitted unremitted earnings subsidiaries company’s current intention indefinitely reinvest substantially unremitted foreign earnings residing outside curaçao entity incorporated curaçao “foreign earnings” refer us nonus earnings furthermore income sourced us subject us income tax unremitted foreign earnings increased 1846 million december 31 2015 1989 million december 31 2016 determining additional income tax may payable earnings repatriated practicable company records benefit uncertain tax positions weight available evidence indicates likely based evaluation technical merits tax position sustained audit tax benefit measured largest amount 50 likely realized upon settlement company reevaluates income tax positions periodically consider changes facts circumstances changes interpretations tax law effectively settled issues audit new audit activity company includes interest applicable penalties related income tax issues part income tax expense consolidated financial statements company’s unrecognized tax benefit 184 million 158 million years ended december 31 2016 2015 respectively company recorded interest penalties unrecognized tax benefits 21 million 02 million less 01 million years ended december 31 2016 2015 2014 respectively approximately 30 million 08 million accrued payment interest penalties december 31 2016 2015 respectively entire amount unrecognized tax benefits including interest would favorably impact company’s effective tax rate recognized december 31 2016 company expect amount unrecognized tax benefits change significantly next twelve months reconciliation gross unrecognized tax benefits excluding interest penalties years ended december 31 2016 2015 2014 follows company subsidiaries file income tax returns us federal jurisdiction certain state foreign jurisdictions including italy united kingdom statute limitations respect federal state tax filings closed years prior 2012 statute limitations respect major foreign tax filing jurisdictions closed years prior 2012 third quarter 2015 internal revenue service commenced examination company’s federal income tax return 2012 october 2016 company notified examination federal income tax return 2013 company cannot reasonably determine examination state local tax examinations material impact financial statements cannot predict timing regarding resolution tax examinations 19 earnings per share eps basic eps computed using weighted average number common shares outstanding respective years diluted eps computed using weighted average number common equivalent shares outstanding respective years using treasury stock method difference basic diluted shares largely results common equivalent shares represents dilutive effect assumed exercise certain outstanding share options assumed vesting restricted stock granted employees directors satisfaction certain necessary conditions contingently issuable shares see note 16 three years ended december 31 2016 adjustments made net income loss purposes calculating basic diluted eps following reconciliation weighted average shares used diluted eps computations adjustments made common stock equivalents years ended december 31 2015 2014 effect would antidilutive 542555 1033731 1229781 outstanding options restricted stock performancebased marketbased equity awards included diluted earnings per share computation years ended december 31 2016 2015 2014 respectively inclusion awards antidilutive performancebased marketbased awards necessary conditions satisfied end respective period 20 quarterly financial data unauditeditem 15 exhibits financial statement schedules documents filed part report form 10k following documents filed part annual report form 10k 1 financial statements see “index consolidated financial statements” page form 10k 2 financial statement schedules required either required information present amounts sufficient require submission schedule information required included consolidated financial statements notes thereto 3 exhibits exhibit number description 21 agreement plan merger entered march 15 2018 among blackstone medical inc summit development inc spinal kinetics inc filed exhibit company’s quarterly report form 10q quarter ended march 31 2018 incorporated herein reference 31 orthofix medical inc certificate incorporation filed exhibit company’s current report form 8k dated august 1 2018 incorporated herein reference 32 orthofix medical inc bylaws filed exhibit company’s current report form 8k dated january 28 2021 incorporated herein reference 41 form stock certificate filed exhibit company’s current report form 8k dated august 1 2018 incorporated herein reference 42 description registrant’s securities registered pursuant section 12 securities exchange act 1934 filed exhibit company’s annual report form 10k year ended december 31 2019 incorporated herein reference 101 second amended restated credit agreement dated october 25 2019 among orthofix medical inc orthofix inc orthofix spinal implants inc orthofix international bv orthofix iii bv certain subsidiaries orthofix medical inc guarantors several banks financial institutions may time become parties thereunder lenders jpmorgan chase na administrative agent filed exhibit company’s current report form 8k filed november 1 2019 incorporated herein reference 102† matrix commercialization collaboration agreement entered july 24 2008 orthofix holdings inc musculoskeletal transplant foundation filed exhibit company’s annual report form 10k fiscal year ended december 31 2009 incorporated herein reference 103 amendment 1 matrix commercialization collaboration agreement dated december 15 2010 musculoskeletal transplant foundation inc orthofix holdings inc filed exhibit company’s annual report form 10k fiscal year ended december 31 2010 incorporated herein reference 104† amendment 2 matrix commercialization collaboration agreement dated january 9 2012 musculoskeletal transplant foundation inc orthofix holdings inc filed exhibit amendment 1 company’s annual report form 10ka year ended december 31 2011 incorporated herein reference 105† amendment 3 matrix commercialization collaboration agreement entered july 1 2013 effective june 25 2013 musculoskeletal transplant foundation inc orthofix holdings inc filed exhibit company’s current report form 8k filed july 8 2013 incorporated herein reference exhibit number description 106 amendment 4 matrix commercialization collaboration agreement entered april 1 2014 musculoskeletal transplant foundation inc orthofix holdings inc filed exhibit company’s current report form 8k filed april 7 2014 incorporated herein reference 107† amendment 5 matrix commercialization collaboration agreement entered march 10 2016 musculoskeletal transplant foundation inc orthofix holdings inc filed exhibit company’s current report form 8k filed march 14 2016 incorporated herein reference 108† amendment 6 matrix commercialization collaboration agreement entered december 29 2017 musculoskeletal transplant foundation inc orthofix holdings inc filed exhibit company’s annual report form 10k filed february 26 2018 incorporated herein reference 109 orthofix medical inc second amended restated stock purchase plan amended 1010 orthofix medical inc amended restated 2012 longterm incentive plan filed exhibit company’s annual report form 10k fiscal year ended december 31 2018 incorporated herein reference 1011 amendment 1 orthofix medical inc amended restated 2012 longterm incentive plan filed exhibit company’s current report form 8k dated june 8 2020 incorporated herein reference 1012 form employee performance stock unit agreement orthofix medical inc amended restated 2012 longterm incentive plan filed exhibit company’s annual report form 10k year ended december 31 2019 incorporated herein reference 1013 form timebased vesting employee restricted stock unit grant agreement 2019 executive retention grants orthofix medical inc amended restated 202 longterm incentive plan filed exhibit company’s annual report form 10k year ended december 31 2019 incorporated herein reference 1014 form timebased vesting employee restricted stock grant agreement orthofix international nv 2012 longterm incentive plan filed exhibit company’s current report form 8k filed july 8 2016 incorporated reference 1015 form timebased vesting employee nonqualified stock option agreement orthofix international nv 2012 longterm incentive plan filed exhibit company’s current report form 8k filed july 8 2016 incorporated reference 1016 form employee nonqualified stock option agreement orthofix international nv 2012 longterm incentive plan july 2014june 2016 timebased vesting filed exhibit company’s quarterly report form 10q quarter ended september 30 2014 incorporated herein reference 1017 form employee nonqualified stock option agreement orthofix international nv 2012 longterm incentive plan pre2014 grants filed exhibit company’s annual report form 10k fiscal year ended december 31 2012 incorporated herein reference 1018 form nonemployee director restricted stock unit agreement orthofix international nv 2012 longterm incentive plan filed exhibit company’s form 10q filed august 7 2017 incorporated herein reference 1019 form timebased vesting nonemployee director nonqualified stock option agreement orthofix international nv 2012 longterm incentive plan initial grant filed exhibit company’s current report form 8k filed july 8 2016 incorporated reference 1020 form nonemployee director nonqualified stock option agreement orthofix international nv 2012 long term incentive plan filed exhibit company’s annual report form 10k fiscal year ended december 31 2012 incorporated herein reference 1021 employee inducement restricted stock unit agreement paul gonsalves filed exhibit company’s form s8 filed september 14 2020 incorporated herein reference exhibit number description 1022 employee inducement nonqualified stock option agreement paul gonsalves filed exhibit company’s form s8 filed september 14 2020 incorporated herein reference 1023 employee inducement restricted stock unit agreement jon serbousek filed exhibit company’s form s8 filed august 5 2019 incorporated herein reference 1024 employee inducement nonqualified stock option agreement jon serbousek filed exhibit company’s form s8 filed august 5 2019 incorporated herein reference 1025 inducement plan spinal kinetics employees filed exhibit company’s form s8 filed april 30 2018 incorporated herein reference 1026 form inducement grant restricted stock agreement filed exhibit company’s form s8 filed april 30 2018 incorporated herein reference 1027 inducement grant nonqualified stock option agreement dated march 13 2013 orthofix international nv bradley r mason filed exhibit company’s current report form 8k filed march 13 2013 incorporated herein reference 1028 amended restated 2004 long term incentive plan filed exhibit company’s quarterly report form 10q quarter ended june 30 2009 incorporated herein reference 1029 form employee nonqualified stock option agreement orthofix international nv amended restated 2004 longterm incentive plan post2008 grants made 2004 long term incentive plan prior adoption 2012 long term incentive plan filed exhibit company’s current report form 8k filed july 7 2009 incorporated herein reference 1030 form indemnification agreement orthofix medical inc directors officers incorporated reference exhibit 101 company’s registration statement form s4 registration 333224407 filed april 23 2018 1031 amended change control severance agreement dated november 1 2016 orthofix international nv bradley r mason filed exhibit company’s annual report form 10k fiscal year ended december 31 2016 incorporated herein reference 1032 transition retirement agreement dated february 25 2019 bradley r mason orthofix medical inc filed exhibit company’s annual report form 10k fiscal year ended december 31 2018 incorporated herein reference 1033 consulting agreement dated november 1 2019 orthofix medical inc bradley r mason filed exhibit company’s current report form 8k filed november 1 2019 incorporated herein reference 1034 change control severance agreement dated november 1 2019 orthofix medical inc jon serbousek filed exhibit company’s current report form 8k filed november 1 2019 incorporated herein reference 1035 letter agreement dated december 4 2019 company kevin kenny filed exhibit company’s annual report form 10k year ended december 31 2019 incorporated herein reference 1036 change control severance agreement dated november 1 2019 orthofix medical inc kevin kenny filed exhibit company’s annual report form 10k year ended december 31 2019 incorporated herein reference 1037 letter agreement dated august 21 2020 company paul gonsalves 1038 change control severance agreement dated september 11 2020 orthofix medical inc paul gonsalves filed exhibit company’s quarterly report form 10q quarter ended september 30 2020 incorporated herein reference exhibit number description 1039 amended change control severance agreement dated november 1 2016 orthofix international nv doug rice filed exhibit company’s annual report form 10k fiscal year ended december 31 2016 incorporated herein reference 1040 change control severance agreement dated november 1 2016 orthofix international nv kimberley elting filed exhibit company’s annual report form 10k fiscal year ended december 31 2016 incorporated herein reference 1041 amended change control severance agreement dated november 1 2016 orthofix international nv michael finegan filed exhibit company’s annual report form 10k fiscal year ended december 31 2016 incorporated herein reference 1042 consulting agreement dated july 4 2020 orthofix medical inc michael finegan filed exhibit company’s quarterly report form 10q filed august 6 2020 incorporated herein reference 1043 change control severance agreement dated september 7 2016 orthofix international nv davide bianchi filed exhibit company’s current report form 8k filed september 9 2016 incorporated herein reference 1044 amended restated employment contract dated july 31 2018 orthofix ag davide bianchi filed exhibit company’s current report form 8k filed august 6 2018 incorporated herein reference 1045 termination agreement dated may 4 2020 orthofix ag davide bianchi 211 list subsidiaries 231 consent independent registered public accounting firm 311 rule 13a14a15d14a certification chief executive officer 312 rule 13a14a15d14a certification chief financial officer 321 section 1350 certification chief executive officer certification chief financial officer following financial statements orthofix medical inc form 10k year ended december 31 2020 filed february 26 2021 formatted inline xbrl inline extensible business reporting language consolidated balance sheets ii consolidated statements operations comprehensive income loss iii consolidated statements changes shareholders’ equity iv consolidated statements cash flows v notes consolidated financial statements cover page orthofix medical inc’s annual report form 10k year ended december 31 2020 formatted inline xbrl contained exhibit 101 filed form 10k † certain confidential portions exhibit omitted means redacting portion text exhibit filed separately secretary commission without redactions pursuant application requesting confidential treatment securities exchange act 1934 item 16 form 10k summary none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated name title date jon serbousek jon serbousek president chief executive officer director principal executive officer february 26 2021 doug rice doug rice chief financial officer principal financial accounting officer february 26 2021 ronald matricaria ronald matricaria chairman board directors february 26 2021 jason hannon jason hannon director february 26 2021 james hinrichs james hinrichs director february 26 2021 alexis v lukianov director february 26 2021 lilly marks lilly marks director february 26 2021 michael e paolucci director february 26 2021 michael e paolucci maria sainz director february 26 2021 maria sainz john sicard director february 26 2021 john sicard orthofix medical inc statement management’s responsibility financial statements shareholders orthofix medical inc management responsible preparation consolidated financial statements related information presented annual report consolidated financial statements include amounts based management’s estimates judgments prepared conformity accounting principles generally accepted united states financial information report shareholders consistent consolidated financial statements company maintains accounting internal control systems provide reasonable assurance reasonable cost assets safeguarded loss unauthorized use disposition financial records reliable preparing financial statements maintaining accountability assets systems augmented written policies organizational structure providing division responsibilities careful selection training qualified personnel company engaged ernst young llp independent registered public accountants audit render opinion consolidated financial statements accordance auditing standards public company accounting oversight board united states standards include assessment systems internal controls test transactions extent considered necessary support opinion board directors audit committee consisting solely outside directors company meets periodically management independent registered public accountants ensure meeting responsibilities discuss matters concerning internal controls financial reporting ernst young llp full free access audit committee james hinrichs chairman audit committee jon serbousek president chief executive officer director doug rice chief financial officer orthofix medical inc index consolidated financial statements report independent registered public accounting firm shareholders board directors orthofix medical inc opinion financial statements audited accompanying consolidated balance sheets orthofix medical inc company december 31 2020 2019 related consolidated statements operations comprehensive income loss changes shareholders equity cash flows three years period ended december 31 2020 related notes collectively referred “consolidated financial statements” opinion consolidated financial statements present fairly material respects financial position company december 31 2020 2019 results operations cash flows three years period ended december 31 2020 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states pcaob companys internal control financial reporting december 31 2020 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated february 25 2021 expressed unqualified opinion thereon adoption new accounting standards discussed notes 3 9 15 consolidated financial statements company changed methods accounting 1 leases 2019 due adoption asu 201602 leases topic 842 2 recognition revenue contracts customers 2018 due adoption asu 201409 revenue contracts customers 3 measurement equity investments fair value recognition changes fair value 2018 due adoption asu 201601 financial instruments asu 201803 technical connections improvements financial instruments basis opinion financial statements responsibility companys management responsibility express opinion company’s financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation financial statements believe audits provide reasonable basis opinion critical audit matters critical audit matters communicated matters arising current period audit financial statements communicated required communicated audit committee 1 relate accounts disclosures material financial statements 2 involved especially challenging subjective complex judgments communication critical audit matters alter way opinion consolidated financial statements taken whole communicating critical audit matters providing separate opinions critical audit matters accounts disclosures relate contingent consideration spinal kinetics description matter described note 12 consolidated financial statements company’s contingent consideration acquisition date spinal kinetics inc consisted potential milestone payments 150 million achieving fda approval 45 million connection certain future product sales december 31 2020 fair value contingent consideration 354 million auditing company’s accounting fair value contingent consideration involved high degree subjectivity evaluating management’s estimates fair value sensitive changes unobservable inputs forecasted future revenues spinal kinetics inc products discount rate applied assumptions potential volatility forecasted revenues addressed matter audit obtained understanding evaluated design tested operating effectiveness controls address risks material misstatement relating measurement valuation contingent consideration liability example tested controls company’s process estimate fair value contingent consideration management’s review significant estimation assumptions methods used develop fair value estimate accuracy calculations included within fair value model underlying data used model test fair value contingent consideration liability performed audit procedures included among others assessing terms arrangement including criteria required achieve contingent consideration evaluating significant assumptions underlying data used company valuation model addition involved valuation specialist assist evaluating appropriateness valuation model certain valuation model’s assumptions test model’s computational accuracy also tested completeness accuracy underlying data used model inventory excess obsolescence reserves description matter december 31 2020 company’s inventory balance 846 million net management’s estimate inventory excess obsolescence reserves described note 5 consolidated financial statements management adjusts value inventory net realizable value extent determines inventory cost cannot recovered due obsolescence factors order make determinations management estimates future demand sales prices determine appropriate inventory reserves make corresponding adjustments carrying value inventories reflect lower cost net realizable value auditing management’s estimate inventory excess obsolescence reserves involved high degree subjectivity estimate sensitive changes assumptions including forecasted product demand length product life cycles period required evaluate level market acceptance new products assumptions significant effect measurement inventory excess obsolescence reserves addressed matter audit obtained understanding evaluated design tested operating effectiveness controls address risks material misstatement relating measurement valuation inventory excess obsolescence reserves example tested controls company’s processes estimate inventory excess obsolescence reserves management’s review approval model used estimate inventory excess obsolescence reserve including data inputs outputs model management’s qualitative adjustments model test inventory excess obsolescence reserve balance performed audit procedures included among others evaluating significant assumptions qualitative adjustments described underlying data used company analysis audit procedures included testing completeness accuracy underlying data used model evaluating whether data representative current circumstances assessed historical accuracy management’s estimates performed sensitivity analyses significant assumptions evaluate changes inventory excess obsolescence reserves would result changes assumptions revenue recognition asc 606 risk side agreements distributors description matter described note 15 consolidated financial statements company recognizes revenue stocking distributors “distributor revenue” upon shipment receipt confirming purchase order distributor obtains control promised goods revenues based company’s historical collection experience considers potential among things return previously sold products auditing company’s measurement potential variable consideration distributor contracts especially challenging due potential side agreements may allow return previously sold products addressed matter audit obtained understanding evaluated design tested operating effectiveness controls company’s process review approve new distributor agreements ii review approve changes made existing arrangements iii review approve product returns iv identify report potential distributor side agreements inspecting source documentation used management’s review audit procedures included among others confirmation terms conditions material distributor agreements addition evaluated whether company’s actual returns product distributors appropriately approved considered management’s application revenue recognition policy distributor revenue ernst young llp served company’s auditor since 2002 dallas texas february 26 2021 orthofix medical inc consolidated balance sheets december 31 2020 2019 accompanying notes form integral part consolidated financial statements orthofix medical inc consolidated statements operations comprehensive income loss years ended december 31 2020 2019 2018 accompanying notes form integral part consolidated financial statements orthofix medical inc consolidated statements changes shareholders’ equity years ended december 31 2020 2019 2018 accompanying notes form integral part consolidated financial statements orthofix medical inc consolidated statements cash flows years ended december 31 2020 2019 2018 accompanying notes form integral part consolidated financial statements orthofix medical inc notes consolidated financial statements 1 business basis presentation covid19 update cares act description business orthofix medical inc subsidiaries “company” global medical device biologics company spine extremities focus company’s mission deliver innovative qualitydriven solutions partnering health care professionals improve patients’ lives headquartered lewisville texas company two reporting segments global spine global extremities orthofix spine orthopedic extremities products distributed 70 countries via companys sales representatives distributors basis presentation consolidated financial statements include financial statements company wholly owned subsidiaries intercompany accounts transactions eliminated consolidation information accounting policies methods used preparation consolidated financial statements included applicable respective footnotes follow covid19 update global coronavirus disease 2019 covid19 pandemic significantly affected company’s patients communities employees business operations pandemic led cancellation deferral elective surgeries procedures within certain hospitals ambulatory surgery centers medical facilities restrictions travel implementation physical distancing measures temporary permanent closure certain businesses addition broad economic factors resulting pandemic including increased unemployment rates reduced consumer spending affecting company’s patients partners circumstances negatively affected company’s net sales particularly period march 2020 may 2020 elective surgery restrictions pronounced though effects remain ongoing certain geographical areas however company remains focused protecting health wellbeing employees partners patients communities operates assuring continuity business operations companys consolidated financial statements reflect estimates assumptions made management affect reported amounts assets liabilities disclosure contingent assets liabilities date consolidated financial statements reported amounts revenue expenses reporting periods presented time future trajectory covid19 pandemic remains uncertain us markets although company anticipates vaccines widely distributed future timing efficacy vaccines uncertain given various uncertainties unclear extent lingering slowdowns elective procedures affect company’s business 2021 beyond expected effects covid19 company’s business depend various factors including magnitude length additional case waves ii distribution efficacy public acceptance covid19 vaccines iii comfort level patients returning clinics hospitals iv extent localized elective surgery shutdowns occur v unemployment rate’s effect potential patients lacking medical insurance coverage vi general hospital capacity constraints occurring need treat covid19 patients addition company seen effects date risk remains covid19 could material negative effects contractual counterparties leading supply chain disruptions counterparty payment defaults bankruptcies including bankruptcies hospital systems significantly rely revenue elective surgeries matters also described part item 1a form 10k heading risk factors coronavirus aid relief economic security act “cares act” march 27 2020 president united states signed cares act federal law aimed providing emergency assistance health care individuals families businesses affected covid19 pandemic generally supporting us economy cares act among things included provisions relating refundable payroll tax credits deferment employer side social security payments net operating loss carryback periods alternative minimum tax credit refunds modifications net interest deduction limitations technical corrections tax depreciation methods qualified improvement property cares act impact company’s income tax benefit reported within consolidated statements operations year ended december 31 2020 cares act provided financial relief company various programs described detail april 2020 company received 139 million funds centers medicare medicaid services “cms” accelerated advance payment program discussion company’s accounting funds see note 15 company also automatically received durable medical equipment provider without request 47 million funds us department health human services april 2020 part provider relief fund upon review qualifying criteria required retain funding primarily relate lost revenues incurrence expenses attributable covid19 determined company met criteria retain funds received company recognized income 47 million related insubstance grant year ended december 31 2020 addition part cares act company permitted defer employer social security payroll tax payments remainder 2020 calendar year 50 taxes deferred december 31 2021 remaining 50 deferred december 31 2022 december 31 2020 company deferred 06 million associated program classified within current liabilities deferred balance subsequently repaid first quarter 2021 2 significant accounting policies preparation financial statements conformity united states generally accepted accounting principles “us gaap” requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period ongoing basis evaluate estimates including related contractual allowances expected credit losses inventories valuation intangible assets goodwill fair value measurements litigation contingent liabilities income taxes sharebased compensation base estimates historical experience future expectations relevant assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources actual results could differ estimates following discussion accounting policies methods used consolidated financial statements presented within footnotes prior period reclassifications certain amortization expense related intangible assets previously reported general administrative expenses reclassified acquisitionrelated amortization remeasurement based use underlying intangible asset reclassification resulted decrease general administrative expense 13 million year ended december 31 2018 market risk ordinary course business company exposed impact changes interest rates foreign currency fluctuations company’s objective limit impact movements earnings cash flows order achieve objective company seeks balance nonus dollar denominated income expenditures financial statements operations outside united states generally maintained local currency foreign currency denominated balance sheet accounts except shareholders’ equity translated us dollars year end exchange rates revenue expense items translated average rates exchange prevailing year gains losses resulting translation foreign currency recorded accumulated comprehensive income loss component shareholders’ equity transactional foreign currency gains losses including generated intercompany operations included expense net gain 39 million loss 14 million loss 33 million years ended december 31 2020 2019 2018 respectively financial instruments concentration credit risk financial instruments could subject company concentration credit risk consist primarily cash equivalents restricted cash accounts receivable generally cash held large financial institutions cash equivalents consist highly liquid money market funds company performs ongoing credit evaluations customers generally require collateral maintains reserve potential credit losses company believes concentration credit risk related accounts receivable limited customers geographically dispersed end users diversified net sales customers based europe approximately 577 million 2020 represents substantial portion accounts receivable balance december 31 2020 least reasonably possible changes global economic conditions andor local operating economic conditions regions factors could affect future realization accounts receivable balances cash equivalents restricted cash company considers highly liquid investments original maturity three months less cash equivalents restricted cash december 31 2018 related court order affecting company’s local bank accounts office são paulo brazil part investigation 30 companies resulted freezing approximately 26 million company’s cash april 3 2019 company’s appeal regarding freezing local bank accounts heard brazil federal court appeals rio de janeiro court ordered unfreezing company’s cash returned without restrictions april 2019 september 2019 approximately 05 million based upon foreign exchange rates december 31 2020 company’s cash brazil frozen upon request satisfy judgment related ongoing legal dispute former brazilian distributor although company appealing judgment cash reclassified restricted cash refer note 13 discussion matter investing activities result cash receipts cash payments years ended december 31 2020 2019 2018 consisted following included within cash investing activities company’s consolidated statements cash flows advertising costs advertising costs expensed incurred advertising costs included within sales marketing expense totaled 09 million 08 million 06 million years ended december 31 2020 2019 2018 respectively research development costs including inprocess research development “iprd” costs expenditures research development expensed incurred expenditures related company’s collaborative arrangement mtf biologics “mtf” expensed based terms related agreement company recognized 08 million research development expense year ended december 31 2020 collaborative arrangement mtf recognize expenditures year ended december 31 2019 october 1 2020 company neo medical sa privately held swissbased company developing new generation products spinal surgery “neo medical” entered partnership includes codevelopment agreement covering parties’ joint development single use instruments cervical spine procedures distribution agreement company exclusively distribute neo medical’s thoracolumbar procedure solutions certain us customer accounts connection agreement company responsible payment variable costs associated development specified products research development expenses incurred collaborative arrangement year ended december 31 2020 totaled less 01 million connection spinal kinetics inc acquisition 2018 company recognized 268 million iprd costs within intangible assets net recorded additional research development costs develop acquired iprd see note 7 details acquired iprd represents fair value assigned acquired research development assets reached technological feasibility fair value assigned acquired iprd determined estimating costs develop acquired technology commercially viable products estimating resulting revenues projects discounting net cash flows present value revenue cost projections used value acquired iprd applicable reduced based probability success developing asset additionally estimated revenues consider relevant market sizes growth factors expected trends technology nature expected timing new product introductions company competitors rates utilized discount net cash flows present value commensurate stage development project uncertainties economic estimates used projections future costs develop iprd subsequent acquisition recorded research development expense incurred see note 7 additional policy discussion related amortization impairment testing iprd 3 recently adopted accounting standards recently issued accounting pronouncements adoption accounting standards update “asu” 201613 financial instrumentscredit losses topic 326 measurement credit losses financial instruments subsequent amendments june 2016 financial accounting standards board “fasb” issued asu 201613 clarified subsequent asus requires credit losses certain types financial instruments including accounts receivable estimated based expected credit losses among changes effective january 1 2020 company adopted asu 201613 using modified retrospective approach therefore results reporting periods january 1 2020 presented topic 326 prior period amounts adjusted continue reported accordance historical accounting guidance see note 15 additional discussion company’s adoption topic 326 resulting accounting policies adoption asu 201704 intangiblesgoodwill topic 350 simplifying test goodwill impairment january 2017 fasb issued asu 201704 eliminates step 2 previous goodwill impairment test required hypothetical purchase price allocation measure goodwill impairment asu 201704 goodwill impairment loss measured amount reporting unit’s carrying value exceeds fair value exceed recorded amount goodwill company adopted asu effective january 1 2020 prospective basis adoption asu impact company’s condensed consolidated balance sheet statements operations cash flows expected impact measurement future goodwill impairment adoption asu 201813 fair value measurement topic 820 disclosure frameworkchanges disclosure requirements fair value measurement august 2018 fasb issued asu 201813 eliminates certain disclosures amount reasons transfers level 1 level 2 fair value hierarchy adds new disclosure requirements level 3 measurements company adopted asu effective january 1 2020 certain provisions asu applied retrospectively provisions provided prospectively adoption asu impact company’s condensed consolidated balance sheet statements operations cash flows however adoption asu result modified disclosures note 12 adoption asu 201815 intangiblesgoodwill otherinternaluse software subtopic 35040 customer’s accounting implementation costs incurred cloud computing arrangement service contract august 2018 fasb issued asu 201815 aligns requirements capitalizing implementation costs incurred hosting arrangement service contract requirements capitalizing implementation costs incurred develop obtain internaluse software accounting service element hosting arrangement service contract affected amendments update company adopted asu effective january 1 2020 prospective basis adoption asu material impact company’s condensed consolidated balance sheet statements operations cash flows expected impact future cloud computing arrangements adoption asu 202004 reference rate reform topic 848 march 2020 fasb issued asu 202004 provides temporary optional guidance ease potential financial reporting burden expected market transition away libor new guidance provides optional expedients exceptions applying us gaap contract modifications hedge accounting transactions affected reference rate reform certain criteria met december 31 2022 company adopted asu effective march 12 2020 effective date asu prospective basis adoption asu material impact company’s condensed consolidated balance sheet statements operations cash flows expected impact future borrowing rate used company’s secured revolving credit facility adoption accounting standards update “asu” 201602 leases topic 842 february 2016 financial accounting standards board “fasb” issued asu 201602 changes lessees account leases standard requires liability recorded balance sheet based present value future lease obligations corresponding rightofuse asset leases classified operating leases company required recognize lease costs straightline basis based combined amortization lease obligation rightofuse asset similar capital leases previous accounting standard leases accounted finance leases relevant criteria met effective january 1 2019 company adopted asu 201602 using modified retrospective approach upon adoption company elected package practical expedients permitted within new standard elected practical expedients allow company carry forward historical lease classification separate allocate consideration paid lease nonlease components included within contract company also elected optional transition method waives requirement apply asu comparative periods presented within financial statements year adoption therefore results reporting periods beginning january 1 2019 presented topic 842 prior period amounts adjusted continue reported accordance company’s historic accounting policies topic 840 see note 9 additional discussion company’s adoption topic 842 lease accounting policies adoption asu 201802 income statement reporting comprehensive income topic 220 reclassification certain tax effects accumulated comprehensive income february 2018 fasb issued asu 201802 allows entities reclassify stranded tax effects resulting tax cuts jobs act tax act accumulated comprehensive income loss retained earnings company adopted guidance effective january 1 2019 using modified retrospective approach resulted increase accumulated comprehensive income loss decrease retained earnings 09 million recently issued accounting pronouncements 4 acquisitions fitbone asset purchase agreement february 3 2020 company wholly owned subsidiary entered asset purchase agreement “purchase agreement” wittenstein se “wittenstein” privatelyheld germanbased company acquire assets associated fitbone intramedullary lengthening system limb lengthening femur tibia bones terms purchase agreement consideration acquired assets company paid 180 million cash consideration entered contract manufacturing supply agreement “cmsa” wittenstein company accounted acquisition business combination acquisition completed march 26 2020 following table summarizes final fair values assets acquired liabilities assumed acquisition date company’s purchase accounting completed fourth quarter 2020 company recorded goodwill 113 million connection acquisition 111 million assigned global extremities reporting segment 02 million assigned global spine reporting segment specifically goodwill includes synergies associated purchase acquired assets expected deductible tax purposes iprd intangible asset considered indefinitelived asset completion abandonment associated research development efforts accordingly development period acquisition asset amortized instead subject impairment review testing provisions upon completion iprd project company determine useful life asset begin amortization company also entered cmsa wittenstein initial term two years manufacture fitbone product line company accounting cmsa finance lease see note 9 discussion recognized finance lease company recorded 04 million 06 million acquisition related costs years ended december 31 2020 2019 respectively costs included consolidated statements operations within general administrative expenses additionally company’s results operations included net sales 19 million related fitbone product line year ended december 31 2020 company recognize revenues related fitbone product line year ended december 31 2019 distributor acquisition july 2020 company wholly owned subsidiary entered agreement acquire certain assets medical device distributor company agreed pay consideration 76 million accordance parties’ agreement following table summarizes fair values assets acquired consideration paid spinal kinetics inc acquisition april 2018 company completed acquisition spinal kinetics inc “spinal kinetics” privately held developer manufacturer artificial cervical lumbar discs 450 million net cash plus potential milestone payments 600 million cash total fair value consideration transferred 766 million goodwill attributable spinal kinetics acquisitions assigned global spine reporting segment deductible tax purposes options medical llc asset acquisition january 2019 company acquired certain assets options medical llc “options medical” medical device distributor based florida terms acquisition parties agreed terminate existing exclusive sales representative agreement employees options medical became employees company acquired customer lists customer information related sale company’s products consideration assets acquired company paid 64 million purchase price allocations acquisitions completed 2019 2018 5 inventories valued lower cost estimated net realizable value provision excess obsolete impaired items reviewed updated periodic basis management inventory procured produced whether internally contract manufacturing arrangements manufacturing facility italy cost determined weightedaverage basis approximates firstin firstout “fifo” method inventory procured produced whether internally contract manufacturing arrangements manufacturing facilities texas california standard costs approximates actual cost fifo method used value inventory standard costs reviewed annually management often event circumstances indicate change cost occurred workinprocess finished products fieldconsignment inventory include material labor production overhead costs fieldconsignment inventory represents immediately saleable finished products inventory possession company’s independent sales representatives located third party customers distributors hospitals company adjusts value inventory extent management determines cost cannot recovered due obsolescence factors order make determinations management uses estimates future demand sales prices product determine appropriate inventory reserves make corresponding adjustments carrying value inventories reflect lower cost estimated net realizable value 6 property plant equipment property plant equipment stated cost less accumulated depreciation acquired part business combination estimated fair value costs include expenditures necessary place asset service generally including freight sales use taxes property plant equipment includes instrumentation held customers generally used facilitate implantation company’s products useful lives assets generally follows company evaluates useful lives assets annual basis depreciation computed straightline basis useful lives assets depreciation leasehold improvements computed shorter lease term useful life asset total depreciation expense 193 million 177 million 159 million years ended december 31 2020 2019 2018 respectively expenditures maintenance repairs minor renewals improvements extend lives respective assets expensed incurred expenditures renewals improvements capitalized assets related accumulated depreciation adjusted property retirements disposals resulting gain loss included earnings fully depreciated assets remain accounts retired service company capitalizes system development costs related internaluse software application development stage costs related preliminary project activities postimplementation activities expensed incurred internaluse software amortized straightline basis estimated useful life generally three seven years 2019 company entered amendment corporate headquarters lease result classification lease changed operating lease finance lease resulted increase lease liability lease asset approximately 80 million compared original operating lease assets liabilities recorded upon adoption asu 201602 longlived assets evaluated impairment whenever events changes circumstances occurred would indicate impairment purposes evaluation company groups longlived assets liabilities lowest level identifiable cash flows asset generate cash flows independent assets liabilities carrying value asset group exceeds undiscounted cash flows expected result use eventual disposition asset group company write carrying value fair value period identified company generally determines fair value longlived assets present value estimated future cash flows determining estimated future cash flows associated assets company uses estimates assumptions future revenue contributions cost structures remaining useful lives asset group use alternative assumptions including estimated cash flows discount rates alternative estimated remaining useful lives could result different calculations impairment 7 intangible assets intangible assets recorded cost acquired part business combination estimated fair value assets amortized straightline basis useful lives assets company believes materially consistent pattern economic benefit provided assets intangible assets related iprd projects considered indefinitelived completion abandonment associated research development efforts period assets considered indefinitelived amortized tested impairment testing performed least annually triggering event occurs could indicate potential impairment development complete generally occurs regulatory approval market product obtained associated assets deemed finitelived amortized period best reflects economic benefits provided assets february 6 2019 company obtained fda approval m6c artificial cervical disc patients suffering cervical disease degeneration following fda approval company transferred 268 million iprd developed technology began amortization 10 years amortization expense intangible assets 112 million 70 million 27 million years ended december 31 2020 december 31 2019 2018 respectively future amortization expense intangible assets estimated follows 8 goodwill company tests goodwill least annually impairment company tests frequently indicators present changes circumstances suggest impairment may exist indicators include among others declines sales earnings cash flows development material adverse change business climate company assesses goodwill impairment reporting unit level defined operating segment one level operating segment part change reporting segments occurred first quarter 2019 company performed quantitative assessment goodwill immediately prior subsequently following change reporting segments analysis result impairment addition net carrying value goodwill previously reported prior reporting segments bone growth therapies ii spinal implants iii biologics consolidated included within global spine reporting segment beginning fourth quarters 2020 2019 company performed qualitative assessment annual goodwill impairment analysis result impairment qualitative analysis considers relevant factors specific reporting units including macroeconomic conditions industry market considerations overall financial performance relevant entityspecific events following table presents net carrying value goodwill rollforward balances december 31 2019 reportable segment impairments related company’s goodwill since change reporting segments 2019 9 leases discussed note 3 company adopted asu 201602leases topic 842 january 1 2019 using modified retrospective approach adoption new standard resulted recognition operating lease assets lease liabilities 202 million 205 million respectively january 1 2019 difference lease assets lease liabilities net deferred tax impact elimination historical prepaid deferred rent recorded adjustment retained earnings standard material impact company’s consolidated statements operations comprehensive income loss cash flows company determines arrangement lease inception company’s leases primarily relate facilities vehicles equipment lease assets represent company’s right use underlying asset lease term lease liabilities represent obligation make lease payments arising lease assets liabilities recognized commencement date based present value lease payments lease term company’s leases provide implicit rate company’s incremental borrowing rate used discount rate based information available commencement date determining present value lease payments lease assets also include impact prepayments made reduced impact lease incentives company recognize lease liabilities lease assets balance sheet shortterm leases lease term twelve months less commencement date rather shortterm lease payments recognized expense straightline basis lease term current period shortterm lease expense reasonably reflects shortterm lease commitments classifications leases company combines lease nonlease components account single lease component variable lease payments excluded lease liability recognized period obligation incurred additionally lease terms may include options extend terminate lease reasonably certain company exercise option 2019 company entered amendment corporate headquarters lease result classification lease changed operating lease finance lease resulting increase lease liability lease asset approximately 80 million summary company’s lease portfolio december 31 2020 2019 presented table components lease costs follows rent expense operating leases 2018 totaled 45 million accounted topic 840 supplemental cash flow information related leases follows wittenstein contract manufacturing supply agreement march 2020 company entered cmsa wittenstein initial term two years manufacture fitbone product line consideration company pay 20 million wittenstein conclusion cmsa certain conditions met relation prompt delivery manufactured products company accounting cmsa finance lease company right direct use obtain substantially economic benefits dedicated equipment used manufacture products option obtain title possession equipment conclusion cmsa result company recognized finance lease liability related rou asset 19 million commencement date cmsa summary company’s remaining lease liabilities december 31 2020 included 10 current liabilities december 2019 company approved initiated targeted restructuring plan us streamline costs better align talent company’s strategic initiatives plan consists primarily realignment certain personnel representing limited number positions december 31 2019 company recorded liability 32 million connection activity recognized 2019 within general administrative expenses 2020 company recorded additional accruals 25 million associated activities made payments totaling 44 million resulting ending liability 13 million december 31 2020 associated restructuring plan 11 longterm debt october 25 2019 company certain whollyowned subsidiaries collectively company “borrowers” borrowers certain material subsidiaries company guarantors entered second amended restated credit agreement “amended credit agreement” jpmorgan chase bank na “jpmorgan” administrative agent certain lender parties thereto amended credit agreement provides 300 million secured revolving credit facility “facility” amending restating 125 million secured revolving credit facility previously existed lenders credit agreement maturity date october 25 2024 april 2020 precautionary measure increase company’s cash position preserve financial flexibility uncertainty resulting covid19 pandemic company completed borrowing 1000 million facility company made payments totaling 1000 million third quarter 2020 fully pay outstanding balance company borrowings outstanding facility december 31 2020 2019 respectively borrowings amended credit agreement may used among things working capital general corporate purposes company subsidiaries including permitted acquisitions permitted payments dividends distributions facility available us dollars 150 million facility available borrowed euros british pounds “agreed currencies” facility permits 50 million facility utilized issuance letters credit agreed currencies borrowers ability increase amount facility increases may take form increases revolving credit commitments issuance new term loans aggregate amount greater 150 million incremental amount total amount facility exceed 350 consolidated ebitda company determined four fiscal quarter period recently ended financial statements available upon satisfaction customary conditions precedent increases incremental loans receipt additional commitments one existing new lenders borrowings facility bear interest floating rate borrowers’ option either libor possibly alternative reference rate used place libor upon occurrence benchmark transition event plus applicable margin ranging 125 225 base rate plus applicable margin ranging 025 125 case subject adjustment based company’s total leverage ratio unused fee ranging 015 025 subject adjustment based company’s total leverage ratio payable quarterly arrears based daily amount undrawn portion lender’s revolving credit commitment facility fees payable outstanding letters credit rate equal applicable margin libor loans plus certain customary fees payable solely issuer letter credit certain company’s existing future material subsidiaries collectively “guarantors” required guarantee repayment borrowers’ obligations amended credit agreement obligations borrowers guarantors respect amended credit agreement secured pledge substantially personal property assets borrowers guarantors including accounts receivables deposit accounts intellectual property investment property inventory equipment equity interests respective subsidiaries amended credit agreement contains customary affirmative negative covenants including limitations company’s subsidiaries ability incur additional debt grant permit additional liens make investments acquisitions merge consolidate others dispose assets pay dividends distributions pay subordinated indebtedness enter affiliate transactions addition amended credit agreement contains financial covenants requiring company consolidated basis maintain last day fiscal quarter total net leverage ratio 35 10 ratio permitted increase 40 10 4 fiscal quarters following material acquisition interest coverage ratio least 30 10 amended credit agreement also includes events default customary facilities type upon occurrence events default subject customary cure rights outstanding loans facility may accelerated andor lenders’ commitments terminated credit agreement also includes events default customary facilities type upon occurrence events default subject customary cure rights outstanding loans facility may accelerated andor lenders’ commitments terminated company compliance required financial covenants december 31 2020 conjunction obtaining facility company paid 15 million debt issuance costs capitalized total 18 million associated facility costs amortized life facility debt issuance costs included longterm assets net accumulated amortization december 31 2020 december 31 2019 debt issuance costs net accumulated amortization 14 million 17 million respectively debt issuance costs amortized expensed totaled 04 million 04 million 04 million years ended december 31 2020 2019 2018 respectively company unused available line credit €55 million 67 million 62 million december 31 2020 2019 respectively italian line credit unsecured line credit provides company option borrow amounts italy interest rates determined time borrowing company paid cash related interest 19 million 08 million 08 million years ended december 31 2020 2019 2018 respectively 12 fair value measurements investments fair value defined price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date nonfinancial assets liabilities company measured fair value include longlived assets impaired currently reported period equity securities measured observable prices orderly transactions authoritative guidance also describes three levels inputs may used measure fair value level 1 quoted prices active markets identical assets liabilities level 2 observable inputs quoted prices active markets identical assets liabilities level 3 unobservable inputs little market data available require reporting entity develop assumptions company’s financial instruments include cash equivalents restricted cash accounts receivable accounts payable longterm secured debt available sale debt securities equity securities contingent consideration deferred compensation plan liabilities carrying value cash equivalents restricted cash accounts receivable accounts payable approximate fair value due shortterm maturities instruments company’s secured revolving credit facility carries floating rate interest therefore carrying value longterm debt considered approximate fair value company’s available sale debt securities equity securities contingent consideration deferred compensation plan liabilities financial instruments recorded fair value recurring basis follows fair value company’s equity securities deferred compensation plan liabilities determined based inputs readily available public markets derived information available publicly quoted markets therefore company categorized instruments level 2 financial instruments neo medical convertible loan agreement equity investment october 1 2020 company purchased shares neo medical’s preferred stock consideration 50 million entered convertible loan agreement pursuant orthofix loaned neo medical chf 46 million “convertible loan” loan bears interest 80 interest due semiannually interest payment date borrower may elect capitalize interest due outstanding principal balance loan convertible loan matures october 1 2024 provided change control neo medical occurs prior maturity date convertible loan shall become immediately due upon event convertible loan may convertible either party shares neo medical’s preferred stock company may convert loan election time prior full repayment settlement convertible loan neo medical may elect convert loan event qualified financing event defined within agreement price per share loan converts dependent upon party electing conversion ii neo medical’s price per share recent fundraising activities time conversion specified within agreement equity securities recorded longterm assets considered investment readily determinable fair value company measures investment cost less impairment plus minus changes resulting observable price changes orderly transactions identical similar investments issuer carrying value investment december 31 2020 50 million convertible loan recorded longterm assets available sale debt security fair value applicable interest recorded interest income fair value convertible loan including accrued interest based upon significant unobservable inputs including use monte carlo simulations optionpricing models probabilityweighted discounted cash flows model requiring company develop assumptions therefore company categorized asset level 3 financial asset significant unobservable inputs used fair value measurement convertible loan include applicable discount rates implied volatility likelihood projected timing repayment conversion projected cash flows support estimated enterprise value neo medical holding inputs constant changes assumptions could result significant change fair value convertible loan amortized cost convertible loan exceeds estimated fair value security deemed impaired must evaluated recognition credit losses impairment resulting credit losses recognized within statement income impairment resulting factors recognized within comprehensive income december 31 2020 company recognized credit losses related convertible loan following table provides reconciliation beginning ending balances convertible loan measured fair value using significant unobservable inputs level 3 following table provides quantitative information related certain key assumptions utilized within valuation december 31 2020 bone biologics equity securities company holds investment common stock bone biologics inc “bone biologics” privatelyheld developer orthobiologic products equity securities considered investments readily determinable fair values company measures investments cost less impairments plus minus changes resulting observable price changes orderly transactions identical similar investments issuer 2018 bone biologics completed series equity financing activities provided new observable price change orderly transaction result company determined investment impaired recorded charge 44 million expense net additional impairment 02 million recognized 2020 result concerns bone biologics’ ability continue going concern changes valuation securities years ended december 31 2020 2019 2018 shown contingent consideration company recognized contingent consideration obligation connection acquisition spinal kinetics 2018 spinal kinetics contingent consideration consists potential future milestone payments 600 million cash milestone payments included 150 million upon us food drug administration “fda” approval m6c artificial cervical disc “fda milestone” ii revenuebased milestone payments 450 million connection future sales acquired artificial discs milestones must achieved within five years april 30 2018 trigger applicable payments february 2019 fda milestone achieved paid estimated fair value remaining spinal kinetics contingent consideration 354 million december 31 2020 estimated fair value reflects assumptions made management december 31 2020 including estimated impact covid19 significant unobservable assumptions expected timing volume elective procedures impact procedures future revenues however impact covid19 company’s business remains uncertain difficult predict information surrounding pandemic continuing evolve actual amount ultimately paid could higher lower fair value remaining contingent consideration december 31 2020 company classified 149 million remaining liability within current liabilities company currently expects pay one revenuebased milestones next twelve months remaining 205 million within longterm liabilities changes fair value recorded operating expense within acquisitionrelated amortization remeasurement following table provides reconciliation beginning ending balances contingent consideration measured fair value using significant unobservable inputs level 3 company estimated fair value remaining potential future revenuebased milestone payments using monte carlo simulation discounted cash flow model fair value measurement based significant inputs unobservable market thus represents level 3 measurement key assumptions applying valuation model include company’s forecasted future revenues spinal kinetics products expected timing payment applicable discount rates applied assumptions potential volatility company’s forecasted revenue significant changes assumptions could result significantly higher lower fair value following table provides range key assumptions used within valuation december 31 2020 contingent consideration attributable agreement closed third quarter 2020 acquire certain assets medical device distributor portion consideration based upon meeting certain revenuebased targets contingent liability measured using probabilityweighted cash flow analysis eneura debt security october 2019 company held debt security eneura inc “eneura” privately held medical technology company developing devices treatment migraines principal amount debt security 150 million accrued interest 80 payment due maturity debt security originally set mature march 4 2019 march 1 2019 company entered amended restated senior secured promissory note eneura “restructured debt security” restructure debt security extended maturity date earlier march 4 2022 ii effective date change control iii effective date initial public offering eneura also eliminated conversion feature included within original note consideration extension eneura issued company warrant purchase common stock “warrant” exercisable 001 per share ten year contractual term prior restructuring debt security accounted available sale debt security fair value included within longterm assets fair value based upon significant unobservable inputs including use discounted cash flow model assumptions regarding expected payback period debt security requiring company develop assumptions therefore company categorized asset level 3 financial asset company evaluated declines fair value quarter determine impairments otherthantemporary debt security amortized cost basis 90 million time restructuring december 31 2018 subsequent restructuring debt security longer classified available sale debt security rather held maturity debt security debt security reclassified available sale debt security held maturity debt security fair value date restructuring result unrealized gains included accumulated comprehensive income loss related debt security subsequently amortized interest income remaining term restructured debt security october 2019 company eneura settled restructured debt security 40 million cash payment agreed transfer warrant eneura company determined restructured debt security warrant impaired adjusted carrying value restructured debt security 40 million settlement value recording net otherthantemporary impairment 65 million expense net included reclassification related unrealized gains included accumulated comprehensive income loss 52 million following table provides reconciliation beginning ending balances eneura debt security measured fair value available sale debt security prior change classification 13 commitments contingencies policy company records accruals certain outstanding legal proceedings investigations claims probable liability incurred amount loss reasonably estimated company evaluates quarterly basis developments legal proceedings investigations claims could affect amount accrual well developments would make loss contingency probable reasonably estimable loss contingency probable reasonably estimable company accrue loss however loss additional loss excess accrual least reasonable possibility material company discloses reasonable estimate possible loss range loss reasonable estimate made company cannot make reasonable estimate possible loss range loss disclosed addition legal fees directly related costs expensed incurred addition matters described paragraphs normal course business company involved various lawsuits time may subject certain contingencies company believes losses related matters individually collectively immaterial possible loss range loss italian medical device payback “imdp” 2015 italian parliament introduced rules entities supply goods services italian national healthcare system healthcare law expected impact business financial reporting companies operating medical technology sector sell medical devices italy key provision law ‘payback’ measure requiring medical device companies italy make payments italian government medical device expenditures exceed regional maximum ceilings companies required make payments equal percentage expenditures exceeding maximum regional caps considerable uncertainty law operate exact timeline finalization company’s current assessment imdp involves significant judgment regarding expected scope actual implementation terms measure latter clarified date italian authorities company accounts estimated cost imdp sales marketing expense recorded expense 15 million 13 million 10 million years ended december 31 2020 2019 2018 respectively december 31 2020 company accrued 70 million related imdp classified within longterm liabilities however actual liability could higher lower amount accrued law clarified italian authorities brazil september 2019 relation ongoing legal dispute former brazilian distributor approximately 05 million based upon foreign exchange rates december 31 2020 company’s cash brazil frozen upon request satisfy judgment although company appealing judgment cash reclassified restricted cash december 31 2020 company accrual 15 million related matter 14 shareholders’ equity dividends company paid dividends holders common stock past certain subsidiaries company restrictions ability pay dividends certain circumstances pursuant amended credit agreement event company decides pay dividend holders common stock future dividends received subsidiaries company may based prevailing rates taxation required pay additional withholding income tax amounts received subsidiaries accumulated comprehensive income loss accumulated comprehensive income loss comprised foreign currency translation adjustments unrealized gains losses eneura debt security settled 2019 unrealized gains losses neo medical convertible loan company’s policy release income tax effects related items recognized within accumulated comprehensive income loss using portfolio approach components changes accumulated comprehensive income loss follows 15 revenue recognition accounts receivable revenue recognition company accounts contract approval commitment parties rights parties identified payment terms identified contract commercial substance collectability consideration probable company’s contracts may contain one performance obligations contract contains one performance obligation company allocates total transaction price performance obligations based upon observable standalone selling price promised goods services underlying performance obligation company recognizes revenue control promised goods services transferred customer typically occurs point time upon shipment delivery utilization amount reflects consideration company expects entitled exchange promised goods services amount company expects entitled exchange goods services reflects fixed amount stated per contract estimates variable consideration discounts extent probable significant reversal cumulative revenue recognized occur uncertainty associated variable consideration resolved following sections discuss company’s revenue recognition policies significant product category bone growth therapies bone growth therapies revenue largely attributable us comprised thirdparty payor transactions wholesale revenue largest portion bone growth therapies revenue derived thirdparty payors includes commercial insurance carriers health maintenance organizations preferred provider organizations governmental payors medicare revenue recognized product fitted accepted patient applicable documents required thirdparty payor obtained amounts paid thirdparty payors generally based fixed allowable reimbursement rates revenues recorded expected preauthorized reimbursement rates net contractual allowances adjustments certain billings subject review thirdparty payors may subject adjustment wholesale revenue related sale company’s bone growth stimulators directly durable medical equipment suppliers wholesale revenues typically recognized upon shipment receipt confirming purchase order customer obtains control promised goods biologics revenue largely attributable us primarily related collaborative arrangement mtf extends july 28 2027 arrangement company markets tissue bone repair reconstruction brand names trinity evolution trinity elite per terms agreement mtf sources tissue processes create bone growth matrix packages delivers tissue customer company exclusive global marketing rights trinity evolution trinity elite tissues exclusive rights market fiberfuse alloquent tissues us nonexclusive marketing rights certain products receives marketing fees mtf based total sales mtf considered primary obligor arrangements therefore company recognizes marketing service fees net basis within net sales upon shipment product customer spinal implants global extremities spinal implants global extremities products distributed worldwide us sales largely comprised commercial sales international sales derived commercial sales stocking distributor arrangements commercial revenue largely related sale company’s spinal implants global extremities products hospital customers customer obtains control revenues recognized products utilized confirming purchase order received hospital revenues within spinal implants global extremities product categories derived stocking distributors purchase company’s products resell directly customers hospitals revenue stocking distributor arrangements company’s policy recognize revenue upon shipment receipt confirming purchase order distributor obtains control promised goods transaction price stocking distributors estimated based upon company’s historical collection experience stocking distributor derive estimate company analyzes twelve months historical invoices stocking distributor subsequent collections invoices period 24 months subsequent invoice date historical collection percentage specific stocking distributor used calculate transaction price cost sales also recorded upon transfer control product customer product sales marketing service fees table presents net sales includes product sales marketing service fees years ended december 31 2020 2019 2018 product sales primarily consists sale bone growth therapies spinal implants global extremities products marketing service fees received mtf based total sales biologics tissues relates solely biologics product category within global spine reporting segment marketing service fees received mtf 535 million approximately 96 total biologics revenues year ended december 31 2020 mtf company’s single supplier trinity evolution trinity elite tissue forms derived human cadaveric donors event circumstance would impact mtf’s continued access donated human cadaveric tissue company’s ability market tissues may adversely impact company’s financial results revenues exclude value added local taxes intercompany sales trade discounts shipping handling costs products shipped customers included cost sales 24 million 28 million 27 million years ended december 31 2020 2019 2018 respectively adoption asu 201613 discussed note 3 company adopted asu 201613 financial instrumentscredit losses topic 326 measurement credit losses financial instruments subsequent amendments using modified retrospective approach adoption new standard resulted increase company’s allowance expected credit losses 11 million increase deferred income tax assets 02 million decrease retained earnings 09 million january 1 2020 net impact adoption company’s balance sheet january 1 2020 presented table standard material impact company’s condensed consolidated statements operations cash flows accounts receivable related allowances payment terms vary type location company’s customers products services offered term invoicing payment due significant subsequent adoption asu 201613 company’s allowance expected credit losses represents portion receivable’s amortized cost basis entity expect collect receivable’s contractual life considering past events current conditions reasonable supportable forecasts future economic conditions process estimating ultimate collection accounts receivable involves significant assumptions judgments determination contractual life accounts receivable aging outstanding receivables well historical collections writeoffs payor reimbursement experience estimated contractual lives receivables integral parts estimation process related reserves expected credit losses establishment contractual allowances accounts receivable analyzed quarterly basis assess adequacy reserves expected credit losses contractual allowances revisions allowances expected credit loss estimates recorded adjustment bad debt expense within sales marketing expenses revisions contractual allowances recorded adjustment net sales estimates periodically tested actual collection experience addition company analyzes receivables geography customer type appropriate developing estimates expected credit losses following table provides detail changes company’s allowance expected credit losses year ended december 31 2020 company generally sell receivables certain italian hospitals year accelerate cash collections 2020 2019 2018 company sold €83 million €98 million €98 million 96 million 109 million 115 million receivables respectively estimated related fees 2020 2019 2018 03 million 03 million 03 million respectively recorded interest expense accounts receivables sold without recourse removed balance sheet time sale puerto rico settlement june 2019 company received payment 14 million administration medical services puerto rico governmentowned corporation settlement approximately 25 million outstanding accounts receivable 25 million outstanding accounts receivable previously fully reserved company’s allowances expected credit losses contractual allowances result settlement accordance company’s policy company recorded resulting adjustment contractual allowances 04 million within net sales recovery allowance expected credit losses credit bad debt expense 10 million contract liabilities company’s contract liabilities largely relate prepayment 139 million received april 2020 cms part accelerated advance payment program cares act intended increase cash flow providers services suppliers impacted covid19 pandemic october 1 2020 president united states signed “continuing appropriations act 2021 extensions act” relaxed number medicare accelerated advance payment programs recoupment terms providers suppliers received funds program new terms recoupment delayed one year payment issued first year medicare automatically recoup 25 medicare payments otherwise owed provider supplier 11 months end 11month period recoupment increase 50 another 6 months thus time periods rather receiving full amount payment newly submitted claims company’s outstanding accelerated advance payment balance reduced recoupment amount full balance repaid december 31 2020 company classified 98 million contract liability within current liabilities 40 million within longterm liabilities based upon company’s estimates funds recouped company recognize net sales year ended december 31 2020 respectively attributable satisfaction performance obligations related cms prepayment contract assets company’s contract assets excluding accounts receivable “other contract assets” largely consist payments made certain distributors obtain contracts gain access customers certain territories provide benefit exclusive distribution company’s products contract assets included longterm assets 20 million 37 million december 31 2020 2019 respectively contract assets amortized straightline basis term related contract impairments incurred contract assets 2020 2019 company applies practical expedient expense sales commissions incurred applicable amortization period would one year less 16 business segment information company changed reportable business segments 2019 align changes company manages business reviews operating performance allocates resources following change company reports results two reportable segments global spine global extremities reporting segments represent operating segments chief executive officer also chief operating decision maker “codm” reviews financial information makes resource allocation decisions among businesses primary metric used codm managing company earnings interest tax depreciation amortization “ebitda” company neither discretely allocates assets goodwill operating segments evaluates operating segments using discrete asset information accordingly reporting segment information prepared based two reporting segments prior periods recast present change reporting segments global spine global spine reporting segment offers three primary product categories bone growth therapies spinal implants biologics bone growth therapies product category manufactures distributes provides support services market leading bone growth stimulator devices enhance bone fusion class iii medical devices indicated adjunctive noninvasive treatment improve fusion success rates cervical lumbar spine well therapeutic treatment nonspine fractures healed nonunions product category uses distributors sales representatives sell devices hospitals healthcare providers patients primarily us spinal implants product category designs develops markets broad portfolio motion preservation fixation implant products used surgical procedures spine spinal implants distributes products network distributors sales representatives sell spine products hospitals healthcare providers globally biologics product category provides portfolio regenerative products tissue forms allow physicians successfully treat variety spinal orthopedic conditions product category specializes marketing company’s exclusive regeneration tissue forms distributes tissues hospitals healthcare providers primarily us network independent distributors sales representatives partnership mtf allows company exclusively market trinity evolution trinity elite tissue forms musculoskeletal defects enhance bony fusion global extremities global extremities reporting segment offers products solutions allow physicians successfully treat variety orthopedic conditions unrelated spine reporting segment specializes design development marketing company’s orthopedic products used fracture repair deformity correction bone reconstruction procedures global extremities distributes products network distributors sales representatives sell orthopedic products hospitals healthcare providers globally corporate activities comprised operating expenses activities company necessarily identifiable within two reporting segments table presents net sales major product category reporting segment following table presents ebitda primary metric used managing company reporting segment following table presents depreciation amortization reporting segment geographical information following data includes net sales geographic destination table presents net sales geographic destination reporting segment consolidated company following data includes property plant equipment geographic area 17 acquisitionrelated amortization remeasurement acquisitionrelated amortization remeasurement consists amortization related intangible assets acquired business combinations asset acquisitions remeasurement related contingent consideration arrangement components acquisitionrelated amortization remeasurement twelve months ended december 31 2020 2019 2018 respectively follows 18 sharebased compensation december 31 2020 2019 company stock option award plans stock purchase plan 2012 long term incentive plan board directors adopted amended restated 2012 longterm incentive plan “2012 ltip” april 23 2018 subsequently provided shareholder ratification 2012 ltip provides grant options purchase shares company’s common stock awards including restricted stock unrestricted stock units stock appreciation rights performancebased awards equitybased awards company’s employees company’s subsidiaries affiliates eligible may receive awards 2012 ltip addition company’s nonemployee directors consultants advisors perform services company subsidiaries affiliates may receive awards 2012 ltip awards granted 2012 ltip expire later ten years date grant december 31 2020 company reserves total 5850000 shares common stock issuance pursuant 2012 ltip subject certain adjustments set forth 2012 ltip december 31 2020 1244863 options outstanding 2012 ltip 732865 exercisable addition 46619 shares unvested restricted stock outstanding 697495 restricted stock units outstanding contain marketbased vesting conditions 2012 ltip december 31 2020 2004 long term incentive plan 2004 long term incentive plan “2004 ltip” reserved 3100000 shares issuance subject certain adjustments set forth 2004 ltip december 31 2020 12500 options outstanding 2004 ltip exercisable inducement plans inducement plan spinal kinetics employees “spinal kinetics inducement plan” reserved 51705 shares issuance employees spinal kinetics inducement continue employment company december 31 2020 remaining options outstanding spinal kinetics inducement plan 2669 shares unvested restricted stock outstanding august 2019 company appointed new president global spine subsequently promoted president chief executive officer inducement accept employment company individual awarded grant stock options acquire 50711 shares common stock award 14743 restricted stock units december 31 2020 50711 options outstanding inducement 12677 exercisable 11058 shares unvested restricted stock outstanding september 2020 company appointed new president global extremities inducement accept employment company individual awarded grant stock options acquire 32945 shares common stock award 10624 restricted stock units december 31 2020 32945 options outstanding inducement none exercisable 10624 shares unvested restricted stock outstanding stock purchase plan second amended restated stock purchase plan amended “stock purchase plan” provides issuance shares company’s common stock eligible employees directors company subsidiaries elect participate plan acquire shares common stock payroll deductions including executive officers purchase period eligible employees may designate 1 25 compensation deducted purchase common stock plan percentage order comply regulations applicable employees domiciled resident member state european union eligible directors designated percentage applied amount equal director compensation paid cash current plan period purchase price shares plan equal 85 fair market value first day plan period lower last day plan period due compensatory nature plan company records related sharebased compensation consolidated statement operations compensation expense estimated using blackscholes valuation model value recognized expense plan period december 31 2020 aggregate number shares reserved issuance stock purchase plan 2350000 december 31 2020 1991738 shares issued sharebased compensation expense sharebased compensation expense recorded line consolidated statements operations employee’s cash compensation following tables present detail sharebased compensation line item consolidated statements income well award type years ended december 31 2020 2019 2018 income tax benefit related expense 32 million 35 million 32 million years ended december 31 2020 2019 2018 respectively stock options fair value timebased stock options determined using blackscholes valuation model value recognized expense service period typically four years net actual forfeitures fair value marketbased stock options determined date grant using monte carlo valuation methodology value recognized expense requisite service period adjusted forfeitures occur monte carlo methodology incorporates valuation possibility market condition may satisfied summary company’s assumptions used determining fair value stock options granted year shown following table expected term options granted estimated based number factors including vesting expiration terms award historical employee exercise behavior options currently outstanding options exercised expired employee’s average length service expected volatility based historical volatility company’s common stock riskfree interest rate determined based upon constant us treasury security rate contractual life approximates expected term option summaries status company’s stock option plans december 31 2020 2019 changes year ended december 31 2020 presented december 31 2020 unamortized compensation expense relating options granted expected recognized 36 million amount expected recognized september 2024 weighted average period approximately 17 years total intrinsic value options exercised 09 million 14 million 32 million years ended december 31 2020 2019 2018 respectively year ended december 31 2020 received 27 million cash stock option exercises tax benefit realized tax deductions exercises 01 million aggregate intrinsic value options outstanding options exercisable december 31 2020 calculated difference exercise price underlying options market price company’s common stock options exercise prices lower 4298 closing price company’s stock december 31 2020 aggregate intrinsic value options outstanding 91 million 73 million 136 million years ended december 31 2020 2019 2018 respectively aggregate intrinsic value options exercisable 37 million 67 million 110 million years ended december 31 2020 2019 2018 respectively timebased restricted stock awards stock units year ended december 31 2020 company granted employees nonemployee directors 250459 shares time based restricted stock awards stock units vest various dates december 2024 compensation expense represents fair value stock measured market price date grant recognized straightline basis vesting period typically four years net actual forfeitures since 2017 annual grant nonemployee directors made form oneyear vesting restricted stock units deferred delivery “dsus” whereby shares settled director ceases service director december 31 2020 74036 dsus outstanding vested settled aggregate fair value timebased restricted stock awards stock units vested years ended december 31 2020 2019 2018 65 million 95 million 80 million respectively unamortized compensation expense related timebased restricted stock awards stock units amounted 120 million december 31 2020 expected recognized weighted average period approximately 25 years aggregate intrinsic value timebased restricted stock awards stock units outstanding 212 million 216 million 188 million years ended december 31 2020 2019 2018 respectively performancebased restricted stock awards stock units company’s performancebased restricted stock awards stock units contain performancebased vesting conditions fair value performancebased restricted stock awards stock units calculated based upon closing stock price date grant value recognized expense derived requisite service period beginning period deemed probable vest net actual forfeitures vesting probability assessed based upon forecasted earnings financial results company grant performancebased restricted stock awards stock units employees years ended december 31 2020 2019 2018 year ended december 31 2015 company granted employees 110660 shares performancebased restricted stock awards vested based upon achievement certain earnings return invested capital targets compensation expense recorded awards 2020 2019 performance targets obtained prior years approximately 04 million compensation expense recorded year ended december 31 2018 associated performancebased restricted stock awards fair value performancebased restricted stock awards vested years ended december 31 2020 2019 2018 00 million 32 million 00 million respectively unamortized compensation expense related performancebased restricted stock awards remains december 31 2020 aggregate intrinsic value performancebased restricted stock awards outstanding 00 million 00 million 29 million years ended december 31 2020 2019 2018 respectively year ended december 31 2015 company also granted 55330 shares performancebased restricted stock units employees vested based upon achievement certain earnings return invested capital targets year ended december 31 2018 company recognized compensation expense 00 million 00 million 16 million associated 2015 performancebased restricted stock units years ended december 31 2020 2019 2018 respectively fair value performancebased restricted stock units vested years ended december 31 2020 2019 2018 00 million 27 million 00 million respectively unamortized compensation expense remains december 31 2020 related 2015 performancebased restricted stock units aggregate intrinsic value performancebased restricted stock units outstanding 00 million 00 million 25 million years ended december 31 2020 2019 2018 respectively marketbased restricted stock units company’s marketbased restricted stock units contain marketbased vesting conditions fair value marketbased restricted stock units determined date grant using monte carlo valuation methodology discounts postvesting restrictions estimated using chaffe model monte carlo methodology incorporates valuation possibility market condition may satisfied value recognized straightline basis vesting period net actual forfeitures awards market conditions achieved settled shares common stock one share common stock issued per restricted stock unit targets achieved 100 level awards may achieved minimum level 50 maximum 200 market conditions awards based company’s stock achieving certain total shareholder return targets relative specified index companies 3year performance period beginning respective grant date fair value marketbased restricted stock units vested settled years ended december 31 2020 2019 2018 14 million 00 million 00 million respectively unamortized compensation expense marketbased restricted stock units amounted 65 million december 31 2020 expected recognized weighted average period approximately 16 years aggregate intrinsic value marketbased restricted stock units outstanding 118 million 119 million 142 million years ended december 31 2020 2019 2018 respectively summary status timebased performancebased marketbased restricted stock awards stock units december 31 2020 2019 changes year ended december 31 2020 presented retirement company’s president chief executive officer february 25 2019 company entered transition retirement agreement “retirement agreement” company’s president chief executive officer brad mason retirement agreement parties agreed mr mason would continue serve role successor appointed board commenced employment occurred october 31 2019 “retirement date” parties agreed mr mason would provide ongoing transition assistance company pursuant consulting arrangement 12 months following retirement date mr mason paid 40000 per month transition consulting services part retirement agreement certain timebased stock options restricted stock awards modified vest retirement date addition stock options modified extend posttermination exercise period 18 months standard qualified retirement four years dependent upon remaining contractual terms options fiscal year 2019 lieu mr mason’s normal annual incentive awards 2012 ltip recognition ongoing transition assistance agreed provide mr mason granted award rsus april 1 2019 grant date fair market value 20 million vested first anniversary date grant subject continued consulting services retirement date full fair value award recorded expense 2019 company recognized sharebased compensation expense year ended december 31 2020 approximately 65 million year ended december 31 2019 related retirement agreement charged general administrative expense consolidated statements operations comprehensive income loss 19 defined contribution plans deferred compensation defined contribution plans orthofix us llc sponsors defined contribution plan “401k plan” covering substantially full time us employees 401k plan allows participants contribute 80 pretax compensation subject certain limitations company matching 100 first 2 employee’s base compensation 50 next 4 employee’s base compensation contributed 401k plan years ended december 31 2020 2019 2018 expenses incurred relating 401k plan including matching contributions approximately 11 million 27 million 23 million respectively april 2020 precautionary measure increase company’s cash position preserve financial flexibility response initial uncertainty covid19 pandemic company temporarily suspended 401k match program remainder fiscal year 2020 401k match program reinstated january 2021 company also operates defined contribution plans international employees meeting minimum service requirements company’s expenses contributions years ended december 31 2020 2019 2018 11 million 10 million 11 million respectively deferred compensation plans italian law italian subsidiary accrues behalf employees deferred compensation paid termination employment accrual deferred compensation based percentage employee’s current annual remuneration plus annual charge deferred compensation also accrued leaving indemnity payable agents case dismissal regulated national contract equal approximately 34 total commissions earned company’s relations italian employees represent 201 total employees december 31 2020 governed provisions national collective labor agreement setting forth mandatory minimum standards labor relations metal mechanic workers industry company party collective bargaining agreement balance longterm liabilities december 31 2020 2019 14 million 13 million respectively represents amount would payable employees agents terminated employment date 20 income taxes income loss continuing operations provision income taxes consisted following provision income taxes continuing operations consists following differences income tax provision us federal statutory tax rate company’s effective tax rate years ended december 31 2020 2019 2018 consist following december 22 2017 tax act signed law making significant changes internal revenue code changes include limited us corporate rate decrease 35 21 effective tax years beginning december 31 2017 transition us international taxation worldwide tax system territorial system onetime transition tax mandatory deemed repatriation cumulative foreign earnings december 31 2017 company calculated best estimate impact tax act 2017 income tax provision accordance understanding tax act guidance available date filing result company recorded 83 million additional income tax expense fourth quarter 2017 period legislation enacted provisional amount related remeasurement certain deferred tax assets liabilities based rates expected reverse future 86 million provisional amount related onetime transition tax mandatory deemed repatriation foreign earnings zero company also recorded benefit 03 million related income tax liability recorded 2016 related repatriation earnings subsidiary puerto rico december 22 2017 staff accounting bulletin 118 “sab 118” issued address application us gaap situations registrant necessary information available prepared analyzed including computations reasonable detail complete accounting certain income tax effects tax act accordance sab 118 determined 86 million deferred tax expense recorded connection remeasurement certain deferred tax assets liabilities zero transition tax mandatory deemed repatriation foreign earnings provisional amount reasonable estimate december 31 2017 detailed analysis company’s deferred tax assets liabilities historical foreign earnings well potential correlative adjustments completed 2018 resulted additional benefit 06 million first quarter 2018 minimal adjustments fourth quarter 2018 december 31 2018 company completed accounting tax effects enactment tax act company paid cash relating taxes totaling less 05 million 81 million 156 million years ended december 31 2020 2019 2018 respectively 2020 company received federal income tax refunds prior years 35 million offset cash payments state foreign jurisdictions 40 million company’s deferred tax assets liabilities follows company accounts income taxes using asset liability method deferred tax assets liabilities recognized expected future tax consequences temporary differences financial reporting income tax basis assets liabilities operating losses credit carryforwards deferred tax assets liabilities measured using enacted tax rates effect years items expected realized tax law rate changes recorded period changes enacted company establishes valuation allowance likely certain deferred tax assets realized foreseeable future valuation allowance primarily attributable net operating loss carryforwards temporary differences certain foreign jurisdictions net increase valuation allowance 118 million year principally relates recognizing full valuation allowance net deferred tax asset within company’s european manufacturing subsidiary company considered many factors assessing likelihood future realization deferred tax assets including recent cumulative losses experienced subsidiary expectations future taxable income loss carryforward periods available company tax reporting purposes relevant factors increase partially offset decrease valuation allowances net operating loss carryforwards foreign jurisdictions due expiration statutory rate changes regarding realizability net deferred tax assets reasonably possible valuation allowance decrease 2021 related expiration foreign net operating losses company federal net operating loss carryforwards 214 million research development credits 16 million result acquisition spinal kinetics carryforwards subject limitation provisions section 382 begin expire 2026 company state net operating loss carryforwards approximately 336 million 214 million relates spinal kinetics begins expire 2027 additionally company net operating loss carryforwards various foreign jurisdictions approximately 1402 million begin expire 2021 majority relate company’s italy netherlands brazil operations prior domestication entity incorporated curaçao “foreign earnings” referred us nonus earnings result domestication income sourced outside us considered unremitted foreign earnings unremitted foreign earnings increased 492 million december 31 2019 537 million december 31 2020 increase due impact currency translation result 2017 tax act current year earnings deemed repatriated foreign subsidiary earnings subject us taxation component global intangible low taxed income gilti tax act included component current tax expense company’s investment foreign subsidiaries continues indefinite nature however company may periodically repatriate portion earnings extent incur significant additional tax liability company records benefit uncertain tax positions weight available evidence indicates likely based evaluation technical merits tax position sustained audit tax benefit measured largest amount 50 likely realized upon settlement company reevaluates income tax positions periodically consider changes facts circumstances changes interpretations tax law effectively settled issues audit new audit activity company includes interest applicable penalties related income tax issues part income tax expense consolidated financial statements company’s unrecognized tax benefit 46 million 169 million years ended december 31 2020 2019 respectively company recorded net interest penalties expense benefit unrecognized tax benefits 54 million 01 million 14 million years ended december 31 2020 2019 2018 respectively approximately 12 million 66 million accrued payment interest penalties december 31 2020 2019 respectively entire amount unrecognized tax benefits including interest would favorably impact company’s effective tax rate recognized company believes reasonably possible next 12 months amount unrecognized tax benefits exclusive interest penalties related resolution federal state foreign matters could reduced 10 million 15 million audits close statutes expire reconciliation gross unrecognized tax benefits excluding interest penalties years ended december 31 2020 2019 2018 follows company subsidiaries file income tax returns us federal jurisdiction certain state foreign jurisdictions including italy well jurisdictions company maintains operations statute limitations respect federal state tax filings closed years prior 2016 statute limitations respect major foreign tax filing jurisdictions closed years prior 2015 third quarter 2015 internal revenue service commenced examination company’s federal income tax return 2012 company concluded examination first quarter 2018 material impact financial statements october 2016 company notified examination federal income tax return 2013 december 2017 examination 2013 concluded change november 2017 company notified examination federal income tax return 2015 february 2019 company reached agreement concluded examination result company recognized benefit approximately 18 million 2019 company cannot reasonably determine state local foreign examinations material impact financial statements cannot predict timing regarding resolution tax examinations 21 earnings per share eps company uses twoclass method computing basic eps due existence nonvested restricted stock awards nonforfeitable rights dividends dividend equivalents referred participating securities basic eps computed using weighted average number common shares outstanding respective years diluted eps computed using weighted average number common equivalent shares outstanding respective years using dilutive either treasury stock method twoclass method difference basic diluted shares largely results common equivalent shares represents dilutive effect assumed exercise certain outstanding share options assumed vesting restricted stock granted employees directors satisfaction certain necessary conditions contingently issuable shares see note 18 three years ended december 31 2020 2019 2018 significant adjustments made net income purposes calculating basic diluted eps following reconciliation weighted average shares used diluted eps computations 1449630 1704708 349930 weighted average outstanding options restricted stock performancebased marketbased equity awards included diluted earnings per share computation years ended december 31 2020 2019 2018 respectively inclusion awards antidilutive performancebased marketbased awards necessary conditions satisfied end respective period 22 subsequent events february 2 2021 company entered technology assignment royalty agreement medical device technology company partially owned controlled wife president chief executive officer jon serbousek whereby company acquired intellectual property rights certain assets consideration 100 million consideration comprised 10 million due signing 90 million contingent consideration dependent upon multiple milestones receipt 510k clearance attainment certain net sales targets addition company shall pay royalty 2 4 net sales commencing upon commercialization acquired assets transaction approved company’s audit finance committee audit finance committee directly supervising directing negotiation transaction company employees reported directly committee connection negotiations mr serbousek excluded discussions participate negotiation evaluation transaction mr serbousek also excluded administration implementation agreements transactions contemplated thereby discussions disputes counterparty connection agreement transactions contemplated thereby administration implementation thereof oversight company’s development commercialization activities relation acquired technology matters relating relationship company counterpartyitem 15 exhibits financial statement schedules reports form 8k documents filed part report form 10k following documents filed part report form 10k 1 financial statements see index consolidated financial statements page form 10k 2 financial statement schedules see index consolidated financial statements page form 10k 3 exhibits exhibit number description 31 certificate incorporation company filed exhibit companys annual report form 20f fiscal year ended december 31 2000 incorporated herein reference 32 articles incorporation company filed exhibit companys annual report form 20f fiscal year ended december 31 2000 incorporated herein reference 101 orthofix inc employee stock purchase plan filed exhibit companys annual report form 10k fiscal year ended december 31 2002 incorporated herein reference 1 102 orthofix international nv staff share option plan filed exhibit companys annual report form 10k fiscal year ended december 31 2002 incorporated herein reference 1 103 form performance accelerated stock option staff share option plan filed exhibit companys annual report form 10k fiscal year ended december 31 2002 incorporated herein reference 1 104 orthofix international nv executive share option plan filed exhibit companys annual report form 10k fiscal year ended december 31 2002 incorporated herein reference 1 105 form performance accelerated stock option inducement agreement 1 106 employment agreement dated july 1 2001 orthofix international nv charles w federico filed exhibit companys annual report form 10k fiscal year ended december 31 2002 incorporated herein reference 1 107 employment agreement dated march 1 2003 company thomas hein filed exhibit companys annual report form 10k fiscal year ended december 31 2002 incorporated herein reference 1 108 employment agreement dated march 1 2003 company gary henley filed exhibit companys annual report form 10k fiscal year ended december 31 2002 incorporated herein reference 1 orthofix international nv 109 employment agreement dated july 1 1999 orthofix international nv robert gainescooper filed exhibit companys annual report form 10k fiscal year ended december 31 2002 incorporated herein reference 1 1010 employment agreement dated july 1 1999 orthofix international nv edgar wallner filed exhibit companys annual report form 10k fiscal year ended december 31 2002 incorporated herein reference 1 1011 employment agreement dated november 20 2003 orthofix international nv bradley r mason 1 1012 full recourse promissory note orthofix international nv charles w federico dated january 10 2002 filed exhibit companys annual report form 10k fiscal year ended december 31 2002 incorporated herein reference 1013 full recourse promissory note orthofix international nv gary henley dated january 10 2002 filed exhibit companys annual report form 10k fiscal year ended december 31 2002 incorporated herein reference 1014 share purchase agreement dated march 20 2003 orthofix international nv intavent limited filed exhibit companys quarterly report form 10q quarter ended june 30 2003 incorporated herein reference 1015 acquisition agreement dated november 20 2003 among orthofix international nv trevor acquisition inc breg inc bradley r mason shareholders representative filed exhibit companys current report form 8k filed january 8 2004 incorporated herein reference 1016 voting subscription agreement dated november 20 2003 among orthofix international nv significant shareholders breg inc identified signature pages thereto filed exhibit companys current report form 8k filed january 8 2004 incorporated herein reference 1017 credit agreement dated december 30 2003 among colgate medical limited borrower orthofix international nv certain subsidiaries borrower guarantors certain limited guarantors party thereto lenders parties thereto wachovia bank national association administrative agent wachovia capital markets llc sole lead arranger book manager filed exhibit companys current report form 8k filed january 8 2004 incorporated herein reference 141 code ethics company 211 subsidiaries company 231 consent ernst young independent auditors 232 consent pricewaterhousecoopers independent accountants 311 rule 13a14a15d14a certification chief executive officer 312 rule 13a14a15d14a certification chief financial officer 321 section 1350 certification chief executive officer 322 section 1350 certification chief financial officer filed herewith 1 management contract compensatory plan arrangement orthofix international nv b reports form 8k following reports form 8k filed fourth quarter 2003 november 26 2003 filed current report form 8k date report november 25 2003 reporting item 5 entered acquisition agreement breg inc representative bregs shareholders acquisition breg entered voting subscription agreement certain significant shareholders breg orthofix international nv signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized orthofix international nv dated march 12 2004 charles w federico name charles w federico title chief executive officer president pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated name title date charles w federico chief executive officer march 12 2004 president director charles w federico thomas hein chief financial officer march 12 2004 principal accounting officer thomas hein robert gainescooper chairman board march 12 2004 directors robert gainescooper edgar wallner deputy chairman director march 12 2004 edgar wallner peter clarke executive vice president march 12 2004 director peter clarke jerry c benjamin director march 12 2004 jerry c benjamim alberto c dabreu de paulo director march 12 2004 alberto c dabreu de paulo james f gero director march 12 2004 james f gero frederik k j hartsuiker director march 12 2004 frederik k j hartsuiker peter j hewett director march 12 2004 peter j hewett john w littlechild director march 12 2004 john w littlechild orthofix international nv index consolidated financial statements page index consolidated financial statementsf1 statement managements responsibility financial statementsf2 report independent auditorsf3 report independent accountantsf4 report independent auditorsf5 report independent auditorsf6 consolidated balance sheets december 31 2003 2002f7 consolidated statements operations years ended december 31 2003 2002 2001f8 consolidated statements changes shareholders equity years ended december 31 2003 2002 2001f9 consolidated statements cash flows years ended december 31 2003 2002 2001f10 notes consolidated financial statementsf11 schedule 2 valuation qualifying accountss1 report independent accountants financial statement schedules2 schedules provision made applicable accounting regulation securities exchange commission required related instructions inapplicable therefore omitted orthofix international nv statement managements responsibility financial statements shareholders orthofix international nv management responsible preparation consolidated financial statements related information presented report consolidated financial statements include amounts based managements estimates judgments prepared conformity accounting principles generally accepted united states financial information report shareholders consistent consolidated financial statements company maintains accounting internal control systems provide reasonable assurance reasonable cost assets safeguarded loss unauthorized use disposition financial records reliable preparing financial statements maintaining accountability assets systems augmented written policies organizational structure providing division responsibilities careful selection training qualified personnel company engaged ernst young llp independent accountants 2003 2002 engaged pricewaterhousecoopers two subsidiaries ernst young 2001 audit render opinion consolidated financial statements accordance auditing standards generally accepted united states standards include assessment systems internal controls test transactions extent considered necessary support opinion board directors audit committee consisting solely outside directors company meets periodically management independent accountants ensure meeting responsibilities discuss matters concerning internal controls financial reporting ernst young llp pricewaterhousecoopers full free access audit committee robert gainescooper chairman board directors charles w federico president chief executive officer director thomas hein chief financial officer orthofix international nv report independent auditors board directors shareholders orthofix international nv audited accompanying consolidated balance sheets orthofix international nv december 31 2003 2002 related consolidated statements operations changes shareholders equity cash flows two years period ended december 31 2003 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position orthofix international nv december 31 2003 2002 consolidated results operations cash flows two years period ended december 31 2003 conformity accounting principles generally accepted united states also opinion related financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein described note 7 consolidated financial statements company adopted statement financial accounting standards 142 goodwill intangible assets effective january 1 2002 ernst young llp charlotte north carolina march 5 2004 orthofix international nv report independent accountants board directors shareholders orthofix international nv opinion based audit report another auditor consolidated statement operations changes shareholders equity cash flows year ended december 31 2001 present fairly material respects results orthofix international nv subsidiaries company operations cash flows year ended december 31 2001 conformity accounting principles generally accepted united states america financial statements responsibility companys management responsibility express opinion financial statements based audit financial statements novamedix distribution limited inter medical supplies limited year ended december 31 2001 wholly owned subsidiaries statements reflect total revenues 212 million year ended december 31 2001 statements audited another auditor whose report thereon furnished us opinion expressed herein insofar relates amounts included novamedix distribution limited inter medical supplies limited based solely report auditor conducted audit statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audit report auditor provide reasonable basis opinion expressed pricewaterhousecoopers london england june 25 2002 report independent auditors board directors management inter medical supplies limited subsidiary orthofix international nv audited accompanying statements operations shareholders equity cash flows year ended december 31 2001 inter medical supplies limited subsidiary orthofix international nv presented separately herein financial statements responsibility companys directors responsibility express opinion financial statements based audit conducted audit accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made directors well evaluating overall financial statement presentation believe audit provides reasonable basis opinion financial statements referred present fairly material respects results operations cash flows inter medical supplies limited year ended december 31 2001 conformity accounting principles generally accepted united states ernst young 7 june 2002 nicosia cyprus orthofix international nv report independent auditors board directors management novamedix distribution limited subsidiary orthofix international nv audited accompanying statements operations shareholders equity cash flows novamedix distribution limited subsidiary orthofix international nv year ended december 31 2001 presented separately herein financial statements responsibility companys directors responsibility express opinion financial statements based audit conducted audit accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made directors well evaluating overall financial statement presentation believe audit provides reasonable basis opinion financial statements referred present fairly material respects results operations cash flows novamedix distribution limited year ended december 31 2001 conformity accounting principles generally accepted united states ernst young 7 june 2002 nicosia cyprus orthofix international nv consolidated balance sheets december 31 2003 2002 accompanying notes form integral part consolidated financial statements orthofix international nv accompanying notes form integral part consolidated financial statements orthofix international nv accompanying notes form integral part consolidated financial statements orthofix international nv accompanying notes form integral part consolidated financial statements orthofix international nv notes consolidated financial statements description business orthofix international nv subsidiaries company multinational corporation principally involved design development manufacture marketing distribution medical equipment principally orthopedic products market 1 accounting policies basis consolidation consolidated financial statements include financial statements company wholly owned majorityowned subsidiaries entities company control percents ownership december 31 2003 follows 100 owned unless otherwise noted orthofix inc usa breg inc usa orthofix holdings inc usa orthofix us llc usa orthofix srl italy novamedix services limited uk orthosonics limited uk intavent orthofix limited uk colgate medical limited uk orthofix limited uk orthofix uk limited uk novamedix distribution limited cyprus inter medical supplies limited cyprus inter medical supplies limited seychelles orthofix ag switzerland 70 owned orthofix gmbh germany 70 owned orthofix international bv holland orthofix ii bv holland orthofix sa france orthofix brasil brazil 895 owned promeca sa de cv mexico 6125 owned intercompany accounts transactions eliminated consolidation equity method accounting used company significant influence operating decisions cannot exercise control equity method original investments recorded cost adjusted companys share undistributed earnings losses companies material intercompany transactions profits associated equity investees eliminated consolidation results subsidiaries acquired year included consolidated statements operations date acquisition b foreign currency translation foreign currency translation performed accordance sfas 52 foreign currency translation balance sheet accounts except shareholders equity translated year end exchange rates revenue expense items translated weighted average rates exchange prevailing year gains losses resulting foreign currency transactions included income expense gains losses orthofix international nv notes consolidated financial statements cont resulting translation foreign currency financial statements recorded accumulated comprehensive income component shareholders equity c inventories valued lower cost estimated net realizable value provision excess obsolete items cost determined weightedaverage basis approximates fifo method valuation workinprocess finished goods field inventory consignment inventory includes cost materials labor production reporting currency reporting currency united states dollar e market risk ordinary course business company exposed impact changes interest rates foreign currency fluctuations companys objective limit impact movements earnings cash flows order achieve objective company seeks balance nondollar income expenditure company ordinarily use derivative instruments hedge foreign exchange exposure f longlived assets property plant equipment stated cost less accumulated depreciation impairment charges computed accordance companys policy depreciation computed straightline basis useful lives assets except land depreciated depreciation leasehold improvements computed shorter lease term useful life asset useful lives follows years buildings 25 33 plant equipment 2 10 furniture fixtures 4 8 expenditures maintenance repairs minor renewals improvements extend life respective asset expensed expenditures renewals improvements capitalized assets related accumulated depreciation adjusted property retirements disposals resulting gain loss included operations fully depreciated assets remain accounts retired service patents intangible assets recorded cost acquired part business combination estimated fair value assets primarily include patents technology agreements trademarks licenses customer relationships distribution networks generally amortized using straightline method estimated useful lives 5 25 years acquisitions completed prior june 30 2001 acquisitions completed subsequent june 30 2001 identifiable intangible assets generally amortized useful life using method amortization reflects pattern economic benefit intangible assets consumed goodwill represents excess purchase price fair value net assets acquired businesses amortized straightline method cases 15 20 years acquisitions completed prior june 30 2001 effective july 1 2001 company adopted provisions statement financial accounting standards sfas 142 goodwill intangible assets applicable business combinations completed june 30 2001 effective january 1 2002 additional provisions sfas 142 relating business combinations completed prior june 30 2001 became effective adopted provisions sfas 142 intangible assets deemed indefinite lives goodwill subject amortization beginning january 1 2002 orthofix international nv notes consolidated financial statements cont company reviews longlived assets whenever events changes circumstances indicate carrying amount asset may recoverable general company recognizes impairment loss sum undiscounted expected future cash flows assets remaining estimated useful life less carrying value assets measurement impairment loss based fair value related asset group assets g revenue recognition revenues recognized income period title passes products delivered royalties royalty earned revenues inventory delivered consignment recognized product accepted used consignee revenues exclude value added local taxes intercompany sales trade discounts revenues reduced estimated returns companys limited guarantee programs shipping handling costs included cost sales h research development costs expenditures research development expensed incurred income taxes income taxes provided using liability method accordance sfas 109 accounting income taxes deferred income taxes arise differences treatment income expense items financial reporting income tax purposes deferred tax assets liabilities resulting differences recorded based enacted tax rates effect differences expected reverse j concentration credit risk company performs ongoing credit evaluations customers generally require collateral company becomes aware customers inability meet obligations case bankruptcy filing deterioration customers financial condition company records specific reserve reduce related receivable amount company reasonably believes collectible company also records reserves bad debt customers based variety factors including length time receivables past due financial condition customer macroeconomic conditions historical experience company maintains reserves potential credit losses within managements expectations company invests excess cash deposits major banks company experienced losses deposits k net income per common share net income per common share computed accordance sfas 128 earnings per share net income per common share basic computed using weighted average number common shares outstanding respective years net income per common share diluted computed using weighted average number common equivalent shares outstanding respective years common equivalent shares represent diluted effect assumed exercise outstanding share options see note 18 consolidated financial statements differences basic diluted shares result solely assumed exercise certain outstanding share options warrants l cash equivalents company considers highly liquid investments original maturity three months less date purchase cash equivalents orthofix international nv notes consolidated financial statements cont sale accounts receivable company follows provisions sfas 140 accounting transfers servicing financial assets extinguishment liabilities trade accounts receivable sold without recourse removed balance sheet time sale n securities investments marketable equity securities classified availableforsale securities carried fair value unrealized gains losses net income taxes reported component shareholders equity gains losses sale securities recognized using specific identification method use estimates preparation financial statements preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect amounts reported financial statements accompanying notes actual results could differ estimates p reclassifications certain prior year amounts reclassified conform 2003 presentation q acquisition treasury stock companys practice appropriate buy shares order enhance shareholder value treasury stock held cost retired r stock based compensation company accounts stock based awards employees intrinsic value method accordance apb 25 related interpretation accordingly company adopted disclosure alternative sfas 148 accounting stock based compensation transition disclosure amendment fasb statement 123 fasb 148 apb 25 compensation cost recognized stock options issued plans orthofix international nv notes consolidated financial statements cont pro forma information regarding companys net income net income per common share years ended december 31 2003 2002 2001 required sfas 148 determined company accounted employee stock option plans fair value method statement purposes pro forma disclosures estimated fair value options amortized expense options vesting period year ended december 31 thousands except per share data 2003 2002 2001 net income reported 24730 25913 20964 stock based employee compensation cost net related tax effects 2454 2492 2749 pro forma 22276 23421 18215 net income per common share basic reported 176 196 160 pro forma 158 177 139 net income per common share diluted reported 168 176 142 pro forma 152 159 124 fair value options plan estimated date grant using blackscholes option pricing model following weighted average assumptions used grants 2003 2002 2001 respectively dividend yield 0 expected volatility 35 40 riskfree interest rates 35 expected lives 450 years blackscholes option valuation model developed use estimating fair value traded options vesting restrictions fully transferable option valuation models require input highly subjective assumptions including expected price volatility companys employee stock options characteristics significantly different traded options changes subjective input assumptions materially affect fair value estimate managements opinion existing models necessarily provide reliable single measure fair value employee stock options recently issued accounting standards january 2003 fasb interpretation 46 fin 46 consolidation variable interest entities issued interpretation provides guidance consolidating variable interest entities requires consolidation variable interest entities vie enterprise absorbs majority entitys expected losses receives majority entitys expected residual returns result ownership contractual financial interests entity december 2003 fasb completed deliberations proposed modifications fin 46 revised interpretations resulting multiple effective dates based nature well creation date vie however revised interpretations must applied later companys first quarter 2004 based upon information known date company believe significant vies fair value financial instruments carrying amounts reflected consolidated balance sheet cash equivalents accounts receivable shortterm bank debt accounts payable approximate fair value due shortterm maturities orthofix international nv notes consolidated financial statements cont instruments companys longterm secured debt carries floating rate interest approximates fair value u advertising costs company expenses advertising costs incurred v comprehensive income comprehensive income includes foreign currency translation adjustments unrealized gains losses availableforsale securities december 31 2003 2002 foreign currency translation gain 94 million loss 23 million respectively unrealized gains losses availableforsale marketable securities december 31 2003 gain 02 million december 31 2002 2 acquisitions december 30 2003 company purchased 100 stock breg inc breg purchase price 150 million plus closing adjustments acquisition costs acquisition related costs financed 110 million senior secured bank debt cash hand issuance 731715 shares orthofix common stock breg based vista california designs manufactures distributes orthopedic products postoperative reconstruction rehabilitative patient use sells products network domestic international independent distributors acquisition accounted using purchase method accordance statement financial accounting standards 141 business combinations purchase price preliminarily allocated assets acquired liabilities assumed based estimated fair market value date acquisition preliminary allocation purchase price reflects following working capital cash 11169 fixed assets acquired 5569 identifiable intangible assets definite lived 35401 identifiable intangible assets indefinite lived 23900 deferred tax liability 14250 goodwill 94512 preliminary purchase price 156301 purchase price acquisition subject potential upward downward adjustments based difference estimated final working capital breg defined acquisition agreement escrow account 120 million established fund working capital adjustment indemnities distributions escrow agreement scheduled 2005 addition items may affect final purchase price allocation include revisions intangible assets based final appraisals information provides better estimate fair value assets acquired liabilities assumed march 20 2003 company completed acquisition remaining 48 minority interest intavent orthofix limited iol 206 million including acquisition costs effective date january 14 2003 company utilized independent firm complete valuation iol company used cash hand complete purchase intavent limited intavent mr gainescooper chairman orthofix settlor trust owns 30 interest intavent iol fully consolidated subsidiary whollyowned subsidiary company recorded additional equity purchase using purchase method accounting impact included results operations date acquisition final allocation purchase price reflects settlement minority interest obligation approximately 99 million identifiable intangible assets approximately 12 million 95 million additional goodwill orthofix international nv notes consolidated financial statements cont summary pro forma condensed unaudited results operations earnings per share years ended december 31 2003 2002 assuming consummation acquisitions 2003 january 1 2003 2002 respectively follows december 2001 company purchased additional 15 equity interest orthosonics limited osn 190000 thereby raising companys ownership osn 70 85 december 2002 minority interest holders exercised put options sell remaining 15 equity interest osn company approximately 660000 therefore resulting whollyowned subsidiary results operations years ending december 31 2002 2001 included fully consolidated basis statement operations company minority interest adjustment date osn whollyowned impact additional equity ownership results operations acquisition occurred beginning periods immaterial result transactions minority interest obligation approximately 203000 settled approximately 647000 additional goodwill recorded july 2003 company paid 07 million earnup provision accrued 2002 associated acquisition remaining 15 equity interest december 2002 company acquired additional 215 equity interest orthofix brasil 70000 thereby raising companys ownership orthofix brasil 895 68 april 20 1999 company paid 19 million shareholders novamedix distribution limited ndl additional 10 equity interest following exercise shareholders put option shares thereby raising companys ownership ndl 80 90 december 1999 company acquired remaining 10 equity interest ndl 2 million april 2002 company paid 52 million earnup provision associated acquisition ndl orthofix international nv notes consolidated financial statements cont 3 inventories december 31 thousands 2003 2002 raw materials 6153 2177 workinprocess 2453 1210 finished goods 13437 11668 field inventory 5202 5260 consignment inventory 7124 5910 less reserve obsolescence 3656 2754 30713 23471 4 securities investments 2003 company sold 250000 marketable equity securities 354000 cash included consolidated balance sheet securities investments december 31 2002 2003 ferrer freeman co private equity firm invests exclusively health care health carerelated companies purchased 100 healthsouths interest orthorx resulted becoming companys new partner joint venture may 6 2003 june 16 2003 company invested additional 350000 1150000 respectively orthorx joint venture ferrer freeman co matched companys investment company accounting investment equity method reduced investment 16 million 19 million december 31 2003 2002 reflect portion joint ventures net losses years ended 2003 company purchased equity interest innovative spinal technologies ist startup company focused commercializing spinal products 15 million investment accounted cost method orthofix international nv notes consolidated financial statements cont 5 property plant equipment december 31 thousands 2003 2002 cost buildings 4728 3414 plant equipment 31445 23026 furniture fixtures 9064 7138 45237 33578 accumulated depreciation 26068 19737 19169 13841 depreciation expense years ended december 31 2003 2002 2001 57 million 51 million 38 million respectively 6 patents intangible assets amortization expense intangible assets estimated approximately 57 million 58 million 59 million 55 million 53 million periods ending december 31 2004 2005 2006 2007 2008 respectively company 239 million trademarks indefinite lives december 31 2003 indefinite lived intangible assets december 31 2002 orthofix international nv notes consolidated financial statements cont 7 goodwill sfas 142 intangible assets deemed indefinite lives goodwill subject annual impairment testing using guidance criteria described standard testing requires comparison carrying values fair values appropriate carrying value impaired assets reduced fair value company performed impairment tests goodwill indefinite lived intangible assets determined impairment exists accordance sfas 142 company discontinued amortization goodwill effective january 1 2002 nonamortization goodwill increased companys net income earnings per share beginning 2002 following unaudited pro forma results assuming goodwill amortized prior january 1 2002 changes net carrying values goodwill years ended december 31 2003 2002 follows december 31 thousands 2003 2002 beginning balance 58781 56707 acquisitions 103935 601 earnouts 19 850 foreign currency effects 5662 623 168397 58781 discussion acquisitions since january 1 2002 associated goodwill see note 2 consolidated financial statements orthofix international nv notes consolidated financial statements cont total goodwill acquired earnouts segment 2003 2002 follows thousands 2003 2002 americas 70 breg 94512 international 9442 1381 103954 1451 8 bank borrowings december 31 thousands 2003 2002 borrowings line credit 72 6977 weighted average interest rate line credit december 31 2003 2002 400 406 respectively borrowings lines credit consist borrowings euros company unused available lines credit 106 million 138 million december 31 2003 2002 respectively terms lines credit give company option borrow amounts italy rates determined time borrowing lines credit unsecured 9 current liabilities december 31 thousands 2003 2002 accrued expenses 12001 7031 salaries related taxes payable 11259 4367 payables 1794 3533 provision ame bonus earnout note 15 5182 30236 20113 orthofix international nv notes consolidated financial statements cont 10 longterm debt december 31 thousands 2003 2002 longterm obligations 110000 336 loans 135 107 110135 443 less current portion 11063 399 99072 44 longterm obligations include senior secured term note 1100 million concurrently closing breg acquisition colgate medical limited colgate borrower wholly owned subsidiary company entered senior secured bank facility senior secured bank facility provides 1 fiveyear amortizing term loan 1100 million scheduled maturity december 30 2008 proceeds used partial payment purchase price breg 2 fiveyear revolving credit facility 150 million drawn december 31 2003 obligation floating interest rate libor prime rate plus margin adjusted quarterly based borrowers leverage ratio interest rate december 31 2003 391 orthofix colgates direct indirect subsidiaries including orthofix inc breg guaranteed obligations colgate senior secured bank facility obligations colgate bank facility colgates subsidiaries guarantees secured pledge respective assets certain companys subsidiaries also guaranteed obligations colgate senior secured bank facility limited recourse basis addition scheduled debt repayments senior secured bank facility requires mandatory prepayments excess cash flow defined credit agreement colgate subsidiaries amount initially equal 75 excess annual cash flow colgate subsidiaries reducing 50 upon attainment leverage ratio less equal 150 100 b net cash proceeds debt issuance colgate subsidiaries equity issuance company colgate subsidiaries c net cash proceeds asset dispositions minimum threshold unless reinvested insurance proceeds condemnation awards credit agreement contains customary negative covenants applicable colgate subsidiaries including restrictions indebtedness liens dividends mergers sales assets credit agreement also contains certain financial covenants including fixed charge coverage ratio interest coverage ratio leverage ratio applicable colgate subsidiaries consolidated basis leverage ratio applicable company subsidiaries consolidated basis weighted average interest rate longterm obligations december 31 2003 2002 392 793 respectively aggregate maturities longterm debt december 31 2003 follows 2004 111 million 2005 111 million 2006 110 million 2007 110 million 2008 660 million orthofix international nv notes consolidated financial statements cont 11 commitments leases company entered operating leases facilities equipment rent expense companys operating leases years ended december 31 2003 2002 2001 approximately 26 million 23 million 25 million respectively future minimum lease payments operating leases december 31 2003 follows thousands 2004 3134 2005 2903 2006 1714 2007 1139 2008 962 thereafter 1458 total 11310 connection incorporation orthofix ag company granted option purchase 15 shares company minority shareholders latter granted option request company purchase remaining 15 shares options exercisable five ten years incorporation orthofix ag november 2000 purchase consideration based multiple net income orthofix ag twelve month period preceding exercise date december 2002 company acquired rights minimally invasive method fracture stabilization fixation hip company paid 1 million worldwide rights market product four years addition company pay royalty 5 million based future sales company option right acquire patents pertaining devices 5 million royalty fee paid company four year licensing period applied purchase price patents royalties year ended december 31 2003 approximately 02 million included cost sales 12 business segment information company designs manufactures markets distributes medical equipment used principally musculoskeletal medical specialists orthopedic applications three years ended december 31 2003 companys operations managed two geographic business units americas international plus group activities americas geographic business unit includes united states mexico brazil international consists rest world plus export distribution operations effective december 30 2003 company acquired breg due timing acquisition breg impact companys statement operations year ended december 31 2003 however identifiable longlived assets presented segment information december 31 2003 orthofix international nv notes consolidated financial statements cont net sales operating income identifiable assets three years ended december 31 2003 company subsidiaries follows capital expenditures segment follows thousands 2003 2002 2001 international 2316 3492 2863 americas 2914 3631 3902 group activities 8 7 4 5238 7130 6769 orthofix international nv notes consolidated financial statements cont geographical information analysis net sales geographic destination thousands 2003 2002 2001 us 132858 117991 110345 4995 4920 2689 americas 137853 122911 113034 uk 25162 22099 19053 italy 16447 12601 11041 24245 19984 19232 international 65854 54684 49326 203707 177595 162360 sales netherlands antilles analysis longlived assets geographic area thousands 2003 2002 us 200626 39936 italy 12122 10529 uk 24866 12202 cyprus 10619 10373 others 10834 8549 259067 81589 orthofix international nv notes consolidated financial statements cont 13 income taxes company subsidiaries taxed rates applicable within respective companys jurisdiction composite income tax rate vary according jurisdictions profits arise components provision income tax expense benefit follows year ended december 31 thousands 2003 2002 2001 italy current 1948 2097 1085 deferred 371 51 211 cyprus current 224 516 133 deferred 16 28 56 uk current 2670 1518 1342 deferred 37 17 404 us current 9471 7651 5097 deferred 333 1319 165 netherlands antilles current 12 5 145 current 212 4 83 deferred 457 221 total tax expense 14585 12875 7867 income continuing operations provision income taxes consisted year ended december 31 thousands 2003 2002 2001 us 26624 24781 11689 non us 12691 15749 18978 39315 40530 30667 orthofix international nv notes consolidated financial statements cont tax effects significant temporary differences comprise deferred tax liabilities assets follows thousands 2003 2002 deferred tax liabilities goodwill 845 570 patents intangible assets 13605 375 property plant equipment 170 95 2022 1162 16642 2202 deferred tax assets accrued compensation 193 128 inventories related reserves 1461 1146 allowance doubtful accounts 2324 1997 net operating loss carryforwards 609 80 deferred royalties 939 162 5526 4128 valuation allowance 529 4997 4128 net deferred tax asset liability 11645 1926 2003 company generated net taxable losses locations likely losses utilized accordingly valuation allowance established additionally connection breg acquisition company recorded 143 million deferred tax liability related preliminary purchase price allocation orthofix international nv notes consolidated financial statements cont year ended december 31 thousands 2003 2002 2001 statutory tax rate presented 2003 italy 4025 1788 2050 2905 cyprus 425 248 441 495 seychelles 40 806 2460 776 uk 30 2584 930 1556 us 385 9318 9588 4500 netherlands antilles 25 357 654 75 14412 14815 10307 tax benefit dmo transaction 1955 goodwill 672 change valuation allowance 529 389 tax holiday benefit seychelles 806 2460 776 differences 450 520 8 income tax expense 14585 12875 7867 portion differences relates income tax charged year intergroup stock profits arising sale inventories one subsidiary another sold third parties year end twelve months ended december 31 2003 2002 2001 amounted 369000 894000 556000 respectively 2001 effective tax rate benefited deduction italy intragroup dividend subsequent purchase remaining 30 minority interest dmo resulting basis differential taxable future therefore deferred tax established difference book tax basis net assets dmo company recorded additional income taxes applicable undistributed earnings foreign subsidiaries considered indefinitely reinvested earnings amounted approximately 1560 million 1241 million 944 december 31 2003 2002 2001 respectively may become taxable upon remittance dividends upon sale liquidation foreign subsidiaries practicable determine amounts net additional income tax may payable earnings repatriated orthofix international nv notes consolidated financial statements cont 14 related parties following related party balances transactions three years ended december 31 2003 company companies directors andor executive officers interest reflected consolidated financial statements company buys components related av impulse system purchases quality control logistic services buys laryngeal mask companies two board members beneficial minority interest year ended december 31 thousands 2003 2002 2001 sales 1706 1275 1264 purchases 15916 18038 12126 accounts payable 1929 2075 1455 accounts receivable 403 239 233 due officers included assets 342 330 15 contingencies litigation company normal course business involved various lawsuits time addition company subject certain contingencies discussed december 4 1998 special committee review committee established determine amount contingent contract rights merger agreement dated may 8 1995 orthofix international american medical electronics ame settlement claims holders record ame common stock options warrants acquire stock august 21 1995 unanimously determined orthofix international would pay ame record holders earnout 500000 plus interest 12 net recovery received resolution 2000 litigation biomet inc electro biology inc maximum 50 million plus interest review committee calculated amount capped figure orthofix international believes 50 million 55 million arbitrator acting auspices american arbitration association aaa subsequently entered consent award based review committees determination january 29 1999 two couples owned shares ame common stock commenced civil action colorado federal court orthofix inc members review committee seeking among relief maximum earnout bonus merger agreement 18 million plus interest plaintiffs also seek represent ame record holders clarence frere louise frere joseph mooibroek marla b mooibroek individually behalf others similarly situated v orthofix inc arthur schwalm robert gainescooper james gero john jane one 1 four 4 99s445 colo related action commenced june 2 1999 plaintiffs filed motion united states district court southern district new york seeking intervene aaa arbitration vacate consent award clarence frere louise frere joseph mooibroek marla b mooibroek individually behalf others similarly situated v orthofix inc arthur schwalm robert gainescooper james gero john jane one 1 four 4 99 civ 4049 sdny two actions consolidated new york federal court orthofix international added party new york federal court resolved two consolidated actions favor company subsidiary july 12 2002 new york federal court denied plaintiffs motion vacate consent award may 21 2003 court denied plaintiffs motion leave file second amended complaint dismissed orthofix international nv notes consolidated financial statements cont earnout bonus action entirety prejudice plaintiffs filed appeal united states court appeals second circuit company vigorously defending trial courts decision favor company subsidiary company expects appeal heard decided first half 2004 company previously reserved approximately 52 million plus accrued interest settlement matter novamedix subsidiary company filed action february 21 1992 kinetic concepts inc kci alleging infringement patents relating novamedixs av impulse system product breach contract unfair competition action novamedix seeking permanent injunction enjoining infringement kci novamedix also seeks damages relating past infringement breach contract unfair competition kci filed counterclaims alleging novamedix engaged inequitable conduct united states patent trademark office fraud kci novamedix engaged common law statutory unfair competition kci seeks declaratory judgment patents invalid unenforceable infringed kci also seeks monetary damages injunctive relief costs attorneys fees unspecified relief 2002 united states patent trademark office issued reexamination certificates validating four us vascular patents owned us district court san antonio texas restored litigation active status provided scheduling order govern matter kci sought add charge infringement novamedix recently issued kci patent request denied procedural basis kci retains right seek enforcement patent separate proceeding portion amounts received payable former owners novamedix original purchase agreement 2003 discovery largely completed several motions pending court liability damage issues company currently involved legal proceeding individually aggregate material effect financial position liquidity operating results company concentrations credit risk financial instruments potentially subject company concentrations credit risk primarily cash investments accounts receivable cash investments primarily money market funds deposited major financial center banks concentrations credit risk respect accounts receivable limited due large number individuals comprising companys customer base certain customers rely third party healthcare payers private insurance companies governments make payments company behalf accounts receivable countries government funds medical spending primarily located north africa middle east south america asia europe company considered special situations establishing allowances potentially uncollectible accounts receivable countries argentina egypt turkey company maintains allowance losses based expected collectability accounts receivable company sells via direct sales force distributors companys distributor av impulse system north america kendall healthcare inc accounted 10 net sales 2003 2002 respectively 11 net sales 2001 16 retirement plans deferred compensation orthofix inc sponsors defined contribution benefit plan 401k plan covering substantially full time employees 401k plan allows participants contribute 15 pretax compensation subject certain limitations company matching 100 first 2 employees base compensation 50 next 4 employees base compensation contributed 401k plan years ended december 31 2003 2002 2001 expenses incurred relating 401k plan including matching contributions approximately 708000 763000 696000 respectively orthofix international nv notes consolidated financial statements cont company operates defined contribution pension plans employees described meeting minimum service requirements companys expenses pension contributions 2003 2002 2001 approximately 487000 415000 335000 respectively italian law orthofix srl accrues behalf employees deferred compensation paid termination employment years provision deferred compensation based percentage employees current annual remuneration plus annual charge deferred compensation also accrued leaving indemnity payable agents case dismissal regulated national contract equal approximately 35 total commissions earned company companys expense deferred compensation 2003 2002 2001 approximately 227000 200000 163000 respectively deferred compensation payments 233000 120000 211000 made 2003 2002 2001 respectively yearend balance represents amount would payable employees agents terminated employment date 17 share option plans warrants option plans december 31 2003 company four stockbased compensation plans described staff share option plan staff stock option plan staff plan fixed stock option plan adopted april 1992 staff plan company may grant options employees 2239700 shares common stock estimated fair market value options date grant options generally vest based years service options fully vested within five years date grant options granted staff plan expire ten years date grant performance accelerated stock option agreement december 1999 companys board directors adopted resolution approving june 29 2000 companys shareholders approved grant certain executive officers company performance accelerated stock options pasos administers subplan staff plan purchase 1000000 shares companys common stock subject terms summarized option purchase companys common stock pasos granted effective january 1 1999 grant date exercise price equal 17875 per share price companys common stock date shareholders approved reservation 1000000 shares issuance paso plan pasos include servicebased performancebased vesting provisions servicebased provisions subject continued employment executive pasos become 100 nonforfeitable exercisable fifth anniversary grant date vesting pasos accelerated however certain stock price targets achieved performancebased vesting provisions provide vesting oneeighth paso grant 500 increase price companys common stock 1500 per share total number shares eligible accelerated vesting annual basis limited 20 number shares subject paso cumulative carryover unvested portion shares eligible accelerated vesting prior years period ended december 31 2003 50000 stock options exercised 50000 forfeited conjunction termination december 31 2003 900000 options remain outstanding option agreements 540000 exercisable january 1 2004 fifth anniversary grant date subsequent year end date options option agreements exercisable orthofix international nv notes consolidated financial statements cont ame 1983 1990 plans terms merger agreement company acquired ame options ame common stock still outstanding 1983 plan 1990 plan hereinafter collectively referred ame plan assumed effective time merger company exercisable common shares accordance terms adjustment reflect exchange ratio adjustment immediately following merger options granted ame plan totaled 624794 3422 remained outstanding december 31 2003 expire throughout 2004 executive share option plan executive share option plan executive plan approved shareholders march 1992 1945000 shares reserved issuance certain executive officers grant price determined companys board directors cannot less fair market value time grant 1440 equivalent 120 price initial public offering price 1200 fifty percent options granted vest automatically tenth anniversary date grant earlier satisfaction performance keyed market price common shares service condition remaining fifty percent vest 20 increments first fifth anniversaries date grant options granted executive plan expire later june 2004 performance accelerated stock option inducement agreements december 30 2003 company granted inducement stock option awards two key executives breg inc conjunction acquisition breg inc exercise price fixed 3800 per share november 20 2003 company announced entered agreement acquire breg inc inducement grants include servicebased performancebased vesting provisions servicebased provisions subject continued employment executive inducement grants become 100 nonforfeitable exercisable fourth anniversary grant date vesting portion options inducement agreement accelerated certain stock price targets achieved performancebased vesting provisions generally provide vesting onefifth inducement grants 500 increase price companys common stock 4000 per share total number shares eligible accelerated vesting annual basis limited 25 number shares subject inducement grants cumulative carryover unvested portion shares eligible accelerated vesting prior years prior expiration term options onehalf vested options exercised one year december 31 2003 200000 options remain outstanding inducement grants none exercisable warrants kinesis warrants time acquisition kinesis medical incs assets warrants purchase 672685 shares kinesis common stock kinesis warrants outstanding assumed company pursuant asset purchase agreement adjustment take account agreed exchange ratio 27400 common stock warrants outstanding december 31 2003 warrants purchase 25819 shares companys common stock remain outstanding exercisable expire august 31 2005 exercise prices fixed range 19125 3825 per common share orthofix international nv notes consolidated financial statements cont summaries status companys stock option warrant plans december 31 2003 2002 2001 changes years ended dates presented december 31 2003 company reserved total 21 million shares common stock issuance eligible participants option plans 2025683 warrant holders 25819 orthofix international nv notes consolidated financial statements cont 18 earnings per share three years period ended december 31 2003 adjustments net income purpose calculating basic diluted net income per common share following reconciliation weighted average shares used basic diluted net income per common share computations year ended december 31 2003 2002 2001 weighted average common sharesbasic 14061447 13196524 13086467 effect diluted securities stock options 620436 1488712 1651100 weighted average common sharediluted 14681883 14685236 14737567 include diluted shares outstanding calculation 206000 options 2003 59000 options 2002 53144 options 2001 inclusion would antidilutive exercise price exceeded average market price common stock respective periods 19 subsequent events february 16 2004 company acquired 100 common stock puerto rican distribution company implantes sistemas medicos inc ismi approximately 14 million cash ismi distributes orthofix third party products orthofix international nv notes consolidated financial statements cont 20 quarterly financial data unaudited thousands except per share data sum per share earnings quarter may equal earnings per share year due change average share calculations accordance prescribed reporting requirements orthofix international nv schedule 2 valuations qualifying accounts years ended december 31 2003 2002 2001 us dollars thousands s1 orthofix international nv schedule 2 valuations qualifying accounts board directors orthofix international nv audit consolidated financial statements referred report dated june 25 2002 appearing form 10k also included audit financial statement schedule listed index page form 10k opinion financial statement schedule presents fairly material respects information set forth therein year ended december 31 2001 read conjunction related consolidated financial statements pricewaterhousecoopers london england june 25 2002 s2