Reported second quarter net income totaled $5.9 million, or $0.35 per share. This compared with $5.8 million, or $0.34 per share in the second quarter of the prior year. Excluding certain items summarized in the table below, second quarter adjusted net income was $7.2 million, or $0.42 per share, which was 17% higher than adjusted net income of $6.3 million, or $0.36, in the prior year.

"I'm very pleased to report a strong quarter, which is reflected in our consolidated revenue and earnings results. These favorable results were consistent across all of our core business segments. This included our spinal implant business, which continued to gain momentum in the second quarter as sales grew 12% led by the recent launches of our Firebird pedicle screw system, Pillar SA interbody device and Trinity® Evolution stem cell-based allograft," said President and CEO Alan Milinazzo. "Additionally, our improved cash flow has allowed us to make a total of $20 million in debt payments ahead of their scheduled maturities so far this year, including a $5 million payment this month. Based on our results for the first half of 2009 we are reaffirming our full-year guidance."

Non-GAAP Performance Measures

The table below presents a reconciliation of second quarter net income calculated in accordance with generally accepted accounting principles (GAAP) to a non-GAAP performance measure, referred to as "adjusted net income", that excludes from net income the items specified in the table. Additionally a reconciliation between second quarter net income calculated in accordance with GAAP and the non-GAAP measure referred to as "Consolidated EBITDA" is included in the Regulation G Supplemental Information Schedule attached to this release. Management believes it is important to provide investors with the same non-GAAP metrics it uses to supplement information regarding the performance and underlying trends of Orthofix's business operations in order to facilitate comparisons to its historical operating results and internally evaluate the effectiveness of the Company's operating strategies. A more detailed explanation of the items in the table below that are excluded from GAAP net income, as well as why management believes the non-GAAP measures are useful to them, is included in the Regulation G Supplemental Information schedule attached to this press release.

  Reconciliation of Non-GAAP Performance Measure                                                                                                                                                                            Second Quarter                                       Q209                        Q208                                                                             ($000's)     EPS            ($000's)     EPS                                                                                                                                                                                                                                      Reported GAAP net income                             $  5,944     $  0.35        $  5,808     $  0.34                                                                                                                     Specified Items:                                                                                                                                                                                                          Strategic investments                                $  1,365     $  0.08        $  516       $  0.03        Reorganization/consolidation costs                   $  1,075     $  0.06        $  371       $  0.02        Foreign exchange (gain)/loss                            ($509  )     ($0.03  )      ($431  )     ($0.03  )   Unrealized, non-cash gain on interest rate swap         ($674  )     ($0.04  )      ---          ---                                                                                                                      Adjusted net income                                  $  7,201     $  0.42        $  6,264     $  0.36                                                                                                                     NOTE: Some calculations may be impacted by rounding                                                           -------------------------------------------------------------------------------  

Revenue

Total second quarter sales in the Company's spine sector were up 13% year-over-year, to a record $70.7 million. Spine stimulation revenue increased 13%, to $40.1 million due to the continued success of the Company's devices, including the only FDA-approved stimulator for the cervical spine. Spinal implant and biologic revenue was $30.6 million, which was 12% higher than the second quarter of 2008. The year-over-year growth in implant and biologic revenue was primarily due to an 11% increase in U.S. sales of thoracolumbar and cervical spine implant devices, and 12% growth in biologic revenue. The growth in sales of thoracolumbar and cervical spine implant devices was driven primarily by the Company's recent introductions of its new Firebird pedicle screw system and Pillar SA interbody device. The increase in biologic revenue from our spinal implants division included $743,000 in sales from the limited market release of the Company's new Trinity® Evolution stem cell-based allograft. After initiating the limited market release of Trinity® Evolution on May 1st, Orthofix began the full market release of its new allograft, which was developed in collaboration with the Musculoskeletal Transplant Foundation (MTF), on July 1st.

Reported second quarter revenue in the Company's orthopedic business was $32.6 million, which was a decrease of 2%, but represented growth of 9% on a constant currency basis, compared with the prior year. The constant currency revenue growth was driven primarily by increases in international sales of external and internal fixation devices of 13% and 6%, respectively, as well as 14% global growth in the sales of Physio-Stim bone growth stimulation devices. Additionally, sales of our biologics products in the Orthopedic Division almost doubled to approximately $1.7 million, which included $1.4 million in sales of Trinity and $164,000 in sales of Trinity Evolution.

Sports medicine revenue in the second quarter grew 5% compared with 2008, to a record $24.5 million. This growth was driven primarily by an 11% increase in U.S. revenue from the Company's core bracing products, which was a reflection of the recent expansion of certain product lines, including soft goods and spine bracing, as well as those for the upper extremities and the ankles and feet.

Gross Margin

The gross profit margin in the second quarter of 2009 was 73.2%, which was 20 basis points higher than the second quarter of 2008. The gross margin in the second quarter of 2009 included the impact of a $1.8 million increase in Orthofix's inventory reserve, which related primarily to the supply of Trinity® allograft remaining on hand at the expiration of the Company's distribution agreement on June 30th. The year-over-year improvement is primarily due to an increased mix of revenue from the Company's higher margin spine stimulation and spinal implants businesses.

Operating Expenses

Second quarter sales and marketing (S&M) expenses as a percent of revenue decreased 70 basis points year-over-year, to 40.2%. The lower S&M ratio was due primarily to a reduction in costs associated with the sales force and sales administration at the Company's spinal implants division.

General and administrative (G&A) expenses in the second quarter of 2009 increased by 100 basis points year-over-year, to 15.4% of sales. This included the impact of approximately $1.7 million ($1.1 million net of tax, or $0.06 per share) in costs associated with the ongoing reorganization and consolidation plan at the Company's spinal implants business.

Research and development (R&D) expenses as a percent of revenue were 6.5% in the second quarter of 2009, compared with 5.1% in the prior year. R&D expenses in the second quarter of 2009 included the final $2.1 million ($1.4 million net of tax, or $0.08 per share) in costs associated with the Company's previously announced $10 million strategic investment in the collaboration with the Musculoskeletal Transplant Foundation (MTF) on the development and commercialization of Trinity Evolution.

Other Income and Expenses

Second quarter net interest expense was $5.8 million, compared with net interest expense of approximately $4.1 million in the second quarter of the prior year. The increase reflects a higher rate of interest partially offset by a lower outstanding debt balance compared with the prior year.

During the second quarter, the Company also incurred an unrealized, non-cash gain of approximately $1 million ($674,000 net of tax, or $0.04 per share) which resulted from changes in the fair value of the Company's interest rate swap.

Mark-to-market adjustments related to this swap are required to be reported in quarterly earnings through the expiration of the swap in June 2011.

The Company also incurred a foreign exchange gain of approximately $800,000 ($509,000 net of tax, or $0.03 per share) in the second quarter primarily due to unrealized, non-cash foreign currency adjustments resulting from a strengthening of the U.S. dollar against various foreign currencies. A number of Orthofix's foreign subsidiaries have intercompany and trade accounts payable that are denominated in currencies, most notably the U.S. Dollar, other than their local currency, and movements in the relative values of those currencies have and are expected to continue to result in foreign exchange gains and losses.