10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2012
	OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             .

Commission File Number: 0-19961

ORTHOFIX INTERNATIONAL N.V.

(Exact name of registrant as specified in its charter)

Curaçao	Not applicable
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

7 Abraham de Veerstraat Curaçao	Not applicable
(Address of principal executive offices)	(Zip Code)

599-9-4658525

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” “non-accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated filer x	Accelerated filer o
Non-Accelerated filer o (Do not check if a smaller reporting company)	Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No

As of July 26, 2012, 18,968,031 shares of common stock were issued and outstanding.

Table of Contents

		Page
PART I	FINANCIAL INFORMATION	3
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets as of June 30, 2012 (unaudited) and December 31, 2011	3
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2011 (unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011 (unaudited)	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	28
PART II	OTHER INFORMATION	29
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	33
Item 6.	Exhibits	35
SIGNATURES		39

Forward-Looking Statements

This Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, relating to our business and financial outlook, which are based on our current beliefs, assumptions, expectations, estimates, forecasts and projections. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “intends,” “predicts,” “potential” or “continue” or other comparable terminology. These forward-looking statements are not guarantees of our future performance and involve risks, uncertainties, estimates and assumptions that are difficult to predict. Therefore, our actual outcomes and results may differ materially from those expressed in these forward-looking statements. You should not place undue reliance on any of these forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any such statement, or the risk factors described in Item 1A under the heading Risk Factors, to reflect new information, the occurrence of future events or circumstances or otherwise.

The forward-looking statements in this filing do not constitute guarantees or promises of future performance. Factors that could cause or contribute to such differences may include, but are not limited to, risks relating to the expected sales of our products, including recently launched products, unanticipated expenditures, changing relationships with customers, suppliers, strategic partners and lenders, changes to and the interpretation of governmental regulations, the resolution of pending litigation matters (including the government investigation and False Claims Act matter relating to our spinal implant business, court review and approvals of our pending settlements in certain government litigation matters, as well as our indemnification obligations with respect to certain product liability claims against, and the government investigation of, our former sports medicine global business unit) (as further described in the Legal Proceedings section of this Form 10-Q), and our ongoing compliance obligations under a corporate integrity agreement with the Office of Inspector General of the Department of Health and Human Services and a deferred prosecution agreement with the U.S. Department of Justice, risks relating to the protection of intellectual property, changes to the reimbursement policies of third parties, the impact of competitive products, changes to the competitive environment, the acceptance of new products in the market, conditions of the orthopedic industry, credit markets and the economy, corporate development and market development activities, including acquisitions or divestitures, unexpected costs or operating unit performance related to recent acquisitions, and other risks described in Item 1A under the heading Risk Factors in this Form 10-Q and those set forth in our Annual Statement on Form 10-K, as amended, for the year ended December 31, 2011, under Item 1A, Risk Factors.

2

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

ORTHOFIX INTERNATIONAL N.V.

Condensed Consolidated Balance Sheets

(U.S. Dollars, in thousands, except share data)	June 30, 2012		December 31, 2011
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	50,089	$	33,207
Restricted cash	72,913		45,476
Trade accounts receivable, less allowance for doubtful accounts of $11,072 and $9,376 at June 30, 2012 and December 31, 2011, respectively	149,472		132,828
Inventories, net	78,423		82,969
Deferred income taxes	20,106		16,349
Escrow receivable	—		41,537
Prepaid expenses and other current assets	25,386		26,069
Assets held for sale	—		171,185
Total current assets	396,389		549,620
Property, plant and equipment, net	45,267		43,368
Patents and other intangible assets, net	7,294		8,236
Goodwill	73,111		73,094
Deferred income taxes	18,444		18,584
Other long-term assets	12,815		11,570
Total assets	$	553,320	$	704,472
Liabilities and shareholders’ equity
Current liabilities:
Bank borrowings	$	499	$	1,318
Current portion of long-term debt	—		17,500
Trade accounts payable	11,551		16,488
Accrued charges related to U.S. Government resolutions	83,864		82,500
Other current liabilities	50,132		45,327
Liabilities held for sale	—		22,676
Total current liabilities	146,046		185,809
Long-term debt	40,000		191,195
Deferred income taxes	9,781		9,778
Other long-term liabilities	3,277		2,519
Total liabilities	199,104		389,301
Contingencies (Note 16)
Shareholders’ equity:
Common shares $0.10 par value; 50,000,000 shares authorized; 18,946,481 and 18,465,444 issued and outstanding as of June 30, 2012 and December 31, 2011, respectively	1,895		1,846
Additional paid-in capital	231,758		214,310
Retained earnings	120,475		97,254
Accumulated other comprehensive income	88		1,761
Total shareholders’ equity	354,216		315,171
Total liabilities and shareholders’ equity	$	553,320	$	704,472

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

3

ORTHOFIX INTERNATIONAL N.V.

Condensed Consolidated Statements of Operations
For the three and six months ended June 30, 2012 and 2011

(Unaudited, U.S. Dollars, in thousands, except share and per share data)	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Net sales	$	119,492		$	116,670		$	235,534		$	229,731
Cost of sales	23,676			23,186			45,616			45,527
Gross profit	95,816			93,484			189,918			184,204
Operating expenses
Sales and marketing	49,810			49,960			99,331			97,399
General and administrative	14,295			17,344			28,865			36,130
Research and development	9,252			6,229			16,302			11,673
Amortization of intangible assets	530			555			1,060			1,103
Charges related to U.S. Government resolutions (Note 16)	1,364			—			1,364			46,000
	75,251			74,088			146,922			192,305
Operating income (loss)	20,565			19,396			42,996			(8,101		)
Other income and expense
Interest expense, net	(1,265		)	(2,198		)	(3,486		)	(4,613		)
Other income (expense), net	660			(342		)	29			(1,451		)
	(605		)	(2,540		)	(3,457		)	(6,064		)
Income (loss) before income taxes	19,960			16,856			39,539			(14,165		)
Income tax expense	(5,993		)	(6,337		)	(13,356		)	(12,056		)
Net income (loss) from continuing operations, net of tax	13,967			10,519			26,183			(26,221		)
Discontinued operations (Note 15)
Gain on sale of Breg, Inc., net of tax	1,040			—			1,040			—
Income (loss) from discontinued operations	(5,846		)	(796		)	(6,352		)	676
Income tax benefit (expense)	2,044			235			2,350			(298		)
Net income (loss) from discontinued operations, net of tax	(2,762		)	(561		)	(2,962		)	378
Net Income (loss)	$	11,205		$	9,958		$	23,221		$	(25,843	)
Net income (loss) per common share- basic:
Net income (loss) from continuing operations, net of tax	$	0.74		$	0.58		$	1.40		$	(1.45	)
Net income (loss) from discontinued operations, net of tax	(0.15		)	(0.03		)	(0.16		)	0.02
Net income (loss) per common share- basic	$	0.59		$	0.55		$	1.24		$	(1.43	)
Net income (loss) per common share- diluted:
Net income (loss) from continuing operations, net of tax	$	0.73		$	0.57		$	1.37		$	(1.45	)
Net income (loss) from discontinued operations, net of tax	(0.15		)	(0.03		)	(0.16		)	0.02
Net income (loss) per common share- diluted:	$	0.58		$	0.54		$	1.21		$	(1.43	)
Weighted average number of common shares:
Basic	18,827,452			18,110,607			18,751,573			18,024,913
Diluted	19,215,984			18,541,220			19,168,940			18,024,913
Comprehensive income (loss)	$	6,822		$	11,793		$	21,548		$	(20,918	)

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

4

ORTHOFIX INTERNATIONAL N.V.

Condensed Consolidated Statements of Cash Flows
For the six months ended June 30, 2012 and 2011

	Six Months Ended June 30,
(Unaudited, U.S. Dollars, in thousands)	2012			2011
Cash flows from operating activities:
Net income (loss)	$	23,221		$	(25,843	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	11,018			11,324
Amortization of debt costs	1,375			643
Provision for doubtful accounts	5,324			4,545
Deferred income taxes	(1,653		)	(2,680		)
Share-based compensation	3,000			3,997
Provision for inventory obsolescence	836			2,116
Gain on sale of Breg, Inc.	(1,040		)	—
Excess tax benefit on non-qualified stock options	(1,156		)	(1,004		)
Other	(6,060		)	335
Change in operating assets and liabilities, net of effect of disposition:
Trade accounts receivable	(24,437		)	(5,353		)
Inventories	2,247			(12,423		)
Escrow receivable	41,537			(326		)
Prepaid expenses and other current assets	335			3,704
Trade accounts payable	(4,391		)	(2,312		)
Charges related to U.S. Government resolutions	1,364			46,000
Other current liabilities	6,236			680
Net cash provided by operating activities	57,756			23,403
Cash flows from investing activities:
Capital expenditures for property, plant and equipment	(12,794		)	(10,963		)
Capital expenditures for intangible assets	(214		)	(335		)
Payment made in connection with acquisition	—			(5,250		)
Net proceeds from the sale of Breg, Inc.	153,092			—
Net cash provided by (used in) investing activities	140,084			(16,548		)
Cash flows from financing activities:
Net proceeds from issuance of common shares	13,341			13,453
Repayments of long-term debt	(168,695		)	(2,500		)
Payment of refinancing fees	—			(758		)
Repayment of bank borrowings, net	(831		)	(1,653		)
Changes in restricted cash	(25,831		)	(2,285		)
Cash payment for purchase of minority interest in subsidiary	—			(517		)
Excess tax benefit on non-qualified stock options	1,156			1,004
Net cash (used in) provided by financing activities	(180,860		)	6,744
Effect of exchange rate changes on cash	(98		)	325
Net increase in cash and cash equivalents	16,882			13,924
Cash and cash equivalents at the beginning of the period	33,207			13,561
Cash and cash equivalents at the end of the period	$	50,089		$	27,485

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

5

ORTHFIX INTERNATIONAL N.V.

Notes to the Unaudited Condensed Consolidated Financial Statements

1.Description of business

Orthofix International N.V. (the “Company”) is a diversified, global medical device company focused on developing and delivering innovative repair and regenerative technologies to the spine and orthopedic markets. The Company is comprised of two reportable segments: Spine and Orthopedics that are supported by Corporate activities.

On May 24, 2012 (the “Closing Date” of the Transaction), Orthofix Holdings Inc. (“Orthofix Holdings”) completed the sale of all of the outstanding shares of Breg, Inc (“Breg”) for $157.5 million in cash. Beginning June 30, 2012, the former sports medicine business is presented as discontinued operations for all periods.  As a result of the sale of Breg, the Company completed its exit from the Sports Medicine global business unit (“GBU”), of which Breg was a significant component. The operations and cash flows of the former Sports Medicine GBU have been eliminated from the ongoing operations, and there is no significant continuing involvement in the sold business. See Note 15 for detailed information on the discontinued operations.

2.Summary of significant accounting policies

(a)Basis of presentation

The accompanying Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S.”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Pursuant to these rules and regulations, certain information and note disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S., have been condensed or omitted. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. The balance sheet at December 31, 2011 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements. For further information, refer to the Consolidated Financial Statements and Notes thereto of the Company’s Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 2011.

(b)Reclassifications

The Company has reclassified certain line items to conform to the current year presentation. The reclassifications have no effect on previously reported net earnings or shareholders’ equity.

(c)Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, the Company evaluates its estimates including those related to the resolution of U.S. government matters, contractual allowances, doubtful accounts, inventories, taxes, shared-based compensation, and potential goodwill and intangible asset impairment. Actual results could differ from these estimates.

(d)Recently Issued Accounting Standards

On June 16, 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-05, Presentation of Comprehensive Income. This ASU eliminates the current option to present other comprehensive income and its components in the statement of changes in shareholders’ equity and increases the prominence of other comprehensive income in the statements by providing an alternative to present the components of net income and comprehensive income as either one continuous or two separate but consecutive financial statements. Companies are also required to present reclassification adjustments for items that are reclassified from other comprehensive income to net income within these statements. This standard is to be applied retrospectively and is effective for fiscal years beginning after December 15, 2011 with early adoption permitted. The Company adopted this ASU as of March 31, 2012 and it did not have a material impact on the Company’s Consolidated financial statements.

6

Notes to the Unaudited Condensed Consolidated Financial Statements (continued)

3.Inventories

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

Inventories were as follows:

(US$ in thousands)	June 30, 2012			December 31, 2011
Raw materials	$	8,017		$	10,115
Work-in-process	5,874			5,606
Finished products	44,244			49,141
Field inventory	38,954			39,400
Consignment inventory	7,317			7,551
	104,406			111,813
Less reserve for obsolescence	(25,983		)	(28,844		)
	$	78,423		$	82,969

4.Patents and other intangible assets

(US$ in thousands)	June 30, 2012			December 31, 2011
Cost
Patents and developed technologies	$	32,480		$	37,683
Trademarks — definite lived (subject to amortization)	548			545
	33,028			38,228
Accumulated amortization
Patents and developed technologies	(25,339		)	(29,611		)
Trademarks — definite lived (subject to amortization)	(395		)	(381		)
Patents and other intangible assets, net	$	7,294		$	8,236

Amortization expense for intangible assets is estimated to be approximately $1 million for the remainder of 2012 and $2 million, $1.3 million, $1.3 million, $0.9 million and $0.8 million for the periods ending December 31, 2013, 2014, 2015, 2016 and 2017 and thereafter, respectively.

5.Goodwill

The following table presents the changes in the net carrying value of goodwill:

(US$ in thousands)	Total
At December 31, 2011	$	73,094
Foreign currency	17
At June 30, 2012	$	73,111

7

Notes to the Unaudited Condensed Consolidated Financial Statements (continued)

6.Bank borrowings

Borrowings under lines of credit consist of borrowings in Euros used to fund international operations. The borrowings under such facilities were $0.5 million and $1.3 million at June 30, 2012 and December 31, 2011, respectively. The weighted average interest rates on borrowings under lines of credit as of June 30, 2012 and December 31, 2011 were 3.41% and 4.02%, respectively.

The Company had an unused available line of credit of €6.9 million ($8.7 million) and €6.3million ($8.1 million) at June 30, 2012 and December 31, 2011, respectively in its Italian line of credit. This line of credit is unsecured and provides the Company the option to borrow amounts in Italy at rates which are determined at the time of borrowing.

7.Long-term debt

On August 30, 2010, the Company’s wholly-owned U.S. holding company, Orthofix Holdings, Inc. (“Orthofix Holdings”) entered into a Credit Agreement (the “Credit Agreement”) with certain domestic direct and indirect subsidiaries of the Company (the “Guarantors”), JPMorgan Chase Bank, N.A., as Administrative Agent, RBS Citizens, N.A., as Syndication Agent, and certain lender parties thereto.

The Credit Agreement provides for a five year, $200.0 million secured revolving credit facility (the “Revolving Credit Facility”), and a five year, $100.0 million secured term loan facility (the “Term Loan Facility”, and together with the Revolving Credit Facility, the “Credit Facilities”). Orthofix Holdings has the ability to increase the amount of the Credit Facilities by an aggregate amount of up to $50 million upon satisfaction of certain conditions.

In May 2012, the Company used a portion of the proceeds from the sale of Breg, Inc. (see Note 15) to repay in full the remaining $87.5 million balance on the Term Loan Facility and pay down $57.5 million of amounts outstanding under the Revolving Credit Facility. This use of proceeds was required by the lenders’ consent dated April 23, 2012 to the Credit Agreement. As a result of the sale of Breg, Breg ceased to be a subsidiary of the Company and, therefore, Breg was released as a credit party under the Credit Agreement. In June 2012, the Company paid down an additional $20 million of amounts outstanding under the Revolving Credit Facility. As a result, at June 30, 2012, the Term Loan Facility had been repaid in full and there was $40 million outstanding under the Revolving Credit Facility.  As of December 31, 2011 the Company had $91.3 million outstanding under the Term Loan Facility and $117.4 million outstanding under the Revolving Credit Facility. Borrowings under the Credit Facilities bear interest at a floating rate, which is, at Orthofix Holdings’ option, either the London Inter-Bank Offered Rate (“LIBOR”) plus an applicable margin or a base rate (as defined in the Credit Agreement) plus an applicable margin (in each case subject to adjustment based on financial ratios). Such applicable margin will be up to 3.25% for LIBOR borrowings and up to 2.25% for base rate borrowings depending upon a measurement of the consolidated leverage ratio with respect to the immediately preceding four fiscal quarters. As of June 30, 2012, the entire Revolving Credit Facility was at the LIBOR rate plus a margin of 3.00%.  As of December 31, 2011, the entire Term Loan Facility and $100 million of the Revolving Credit Facility was at the LIBOR rate plus a margin of 3.00%. As of December 31, 2011, the remaining $17.4 million of the Revolving Credit Facility was at a base rate (as defined in the Credit Agreement) plus a margin of 2.00%. The effective interest rate on the Credit Facilities as of June 30, 2012 and December 31, 2011 was 3.3% and 3.4%, respectively.

Outstanding principal on the Revolving Credit Facility is due on August 30, 2015.

Borrowings under the Revolving Credit Facility, which may be made in the future, will be used for working capital, capital expenditures and other general corporate purposes of Orthofix Holdings and its subsidiaries. The Guarantors have guaranteed repayment of Orthofix Holdings’ obligations under the Credit Agreement. The obligations of Orthofix Holdings and each of the Guarantors with respect to the Credit Facilities are secured by a pledge of substantially all of the assets of Orthofix Holdings and each of the Guarantors.

In May 2011, the Company obtained an amendment to the Credit Agreement to provide additional capacity under the various restrictive negative covenants for the Company’s payment of the Specified Settlement Amounts (as defined in the Credit Agreement, as amended) associated with each of the potential settlements (See Note 16).  The amendment updates the definition of Consolidated EBITDA to exclude Specified Settlement Amounts of up to $50 million in the aggregate.

The Credit Agreement, as amended, requires Orthofix Holdings and the Company to comply with coverage ratios on a consolidated basis and contains affirmative and negative covenants, including limitations on additional debt, liens, investments and acquisitions. The Credit Agreement, as amended, also includes events of default customary for facilities of this type. Upon the occurrence of an event of default, all outstanding loans may be accelerated and/or the lenders’ commitments terminated.  The Company was in compliance with the affirmative and negative covenants at June 30, 2012 and there were no events of default.

8

Notes to the Unaudited Condensed Consolidated Financial Statements (continued)

Certain subsidiaries of the Company have restrictions on their ability to pay dividends or make intercompany loan advances pursuant to the Company’s Credit Facilities. The net assets of Orthofix Holdings and its subsidiaries are restricted for distributions to the parent company. Domestic subsidiaries of the Company, as parties to the credit agreement, have access to these net assets for operational purposes. The amount of restricted net assets of Orthofix Holdings and its subsidiaries as of June 30, 2012 and December 31, 2011 was $200 million and $186.0 million, respectively. In addition, the Credit Agreement restricts the Company and subsidiaries that are not parties to the Credit Agreement, as amended, from access to cash held by Orthofix Holdings and its subsidiaries. The amount of restricted cash of the Company as of June 30, 2012 and December 31, 2011 was $72.9 million and $45.5 million, respectively.

In conjunction with obtaining the Credit Facilities and the Credit Agreement, as amended, the Company incurred debt issuance costs of $5 million. These costs are being amortized using the effective interest method over the life of the Credit Facilities. In conjunction with the Term Loan Facility repayment in May 2012, the Company wrote off $0.8 million of related debt issuance costs. As of June 30, 2012 and December 31, 2011, debt issuance costs, net of accumulated amortization, related to the Credit Agreement were $2.1 million and $3.5 million, respectively.

8.Derivative instruments

The tables below disclose the types of derivative instruments the Company owns, the classifications and fair values of these instruments within the balance sheet, and the amount of gain (loss) recognized in other comprehensive income (loss) (“OCI”) or net income (loss).

(US$ in thousands)As of June 30, 2012	Fair value: favorable (unfavorable)		Balance sheet location
Cross-currency swap	$	2,321	Other long-term assets

As of December 31, 2011
Cross-currency swap	$	1,011	Other long-term assets

	Three Months Ended June 30,					Six Months Ended June 30,
(US$ in thousands)	2012			2011		2012			2011
Cross-currency swap unrealized gain (loss) recorded in other comprehensive income (loss), net of taxes	$	(585	)	$	199	$	(76	)	$	1,301

Cross-currency swap

In 2006, the Company entered into a cross-currency swap agreement with Wells Fargo to manage its cash flows related to foreign currency exposure for a portion of the Company’s intercompany receivable of a U.S. dollar functional currency subsidiary that is denominated in Euro. The derivative instrument, a ten-year fully amortizable agreement with an initial notional amount of $63.0 million, was scheduled to expire on December 30, 2016. Upon executing the Company’s Credit Agreement (See Note 7), the Company terminated this cross-currency swap agreement on September 30, 2010. Also on September 30, 2010, the Company entered into a new cross-currency swap agreement (the “replacement swap”) agreement with JPMorgan Chase Bank and Royal Bank of Scotland PLC (the “counterparties”).Upon the termination of the cross-currency swap agreement with Wells Fargo on September 30, 2010, the amount representing the current fair value of the terminated cross-currency swap was $450,000 (the “cash settlement amount”). The cash settlement amount paid to Wells Fargo was recorded in other long-term assets on the condensed consolidated balance sheets and is being amortized over the remaining life of the underlying transaction, assuming such payments remain probable.

Under the terms of the replacement swap agreement, the Company pays Euros based on a €33.5 million notional value and a fixed rate of 5.00% and receives U.S. dollars based on a notional value of $45.5 million and a fixed rate of 4.635%. The expiration date is December 30, 2016, the date upon which the underlying intercompany debt, to which the replacement swap agreement applies, matures. The replacement swap agreement is designated as a cash flow hedge and therefore the Company recognized an unrealized gain (loss) on the change in fair value, net of tax, within other comprehensive income (loss).

9

Notes to the Unaudited Condensed Consolidated Financial Statements (continued)

9.Fair value measurements

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

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

As of June 30, 2012, the Company’s financial instruments included cash equivalents, restricted cash, accounts receivable, short-term bank borrowings, accounts payable, long-term secured debt and a cross-currency derivative contract. Cash equivalents consist of short-term highly liquid, income-producing investments, all of which have original maturities of 90 days or less, including money market funds. The carrying amount of restricted cash, accounts receivable, short-term bank borrowings and accounts payable approximate fair value due to the short-term maturities of these instruments. The Company’s Credit Facilities carry a floating rate of interest.  The fair value of our Credit Facilities approximates book value as of June 30, 2012 because our interest rate was at the one month LIBOR plus an applicable margin.  See Note 7 for further discussion of our Credit Facilities.

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

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

(US$ in thousands)	Balance June 30, 2012		Level 1		Level 2		Level 3
Derivative financial instruments (1)
Cash flow hedges
Cross-currency hedge	$	2,321	$	—	$	2,321	$	—

(1)            See Note 8, “Derivative Instruments”

(US$ in thousands)	Balance December 31, 2011		Level 1		Level 2		Level 3
Derivative financial instruments(1)
Cash flow hedges
Cross currency hedge	$	1,011	$	—	$	1,011	$	—

10

Notes to the Unaudited Condensed Consolidated Financial Statements (continued)

10.Comprehensive income (loss)

Accumulated other comprehensive income is comprised of foreign currency translation adjustments and the effective portion of the gain (loss) on the Company’s cross-currency swap, which is designated and accounted for as a cash flow hedge (See Note 8). The components of and changes in accumulated other comprehensive income were as follows:

(US$ in thousands)	Foreign Currency Translation Adjustments			Fair Value of Cross-Currency Swap			Accumulated Other Comprehensive Income
Balance at December 31, 2011	$	1,893		$	(132	)	$	1,761
Unrealized gain on cross-currency swap, net of tax of $(44)	—			(76		)	(76		)
Foreign currency translation adjustment (1)	(1,597		)	—			(1,597		)
Balance at June 30, 2012	$	296		$	(208	)	$	88

(1)As the cash generally remains permanently invested in the non-U.S. dollar denominated foreign subsidiaries, no deferred taxes are recognized on the related foreign currency translation adjustment.

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

	Three Months Ended June 30,					Six Months Ended June 30,
(US$ in thousands)	2012			2011		2012			2011
Net income (loss)	$	11,205		$	9,958	$	23,221		$	(25,843	)
Other comprehensive income (loss):
Unrealized gain (loss) on cross-currency swap, net of tax	(585		)	199		(76		)	1,301
Foreign currency translation adjustment	(3,798		)	1,636		(1,597		)	3,624
Total comprehensive income (loss)	$	6,822		$	11,793	$	21,548		$	(20,918	)

11.Earnings per share

For the three and six months ended June 30, 2012 and 2011, there were no adjustments to net income (loss) for purposes of calculating basic and diluted net income (loss) available to common shareholders. The following is a reconciliation of the weighted average shares used in the basic and diluted net income (loss) per common share computations.

	Three Months Ended June 30,		Six Months Ended June 30,
	2012	2011	2012	2011
Weighted average common shares-basic	18,827,452	18,110,607	18,751,573	18,024,913
Effect of dilutive securities:
Unexercised stock options net of treasury share repurchase	388,532	430,613	417,367	—
Weighted average common shares-diluted	19,215,984	18,541,220	19,168,940	18,024,913

No adjustment has been made in the six months ended June 30, 2011 for any common stock equivalents because their effects would be anti-dilutive.  For the six months ended June 30, 2011, potentially dilutive shares totaled 350,233.

Options to purchase shares of common stock with exercise prices in excess of the average market price of common shares are not included in the computation of diluted earnings per share. There were 796,851 and 768,269 outstanding options not included in the diluted earnings per share computation for the three and six months ended June 30, 2012, respectively, because the inclusion of these options was anti-dilutive. There were 1,601,560 and 1,594,274 outstanding options not included, respectively, in the diluted earnings per share computation for the three and six months ended June 30, 2011, respectively, because the inclusion of these options was anti-dilutive.

11

Notes to the Unaudited Condensed Consolidated Financial Statements (continued)

12.Share-based compensation

All share-based compensation costs are measured at the grant date, based on the estimated fair value of the award, and are recognized as expense in the condensed consolidated statements of operations over the requisite service period.

The following table shows the detail of share-based compensation by line item in the condensed consolidated statements of operations:

	Three Months Ended June 30,				Six Months Ended June 30, 2011
(US$ in thousands)	2012		2011		2012		2011
Cost of sales	$	106	$	35	$	283	$	72
Sales and marketing	397		511		842		1,110
General and administrative	772		1,777		1,542		2,489
Research and development	30		49		71		97
Total	$	1,305	$	2,372	$	2,378	$	3,768

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

During the three and six months ended June 30, 2012, there were 218,324 and 481,037 shares, respectively, of common stock issued related to stock purchase plan issuances, stock option exercises and the vesting of restricted stock awards. During the three and six months ended June 30, 2011, there were 218,831 and 515,318 shares, respectively, of common stock issued related to stock purchase plan issuances, stock option exercises and the vesting of restricted stock awards.

13.Income taxes

Continuing Operations

The Company recognized a $13.4 million and $12.1 million provision for income tax on continuing operations which reflects an effective tax rate of 33.8% on pre-tax income and (85.1%) on a pre-tax loss for the six months ended June 30, 2012 and 2011, respectively.  Excluding the impact of discrete charges related to the U.S. Government resolutions, the effective tax rate on continuing operations for the first six months of 2012 and 2011 was 37.0% and 37.9%, respectively, The principal factors affecting the Company’s effective tax rate for the first six months of 2012 were the tax benefit of discrete items related to the U.S. Government resolutions, the Company’s mix of earnings among various tax jurisdictions, state taxes and current period losses in certain jurisdictions for which the Company does not currently provide a tax benefit.  The effective tax rate for the first six months of 2011 was impacted by discrete charges related to U.S. Government inquiries, for which no tax benefit was recorded, the mix of earnings among tax jurisdictions, state taxes and current period losses in certain foreign jurisdictions for which the Company does not currently provide a tax benefit.

Discontinued Operations

The Company recognized a $2.4 million benefit and $0.3 million provision for income tax on discontinued operations which reflect an effective tax rate of 44.2% on a pre-tax loss and 44.0% on a pre-tax income for the six months ended June 30, 2012 and 2011, respectively.  The effective tax rate on discontinued operations for the first six months of 2012 was 37.0% excluding the impact of the gain on the sale of Breg, Inc. in 2012.  The principal factors affecting the Company’s effective tax rate for the first six months of 2012 and 2011 were the tax benefit of discrete items, the Company’s mix of earnings among various tax jurisdictions, state taxes and current period losses in certain jurisdictions for which the Company does not currently provide a tax benefit.

As of June 30, 2012 and December 31, 2011, the Company’s gross unrecognized tax benefit was $0.6 million and $0.7 million, respectively.  The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits in income tax expense.  The Company had approximately $0.5 million accrued for payment of interest and penalties as of June 30, 2012 and December 31, 2011.  The entire amount of unrecognized tax benefits, including interest, would favorably impact the Company’s effective tax rate if recognized.  As of June 30, 2012, the Company does not expect the amount of unrecognized tax benefits to change significantly over the next twelve months.

The Company files a consolidated income tax return in the U.S. federal jurisdiction and numerous consolidated and separate income tax returns in many state and foreign jurisdictions.  The statute of limitations with respect to federal tax authorities is closed for years prior to December 31, 2008.  The statute of limitations for the various state tax filings is closed in most instances for years prior to December 31, 2007.  The statute of limitations with respect to the major foreign tax filing jurisdictions is closed for years prior to December 31, 2006.

12

Notes to the Unaudited Condensed Consolidated Financial Statements (continued)

14.Business segment information

The Company’s segment information is prepared on the same basis that management reviews the financial information for operational decision making purposes. At this time, the Company’s Chief Operating Decision Maker (the “CODM”) only uses global business units (“GBUs”) reporting for Sales and Operating Income to assess operating performance. Items below operating income are not considered when measuring the profitability of a segment.  In the future, the CODM may decide to review other financial metrics by GBU. Goodwill is also assigned to specific GBUs. The Company neither discretely allocates assets, other than goodwill, to its operating segments nor evaluates the operating segments using discrete asset information.  The Company manages its business by its two GBUs, which are comprised of Spine and Orthopedics supported by Corporate activities. These GBUs represent the segments for which the CODM reviews financial information and makes resource allocation decisions among business units. Accordingly, the Company’s segment information (as provided below) has been prepared based on the Company’s two GBUs reporting segments. These segments are discussed below.

Spine

Spine provides a portfolio of repair and regenerative products that allow physicians to successfully treat a variety of spinal conditions.  This global business unit specializes in the design, development and marketing of the Company’s spinal repair products along with regenerative stimulation and biologics products used in spine applications.  Spine distributes its products through a network of distributors, sales representatives and affiliates.  This global business unit uses both direct and distributor sales representatives to sell and market spine products to hospitals, doctors and other healthcare providers, globally.

Orthopedics

Orthopedics provides a comprehensive portfolio of repair and regenerative products that allow physicians to successfully treat a variety of orthopedic conditions unrelated to spine.  This global business unit specializes in the design, development and marketing of the Company’s orthopedic repair products along with regenerative stimulation and biologics products used in orthopedic applications. Orthopedics distributes its products through a network of distributors, sales representatives and affiliates.  This global business unit uses both direct and distributor sales representatives to sell and market orthopedics products to hospitals, doctors and other healthcare providers, globally.

Corporate

Corporate activities are comprised of the operating expenses of Orthofix International N.V. and its U.S. holding company subsidiary, Orthofix Holdings, Inc., along with activities not necessarily identifiable with the two GBUs.

The tables below present external net sales for continuing operations by GBU reporting segments:

	External Net Sales by GBU
	Three Months Ended June 30,
(US$ in thousands)	2012		2011		Reported Growth		Constant Currency Growth
Spine
Spine Repair Implants and Regenerative Biologics	$	38,501	$	36,882	4	%	4	%
Spine Regenerative Stimulation	43,294		39,660		9	%	9	%
Total Spine	81,795		76,542		7	%	7	%
Orthopedics	37,697		40,128		(6	)%	2	%
Total Net Sales	$	119,492	$	116,670	2	%	5	%

	External Net Sales by GBU
	Six Months Ended June 30,
(US$ in thousands)	2012		2011		Reported Growth		Constant Currency Growth
Spine
Spine Repair Implants and Regenerative Biologics	$	74,258	$	70,839	5	%	5	%
Spine Regenerative Stimulation	82,565		78,278		5	%	5	%
Total Spine	156,823		149,117		5	%	5	%
Orthopedics	78,711		80,614		(2	)%	3	%
Total Net Sales	$	235,534	$	229,731	3	%	4	%

13

Notes to the Unaudited Condensed Consolidated Financial Statements (continued)

The table below presents operating income (loss) for continuing operations by GBU reporting segments:

Operating Income (Loss) by GBU	Three Months Ended June 30,						Six Months Ended June 30,
(US$ in thousands)	2012			2011			2012			2011
Spine (1)	$	21,029		$	22,292		$	42,594		$	5,866
Orthopedics (2)	4,093			4,972			9,073			1,340
Corporate (3)	(4,557		)	(7,868		)	(8,671		)	(15,307		)
Total	$	20,565		$	19,396		$	42,996		$	(8,101	)

(1)For the six months ended June 30, 2012 and 2011, the operating income for the Spine GBU included $1.2 million and $36.5 million, respectively, of expenses in connection with charges related to U.S. Government resolutions. For the six months ended June 30, 2012, the operating income for the Spine GBU included a $3.1 million charge for an arbitration resolution related to a 2008 co-development agreement.

(2)For the six months ended June 30, 2012 and 2011, the operating income for the Orthopedics GBU included $0.2 million and $6.5 million, respectively, of expenses in connection with charges related to U.S. Government resolutions.

(3)For the six months ended June 30, 2011, the operating loss for the Corporate GBU included $3 million of expenses in connection with charges related to U.S. Government resolutions. For the three and six months ended June 30, 2011, the operating loss for the Corporate GBU included $3.2 million of senior management succession charges.

15.Sale of Breg and Disposition of Sports Medicine GBU

On April 23, 2012, the Company’s subsidiary Orthofix Holdings and Breg entered into a stock purchase agreement (the “SPA”) with Breg Acquisition Corp. (“Buyer”), a newly formed affiliate of Water Street Healthcare Partners II, L.P., pursuant to which Buyer agreed to acquire from Orthofix Holdings all the outstanding shares of Breg, subject to the terms and conditions contained therein (the “Transaction”).  Under the terms of the SPA, upon closing of the sale, Orthofix Holdings and the Company agreed to indemnify Buyer with respect to certain specified matters, including the government investigation and product liability matters regarding a previously owned infusion pump product line, and pre-closing sales of cold therapy units and certain post-closing sales of cold therapy units.  (See “Matters Related to the Company’s former Breg Subsidiary and Possible Indemnification Obligations under Note 16.) On May 24, 2012 (the “Closing Date”), Orthofix Holdings completed the sale of all of the outstanding shares of Breg for $157.5 million in cash. After adjustments for working capital and indebtedness in accordance with the terms of the SPA, Orthofix Holdings used $145 million of the net proceeds to prepay outstanding Company indebtedness, as required by a lender consent received in connection with the Company’s existing Credit Agreement. As a result of the closing of this Transaction, Breg ceased to be a subsidiary of the Company and, therefore, Breg was released as a credit party under the Credit Agreement. The Company also agreed to enter into certain transition arrangements at the closing, including a transition services agreement pursuant to which the Company agreed to continue to provide administrative operational support for a period of up to twelve months.  As a result of the sale of Breg, the Company completed its exit from the Sports Medicine GBU, of which Breg was a significant component.

The portion of indemnification related to post closing claims related to post-closing sales of cold therapy has created a guarantee under Accounting Standards Codification “ASC 460 — Guarantees” and the fair value of the liability has been recorded under the initial recognition criteria in the amount of $2 million at the Closing Date of the transaction.  The Company will amortize the fair value of the noncontingent liability ratably over the period of indemnification which is three years.  The Company’s obligations under this guarantee were approximately $2 million as of June 30, 2012.

14

Notes to the Unaudited Condensed Consolidated Financial Statements (continued)

Gain on Sale of Discontinued Operations

The following table presents the value of the asset disposition, proceeds received, net of various working capital adjustments and indebtedness and net gain on sale of Breg as shown in the condensed consolidated statement of operations for the six months ended June 30, 2012.

(US$ in thousands)	Total
Cash proceeds	$	157.500
Less:
Working Capital	(7,532		)
Transaction related expenses	(4,057		)
Fair Value of Indemnification	(2,000		)
Tangible assets	(8,292		)
Intangible assets	(28,164		)
Goodwill	(106,200		)
Gain on sale of Breg	1,255
Income tax expense	(215		)
Gain on sale of Breg, net of taxes	$	1,040

The Sports Medicine GBU contributed $43.4 million and $53 million of net sales in the six months ended June 30, 2012 and 2011, respectively. The Sports Medicine global business unit contributed $16.3 million and $26.9 million of net sales in the three months ended June 30, 2012 and 2011, respectively. The Sports Medicine global business unit had $2.9 million of operating loss and $0.6 million of operating income in the six months ended June 30, 2012 and 2011, respectively. The Sports Medicine global business unit had $2.5 million and $0.8 million of operating loss in the three months ended June 30, 2012 and 2011, respectively.  The financial information above includes the financial results of Breg operations up to the date of sale.

The Company’s consolidated financial statements and related footnote disclosures reflect the Sports Medicine global business unit as discontinued operations.  Income (loss) associated with the Sports Medicine global business unit, net of applicable income taxes is shown as income (loss) from discontinued operations for all periods presented in accordance with ASC 205-20 Discontinued Operations.  In addition, the assets and liabilities of the discontinued entity have been reclassified and presented as assets held for sale and liabilities held for sale in the Company’s balance sheet as of December 31, 2011.

The assets and liabilities of the discontinued operations are as follows:

(US$ in thousands)	December 31, 2011
Assets Held for Sale
Restricted cash	$	1,629
Trade accounts receivable, less allowance	13,711
Inventories, net	8,277
Property, plant and equipment, net	8,756
Intangible assets, net	29,279
Goodwill	106,279
Deferred income taxes, prepaid expenses and other assets	3,254
Assets Held for Sale	$	171,185
Liabilities Held for Sale
Trade accounts payable	3,616
Deferred income taxes and other liabilities	19,060
Liabilities Held for Sale	$	22,676

15

Notes to the Unaudited Condensed Consolidated Financial Statements (continued)

16.Contingencies

The Company is a party to outstanding legal proceedings, investigations and claims as described below. The Company believes that it is unlikely that the outcome of each of these matters, including the matters discussed below, will have a material adverse effect on the Company and its subsidiaries as a whole, notwithstanding that the unfavorable resolution of any matter may have a material effect on the Company’s net earnings (if any) in any particular quarter. However, the Company cannot predict with any certainty the final outcome of any legal proceedings, investigations (including any settlement discussions with the government seeking to resolve such investigations) or claims made against it or its subsidiaries described in the paragraphs below, and there can be no assurance that the ultimate resolution of any such matter will not have a material adverse impact on the Company’s consolidated financial position, results of operations, or cash flows.

The Company records accruals for certain of its outstanding legal proceedings, investigations or claims when it is probable that a liability will be incurred and the amount of the loss can be reasonably estimated. The Company evaluates, on a quarterly basis, developments in legal proceedings, investigations and claims that could affect the amount of any accrual, as well as any developments that would make a loss contingency both probable and reasonably estimable. When a loss contingency is not both probable and reasonably estimable, the Company does not accrue the loss. However, if the loss (or an additional loss in excess of the accrual) is at least a reasonable possibility and material, then the Company discloses a reasonable estimate of the possible loss or range of loss, if such reasonable estimate can be made. If the Company cannot make a reasonable estimate of the possible loss, or range of loss, then that is disclosed.

The assessments of whether a loss is probable or a reasonable possibility, and whether the loss or range of loss is reasonably estimable, often involve a series of complex judgments about future events. Among the factors that the Company considers in this assessment are the nature of existing legal proceedings, investigations and claims, the asserted or possible damages or loss contingency (if reasonably estimable), the progress of the matter, existing law and precedent, the opinions or views of legal counsel and other advisers, the involvement of the U.S. Government and its agencies in such proceedings, the Company’s experience in similar matters and the experience of other companies, the facts available to the Company at the time of assessment, and how the Company intends to respond, or has responded, to the proceeding, investigation or claim. The Company’s assessment of these factors may change over time as individual proceedings, investigations or claims progress. For matters where the Company is not currently able to reasonably estimate a range of reasonably possible loss, the factors that have contributed to this determination include the following: (i) the damages sought are indeterminate, or an investigation has not manifested itself in a filed civil or criminal complaint, (ii) the matters are in the early stages, (iii) the matters involve novel or unsettled legal theories or a large or uncertain number of actual or potential cases or parties, and/or (iv) discussions with the government or other parties in matters that may be expected ultimately to be resolved through negotiation and settlement have not reached the point where the Company believes a reasonable estimate of loss, or range of loss, can be made. In such instances, the Company believes that there is considerable uncertainty regarding the timing or ultimate resolution of such matters, including a possible eventual loss, fine, penalty or business impact, if any.

In addition to the matters described in the paragraphs below, in the normal course of our business, the Company is involved in various lawsuits from time to time and may be subject to certain other contingencies. To the extent losses related to these contingencies are both probable and reasonably estimable, the Company accrues appropriate amounts in the accompanying financial statements and provides disclosures as to the possible range of loss in excess of the amount accrued, if such range is reasonably estimable. The Company believes losses are individually and collectively immaterial as to a possible loss and range of loss.

Litigation

Matters Related To Blackstone Medical, Inc. and Related Escrow Claims

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

16

Notes to the Unaudited Condensed Consolidated Financial Statements (continued)

On or about January 7, 2008, the Company received a federal grand jury subpoena from the U.S. Attorney’s Office for the District of Massachusetts (“Boston USAO”). The subpoena sought documents from the Company for the period January 1, 2000 through July 15, 2007. The Company believes that the subpoena concerned the compensation of physician consultants and related matters, and further believes that it was associated with HHS-OIG’s investigation of such matters. On September 18, 2008, the Company submitted a claim for indemnification from the escrow fund established in connection with the Blackstone Merger Agreement for any losses to the Company resulting from this matter. On or about April 29, 2009, counsel received a HIPAA subpoena issued by the U.S. Department of Justice (“DOJ”). The subpoena sought documents from the Company for the period January 1, 2000 through July 15, 2007. The Company believes that the subpoena concerned the compensation of physician consultants and related matters, and further believes that it was associated with HHS-OIG’s investigation of such matters, as well as the January 7, 2008 federal grand jury subpoena. On or about August 26, 2010, counsel for Orthofix Inc. and Blackstone executed a tolling agreement with the Boston USAO (the “Tolling Agreement”) that extended an agreement tolling the statute of limitations applicable to any criminal, civil, or administrative proceedings that the government might later initiate to include the period from December 1, 2008 through and including October 31, 2010. On or about February 1, 2011, the parties further extended the tolling of the statute of limitations through and including May 31, 2011 with respect to any criminal proceedings that the government might later initiate.

On or about December 5, 2008, the Company obtained a copy of a qui tam complaint filed by Susan Hutcheson and Philip Brown against Blackstone and the Company in the U.S. District Court for the District of Massachusetts. A qui tam action is a civil lawsuit brought by an individual for an alleged violation of a federal statute, in which DOJ has the right to intervene and take over the prosecution of the lawsuit at its option. On September 18, 2008, after being informed of the existence of the lawsuit by representatives of DOJ and prior to the unsealing of the complaint (which was unsealed by the court on or about November 24, 2008), the Company submitted a claim for indemnification from the escrow fund established in connection with the Blackstone Merger Agreement for any losses to the Company resulting from this matter. On November 21, 2008, the U.S. Department of Justice filed a notice of non-intervention in the case. The complaint was served on Blackstone on or about March 24, 2009. Counsel for the plaintiffs filed an amended complaint on June 4, 2009. The amended complaint sets forth a cause of action against Blackstone under the False Claims Act for alleged inappropriate payments and other items of value conferred on physician consultants; Orthofix is not named as a defendant in the amended complaint. The Company understands that this lawsuit was related to the matters described above involving the HHS-OIG, the Boston USAO, and DOJ. On or about March 12, 2010, the United States District Court for the District of Massachusetts granted Blackstone’s motion to dismiss and, on March 15, 2010, entered judgment in favor of Blackstone. On June 1, 2011, the United States Court of Appeals for the First Circuit reversed the motion to dismiss and remanded to the district court for further proceedings. In response to a joint motion to stay the action, on August 22, 2011, the United States District Court for the District of Massachusetts entered an order administratively closing the lawsuit for a period of no more than ninety (90) days. On August 30, 2011, Blackstone filed with the United States Supreme Court a Petition for a Writ of Certiorari to review the June 1, 2011 judgment of the United States Court of Appeals for the First Circuit, which was denied on December 5, 2011.

In January 2012, after a series of ongoing discussions and negotiations with the Boston USAO, the Company’s board of directors approved an agreement in principle to pay $32 million to resolve the matters described in the immediately preceding paragraphs. The Company is currently in discussions with the Boston USAO, the DOJ, and HHS-OIG, as to the terms of definitive written agreements to finally resolve these matters. As part of the resolution of this matter (and matters described below related to the Company’s regenerative stimulation business), on June 6, 2012, Orthofix International N.V., Orthofix Inc. and Blackstone Medical, Inc. entered into a five-year Corporate Integrity Agreement with HHS-OIG.  (The Corporate Integrity Agreement is further described below under the subheading “Corporate Integrity Agreement with HHS-OIG”.)  Based on information currently available, the Company believes that it is probable that a final written definitive settlement agreement with the U.S. Government will be entered into on these economic terms, which, as described below, would be fully funded from the escrow fund established in connection with the Blackstone Merger Agreement. There can be no assurance that the Company will enter into a consensual resolution of these matters, or what the final terms of any such resolution might be; however, the Company believes that the likelihood of any such additional material loss in excess of this amount is remote.

In 2007 and 2008, the Company received certain other subpoenas from state and federal entities related to Blackstone’s financial relationship with physicians, which the Company has described in prior reports.  The Company has fully responded to each of these subpoenas, and there are currently no pending proceedings related to any of these matters.

Under the Blackstone Merger Agreement, the former shareholders of Blackstone agreed to indemnify the Company for breaches of representations and warranties under the agreement as well as certain other specified matters. These post-closing indemnification obligations of the former Blackstone shareholders were limited to a cumulative aggregate amount of $66.6 million. At closing, an escrow fund was established pursuant to the terms of the Blackstone Merger Agreement to fund timely submitted indemnification claims. The initial amount of the escrow fund was $50.0 million. As of December 31, 2011, the escrow fund contained $47.5 million.

17

Notes to the Unaudited Condensed Consolidated Financial Statements (continued)

In February 2012, the Company reached an agreement with the representative of the former shareholders of Blackstone resolving all outstanding escrow and indemnification claims under the Blackstone Merger Agreement.  Under this agreement, approximately $42.5 million was distributed from the escrow fund to the Company (which will be used, among other things, to fund the proposed $32 million settlement in principle described above).  Each of the Company and the former shareholders of Blackstone also mutually released each other from all further claims against each other related to these matters.  As of September 30, 2011, the Company had recognized $15.5 million as an “escrow receivable” on the consolidated balance sheet, reflecting previously incurred expenses that the Company believed were reasonably assured of collection.  The Company received approximately $9.5 million in cash from the escrow fund after application of (i) the $32 million allocated to the settlement in principle described above with the government and (ii) approximately $1 million of other fees incurred with respect to this matter since September 30, 2011. As a result, the Company recorded a charge of approximately $6 million during the fourth quarter of 2011 for previously incurred legal fees that were reflected in this escrow receivable balance as of September 30, 2011. The Company recorded a charge of $0.2 million in the second quarter of 2012 which represents imputed interest on the settlement accrued through June 30, 2012.

Matters Related to Regenerative Stimulation Business

On or about April 10, 2009, the Company received a HIPAA subpoena (“HIPAA subpoena”) issued by the Boston USAO. The subpoena sought documents concerning, among other things, the Company’s promotion and marketing of its regenerative stimulator devices (which the Company has also described in the past as its “bone growth stimulator devices”). The Boston USAO issued several subsequent document and testimony subpoenas.  The Company cooperated with these requests.

On or about April 14, 2009, the Company obtained a copy of a qui tam complaint filed by Jeffrey J. Bierman in the U.S. District Court for the District of Massachusetts against the Company, Orthofix Inc. and other companies that have allegedly manufactured regenerative stimulation devices, including Orthologic Corp., DJO Incorporated, Reable Therapeutics, Inc., the Blackstone Group, L.P., Biomet, Inc., EBI, L.P., EBI Holdings, Inc., EBI Medical Systems, Inc., Bioelectron, Inc., LBV Acquisition, Inc., and Smith & Nephew, Inc. The complaint, as subsequently amended in 2010, alleged various causes of action under the federal False Claims Act and state and city false claims acts premised on the contention that the defendants improperly promoted the sale, as opposed to the rental, of regenerative stimulation devices. The complaint also included claims against the defendants for, among other things, allegedly misleading physicians and purportedly causing them to file false claims and for allegedly violating the Anti-Kickback Act by providing free products to physicians, waiving patients’ insurance co-payments and providing inducements to independent sales agents to generate business.

On April 28, 2011, after a series of ongoing discussions and negotiations with the Boston USAO, the Company’s board of directors approved an agreement in principle proposed by the Boston USAO to resolve the criminal and civil matters described in the immediately preceding two paragraphs. On June 6, 2012, the Company entered into a definitive settlement agreement with the United States of America, acting through DOJ and on behalf of HHS-OIG, the TRICARE Management Activity, through its General Counsel, the Office of Personnel Management, in its capacity as administrator of the Federal Employees Health Benefits Program, the United States Department of Veteran Affairs and Mr. Bierman.  This settlement agreement finally resolves these matters.

In connection with the settlement agreement, the Company’s wholly-owned subsidiary, Orthofix Inc., entered into a plea agreement with the Boston USAO and DOJ on June 7, 2012 under which Orthofix Inc. agreed to plead guilty to one felony count of obstruction of a June 2008 federal audit (§18 U.S.C. 1516).  This plea agreement currently remains subject to review and approval by the U.S. District Court for the District of Massachusetts, and there can be no assurance that the plea agreement will be approved by the court on the terms proposed.

The Company has agreed to pay $34.2 million (plus interest at a rate of 3% from May 5, 2011 through the day before payment is made) under the terms of the settlement agreement.  Under the plea agreement, Orthofix Inc. has agreed to pay (i) a criminal fine of $7.8 million, and (ii) a mandatory special assessment of $400.  In addition, the Company agreed in July 2012 to pay Mr. Bierman’s counsel $1.0 million in fees.  The Company previously recorded a charge of $43 million during the first quarter of 2011 in anticipation of the settlement.  The Company recorded a charge of $1.2 million in the second quarter of 2012 which represents imputed interest on the settlement accrued through June 30, 2012.

The settlement is neither an admission of liability by the Company or its subsidiaries nor a concession by the United States or the civil qui tam relator that their claims are not well founded, except as to such admissions as Orthofix Inc. makes in connection with its guilty plea under the Plea Agreement.

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Notes to the Unaudited Condensed Consolidated Financial Statements (continued)

Corporate Integrity Agreement with HHS-OIG

On June 6, 2012, in connection with the Company’s settlement of the matters described above related to the Company’s regenerative stimulation business, and in anticipation of a final settlement of the government investigation and related qui tam complaint described above related to Blackstone Medical, Inc., the Company also entered into a five-year corporate integrity agreement with HHS-OIG (the “CIA”).  The CIA acknowledges the existence of the Company’s current compliance program, and requires that the Company continue to maintain during the term of the CIA a compliance program designed to promote compliance with federal healthcare and Food and Drug Administration (“FDA”) requirements.  The Company is also required to maintain several elements of the existing program during the term of the CIA, including maintaining a Chief Compliance Officer, a Compliance Committee, and a Code of Conduct.  The CIA requires that the Company conduct certain additional compliance-related activities during the term of the CIA, including various training and monitoring procedures, and maintaining a disciplinary process for compliance obligations.  Pursuant to the CIA, the Company is required to notify the HHS-OIG in writing, among other things, of: (i) any ongoing government investigation or legal proceeding involving an allegation that the Company has committed a crime or has engaged in fraudulent activities; (ii) any other matter that a reasonable person would consider a probable violation of applicable criminal, civil, or administrative laws related to compliance with Federal healthcare programs or FDA requirements; and (iii) any change in location, sale, closing, purchase, or establishment of a new business unit or location related to items or services that may be reimbursed by Federal healthcare programs.  The Company is also subject to periodic reporting and certification requirements attesting that the provisions of the CIA are being implemented and followed, as well as certain document and record retention mandates.  The CIA provides that in the event of an uncured material breach of the CIA, the Company could be excluded from participation in Federal healthcare programs and/or subject to monetary penalties.

Matters Related to Promeca

During the second quarter of 2010 internal management review of Promeca S.A. de C.V. (“Promeca”), one of the Company’s Mexican subsidiaries, the Company received allegations of improper payments by certain of Promeca’s local employees in Mexico to employees of a Mexican governmental healthcare entity. The Company engaged Hogan Lovells US LLP and Deloitte Financial Advisory Services LLP to conduct an internal investigation (the “Promeca Internal Investigation”) focusing on compliance with the Foreign Corrupt Practices Act (“FCPA”) and voluntarily contacted the Securities and Exchange Commission (the “SEC”) and DOJ to advise both agencies that an internal investigation was underway. Promeca accounted for approximately one percent of the Company’s consolidated net sales and consolidated total assets.

The Company completed the Promeca Internal Investigation in April 2011 and commenced settlement discussions with the U.S. Government regarding this matter in May 2011. In January 2012, the Company reached an agreement in principle to settle these matters with the DOJ, and on July 10, 2012, the Company entered into definitive agreements with DOJ and the SEC agreeing to settle this matter.  As part of the settlement, the Company has entered into (i) a consent to final judgment (the “SEC Consent”) with the SEC in a civil matter filed by the SEC on the same date in the U.S. District Court for the Eastern District of Texas and (ii) a deferred prosecution agreement (the “DPA”) with DOJ.  These agreements remain subject to review and approval by the U.S. District Court for the Eastern District of Texas, and there can be no assurance that they will be approved by the court on the terms proposed.

Under the terms of the SEC Consent, the Company will settle civil claims related to this matter by voluntarily disgorging profits to the United States government in an amount of $5.2 million, inclusive of pre-judgment interest.  The Company has also agreed to pay a fine of $2.2 million to the U.S. Government pursuant to the terms of the DPA.  The Company previously recorded charges of $3.0 million during the first quarter of 2011 and $4.5 million during the fourth quarter of 2011 to establish an accrual in anticipation of a future final resolution of these matters with both DOJ and the SEC.  The Company made payment of the amounts owed pursuant to the DPA in July 2012, and expects to make payments pursuant to the SEC Consent in the third fiscal quarter of 2012.

As part of the DPA, which has a term of three years, DOJ has agreed not to pursue any criminal charges against the Company in connection with this matter if the Company complies with the terms of the DPA.  The DPA takes note of the Company’s self-reporting of this matter to DOJ and the SEC, and of remedial measures, including the implementation of an enhanced compliance program, previously undertaken by the Company.  The DPA provides that the Company shall continue to cooperate fully with DOJ in any future matters related to corrupt payments, false books and records or inadequate internal controls.  In that regard, the Company has represented that the Company has implemented and will continue to implement a compliance and ethics program designed to prevent and detect violations of the FCPA and other applicable anti-corruption laws.  The Company will periodically report to DOJ during the term of the DPA regarding such remediation and implementation of compliance measures.

In addition, under the terms of the SEC Consent, the Company will periodically report to the SEC during a two-year term regarding the status of such remediation and implementation of compliance measures.  The SEC Consent and the DPA do not provide for the appointment of any independent external monitor by DOJ or the SEC.

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Notes to the Unaudited Condensed Consolidated Financial Statements (continued)

Matters Related to the Company’s Former Breg Subsidiary and Possible Indemnification Obligations

On May 24, 2012, the Company sold Breg to an affiliate of Water Street Healthcare Partners II, L.P. (“Water Street”) pursuant to a stock purchase agreement (the “Breg SPA”).  Under the terms of the Breg SPA, upon closing of the sale, the Company and its subsidiary, Orthofix Holdings, Inc., agreed to indemnify Water Street and Breg with respect to certain specified matters, including (i) the government investigation and product liability matters regarding the previously owned infusion pump product line described above, and (ii) pre-closing sales of cold therapy units and certain post-closing sales of cold therapy units, including the product liability cases with respect to such products described above.  The Company has established an accrual of $2.0 million, and had recorded the related charge to discontinued operations,  for its indemnification obligations in connection with the July 2012 verdict described in the preceding paragraph, however, actual liability in this case could be higher or lower than the amount accrued.  The Company has not established any accrual in connection with its other indemnification obligations under the Breg SPA, and currently cannot reasonably estimate the possible loss, or range of loss, in connection with such obligations.

The Company’s former subsidiary, Breg, which the Company divested in May 2012, was engaged in the manufacturing and sale of local infusion pumps for pain management from 1999 to 2008. Since 2008, numerous product liability cases have been filed in the United States alleging that the local anesthetic, when dispensed by such infusion pumps inside a joint, causes a rare arthritic condition called “chondrolysis.” The Company believes that meritorious defenses exist to these claims and Breg is vigorously defending these cases. One of the Company’s insurance carriers has asserted to the Company that certain potential losses related to this matter are not covered by its insurance coverage, and the Company currently is in arbitration with this carrier.

On or about August 2, 2010, Breg received a HIPAA subpoena issued by the DOJ. The subpoena seeks documents from the Company and its subsidiaries for the period of January 1, 2000 through the date of the subpoena. The Company believes that document production in response to the subpoena is completed as of July 2012. The Company believes that this subpoena relates to an investigation by the DOJ into whether Breg’s sale, marketing and labeling of local infusion pumps for pain management, prior to Breg’s divestiture of this product line in 2008, complied with FDA regulations and federal law.  On January 27, 2012, the Company was orally notified by a U.S. Government official that a civil investigation of Breg was pending in connection with this matter.  The Company is currently cooperating with the U.S. Government in connection with this matter.

At the time of its divestiture by the Company, Breg was currently and had been engaged in the manufacturing and sales of motorized cold therapy units used to reduce pain and swelling. Several domestic product liability cases have been filed in recent years, mostly in California state court, alleging that the use of cold therapy causes skin and/or nerve injury and seeking damages on behalf of individual plaintiffs who were allegedly injured by such units. The majority of these cases are at an early stage and no conclusion can be drawn at the present time regarding their potential outcome. However, the Company believes that meritorious defenses exist to these claims.  In July 2012, a jury in one case returned a verdict providing for approximately $2.0 million in compensatory damages to the plaintiff against Breg, and could assess additional exemplary damages in the future.  The Company expects the $2.0 million compensatory award to be covered by existing insurance policies, while any exemplary portion of an award will not be covered by insurance.  The case remains subject to further post-verdict motions and appeals.

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

The following discussion and analysis addresses our liquidity, financial condition and results of operations for the three and six months ended June 30, 2012 compared to our results of operations for the three and six months ended June 30, 2011. These discussions should be read in conjunction with our historical consolidated financial statements and related notes thereto and the other financial information included in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K, as amended for the fiscal year ended December 31, 2011.

General Overview

We are a diversified, global medical device company focused on developing and delivering innovative repair and regenerative solutions to the spine and orthopedic markets. Our products are designed to address the lifelong bone-and-joint health needs of patients of all ages, helping them achieve a more active and mobile lifestyle. We design, develop, manufacture, market and distribute medical equipment used principally by musculoskeletal medical specialists for orthopedic applications. Our main products are invasive and minimally invasive spinal implant products and related human cellular and tissue based products (“HCT/P products”), non-invasive regenerative stimulation products used to enhance bone growth and the success rate of spinal fusions and to treat non-union fractures, external and internal fixation devices used in fracture repair and limb lengthening and bone reconstruction.

We have administrative and training facilities in the United States (“U.S.”) and Italy and manufacturing facilities in the U.S., the United Kingdom, and Italy. We directly distribute our products in the U.S., the United Kingdom, Italy, Germany, Switzerland, Austria, France, Belgium, Brazil and Puerto Rico. In several markets, we distribute our products through independent distributors.

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

Our reporting currency is the U.S. Dollar. All balance sheet accounts, except shareholders’ equity, are translated at period-end exchange rates and revenue and expense items are translated at weighted average rates of exchange prevailing during the period. Gains and losses resulting from the translation of foreign currency financial statements are recorded in the accumulated other comprehensive income component of shareholders’ equity.

Our financial condition, results of operations, and cash flows are not significantly impacted by seasonality trends. However, sales associated with products for elective procedures appear to be influenced by the somewhat lower volume of such procedures performed in the late summer.  In addition, we do not believe our operations will be significantly affected by inflation. However, in the ordinary course of business, we are exposed to the impact of changes in interest rates and foreign currency fluctuations. Our objective is to limit the impact of such movements on earnings and cash flows. In order to achieve this objective, we seek to balance non-dollar denominated income and expenditures.  During the period, we have used derivative instruments to hedge foreign currency fluctuation exposures. See Item 3,

Quantitative and Qualitative Disclosures About Market Risk.

Our segment information is prepared on the same basis that management reviews the financial information for operational decision making purposes. At this time, our Chief Operating Decision Maker (the “CODM”) only uses global business units (“GBUs”) reporting for Sales and Operating Income to assess operating performance. Items below operating income are not considered when measuring the profitability of a segment.  In the future, the CODM may decide to review other financial metrics by GBU. Goodwill is also assigned to specific GBUs. We neither discretely allocate assets, other than goodwill, to our operating segments nor evaluate the operating segments using discrete asset information.  We manage our business by our two GBUs, which are comprised of Spine and Orthopedics supported by Corporate activities. These GBUs represent the segments for which our CODM reviews financial information and makes resource allocation decisions among business units. Accordingly, our segment information (as provided below) has been prepared based on our two GBUs reporting segments. These two segments are discussed below.

Spine

Spine provides a portfolio of repair and regenerative products that allow physicians to successfully treat a variety of spinal conditions.  This global business unit specializes in the design, development and marketing of our spine repair products along with regenerative stimulation and biologics products used in spine applications.  Spine distributes its products through a network of distributors, sales representatives and affiliates.  This global business unit uses both direct and distributor sales representatives to sell and market spine products to hospitals, doctors and other healthcare providers, globally.

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Orthopedics

Orthopedics provides a comprehensive portfolio of repair and regenerative products that allow physicians to successfully treat a variety of orthopedic conditions unrelated to spine.  This global business unit specializes in the design, development and marketing of our orthopedic repair products along with regenerative stimulation and biologics products used in orthopedic applications. Orthopedics distributes its products through a network of distributors, sales representatives and affiliates.  This global business unit uses both direct and distributor sales representatives to sell and market orthopedics products to hospitals, doctors and other healthcare providers, globally.

Corporate

Corporate activities are comprised of the operating expenses of Orthofix International N.V. and its U.S. holding company subsidiary, Orthofix Holdings, Inc., along with activities not necessarily identifiable with the two GBUs.

GBU Revenues

The following tables display net sales by global business unit for the three and six months ended June 30, 2012 and 2011. We assess our performance based on these GBUs. We maintain our records and account for net sales, costs of sales and expenses by GBU.

The tables below present external net sales from continuing operations by GBU:

	External Net Sales by GBU
	Three Months Ended June 30,
(US$ in thousands)	2012		2011		Reported Growth		Constant Currency Growth
Spine
Spine Repair Implants and Regenerative Biologics	$	38,501	$	36,882	4	%	4	%
Spine Regenerative Stimulation	43,294		39,660		9	%	9	%
Total Spine	81,795		76,542		7	%	7	%
Orthopedics	37,697		40,128		(6	)%	2	%
Total Net Sales	$	119,492	$	116,670	2	%	5	%

	External Net Sales by GBU
	Six Months Ended June 30,
(US$ in thousands)	2012		2011		Reported Growth		Constant Currency Growth
Spine
Spine Repair Implants and Regenerative Biologics	$	74,258	$	70,839	5	%	5	%
Spine Regenerative Stimulation	82,565		78,278		5	%	5	%
Total Spine	156,823		149,117		5	%	5	%
Orthopedics	78,711		80,614		(2	)%	3	%
Total Net Sales	$	235,534	$	229,731	3	%	4	%

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The following table presents certain items in our condensed consolidated statements of operations as a percent of total net sales for the periods indicated:

	Three Months Ended June 30,		Six Months Ended June 30,
	2012 (%)	2011 (%)	2012 (%)	2011 (%)
Net sales	100	100	100	100
Cost of sales	20	20	19	20
Gross profit	80	80	81	80
Operating expenses:
Sales and marketing	42	43	42	42
General and administrative	12	15	12	16
Research and development	8	5	7	5
Amortization of intangible assets	0	0	0	0
Charges related to U.S. Government inquiries	1	0	1	20
Operating income (loss)	17	17	18	(4	)
Net income (loss)	9	9	10	(11	)

Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011

Net sales increased $2.8 million to $119.5 million in the second quarter of 2012 compared to $116.7 million for the same period last year. The impact of foreign currency decreased sales by $3.3 million during the second quarter of 2012 when compared to the second quarter of 2011.

Sales

Net sales in our Spine global business unit increased to $81.8 million in the second quarter of 2012 compared to $76.5 million for the same period last year, an increase of $5.3 million. The increase in Spine’s net sales was primarily the result of a 9% increase in the sales of our Regenerative Stimulation products used in Spine applications when compared to the prior year. Revenue from our Repair Implants and Regenerative Biologics revenue products in the second quarter of 2012 increased 4% when compared to the same period in the prior year, due to increased adoption of Trinity ® Evolution™ in spine applications which led to a 48% increase in sales of Regenerative Biologics in the second quarter of 2012.

Net sales in our Orthopedics global business unit decreased 6%, (but increased 2% on a constant currency basis) to $37.7 million in the second quarter of 2012 compared to $40.1 million for the same period last year. This constant currency increase was led by sales of Regenerative Biologics in Orthopedics applications resulting in a 13% increase in regenerative biologics. Also contributing to the growth was the recently launched internal fixation systems for the foot and ankle.

Gross Profit — Our gross profit increased $2.3 million to $95.8 million in the second quarter of 2012 compared to $93.5 million for the same period last year. Gross profit as a percent of net sales in the second quarter of 2012 was 80.2% for the second quarter of 2012 and 80.1% for 2011 during the same period.

Sales and Marketing Expense — Sales and marketing expense, which includes commissions, certain royalties and the bad debt provision, generally increase and decrease in relation to sales. Sales and marketing expense decreased $0.2 million, to $49.8 million in the second quarter of 2012 compared to $50 million in the second quarter of 2011. As a percent of net sales, sales and marketing expense was 41.7% and 42.8% in the first quarter of 2012 and 2011, respectively.  The second quarter of 2011 also included $0.3 million of senior management succession charges.

General and Administrative Expense — General and administrative expense decreased $3 million, or 17%, in the second quarter of 2012 to $14.3 million compared to $17.3 million in the second quarter of 2011.  The second quarter of 2011 included $3.2 million of senior management succession charges.  We incurred $0.4 million and $1.6 million of expenses in the second quarter of 2012 and 2011, respectively related to regenerative stimulation and Mexico FCPA investigations. General and administrative expense as a percent of net sales was 12% in the second quarter of 2012 compared to 14.9% for the same period last year.

Research and Development Expense — Research and development expense increased $3.1 million in the second quarter of 2012 to $9.3 million compared to $6.2 million in the second quarter of 2011. The increase in research and development expenses in the second quarter of 2012 compared to the same period in the prior year was due to a $3.1 million charge, or 2.6% of net sales, for an arbitration resolution related to a 2008 co-development agreement.  As a percent of sales, research and development expense was 7.7% in the second quarter of 2012 compared to 5.3% for the same period last year.

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Amortization of Intangible Assets — Amortization of intangible assets decreased by $0.1 million in the second quarter of 2012 to $0.5 million compared to $0.6 million for the same period last year.

Charges Related to U.S. Government Resolutions — The Company recorded a charge of $1.4 million in the second quarter of 2012 which represents imputed interest accrued on the previously disclosed settlements in principle of the U.S. government investigations and related qui tam complaints related to our regenerative stimulation business and Blackstone Medical Inc., respectively.

Interest Expense, net — Interest expense, net was $1.3 million for the second quarter of 2012 compared to $2.2 million for the same period last year, primarily as the result of a lower year over year outstanding debt balance repaid with a portion of the proceeds from the sale of Breg.

Other Income and Expense — Other income (expense) was $0.7 million and ($0.3) million for the second quarters of 2012 and 2011, respectively. The fluctuation can be mainly attributable to the effect of foreign exchange. Several of our foreign subsidiaries hold trade payables or receivables in currencies (most notably the U.S. Dollar) other than their functional (local) currency which results in foreign exchange gains or losses when there is relative movement between those currencies.

Income Tax Expense — Our worldwide effective tax rate on continuing operations was 30.0% and 37.6% during the second quarters of 2012 and 2011, respectively.  The effective tax rate for the second quarter of 2012 and 2011 was affected by our mix of earnings among various tax jurisdictions, state taxes and current period losses in certain jurisdictions for which we do not currently provide a tax benefit.  The second quarter of 2012 rate was also affected by the tax benefit of discrete items related to the U.S. Government resolutions.  The effective tax rate for the second quarter of 2012 was 36.5% excluding the impact of the discrete charges.

Discontinued operations — Discontinued operations in the second quarter of 2012 and 2011 includes the results of our Sports Medicine GBU up to May 24, 2012 (the closing date of the sale of Breg), net of income taxes. The second quarter of 2012 also includes the gain on the sale of Breg, of $1.3 million, net of income taxes of $0.2 million.

Net Income — Net income for the second quarter of 2012 was $11.2 million, or $0.59 per basic and $0.58 per diluted share, compared to net income of $10 million, or $0.55 per basic share and $0.54 per diluted share for the same period last year.

Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011

Net sales increased $5.8 million to $235.5 million in the first six months of 2012 compared to $229.7 million for the same period last year. The impact of foreign currency decreased sales by $4.5 million during the first six months of 2012 when compared to the same period of 2011.

Sales

Net sales in our Spine global business unit increased to $156.8 million in the first six months of 2012 compared to $149.1 million for the same period last year, an increase of $7.7 million. The increase in Spine’s net sales was primarily the result of a 5% increase in sales of our Repair and Regenerative biologics revenue products in the first six months of 2012 when compared to the same period in the prior year, due to increased adoption of Trinity ® Evolution™ in spine applications which led to a 48% increase in sales of Regenerative Biologics in the first six months of 2012.  The Regenerative Stimulations products used in Spine applications increased 5% when compared to the prior year.

Net sales in our Orthopedics global business unit decreased 2%, (but increased 3% on a constant currency basis) to $78.7 million in the first six months of 2012 compared to $80.6 million for the same period last year. The constant currency sales growth was led by sales of Trinity ® Evolution™ in Orthopedic applications resulted in an 11% increase in Regenerative Biologics. Also contributing to the growth was the recently launched internal fixation systems for the foot and ankle.

Gross Profit — Our gross profit increased $5.7 million to $189.9 million in the first six months of 2012, compared to $184.2 million for the same period last year. Gross profit as a percent of net sales in the first six months of 2012 was 80.6% for the first six months of 2012 and 80.2% in 2011 during the same period.

Sales and Marketing Expense — Sales and marketing expense, which includes commissions, certain royalties and the bad debt provision, generally increase and decrease in relation to sales. Sales and marketing expense increased $1.9 million, to $99.3 million in the first six months of 2012 compared to $97.4 million in the first six months of 2011. As a percent of net sales, sales and marketing expense was 42.2% and 42.4% in the first six months of 2012 and 2011, respectively.

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General and Administrative Expense — General and administrative expense decreased $7.2 million, or 20.1%, in the first six months of 2012 to $28.9 million compared to $36.1 million in the first six months of 2011. General and administrative expense as a percent of net sales was 12.3% in the first six months of 2012 compared to 15.7% for the same period last year. The decrease in general and administrative expense relates to decreased legal costs associated with various legal matters. We incurred $1.1 million and $6.6 million of expenses in the first six months of 2012 and 2011, respectively related to regenerative stimulation and Mexico FCPA investigations. During the first six months of 2011, we incurred $3.2 million of senior management succession charges.

Research and Development Expense — Research and development expense increased $4.6 million in the first six months of 2012 to $16.3 million compared to $11.7 million for the same period last year. As a percent of sales, research and development expense was 6.9% in the first six months of 2012 compared to 5.1% for the same period last year. The increase in research and development expenses in the first six months of 2012 compared to the same period in the prior year was due to a $3.1 million charge or 1.3% of net sales for an arbitration resolution related to a 2008 co-development agreement and a $1 million strategic investment with Musculoskeletal Transplant Foundation (“MTF”) on the development and commercialization of the next generation cell-based bone growth technology and timing of spending related to our ongoing research, development and clinical activities.

Amortization of Intangible Assets — Amortization of intangible assets was $1.1 million in the first six months of 2012 and 2011.

Charges Related to U.S. Government Resolutions — The Company recorded a charge of $1.4 million in the first six months of 2012 which represents imputed interest accrued from the respective settlement in principle dates in 2011 and 2012 through June 30, 2012 on the previously disclosed settlements in principle of the U.S. government investigations and related qui tam complaints related to our regenerative stimulation business and Blackstone Medical Inc., respectively. During the first six months of 2011, we reached an agreement in principle with the U.S. Government to resolve criminal and civil matters related to the previously disclosed government investigations of our regenerative stimulation business and recorded a charge of $43 million for the estimated settlement. During the first six months of 2011, we recorded a charge of $3 million to establish an accrual in connection with the fines and penalties related to the FCPA matter involving our Promeca subsidiary.

Interest Expense, net — Interest expense, net was $3.5 million for the first six months of 2012 compared to $4.6 million for the same period last year, primarily as the result of a lower rate of effective interest and a lower year over year outstanding debt balance repaid with a portion of the proceeds from the sale of Breg, Inc.

Other Income and Expense — Other income (expense) was de minimis and $1.5 million for the first six months of 2012 and 2011, respectively. The fluctuation can be mainly attributable to the effect of foreign exchange. Several of our foreign subsidiaries hold trade payables or receivables in currencies (most notably the U.S. Dollar) other than their functional (local) currency which results in foreign exchange gains or losses when there is relative movement between those currencies.

Income Tax Expense — Our worldwide effective tax rate on continuing operations was 33.8% and (85.1%) during the first six months of 2012 and 2011, respectively.  The principal factors affecting our effective tax rate for the first six months of 2012 were the tax benefit of discrete items related to the U.S. Government resolutions, our mix of earnings among various tax jurisdictions, state taxes and current period losses in certain jurisdictions for which we do not currently provide a tax benefit.  We do not believe that it is more likely than not that we will generate sufficient future income in these jurisdictions to allow for the utilization of these losses before their expiration.  The effective tax rate for the first six months of 2011 was impacted by discrete charges related to U.S. Government resolutions, for which we recorded no tax benefit, the mix of earnings among tax jurisdictions, state taxes and current period losses in certain foreign jurisdictions for which we do not currently provide a tax benefit.  In the first six months of 2011, we did not record a tax benefit associated with the expense attributable to the charges related to U.S. Government resolutions due to the uncertainty of the extent to which these expenses would be deductible for income tax purposes at that time.  The effective tax rate for the first six months of 2012 and 2011 was 37.0% and 37.9%, respectively, excluding the impact of the discrete charges.

Discontinued operations — Discontinued operations in the first six months of 2012 and 2011 includes the results of our Sports Medicine GBU up to May 24, 2012 (the closing date of the sale of Breg), net of income taxes. The first six months of 2012 also include the gain on the sale of Breg, of $1.3 million, net of income taxes of $0.2 million.

Net Income — Net income for the first six months of 2012 was $23.2 million, or $1.24 per basic and $1.21 per diluted share, compared to net loss of $25.8 million, or $(1.43) per basic share and diluted share for the same period last year.

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Liquidity and Capital Resources

Cash and cash equivalents including Restricted Cash at June 30, 2012 were $123 million, of which $72.9 million was subject to certain restrictions under the senior secured credit agreement described below. This compares to cash and cash equivalents of $78.7 million at December 31, 2011, of which $45.5 million was subject to certain restrictions under the senior secured credit agreement discussed below.

Net cash provided by operating activities was $57.8 million and $23.4 million for the six months ended June 30, 2012 and 2011, respectively. Net cash provided by operating activities is comprised of net income (loss), non-cash items (including depreciation and amortization, provision for doubtful accounts, provision for inventory obsolescence, share-based compensation, deferred income taxes, gain on sale of Breg, Inc.) and changes in working capital. Net income increased $49.0 million to net income of $23.2 million for the six months ended June 30, 2012 from a net loss of $25.8 million for the comparable period in the prior year. Non-cash items for the six months ended June 30, 2012 decreased $7.7 million to $11.6 million compared to non-cash items of $19.3 million in the same period of 2011. Working capital accounts consumed $21.6 million and $16 million of cash for the six months ended June 30, 2012 and 2011, respectively. For the six months ended June 30, 2012, working capital accounts were impacted by $41.5 million in cash received by the Company from the Blackstone escrow fund which was recorded in Restricted Cash in accordance with the credit facility.  A $32 million portion of this amount is earmarked for payment of the Blackstone settlement.

For the six months ended June 30, 2011, working capital accounts were impacted by charges related to U.S. Government resolutions of $46 million, which offset the net loss recorded during the same period for those matters. Overall performance indicators for our two primary working capital accounts, accounts receivable and inventory reflect days sales in receivables of 114 days at June 30, 2012 and 99 days at June 30, 2011 excluding our former sports medicine global business unit, and inventory turns of 1.2 times as of June 30, 2012 and 1.1 times as of June 30, 2011. The increase in DSO during the period was partially related to the additional working capital investment made associated with our MTF partnership as well as temporary delays in billing capabilities experienced in the first quarter of 2012 related to a system conversion and office relocation in two of our foreign jurisdictions.

Net cash provided by investing activities was $140.1 million for the six months ended June 30, 2012 compared to net cash used in investing activities of $16.5 million for the six months ended June 30, 2011. During the second quarter of 2012 we sold Breg, Inc, for net proceeds of $153.1 million. During the second quarter of 2011, we acquired 100% of the stock of Omni Motion, Inc. for a cash purchase price of $5.3 million plus acquisition costs. During the six months ended June 30, 2012 and 2011, we invested $13.0 million and $11.3 million in capital expenditures, respectively.

Net cash used in financing activities was $180.9 million for the six months ended June 30, 2012 compared to net cash provided by financing activities of $6.7 million for the six months ended June 30, 2011. During the six months ended June 30, 2012, we repaid approximately $168.7 million against the principal on our senior secured term loan and revolving debt with a portion of the proceeds from the sale of Breg, Inc., and available cash compared to $2.5 million during the six months ended June 30, 2011. Our restricted cash balance usage increased $23.5 million to $25.8 million primarily related to the cash received from the Blackstone escrow fund which is recorded in Restricted Cash in accordance with the credit facility. During the six months ended June 30, 2012 and 2011, we received proceeds of $13.3 million and $13.5 million, respectively, from the issuance of 481,037 shares and 515,318 shares, respectively, of our common stock related to stock purchase plan issuances, stock option exercises, and the vesting of restricted stock awards.

On August 30, 2010, our wholly-owned U.S. holding company, Orthofix Holdings, Inc. (“Orthofix Holdings”) entered into a Credit Agreement (the “Credit Agreement”) with certain of our domestic direct and indirect subsidiaries (the “Guarantors”), JPMorgan Chase Bank, N.A., as Administrative Agent, RBS Citizens, N.A., as Syndication Agent, and certain lender parties thereto.

The Credit Agreement provides for a five year, $200.0 million secured revolving credit facility (the “Revolving Credit Facility”), and a five year, $100.0 million secured term loan facility (the “Term Loan Facility”, and together with the Revolving Credit Facility, the “Credit Facilities”). Orthofix Holdings has the ability to increase the amount of the Credit Facilities by an aggregate amount of up to $50 million upon satisfaction of certain conditions.

In May 2012, we used a portion of the proceeds from the sale of Breg (see Note 15) to repay the $87.5 million remaining balance on the Term Loan Facility and pay down $57.5 million of amounts outstanding under the Revolving Credit Facility. This use of proceeds was required by the lenders’ consent dated April 23, 2012 to the Credit Agreement. In June 2012 we paid down an additional $20 million of amounts outstanding under the Revolving Credit Facility.

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As of June 30, 2012, the Term Loan Facility had been repaid in full and there was $40 million outstanding under the Revolving Credit Facility.  As of December 31, 2011, we had $91.3 million outstanding under the Term Loan Facility and $117.4 million outstanding under the Revolving Credit Facility. Borrowings under the Credit Facilities bear interest at a floating rate, which is, at Orthofix Holdings’ option, either the London Inter-Bank Offered Rate (“LIBOR”) plus an applicable margin or a base rate (as defined in the Credit Agreement) plus an applicable margin (in each case subject to adjustment based on financial ratios). Such applicable margin will be up to 3.25% for LIBOR borrowings and up to 2.25% for base rate borrowings depending upon a measurement of the consolidated leverage ratio with respect to the immediately preceding four fiscal quarters. As of June 30, 2012, the entire Revolving Credit Facility was at the LIBOR rate plus a margin of 3.00%.  As of December 31, 2011, the entire Term Loan Facility and $100 million of the Revolving Credit Facility was at the LIBOR rate plus a margin of 3.00%. As of December 31, 2011, the remaining $17.4 million of the Revolving Credit Facility was at a base rate (as defined in the Credit Agreement) plus a margin of 2.00%. The effective interest rate on the Credit Facilities at June 30, 2012 was 3.3% and at December 31, 2011 was 3.4%.

Outstanding principal on the Revolving Credit Facility is due on August 30, 2015.

Borrowings under the Revolving Credit Facility, which may be made in the future, will be used for working capital, capital expenditures and other general corporate purposes of Orthofix Holdings and its subsidiaries. The Guarantors have guaranteed repayment of Orthofix Holdings’ obligations under the Credit Agreement. The obligations of Orthofix Holdings and each of the Guarantors with respect to the Credit Facilities are secured by a pledge of substantially all of the assets of Orthofix Holdings and each of the Guarantors.

In May 2011, we obtained an amendment to the Credit Agreement to provide additional capacity under the various restrictive negative covenants for our payment of the Specified Settlement Amounts (as defined in the Credit Agreement, as amended) associated with each of the potential settlements (See Note 16 to the Unaudited Condensed Consolidated Financial Statements).  The amendment updates the definition of Consolidated EBITDA to exclude Specified Settlement Amounts of up to $50 million in the aggregate.  We expect to be in compliance with our covenants prospectively.

The Credit Agreement as amended requires us and Orthofix Holdings to comply with coverage ratios on a consolidated basis. The Credit Agreement contains affirmative and negative covenants, including limitations on additional debt, liens, investments and acquisitions. We believe we were in compliance with the affirmative and negative covenants at June 30, 2012. The Credit Agreement also includes events of default customary for facilities of this type. A breach of any of these covenants could result in an event of default under the Credit Agreement as amended, which could permit acceleration of the debt payments under the facility.

Certain of our subsidiaries have restrictions on their ability to pay dividends or make intercompany loan advances pursuant to the Credit Facilities. The net assets of Orthofix Holdings and its subsidiaries are restricted for distributions to the parent company. Our domestic subsidiaries, as parties to the credit agreement, have access to these net assets for operational purposes. The amount of restricted net assets of Orthofix Holdings and its subsidiaries as of June 30, 2012 and December 31, 2011 was $200 million and $186 million, respectively. In addition, the Credit Agreement restricts us and our subsidiaries that are not parties to the Credit Agreement, as amended, from access to cash held by Orthofix Holdings and its subsidiaries. The amount of restricted cash as of June 30, 2012 and December 31, 2011 was $72.9 million and $45.5 million, respectively.

In conjunction with obtaining the Credit Facilities and the Credit Agreement, as amended, the Company incurred debt issuance costs of $5 million. These costs are being amortized using the effective interest method over the life of the Credit Facilities. In conjunction with the Term Loan Facility repayment in May 2012, the Company wrote off $0.8 million of related debt issuance costs. As of June 30, 2012 and December 31, 2011, debt issuance costs, net of accumulated amortization, related to the Credit Agreement were $2.1 million and $3.5 million, respectively.

At June 30, 2012, we had outstanding borrowings of €0.4 million ($0.5 million) and unused available line of credit of approximately €6.9 million ($8.7 million) under the line of credit established in Italy to finance the working capital of our Italian operations. The terms of the lines of credit give us the option to borrow amounts in Italy at rates determined at the time of borrowing.

We believe that current cash balances together with projected cash flows from operating activities, the availability of the $160 million revolving credit facility, the available Italian lines of credit and our debt capacity are sufficient to cover the Specified Settlement Amounts, anticipated working capital and capital expenditure needs including research and development costs over the near term.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to certain market risks as part of our ongoing business operations. Primary exposures include changes in interest rates and foreign currency fluctuations. These exposures can vary sales, cost of sales, costs of operations and the cost of financing and yields on cash and short-term investments. We use derivative financial instruments, where appropriate, to manage these risks. However, our risk management policy does not allow us to hedge positions we do not hold nor do we enter into derivative or other financial investments for trading or speculative purposes. As of June 30, 2012, we had a currency swap in place to minimize foreign currency exchange risk related to a €33.5 million intercompany note.

We are exposed to interest rate risk in connection with our Term Loan facility and Revolving Credit Facility, which bear interest at floating rates based on LIBOR plus an applicable borrowing margin or at a base rate (as defined in the Credit Agreement) plus an applicable borrowing margin. Therefore, interest rate changes generally do not affect the fair market value of the debt, but do impact future earnings and cash flows, assuming other factors are held constant.

As of June 30, 2012, $40 million of the Revolving Credit Facility is at the LIBOR rate plus a margin of 3.00%. These margins are adjusted based upon the measurement of consolidated leverage ratio of our Company and our subsidiaries with respect to the immediately preceding four fiscal quarters. As of June 30, 2012, our effective interest rate on our Credit Facilities was 3.3%. Based on the balance outstanding under the Credit Facilities as of June 30, 2012, an immediate change of one percentage point in the applicable interest rate on the Revolving Credit Facility would cause a change in interest expense of approximately $0.4 million annually.

Our foreign currency exposure results from fluctuating currency exchange rates, primarily the U.S. Dollar against the Euro, Great Britain Pound, Mexican Peso and Brazilian Real. We are subject to cost of goods currency exposure when we produce products in foreign currencies such as the Euro or Great Britain Pound and sell those products in U.S. Dollars. We are subject to transactional currency exposures when foreign subsidiaries (or the Company itself) enter into transactions denominated in a currency other than their functional currency. As of June 30, 2012, we had an un-hedged intercompany receivable denominated in Euro of approximately €23.2 million ($29.3 million). We recorded an unrealized foreign currency loss during the six months ended June 30, 2012 of $0.7 million related to this un-hedged long-term intercompany note, which resulted from the strengthening of the U.S. dollar against the Euro during the period. As this note is not expected to be repaid, we have considered such amounts to be permanently invested and therefore recorded such amount in accumulated other comprehensive income. For the six months ended June 30, 2012, we recorded a foreign currency gain of $0.4 million on our condensed consolidated statements of operations resulting from gains and losses in foreign currency transactions.

We also are subject to currency exposure from translating the results of our global operations into the U.S. dollar at exchange rates that have fluctuated during the period. As we continue to distribute and manufacture our products in selected foreign countries, we expect that future sales and costs associated with our activities in these markets will continue to be denominated in the applicable foreign currencies, which could cause currency fluctuations to materially impact our operating results.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Senior Vice President of Finance and Chief Financial Officer, we performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a - 15(e) or 15d — 15 (e)) as of the end of the period covered by this Form 10-Q. Based upon that evaluation, our President and Chief Executive Officer and Senior Vice President of Finance and Chief Financial Officer concluded that, as of the end of the period covered by this Form 10-Q, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There have not been any changes in our internal control over financial reporting during the fiscal quarter ended June 30, 2012 that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are party to outstanding legal proceedings, investigations and claims as described below. We believe that it is unlikely that the outcome of each of these matters, including the matters discussed below, will have a material adverse effect on our Company and its subsidiaries as a whole, notwithstanding that the unfavorable resolution of any matter may have a material effect on our net earnings (if any) in any particular quarter. However, we cannot predict with any certainty the final outcome of any legal proceedings, investigations (including any settlement discussions with the government seeking to resolve such investigations) or claims made against us as described in the paragraphs below, and there can be no assurance that the ultimate resolution of any such matter will not have a material adverse impact on our consolidated financial position, results of operations, or cash flows.

We record accruals for certain outstanding legal proceedings, investigations or claims when it is probable that a liability will be incurred and the amount of the loss can be reasonably estimated. We evaluate, on a quarterly basis, developments in legal proceedings, investigations and claims that could affect the amount of any accrual, as well as any developments that would make a loss contingency both probable and reasonably estimable. When a loss contingency is not both probable and reasonably estimable, we do not accrue the loss. However, if the loss (or an additional loss in excess of the accrual) is at least a reasonable possibility and material, then we disclose a reasonable estimate of the possible loss or range of loss, if such reasonable estimate can be made. If we cannot make a reasonable estimate of the possible loss, or range of loss, then that is disclosed.

The assessments of whether a loss is probable or a reasonable possibility, and whether the loss or range of loss is reasonably estimable, often involve a series of complex judgments about future events. Among the factors that we consider in this assessment are the nature of existing legal proceedings, investigations and claims, the asserted or possible damages or loss contingency (if reasonably estimable), the progress of the matter, existing law and precedent, the opinions or views of legal counsel and other advisers, the involvement of the U.S. Government and its agencies in such proceedings, our experience in similar matters and the experience of other companies, the facts available to us at the time of assessment, and how we intend to respond, or have responded, to the proceeding, investigation or claim. Our assessment of these factors may change over time as individual proceedings, investigations or claims progress. For matters where we are not currently able to reasonably estimate a range of reasonably possible loss, the factors that have contributed to this determination include the following: (i) the damages sought are indeterminate, or an investigation has not manifested itself in a filed civil or criminal complaint, (ii) the matters are in the early stages, (iii) the matters involve novel or unsettled legal theories or a large or uncertain number of actual or potential cases or parties, and/or (iv) discussions with the government or other parties in matters that may be expected ultimately to be resolved through negotiation and settlement have not reached the point where we believe a reasonable estimate of loss, or range of loss, can be made. In such instances, we believe that there is considerable uncertainty regarding the timing or ultimate resolution of such matters, including a possible eventual loss, fine, penalty or business impact, if any.

In addition to the matters described in the paragraphs below, in the normal course of our business, we are involved in various lawsuits from time to time and may be subject to certain other contingencies. To the extent losses related to these contingencies are both probable and reasonably estimable, we accrue appropriate amounts in the accompanying financial statements and provide disclosures as to the possible range of loss in excess of the amount accrued, if such range is reasonably estimable. We believe losses are individually and collectively immaterial as to a possible loss and range of loss.

Litigation

Matters Related To Blackstone Medical, Inc. and Related Escrow Claims

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

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On or about January 7, 2008, we received a federal grand jury subpoena from the U.S. Attorney’s Office for the District of Massachusetts (“Boston USAO”). The subpoena sought documents from us for the period January 1, 2000 through July 15, 2007. We believe that the subpoena concerned the compensation of physician consultants and related matters, and further believe that it was associated with HHS-OIG’s investigation of such matters. On September 18, 2008, we submitted a claim for indemnification from the escrow fund established in connection with the Blackstone Merger Agreement for any losses to us resulting from this matter. On or about April 29, 2009, counsel received a HIPAA subpoena issued by the U.S. Department of Justice (“DOJ”). The subpoena sought documents from us for the period January 1, 2000 through July 15, 2007.  We believe that the subpoena concerned the compensation of physician consultants and related matters, and further believe that it was associated with HHS-OIG’s investigation of such matters, as well as the January 7, 2008 federal grand jury subpoena. On or about August 26, 2010, counsel for Orthofix Inc. and Blackstone executed a tolling agreement with the Boston USAO (the “Tolling Agreement”) that extended an agreement tolling the statute of limitations applicable to any criminal, civil, or administrative proceedings that the government might later initiate to include the period from December 1, 2008 through and including October 31, 2010. On or about February 1, 2011, the parties further extended the tolling of the statute of limitations through and including May 31, 2011 with respect to any criminal proceedings that the government might later initiate.

On or about December 5, 2008, we obtained a copy of a qui tam complaint filed by Susan Hutcheson and Philip Brown against us and Blackstone in the U.S. District Court for the District of Massachusetts. A qui tam action is a civil lawsuit brought by an individual for an alleged violation of a federal statute, in which DOJ has the right to intervene and take over the prosecution of the lawsuit at its option. On September 18, 2008, after being informed of the existence of the lawsuit by representatives of DOJ and prior to the unsealing of the complaint (which was unsealed by the court on or about November 24, 2008), we submitted a claim for indemnification from the escrow fund established in connection with the Blackstone Merger Agreement for any losses to us resulting from this matter. On November 21, 2008, the U.S. Department of Justice filed a notice of non-intervention in the case. The complaint was served on Blackstone on or about March 24, 2009. Counsel for the plaintiffs filed an amended complaint on June 4, 2009. The amended complaint sets forth a cause of action against Blackstone under the False Claims Act for alleged inappropriate payments and other items of value conferred on physician consultants; Orthofix is not named as a defendant in the amended complaint. We understand that this lawsuit was related to the matters described above involving HHS-OIG, the Boston USAO, and DOJ. On or about March 12, 2010, the United States District Court for the District of Massachusetts granted Blackstone’s motion to dismiss and, on March 15, 2010, entered judgment in favor of Blackstone. On June 1, 2011, the United States Court of Appeals for the First Circuit reversed the motion to dismiss and remanded to the district court for further proceedings. In response to a joint motion to stay the action, on August 22, 2011, the United States District Court for the District of Massachusetts entered an order administratively closing the lawsuit for a period of no more than ninety (90) days. On August 30, 2011, Blackstone filed with the United States Supreme Court a Petition for a Writ of Certiorari to review the June 1, 2011 judgment of the United States Court of Appeals for the First Circuit, which was denied on December 5, 2011.

In January 2012, after a series of ongoing discussions and negotiations with the Boston USAO, our board of directors approved an agreement in principle to pay $32 million to resolve the matters described in the immediately preceding paragraphs. We are currently in discussions with the Boston USAO, DOJ, and HHS-OIG, as to the terms of definitive written agreements to finally resolve these matters. As part of the resolution of this matter (and matters described below related to our regenerative stimulation business), on June 6, 2012, Orthofix International N.V., Orthofix Inc. and Blackstone Medical, Inc. entered into a five-year Corporate Integrity Agreement with HHS-OIG.  (The Corporate Integrity Agreement is further described below under the subheading “Corporate Integrity Agreement with HHS-OIG”.) Based on information currently available, we believe that it is probable that a final written definitive settlement agreement with the U.S. Government will be entered into on these economic terms, which, as described below, would be fully funded from the escrow fund established in connection with the Blackstone Merger Agreement. There can be no assurance that we will enter into a consensual resolution of these matters, or what the final terms of any such resolution might be; however, we believe that the likelihood of any such additional material loss in excess of this amount is remote.

In 2007 and 2008, we received certain other subpoenas from state and federal entities related to Blackstone’s financial relationship with physicians, which we have described in prior reports.  We have fully responded to each of these subpoenas, and there are currently no pending proceedings related to any of these matters.

Under the Blackstone Merger Agreement, the former shareholders of Blackstone agreed to indemnify us for breaches of representations and warranties under the agreement as well as certain other specified matters. These post-closing indemnification obligations of the former Blackstone shareholders were limited to a cumulative aggregate amount of $66.6 million. At closing, an escrow fund was established pursuant to the terms of the Blackstone Merger Agreement to fund timely submitted indemnification claims. The initial amount of the escrow fund was $50.0 million. As of December 31, 2011, the escrow fund contained $47.5 million.

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In February 2012, we reached an agreement with the representative of the former shareholders of Blackstone resolving all outstanding escrow and indemnification claims under the Blackstone Merger Agreement.  Under this agreement, approximately $42.5 million was distributed to us from the escrow fund (which will be used, among other things, to fund the proposed $32 million settlement in principle described above).  Each of the Company and the former shareholders of Blackstone also mutually released each other from all further claims against each other related to these matters.  As of September 30, 2011, we had recognized $15.5 million as an “escrow receivable” on our consolidated balance sheet, reflecting previously incurred expenses that we believed were reasonably assured of collection.  We received approximately $9.5 million in cash from the escrow fund after application of (i) the $32 million allocated to the settlement in principle described above with the government and (ii) approximately $1 million of other fees incurred with respect to this matter since September 30, 2011. As a result, we recorded a charge of approximately $6 million during the fourth quarter of 2011 for previously incurred legal fees that were reflected in this escrow receivable balance as of September 30, 2011. The Company recorded a charge of $0.2 million in the second quarter of 2012 which represents imputed interest on the settlement accrued through June 30, 2012.

Matters Related to Regenerative Stimulation Business

On or about April 10, 2009, we received a HIPAA subpoena (“HIPAA subpoena”) issued by the Boston USAO. The subpoena sought documents concerning, among other things, our promotion and marketing of our regenerative stimulator devices (which we have also described in the past as our “bone growth stimulator devices”). The Boston USAO issued several subsequent document and testimony subpoenas. We cooperated with these requests.

On or about April 14, 2009, we obtained a copy of a qui tam complaint filed by Jeffrey J. Bierman in the U.S. District Court for the District of Massachusetts against the us, Orthofix Inc. and other companies that have allegedly manufactured regenerative stimulation devices, including Orthologic Corp., DJO Incorporated, Reable Therapeutics, Inc., the Blackstone Group, L.P., Biomet, Inc., EBI, L.P., EBI Holdings, Inc., EBI Medical Systems, Inc., Bioelectron, Inc., LBV Acquisition, Inc., and Smith & Nephew, Inc.  The complaint, as subsequently amended in 2010, alleged various causes of action under the federal False Claims Act and state and city false claims acts premised on the contention that the defendants improperly promoted the sale, as opposed to the rental, of regenerative stimulation devices. The complaint also included claims against the defendants for, among other things, allegedly misleading physicians and purportedly causing them to file false claims and for allegedly violating the Anti-Kickback Act by providing free products to physicians, waiving patients’ insurance co-payments and providing inducements to independent sales agents to generate business.

On April 28, 2011, after a series of ongoing discussions and negotiations with the Boston USAO, our board of directors approved an agreement in principle proposed by the Boston USAO to resolve the criminal and civil matters described in the immediately preceding two paragraphs.  On June 6, 2012, we entered into a definitive settlement agreement with the United States of America, acting through DOJ and on behalf of HHS-OIG, the TRICARE Management Activity, through its General Counsel, the Office of Personnel Management, in its capacity as administrator of the Federal Employees Health Benefits Program, the United States Department of Veteran Affairs and Mr. Bierman.  This settlement agreement finally resolves these matters.

In connection with the settlement agreement, our wholly-owned subsidiary, Orthofix Inc., entered into a plea agreement with the Boston USAO and DOJ on June 7, 2012 under which Orthofix Inc. agreed to plead guilty to one felony count of obstruction of a June 2008 federal audit (§18 U.S.C. 1516).  This plea agreement currently remains subject to review and approval by the U.S. District Court for the District of Massachusetts, and there can be no assurance that the plea agreement will be approved by the court on the terms proposed.

We have agreed to pay $34.2 (plus interest at a rate of 3% from May 5, 2011 through the day before payment is made) under the terms of the settlement agreement.  Under the plea agreement, Orthofix Inc. has agreed to pay (i) a criminal fine of $7.8 million, and (ii) a mandatory special assessment of $400.  In addition, we agreed in July 2012 to pay Mr. Bierman’s counsel $1.0 million in fees.  We previously recorded a charge of $43 million during the first quarter of 2011 in anticipation of the settlement.  The Company recorded a charge of $1.2 million in the second quarter of 2012 which represents imputed interest on the settlement accrued through June 30, 2012.

The settlement is neither an admission of liability by the Company or its subsidiaries nor a concession by the United States or the civil qui tam relator that their claims are not well founded, except as to such admissions as Orthofix Inc. makes in connection with its guilty plea under the Plea Agreement.

Corporate Integrity Agreement with HHS-OIG

On June 6, 2012, in connection with our settlement of the matters described above related to our regenerative stimulation business, and in anticipation of a final settlement of the government investigation and related qui tam complaint described above related to Blackstone Medical, Inc., we also entered into a five-year corporate integrity agreement with HHS-OIG (the “CIA”).  The CIA acknowledges the existence of our current compliance program, and requires that we continue to maintain during the term of the CIA a compliance program designed to promote compliance with federal healthcare and Food and Drug Administration (“FDA”) requirements.  We are also required to maintain several elements of the existing program during the term of the CIA, including maintaining a Chief Compliance Officer, a Compliance Committee, and a Code of Conduct.  The CIA requires that we conduct certain additional compliance-related activities during the term of the CIA, including various training and monitoring procedures, and maintaining a disciplinary process for compliance obligations.

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Pursuant to the CIA, we are required to notify the HHS-OIG in writing, among other things, of: (i) any ongoing government investigation or legal proceeding involving an allegation that the Company has committed a crime or has engaged in fraudulent activities; (ii) any other matter that a reasonable person would consider a probable violation of applicable criminal, civil, or administrative laws related to compliance with Federal healthcare programs or FDA requirements; and (iii) any change in location, sale, closing, purchase, or establishment of a new business unit or location related to items or services that may be reimbursed by Federal healthcare programs.  We are also subject to periodic reporting and certification requirements attesting that the provisions of the CIA are being implemented and followed, as well as certain document and record retention mandates.  The CIA provides that in the event of an uncured material breach of the CIA, we could be excluded from participation in Federal healthcare programs and/or subject to monetary penalties.

Matters Related to Promeca

During the second quarter of 2010 internal management review of Promeca S.A. de C.V. (“Promeca”), one of our Mexican subsidiaries, we received allegations of improper payments by certain of Promeca’s local employees in Mexico to employees of a Mexican governmental healthcare entity. We engaged Hogan Lovells US LLP and Deloitte Financial Advisory Services LLP to conduct an internal investigation (the “Promeca Internal Investigation”) focusing on compliance with the Foreign Corrupt Practices Act (“FCPA”) and voluntarily contacted the Securities and Exchange Commission (the “SEC”) and DOJ to advise both agencies that an internal investigation was underway. Promeca accounted for approximately one percent of our consolidated net sales and consolidated total assets.

We completed the Promeca Internal Investigation in April 2011 and commenced settlement discussions with the U.S. Government regarding this matter in May 2011.  In January 2012, we reached an agreement in principle to settle these matters with DOJ, and on July 10, 2012, we entered into definitive agreements with DOJ and the SEC agreeing to settle this matter.  As part of the settlement, we have entered into (i) a consent to final judgment (the “SEC Consent”) with the SEC in a civil matter filed by the SEC on the same date in the U.S. District Court for the Eastern District of Texas and (ii) a deferred prosecution agreement (the “DPA”) with DOJ.  These agreements remain subject to review and approval by the U.S. District Court for the Eastern District of Texas, and there can be no assurance that they will be approved by the court on the terms proposed.

Under the terms of the SEC Consent, we will settle civil claims related to this matter by voluntarily disgorging profits to the United States government in an amount of $5.2 million, inclusive of pre-judgment interest.  We have also agreed to pay a fine of $2.2 million to the U.S. Government pursuant to the terms of the DPA.  We previously recorded charges of $3.0 million during the first quarter of 2011 and $4.5 million during the fourth quarter of 2011 to establish an accrual in anticipation of a future final resolution of these matters with both DOJ and the SEC.  We made payment of the amounts owed pursuant to the DPA in July 2012, and expect to make payments pursuant to the SEC Consent in the third fiscal quarter of 2012.

As part of the DPA, which has a term of 3 years, DOJ has agreed not to pursue any criminal charges against us in connection with this matter if we comply with the terms of the DPA.  The DPA takes note of our self-reporting of this matter to DOJ and the SEC, and of remedial measures, including the implementation of an enhanced compliance program, previously undertaken by us.  The DPA provides that we shall continue to cooperate fully with DOJ in any future matters related to corrupt payments, false books and records or inadequate internal controls.  In that regard, we have represented that we have implemented and will continue to implement a compliance and ethics program designed to prevent and detect violations of the FCPA and other applicable anti-corruption laws.  We will periodically report to DOJ during the term of the DPA regarding such remediation and implementation of compliance measures.

In addition, under the terms of the SEC Consent, we will periodically report to the SEC during a 2-year term regarding the status of such remediation and implementation of compliance measures.  The SEC Consent and the DPA do not provide for the appointment of any independent external monitor by DOJ or the SEC.

Matters Related to Our Former Breg Subsidiary and Possible Indemnification Obligations

On May 24, 2012, we sold Breg to an affiliate of Water Street Healthcare Partners II, L.P. (“Water Street”) pursuant to a stock purchase agreement (the “Breg SPA”).  Under the terms of the Breg SPA, upon closing of the sale, the Company and its subsidiary, Orthofix Holdings, Inc., agreed to indemnify Water Street and Breg with respect to certain specified matters, including (i) the government investigation and product liability matters regarding the previously owned infusion pump product line described above, and (ii) pre-closing sales of cold therapy units and certain post-closing sales of cold therapy units, and has recorded the related charge to discontinued operations, including the product liability cases with respect to such products described above.  We have established an accrual of $2.0 million for its indemnification obligations in connection with the July 2012 verdict described in the preceding paragraph, however, actual liability in this case could be higher or lower than the amount accrued.  We have not established any accrual in connection with its other indemnification obligations under the Breg SPA, and currently cannot reasonably estimate the possible loss, or range of loss, in connection with such obligations.

Our former subsidiary, Breg, Inc (“Breg”), which we divested in May 2012, was engaged in the manufacturing and sale of local infusion pumps for pain management from 1999 to 2008. Since 2008, numerous product liability cases have been filed in the United States alleging that the local anesthetic, when dispensed by such infusion pumps inside a joint, causes a rare arthritic condition called “chondrolysis.” We believe that meritorious defenses exist to these claims and Breg is vigorously defending these cases. One of our insurance carriers has asserted to us that certain potential losses related to this matter are not covered by our insurance coverage, and we are currently in arbitration with this carrier.

On or about August 2, 2010, Breg received a HIPAA subpoena issued by the DOJ. The subpoena seeks documents from us and our subsidiaries for the period of January 1, 2000 through the date of the subpoena. We believe that document production in response to the subpoena is completed as of July 2012. We believe that this subpoena relates to an investigation by the DOJ into whether Breg’s sale, marketing and labeling of local infusion pumps for pain management, prior to Breg’s divestiture of this product line in 2008, complied with FDA regulations and federal law. On January 27, 2012, we were orally notified by a U.S. Government official that a civil investigation of Breg was pending in connection with this matter.  We are currently cooperating with the U.S. Government in connection with this matter.

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At the time of its divestiture by us, Breg was currently and had been engaged in the manufacturing and sales of motorized cold therapy units used to reduce pain and swelling. Several domestic product liability cases have been filed in recent years, mostly in California state court, alleging that the use of cold therapy causes skin and/or nerve injury and seeking damages on behalf of individual plaintiffs who were allegedly injured by such units. The majority of these cases are at an early stage and no conclusion can be drawn at the present time regarding their potential outcome. However, we believe that meritorious defenses exist to these claims.  In July 2012, a jury in one case returned a verdict providing for approximately $2.0 million in compensatory damages to the plaintiff against Breg, and could assess additional exemplary damages in the future.  We expect the $2.0 million compensatory award to be covered by existing insurance policies, while any exemplary portion of an award will not be covered by insurance.  The case remains subject to further post-verdict motions and appeals.

Item 1A. Risk Factors

The following risk factors supplement the risk factors contained in Part I, Item 1A. Risk Factors, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, and should be read in conjunction with such risk factors:

If we fail to comply with the terms of our Deferred Prosecution Agreement and Corporate Integrity Agreement, we may be subject to criminal prosecution and/or exclusion from federal healthcare programs.

On June 6, 2012, in connection with our settlement of a U.S. government investigation and related qui tam complaint related to our regenerative stimulation business, and in anticipation of a final settlement of the U.S. government investigation and related qui tam complaint related to Blackstone Medical, Inc., we entered into a five-year corporate integrity agreement (the “CIA”) with the Office of Inspector General of the Department of Health and Human Services (“HHS-OIG”).  The CIA acknowledges the existence of our current compliance program, and requires that we continue to maintain during the term of the CIA a compliance program designed to promote compliance with federal healthcare and Food and Drug Administration (“FDA”) requirements.  We are also required to maintain several elements of the existing program during the term of the CIA, including maintaining a Chief Compliance Officer, a Compliance Committee, and a Code of Conduct.  The CIA requires that we conduct certain additional compliance-related activities during the term of the CIA, including various training and monitoring procedures, and maintaining a disciplinary process for compliance obligations.  Pursuant to the CIA, we are required to notify the HHS-OIG in writing, among other things, of: (i) any ongoing government investigation or legal proceeding involving an allegation that the Company has committed a crime or has engaged in fraudulent activities; (ii) any other matter that a reasonable person would consider a probable violation of applicable criminal, civil, or administrative laws related to compliance with Federal healthcare programs or FDA requirements; and (iii) any change in location, sale, closing, purchase, or establishment of a new business unit or location related to items or services that may be reimbursed by Federal healthcare programs.  We are also subject to periodic reporting and certification requirements attesting that the provisions of the CIA are being implemented and followed, as well as certain document and record retention mandates.  The CIA provides that in the event of an uncured material breach of the CIA, we could be excluded from participation in Federal healthcare programs and/or subject to prosecution and subject to other monetary penalties, each of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

On July 10, 2012, we entered into definitive agreements with the U.S. Department of Justice (“DOJ”) and Securities and Exchange Commission (the “SEC”) agreeing to settle our self-initiated and self-reported internal investigation of our Mexican subsidiary, Promeca S.A. de C.V. (“Promeca”), regarding non-compliance by Promeca with the Foreign Corrupt Practices Act (“ the FCPA”).  As part of the settlement, we entered into a 3-year deferred prosecution agreement with DOJ.  DOJ has agreed not to pursue any criminal charges against us in connection with this matter if we comply with the terms of the DPA.  The DPA takes note of our self-reporting of this matter to DOJ and the SEC, and of remedial measures, including the implementation of an enhanced compliance program, previously undertaken by us.  The DPA provides that we shall continue to cooperate fully with DOJ in any future matters related to corrupt payments, false books and records or inadequate internal controls.  In that regard, we have represented that we have implemented and will continue to implement a compliance and ethics program designed to prevent and detect violations of the FCPA and other applicable anti-corruption laws.  We will periodically report to DOJ during the term of the DPA regarding such remediation and implementation of compliance measures.  As part of the settlement, we also agreed to certain reporting obligations to the SEC regarding the status of our remediation and implementation of compliance measures.  In the event that we fail to comply with these obligations, we could be subject to criminal prosecution by DOJ for the FCPA-related matters we self-reported.  Such a criminal prosecution could subject us to penalties that could have a material adverse effect our business, financial condition, results of operations and cash flows.

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Our recently announced settlements with the U.S. government remain subject to U.S. federal court review and approval, and there can be no assurance that such approval will be obtained.

As described above, and as further described under the subheadings “Matters Related to Regenerative Stimulation Business” and “Matters Related to Promeca” in the Legal Proceedings section under Part II, Item 1 of this Quarterly Report on Form 10-Q, we have recently announced settlements in connection with (i) a U.S. government investigation and related qui tam complaint related to our regenerative stimulation business and (ii) a self-initiated and self-reported internal investigation of our Mexican subsidiary, Promeca, into allegations of non-compliance by Promeca with the FCPA.  These settlements remain subject to review and approval, respectively, by the U.S. District Court for the District of Massachusetts and the U.S. District Court for the Eastern District of Texas.  However, there can be no assurance that these agreements will be approved by the respective courts on the terms proposed.  In the event that these agreements are not approved by the court, we could be required to further negotiate these agreements on terms different than those currently agreed.  If these terms were to incur substantial additional monetary penalties, or additional material restrictions on our business, it could have a material adverse effect our business, financial condition, results of operations and cash flows.

We could be subject to indemnification obligations under our agreement with the purchaser of our former sports medicine business unit.

In May 2012, we sold our former sports medicine business unit, Breg, Inc., to an affiliate of Water Street Healthcare Partners II, L.P. pursuant to a stock purchase agreement between us and the buyer.  Under the stock purchase agreement, we have agreed to indemnify the buyer with respect to certain specified matters, including (i) an ongoing U.S. government investigation and certain ongoing product liability matters relating to a previously owned infusion pump product line, and (ii) product liability claims relating to pre-closing sales of cold therapy units and certain post-closing sales of cold therapy units.  These matters are further described under the subheading “Matters Related to Our Former Breg Subsidiary and Possible Indemnification Obligations” in the Legal Proceedings section under Part II, Item 1 of this Quarterly Report on Form 10-Q. We currently cannot reasonably estimate the possible loss, or range of loss, in connection with these indemnified matters.  In the event that they are substantial, it could have a material adverse effect our business, financial condition, results of operations and cash flows.

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Item 6. Exhibits

Exhibit Number	Description
2.1	Agreement and Plan of Merger, dated as of August 4, 2006, among Orthofix International N.V., Orthofix Holdings, Inc., New Era Medical Limited, Blackstone Medical, Inc. and William G. Lyons, III, as Equityholders’ Representative (filed as an exhibit to the Company’s current report on Form 8-K filed August 7, 2006 and incorporated herein by reference).
2.2	Asset Purchase Agreement, dated as of March 8, 2010, by and between Tyco Healthcare Group LP d/b/a Covidien, Covidien AG, Mallinckrodt do BrasilLtda, Kendall de Mexico S.A. de C.V., Novamedix Limited, Novamedix Distribution Limited, Novamedix Services Limited, Promeca S.A. de C.V., Orthofix do Brasil, OrthofixS.r.l., Orthofix S.A., IntaventOrthofix Limited, Breg Mexico S. de R.I. de CV, and Implantes y Sistemas Medicos, Inc. (filed as an exhibit to the Company’s current report on Form 8-K filed March 9, 2010 and incorporated herein by reference).
2.3	Stock Purchase Agreement, dated as of April 23, 2012, by and among Breg, Inc., Orthofix Holdings, Inc. and Breg Acquisition Corp. (filed as an exhibit to the Company’s current report on Form 8-K filed April 24, 2012 and incorporated herein by reference).
3.1	Certificate of Incorporation of the Company (filed as an exhibit to the Company’s annual report on Form 20-F dated June 29, 2001 and incorporated herein by reference).
3.2	Articles of Association of the Company as amended (filed as an exhibit to the Company’s Annual report on Form 10-K for the year ended December 31, 2011 and incorporated herein by reference).
10.1	Credit Agreement, dated as of August 30, 2010, among Orthofix Holdings, Inc., Orthofix International N.V. and certain domestic subsidiaries of Orthofix International N.V., the several banks and other financial institutions as may from time to time become parties thereunder, and JPMorgan Chase, N.A. (filed as an exhibit to the Company’s current report on Form 8-K filed August 31, 2010 and incorporated herein by reference).
10.2	First Amendment to Credit Agreement, dated May 4, 2011, among Orthofix Holdings, Inc., a Delaware corporation, Orthofix International N.V. (“Orthofix International”), a Netherlands Antilles corporation, certain domestic direct and indirect subsidiaries of Orthofix International, JPMorgan Chase Bank, N.A., as Administrative Agent, and certain lender parties thereto (filed as an exhibit to the Company’s current report on Form 8-K filed May 5, 2011 and incorporated herein by reference).
10.3+	Matrix Commercialization Collaboration Agreement, entered into July 24, 2008, by and between Orthofix Holdings, Inc. and Musculoskeletal Transplant Foundation (filed as an exhibit to the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2009 and incorporated herein by reference).
10.4	Amendment No. 1 to Matrix Commercialization Collaboration Agreement, dated as of December 15, 2010, by and between Musculoskeletal Transplant Foundation, Inc. and Orthofix Holdings, Inc. (filed as an exhibit to the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2010 and incorporated herein by reference).
10.5+	Amendment No. 2 to Matrix Commercialization Collaboration Agreement, dated as of January 9, 2012, by and between Musculoskeletal Transplant Foundation, Inc. and Orthofix Holdings, Inc. (filed as an exhibit to amendment no. 1 to the Company’s annual report on Form 10-K/A for the fiscal year ended December 31, 2011, filed May 1, 2012, and incorporated herein by reference).
10.6	Orthofix International N.V. Amended and Restated Stock Purchase Plan, as amended (filed as an exhibit to the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2011 and incorporated herein by reference).
10.7*	Orthofix International N.V. 2012 Long-Term Incentive Plan.
10.8	Orthofix International N.V. Amended and Restated 2004 Long Term Incentive Plan (filed as an exhibit to the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 2009 and incorporated herein by reference).
10.9	Orthofix International N.V. Staff Share Option Plan, as amended through April 22, 2003 (filed as an exhibit to the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2007 and incorporated herein by reference).

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10.10	Amended and Restated Orthofix Deferred Compensation Plan (filed as an exhibit to the Company’s current report on Form 8-K filed January 7, 2009, and incorporated herein by reference).
10.11*	Form of Employee Non-Qualified Stock Option Agreement under the Orthofix International N.V. 2012 Long-Term Incentive Plan (June 2012 grants).
10.12	Form of Employee Non-Qualified Stock Option Agreement under the Orthofix International N.V. Amended and Restated 2004 Long Term Incentive Plan (post-2008 grants) (filed as an exhibit to the Company’s current report on Form 8-K filed July 7, 2009 and incorporated herein by reference).
10.13	Form of Non-Employee Director Non-Qualified Stock Option Agreement under the Orthofix International N.V. Amended and Restated 2004 Long Term Incentive Plan (post-2008 grants) (filed as an exhibit to the Company’s current report on Form 8-K filed July 7, 2009 and incorporated herein by reference).
10.14	Form of Nonqualified Stock Option Agreement under the Orthofix International N.V. Amended and Restated 2004 Long Term Incentive Plan (pre-2009 grants — vesting over 3 years) (filed as an exhibit to the Company’s current report on Form 8-K filed June 20, 2008 and incorporated herein by reference).
10.15	Form of Nonqualified Stock Option Agreement under the Orthofix International N.V. Amended and Restated 2004 Long Term Incentive Plan (pre-2009 grants — 3 year cliff vesting) (filed as an exhibit to the Company’s current report on Form 8-K filed June 20, 2008 and incorporated herein by reference).
10.16	Form of Restricted Stock Grant Agreement under the Orthofix International N.V. Amended and Restated 2004 Long Term Incentive Plan (pre-2011 grants — vesting over 3 years) (filed as an exhibit to the Company’s current report on Form 8-K filed June 20, 2008 and incorporated herein by reference).
10.17	Form of Restricted Stock Grant Agreement under the Orthofix International N.V. Amended and Restated 2004 Long Term Incentive Plan (post-2010 grants — vesting over 3 years) (filed as an exhibit to the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2010 and incorporated herein by reference).
10.18	Form of Restricted Stock Grant Agreement under the Orthofix International N.V. Amended and Restated 2004 Long Term Incentive Plan (3 year cliff vesting) (filed as an exhibit to the Company’s current report on Form 8-K filed June 20, 2008 and incorporated herein by reference).
10.19	Inducement Grant Nonqualified Stock Option Agreement between Orthofix International N.V. and Robert S. Vaters (filed as an exhibit to the current report on Form 8-K of Orthofix International N.V dated September 10, 2008 and incorporated herein by reference).
10.20	Inducement Grant Nonqualified Stock Option Agreement, dated April 1, 2011, between Orthofix International N.V. and Vicente Trelles (filed as an exhibit to the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2011 and incorporated herein by reference).

36

10.21	Second Amended and Restated Performance Accelerated Stock Options Agreement between Orthofix International N.V. and Bradley R. Mason dated October 14, 2008 (filed as an exhibit to the Company’s current report on Form 8-K filed October 15, 2008 and incorporated herein by reference).
10.22	Nonqualified Stock Option Agreement between Orthofix International N.V. and Bradley R. Mason dated October 14, 2008 (filed as an exhibit to the Company’s current report on Form 8-K filed October 15, 2008 and incorporated herein by reference).
10.23	Form of Award Letter Regarding Special Retention Cash Bonus Award (filed as an exhibit to the Company’s current report on Form 8-K/A filed on February 23, 2011 and incorporated herein by reference).
10.24*	Description of Director Compensation Policy
10.25	Form of Indemnity Agreement (filed as an exhibit to the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2008 and incorporated herein by reference).
10.26	Amended and Restated Employment Agreement, entered into and effective as of July 1, 2009, by and between Orthofix Inc. and Alan W. Milinazzo (filed as an exhibit to the Company’s current report on Form 8-K filed July 7, 2009 and incorporated herein by reference).
10.27	Amendment No. 1 to Amended and Restated Employment Agreement, dated July 30, 2009, by and between Orthofix Inc. and Alan W. Milinazzo (filed as an exhibit to the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2009 and incorporated herein by reference).
10.28	Letter Agreement, dated June 15, 2011, between Orthofix Inc., Orthofix International N.V. and Alan W. Milinazzo (filed as an exhibit to the Company’s quarterly report on current report on Form 8-K filed June 16, 2011 and incorporated herein by reference).
10.29	Amended and Restated Employment Agreement, entered into and effective as of July 28, 2010, by and between Orthofix Inc. and Robert S. Vaters (filed as an exhibit to the Company’s current report on Form 8-K filed August 3, 2010 and incorporated herein by reference).
10.30	Addendum to Amended and Restated Employment Agreement, entered into as of March 9, 2011, by and between Orthofix Inc. and Robert S. Vaters (filed as an exhibit to the Company’s quarterly report on current report on Form 8-K filed March 15, 2011 and incorporated herein by reference).
10.31	Amended and Restated Employment Agreement, dated as of June 15, 2011 and effective as of August 1, 2011, by and between Orthofix Inc., Orthofix International N.V. and Robert S. Vaters (filed as an exhibit to the Company’s quarterly report on current report on Form 8-K filed June 16, 2011 and incorporated herein by reference).
10.32	Amended and Restated Employment Agreement, entered into and effective as of July 1, 2009, by and between Orthofix Inc. and Michael M. Finegan (filed as an exhibit to the Company’s current report on Form 8-K filed July 7, 2009 and incorporated herein by reference).

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10.33	Amendment No. 1 to Amended and Restated Employment Agreement, dated August 4, 2009, by and between Orthofix Inc. and Michael M. Finegan (filed as an exhibit to the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2009 and incorporated herein by reference).
10.34	Amendment No. 2 to Amended and Restated Employment Agreement, dated as of October 1, 2011, by and between Orthofix Inc. and Michael M. Finegan (filed as an exhibit to the Company’s current report on Form 8-K filed October 4, 2011 and incorporated herein by reference).
10.35	Employment Agreement, entered into on December 9, 2010, by and between Orthofix Inc. and Jeffrey M. Schumm (filed as an exhibit to the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2010 and incorporated herein by reference).
10.36	Employment Agreement, entered into as of March 2, 2011, by and between Orthofix Inc. and Brian McCollum (filed as an exhibit to the Company’s quarterly report on current report on Form 8-K filed March 7, 2011 and incorporated herein by reference).
10.37	Employment Agreement, entered into as of April 1, 2011, by and between Orthofix Inc. and Vicente Trelles (filed as an exhibit to the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2011 and incorporated herein by reference).
10.38	Employment Agreement, entered into as of October 1, 2011, by and between Orthofix Inc. and Bryan McMillan (filed as an exhibit to the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2011 and incorporated herein by reference).
10.39	Amended and Restated Employment Agreement, entered into on July 28, 2010, by and between Orthofix Inc. and Michael Simpson (filed as an exhibit to the Company’s current report on Form 8-K filed August 3, 2010 and incorporated herein by reference).
10.40	Separation Letter Agreement, dated February 7, 2011, between Orthofix Inc. and Michael Simpson (filed as an exhibit to the Company’s current report on Form 8-K filed on February 10, 2011 and incorporated herein by reference).
10.41	Amended and Restated Employment Agreement, entered into on July 1, 2009, by and between Orthofix Inc. and Eric Brown (filed as an exhibit to the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2009 and incorporated herein by reference).
10.42	Separation Letter Agreement, dated January 10, 2011, between Orthofix Inc. and Eric Brown (filed as an exhibit to the Company’s current report on Form 8-K filed January 14, 2011 and incorporated herein by reference).
10.43	Form of Amendment to Stock Option Agreements (for Alan W. Milinazzo, Robert S. Vaters, Bradley R. Mason, Michael M. Finegan and Michael Simpson) (filed as an exhibit to the Company’s current report on Form 8-K filed July 7, 2009 and incorporated herein by reference).
10.44	Settlement Agreement, entered into on June 6, 2012, among the United States of America, acting through the United States Department of Justice and on behalf of the Office of Inspector General of the Department of Health and Human Services, the TRICARE Management Activity, through its General Counsel, the Office of Personnel Management , in its capacity as administrator of the Federal Employees Health Benefits Program, the United States Department of Veteran Affairs, Orthofix International N.V. and relator Jeffrey J. Bierman (filed as an exhibit to the Company’s current report on Form 8-K/A filed June 7, 2012 and incorporated herein by reference).
10.45	Plea Agreement, entered into on June 7, 2012, among the United States Attorney for the District of Massachusetts, the Department of Justice and Orthofix Inc. (filed as an exhibit to the Company’s current report on Form 8-K/A filed June 7, 2012 and incorporated herein by reference).
10.46	Corporate Integrity Agreement, entered into on June 6, 2012, between the Office of Inspector General of the Department of Health and Human Services and Orthofix International N.V. (filed as an exhibit to the Company’s current report on Form 8-K/A filed June 7, 2012 and incorporated herein by reference).
31.1*	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2*	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32.1*	Section 1350 Certification of Chief Executive Officer.
32.2*	Section 1350 Certification of Chief Financial Officer.
101*	The following materials from the Orthofix International N.V. Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 formatted in Extensible Business Reporting Language (“XBRL”): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Cash Flows and (iv) related notes, detail tagged.

*	Filed herewith.
+	Certain confidential portions of this exhibit were omitted by means of redacting a portion of the text. This exhibit has been filed separately with the Secretary of the Commission without redactions pursuant to our Application Requesting Confidential Treatment under the Securities Exchange Act of 1934.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	ORTHOFIX INTERNATIONAL N.V.
Date: July 30, 2012	By:	/s/ Robert S. Vaters
		Name:	Robert S. Vaters
		Title:	President and Chief Executive Officer
Date: July 30, 2012	By:	/s/ Brian McCollum
		Name:	Brian McCollum
		Title:	Senior Vice President of Finance and Chief Financial Officer

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EX-10.7

Exhibit 10.7

ORTHOFIX INTERNATIONAL N.V.

2012 LONG-TERM INCENTIVE PLAN

Table of Contents

			Page
1.	PURPOSE		1
2.	DEFINITIONS		1
3.	ADMINISTRATION OF THE PLAN		7
	3.1 Committee		8
		3.1.1 Powers and Authorities	8
		3.1.2 Composition of Committee	8
		3.1.3 Other Committees	8
		3.1.4 Delegation by Committee	9
	3.2 Board		9
	3.3 Terms of Awards		9
		3.3.1 Committee Authority	9
		3.3.2 Forfeiture; Recoupment	10
	3.4 No Repricing		11
	3.5 Deferral Arrangement		11
	3.6 No Liability		11
	3.7 Registration; Share Certificates		11
4.	STOCK SUBJECT TO THE PLAN		11
	4.1 Number of Shares of Stock Available for Awards		12
	4.2 Adjustments in Authorized Shares of Stock		12
	4.3 Share Usage		12
5.	EFFECTIVE DATE; TERM; AMENDMENT AND TERMINATION		13
	5.1 Effective Date		13
	5.2 Term		13
	5.3 Amendment and Termination		14
6.	AWARD ELIGIBILITY AND LIMITATIONS		14
	6.1 Eligible Grantees		14
	6.2 Limitation on Shares of Stock Subject to Awards and Cash Awards		14
	6.3 Stand-Alone, Additional, Tandem and Substitute Awards		15
7.	AWARD AGREEMENT		15
8.	TERMS AND CONDITIONS OF OPTIONS		15
	8.1 Option Price		15
	8.2 Vesting		16
	8.3 Term		16
	8.4 Termination of Service		16
	8.5 Limitations on Exercise of Option		17
	8.6 Method of Exercise		17
	8.7 Rights of Holders of Options		17
	8.8 Delivery of Stock		17
	8.9 Transferability of Options		17
	8.10 Family Transfers		18

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	8.11 Limitations on Incentive Stock Options		18
	8.12 Notice of Disqualifying Disposition		18
9.	TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS		18
	9.1 Right to Payment and Grant Price		19
	9.2 Other Terms		19
	9.3 Term		19
	9.4 Transferability of SARS		19
	9.5 Family Transfers		20
10.	TERMS AND CONDITIONS OF RESTRICTED STOCK AND STOCK UNITS		20
	10.1 Grant of Restricted Stock or Stock Units		20
	10.2 Restrictions		20
	10.3 Registration; Restricted Share Certificates		20
	10.4 Rights of Holders of Restricted Stock		21
	10.5 Rights of Holders of Stock Units		21
		10.5.1 Voting and Dividend Rights	21
		10.5.2 Creditor’s Rights	22
	10.6 Termination of Service		22
	10.7 Purchase of Restricted Stock and Shares of Stock Subject to Stock Units		22
	10.8 Delivery of Shares of Stock		22
11.	TERMS AND CONDITIONS OF UNRESTRICTED STOCK AWARDS AND OTHER EQUITY-BASED AWARDS		22
	11.1 Unrestricted Stock Awards		23
	11.2 Other Equity-Based Awards		23
12.	FORM OF PAYMENT FOR OPTIONS AND RESTRICTED STOCK		23
	12.1 General Rule		23
	12.2 Surrender of Shares of Stock		23
	12.3 Cashless Exercise		24
	12.4 Other Forms of Payment		24
13.	TERMS AND CONDITIONS OF DIVIDEND EQUIVALENT RIGHTS		24
	13.1 Dividend Equivalent Rights		24
	13.2 Termination of Service		25
14.	TERMS AND CONDITIONS OF PERFORMANCE-BASED AWARDS		25
	14.1 Grant of Performance-Based Awards		25
	14.2 Value of Performance-Based Awards		25
	14.3 Earning of Performance-Based Awards		25
	14.4 Form and Timing of Payment of Performance-Based Awards		25
	14.5 Performance Conditions		26
	14.6 Performance-Based Awards Granted to Designated Covered Employees		26
		14.6.1 Performance Goals Generally	26
		14.6.2 Timing For Establishing Performance Goals	26
		14.6.3 Payment of Awards; Other Terms	27
		14.6.4 Performance Measures	27
		14.6.5 Evaluation of Performance	29

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		14.6.6 Adjustment of Performance-Based Compensation	29
		14.6.7 Committee Discretion	29
	14.7 Status of Awards Under Code Section 162(m)		29
15.	PARACHUTE LIMITATIONS		30
16.	REQUIREMENTS OF LAW		30
	16.1 General		30
	16.2 Rule 16b-3		31
17.	EFFECT OF CHANGES IN CAPITALIZATION		31
	17.1 Changes in Stock		31
	17.2 Reorganization in Which the Company Is the Surviving Entity Which Does not Constitute a Change in Control		32
	17.3 Change in Control in which Awards are not Assumed		32
	17.4 Change in Control in which Awards are Assumed		34
	17.5 Adjustments		34
	17.6 No Limitations on Company		35
18.	GENERAL PROVISIONS		35
	18.1Disclaimer of Rights		35
	18.2 Nonexclusivity of the Plan		35
	18.3 Withholding Taxes		35
	18.4 Captions		36
	18.5 Construction		36
	18.6 Other Provisions		37
	18.7 Number and Gender		37
	18.8 Severability		37
	18.9 Governing Law		37
	18.10 Section 409A of the Code		37

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ORTHOFIX INTERNATIONAL N.V.

2012 LONG-TERM INCENTIVE PLAN

Orthofix International N.V. (the “Company”) sets forth herein the terms of its 2012 Long-Term Incentive Plan (the “Plan”), as follows:

1.PURPOSE

The Plan is intended to (a) provide eligible persons with an incentive to contribute to the success of the Company and to operate and manage the Company’s business in a manner that will provide for the Company’s long-term growth and profitability to benefit its shareholders and other important stakeholders, including its employees and customers, and (b) provide a means of obtaining, rewarding and retaining key personnel. To this end, the Plan provides for the grant of awards of stock options, stock appreciation rights, restricted stock, stock units, unrestricted stock, dividend equivalent rights, performance shares and other performance-based awards, other equity-based awards, and cash bonus awards. Any of these awards may, but need not, be made as performance incentives to reward the holders of such awards for the achievement of performance goals in accordance with the terms of the Plan. Stock options granted under the Plan may be non-qualified stock options or incentive stock options, as provided herein.

2.DEFINITIONS

For purposes of interpreting the Plan documents (including the Plan and Award Agreements), the following definitions shall apply:

2.1 “Affiliate” means any company or other entity that controls, is controlled by or is under common control with the Company within the meaning of Rule 405 of Regulation C under the Securities Act, including any Subsidiary. For purposes of grants of Options or Stock Appreciation Rights, an entity may not be considered an Affiliate unless the Company holds a “controlling interest” in such entity within the meaning of Treasury Regulation Section 1.414(c)-2(b)(2)(i), provided that (a) except as specified in clause (b) below, an interest of “at least 50 percent” shall be used instead of an interest of “at least 80 percent” in each case where “at least 80 percent” appears in Treasury Regulation Section 1.414(c)-2(b)(2)(i) and (b) where the grant of Options or Stock Appreciation Rights is based upon a legitimate business criterion, an interest of “at least 20 percent” shall be used instead of an interest of “at least 80 percent” in each case where “at least 80 percent” appears in Treasury Regulation Section 1.414(c)-2(b)(2)(i).

2.2 “Applicable Laws” means the legal requirements relating to the Plan and the Awards under (a) applicable provisions of the corporate, securities, tax and other laws, rules, regulations and government orders of any jurisdiction applicable to Awards granted to residents therein and (b) the rules of any Stock Exchange on which the Stock is listed.

2.3 “Award” means a grant under the Plan of an Option, a Stock Appreciation Right, Restricted Stock, a Stock Unit, Unrestricted Stock, a Dividend Equivalent Right, a Performance Share or other Performance-Based Award, an Other Equity-Based Award, or cash.

2.4 “Award Agreement” means the agreement between the Company and a Grantee that evidences and sets out the terms and conditions of an Award.

2.5 “Award Stock” shall have the meaning set forth in Section 17.3(a)(ii)

2.6 “Benefit Arrangement” shall have the meaning set forth in Section 15.

2.7 “Board” means the Board of Directors of the Company.

2.8 “Cause” means, with respect to any Grantee, as determined by the Committee and unless otherwise provided in an applicable agreement between such Grantee and the Company or an Affiliate, (a) gross negligence or willful misconduct in connection with the performance of duties; (b) conviction of a criminal offense (other than minor traffic offenses); or (c) material breach of any term of any employment, consulting or other services, confidentiality, intellectual property or non-competition agreements, if any, between such Grantee and the Company or an Affiliate. Any determination by the Committee whether an event constituting Cause shall have occurred shall be final, binding and conclusive.

2.9 “Capital Stock” means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) in equity of such Person, whether outstanding on the Effective Date or issued thereafter, including, without limitation, all common stock, par value $0.10 per share, of the Company.

2.10 “Change in Control” means the occurrence of any of the following:

(a) a “Person” or “group” (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act) of more than fifty percent (50%) of the total voting power of the Voting Stock of the Company, on a Fully Diluted Basis;

(b) individuals who on the Effective Date constitute the Board (together with any new Directors whose election by such Board or whose nomination by such Board for election by the shareholders of the Company was approved by a vote of at least a majority of the members of such Board then in office who either were members of such Board on the Effective Date or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the members of such Board then in office;

(c) the Company consolidates with, or merges with or into, any Person, or any Person consolidates with, or merges with or into, the Company, other than any such transaction in which the holders of securities that represented one hundred percent (100%) of the Voting Stock of the Company immediately prior to such transaction (or other securities into which such securities are converted as part of such merger or consolidation transaction) own directly or indirectly at least a majority of the voting power of the Voting Stock of the surviving Person in such merger or consolidation transaction immediately after such transaction;

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(d) there is consummated any direct or indirect sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one transaction or a series of related transactions, of all or substantially all of the assets of the Company and its Subsidiaries, taken as a whole, to any “Person” or “group” (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act); or

(e) the shareholders of the Company adopt a plan or proposal for the liquidation, winding up or dissolution of the Company.

2.11 “Code” means the Internal Revenue Code of 1986, as amended, as now in effect or as hereafter amended, and any successor thereto. References in the Plan to any Code Section shall be deemed to include, as applicable, regulations promulgated under such Code Section.

2.12 “Committee” means a committee of, and designated from time to time by resolution of, the Board, which shall be constituted as provided in Section 3.1.2 and Section 3.1.3 (or, if no Committee has been so designated, the Board).

2.13 “Company” means Orthofix International N.V.

2.14 “Covered Employee” means a Grantee who is a “covered employee” within the meaning of Code Section 162(m)(3).

2.15 “Disability” means the inability of a Grantee to perform each of the essential duties of such Grantee’s position by reason of a medically determinable physical or mental impairment which is potentially permanent in character or which can be expected to last for a continuous period of not less than 12 months; provided that, with respect to rules regarding expiration of an Incentive Stock Option following termination of a Grantee’s Service, Disability shall mean the inability of such Grantee to engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.

2.16 “Dividend Equivalent Right” means a right, granted to a Grantee pursuant to Section 13, to receive cash, Stock, other Awards or other property equal in value to dividends or other periodic payments paid or made with respect to a specified number of shares of Stock.

2.17 “Effective Date” means April 13, 2012, the date on which the Plan was approved by the Board of Directors.

2.18 “Employee” means, as of any date of determination, an employee (including an officer) of the Company or an Affiliate.

2.19 “Exchange Act” means the Securities Exchange Act of 1934, as amended, as now in effect or as hereafter amended.

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2.20   “Fair Market Value” means the fair market value of a share of Stock for purposes of the Plan, which shall be determined as of any Grant Date as follows:

(a) If on such Grant Date the shares of Stock are listed on a Stock Exchange, or are publicly traded on another established securities market (a “Securities Market”), the Fair Market Value of a share of Stock shall be the closing price of the Stock as reported on such Stock Exchange or such Securities Market (provided that, if there is more than one such Stock Exchange or Securities Market, the Committee shall designate the appropriate Stock Exchange or Securities Market for purposes of the Fair Market Value determination). If there is no such reported closing price on such Grant Date, the Fair Market Value of a share of Stock shall be the closing price of the Stock on the next preceding day on which any sale of Stock shall have been reported on such Stock Exchange or such Securities Market.

(b) If on such Grant Date the shares of Stock are not listed on a Stock Exchange or publicly traded on a Securities Market, the Fair Market Value of a share of Stock shall be the value of the Stock as determined by the Committee by the reasonable application of a reasonable valuation method, in a manner consistent with Code Section 409A.

Notwithstanding this Section 2.20 or Section 18.3, for purposes of determining taxable income and the amount of the related tax withholding obligation pursuant to Section 18.3, the Fair Market Value will be determined by the Company using any reasonable method; provided, further, that for any shares of Stock subject to an Award that are sold by or on behalf of a Grantee on the same date on which such shares may first be sold pursuant to the terms of the related Award Agreement, the Fair Market Value of such shares shall be the sale price of such shares on such date (or if sales of such shares are effectuated at more than one sale price, the weighted average sale price of such shares on such date).

2.21 “Family Member” means, with respect to any Grantee as of any date of determination, (a) a person who is a spouse, former spouse, child, stepchild, grandchild, parent, stepparent, grandparent, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother, sister, brother-in-law, or sister-in-law, including adoptive relationships, of such Grantee, (b) any person sharing such Grantee’s household (other than a tenant or employee), (c) a trust in which any one or more of the persons specified in clauses (a) and (b) above (and such Grantee) own more than fifty percent (50%) of the beneficial interest, (d) a foundation in which any one or more of the persons specified in clauses (a) and (b) above (and such Grantee) control the management of assets, and (e) any other entity in which one or more of the persons specified in clauses (a) and (b) above (and such Grantee) own more than fifty percent (50%) of the voting interests.

2.22 “Fully Diluted Basis” means, as of any date of determination, the sum of (x) the number of shares of Voting Stock outstanding as of such date of determination plus (y) the number of shares of Voting Stock issuable upon the exercise, conversion or exchange of all then-outstanding warrants, options, convertible Capital Stock or indebtedness, exchangeable Capital Stock or indebtedness, or other rights exercisable for or convertible or exchangeable into, directly or indirectly, shares of Voting Stock, whether at the time of issue or upon the passage of time or upon the occurrence of some future event, and whether or not in the money as of such date of determination

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2.23 “Grant Date” means, as determined by the Committee, the latest to occur of (a) the date as of which the Committee approves the Award, (b) the date on which the recipient of an Award first becomes eligible to receive an Award under Section 6 hereof (e.g., in the case of a new hire, the first date on which such new hire performs any Service), or (c) such subsequent date specified by the Committee in the corporate action approving the Award.

2.24 “Grantee” means a person who receives or holds an Award under the Plan.

2.25 “Incentive Stock Option” means an “incentive stock option” within the meaning of Code Section 422, or the corresponding provision of any subsequently enacted tax statute, as amended from time to time.

2.26 “Non-qualified Stock Option” means an Option that is not an Incentive Stock Option.

2.27 “Option” means an option to purchase one or more shares of Stock pursuant to the Plan.

2.28 “Option Price” means the exercise price for each share of Stock subject to an Option.

2.29 “Other Agreement” shall have the meaning set forth in Section 15.

2.30 “Other Equity-Based Award” means an Award representing a right or other interest that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on, or related to, Stock, other than an Option, a Stock Appreciation Right, Restricted Stock, a Stock Unit, Unrestricted Stock, a Dividend Equivalent Right or a Performance Share.

2.31  “Outside Director” means a member of the Board who is not an Employee.

2.32 “Parachute Payment” shall have the meaning set forth in Section 15(a)

2.33 “Performance-Based Award” means an Award of Options, Stock Appreciation Rights, Restricted Stock, Stock Units, Performance Shares, Other Equity-Based Awards or cash made subject to the achievement of performance goals (as provided in Section 14) over a Performance Period specified by the Committee.

2.34 “Performance-Based Compensation” means compensation under an Award that is intended to satisfy the requirements of Code Section 162(m) for “qualified performance-based compensation” paid to Covered Employees. Notwithstanding the foregoing, nothing in the Plan shall be construed to mean that an Award which does not satisfy the requirements for “qualified performance-based compensation” within the meaning of and pursuant to Code Section 162(m) does not constitute performance-based compensation for other purposes, including the purposes of Code Section 409A.

2.35 “Performance Measures” means measures as specified in Section 14.6.4 on which the performance goals under Performance-Based Awards are based and which are approved by the Company’s shareholders pursuant to, and to the extent required by, the Plan in order to qualify such Performance-Based Awards as Performance-Based Compensation.

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2.36 “Performance Period” means the period of time during which the performance goals under Performance-Based Awards must be met in order to determine the degree of payout and/or vesting with respect to any such Performance-Based Awards.

2.37 “Performance Shares” means a Performance-Based Award representing a right or other interest that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on, or related to, Stock, made subject to the achievement of performance goals (as provided in Section 14) over a Performance Period of up to ten (10) years.

2.38 “Person” means an individual, a corporation, a partnership, a limited liability company, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof.

2.39 “Plan” means this the Company 2012 Long-Term Incentive Plan, as amended from time to time.

2.40 “Prior Plan” means the Orthofix International N.V. Amended and Restated 2004 Long-Term Incentive Plan.

2.41 “Reporting Person” means a person who is required to file reports under Section 16(a) of the Exchange Act, or any successor provision.

2.42 “Restricted Period” shall have the meaning set forth in Section 10.2.

2.43 “Restricted Stock” means shares of Stock awarded to a Grantee pursuant to Section 10.

2.44 “SAR Price” shall have the meaning set forth in Section 9.1.

2.45 “Securities Act” means the Securities Act of 1933, as amended, as now in effect or as hereafter amended.

2.46 “Service” means service qualifying a Grantee as a Service Provider to the Company or an Affiliate. Unless otherwise provided in the applicable Award Agreement, a Grantee’s change in position or duties shall not result in interrupted or terminated Service, so long as such Grantee continues to be a Service Provider to the Company or an Affiliate. Subject to the preceding sentence, any determination by the Committee whether a termination of Service shall have occurred for purposes of the Plan shall be final, binding and conclusive. If a Service Provider’s employment or other service relationship is with an Affiliate and the applicable entity ceases to be an Affiliate, a termination of Service shall be deemed to have occurred when such entity ceases to be an Affiliate unless the Service Provider transfers his or her employment or other service relationship to the Company or any other Affiliate.

2.47 “Service Provider” means an Employee, officer, or director of the Company or an Affiliate, or a consultant or adviser (who is a natural person) to the Company or an Affiliate currently providing services to the Company or an Affiliate.

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2.48 “Stock” means the common stock, par value $0.10 per share, of the Company, or any security which shares of Stock may be changed into or for which shares of Stock may be exchanged as provided in Section 17.1.

2.49 “Stock Appreciation Right” or “SAR” means a right granted to a Grantee pursuant to Section 9.

2.50 “Stock Exchange” means The NASDAQ Stock Exchange LLC or another established national or regional stock exchange.

2.51 “Stock Unit” means a bookkeeping entry representing the equivalent of one (1) share of Stock awarded to a Grantee pursuant to Section 10 that (a) is not subject to vesting or (b) is subject to time-based vesting, but not to performance-based vesting. A Stock Unit may also be referred to as a restricted stock unit.

2.52 “Subsidiary” means any corporation (other than the Company) or non-corporate entity with respect to which the Company owns, directly or indirectly, fifty percent (50%) or more of the total combined voting power of all classes of stock, membership interests or other ownership interests of any class or kind ordinarily having the power to vote for the directors, managers or other voting members of the governing body of such corporation or non-corporate entity. In addition, any other entity may be designated by the Committee as a Subsidiary, provided that (a) such entity could be considered as a subsidiary according to generally accepted accounting principles in the United States of America, and (b) in the case of an Award of Options or Stock Appreciation Rights, such Award would be considered to be granted in respect of “service recipient stock” under Code Section 409A.

2.53 “Substitute Award” means an Award granted upon assumption of, or in substitution for, outstanding awards previously granted under a compensatory plan by a business entity acquired or to be acquired by the Company or an Affiliate or with which the Company or an Affiliate has combined or will combine.

2.54 “Ten Percent Shareholder” means a natural person who owns more than ten percent (10%) of the total combined voting power of all classes of outstanding voting securities of the Company, the Company’s parent (if any) or any of the Company’s Subsidiaries. In determining stock ownership, the attribution rules of Code Section 424(d) shall be applied.

2.55 “Unrestricted Stock” shall have the meaning set forth in Section 11.

2.56 “Voting Stock” means, with respect to any Person, Capital Stock of any class or kind ordinarily having the power to vote for the election of directors, managers or other voting members of the governing body of such Person.

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3.ADMINISTRATION OF THE PLAN

3.1Committee.

3.1.1Powers and Authorities.

The Committee shall administer the Plan and shall have such powers and authorities related to the administration of the Plan as are consistent with the Company’s articles of association and Applicable Laws. Without limiting the generality of the foregoing, the Committee shall have full power and authority to take all actions and to make all determinations required or provided for under the Plan, any Award or any Award Agreement, and shall have full power and authority to take all such other actions and make all such other determinations not inconsistent with the specific terms and provisions of the Plan which the Committee deems to be necessary or appropriate to the administration of the Plan, any Award or any Award Agreement. All such actions and determinations shall be made by (a) the affirmative vote of a majority of the members of the Committee present at a meeting at which a quorum is present, or (b) the unanimous consent of the members of the Committee executed in writing in accordance with the Company’s articles of association and bylaws and Applicable Laws. Unless otherwise expressly determined by the Board, the Committee shall have the authority to interpret and construe all provisions of the Plan, any Award and any Award Agreement, and any such interpretation or construction, and any other determination contemplated to be made under the Plan or any Award Agreement, by the Committee shall be final, binding and conclusive whether or not expressly provided for in any provision of the Plan, such Award or such Award Agreement.

In the event that the Plan, any Award or any Award Agreement provides for any action to be taken by the Board or any determination to be made by the Board, such action may be taken or such determination may be made by the Committee constituted in accordance with this Section 3.1 if the Board has delegated the power and authority to do so to such Committee.

3.1.2Composition of Committee.

The Committee shall be a committee composed of not fewer than two directors of the Company designated by the Board to administer the Plan. Each member of the Committee shall be a “Non-Employee Director” within the meaning of Rule 16b-3 under the Exchange Act, an “outside director” within the meaning of Code Section 162(m)(4)(C)(i) and, for so long as the Stock is listed on The NASDAQ Stock Exchange LLC, an “independent director” within the meaning of NASDAQ Listing Rule 5605(a)(2) (or, in each case, any successor term or provision); provided that any action taken by the Committee shall be valid and effective whether or not members of the Committee at the time of such action are later determined not to have satisfied the requirements for membership set forth in this Section 3.1.2 or otherwise provided in any charter of the Committee. Without limiting the generality of the foregoing, the Committee may be the Compensation Committee of the Board or a subcommittee thereof if the Compensation Committee of the Board or such subcommittee satisfies the foregoing requirements.

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3.1.3Other Committees.

The Board also may appoint one or more committees of the Board, each composed of one or more directors of the Company who need not be Outside Directors, which may administer the Plan with respect to Grantees who are not “officers” as defined in Rule 16a-1(f) under the Exchange Act or directors of the Company, may grant Awards under the Plan to such Grantees, and may determine all terms of such Awards, subject to the requirements of Rule 16b-3 under the Exchange Act, Code Section 162(m) and, for so long as the Stock is listed on The NASDAQ Stock Exchange LLC, the rules of such Stock Exchange.

3.1.4Delegation by Committee.

To the extent permitted by Applicable Laws, the Committee may by resolution delegate some or all of its authority with respect to the Plan and Awards to the President and Chief Executive Officer of the Company and/or any other officer of the Company designated by the Committee, provided that the Committee may not delegate its authority hereunder (a) to make Awards to directors of the Company, (b) to make Awards to Employees who are (i) “officers” as defined in Rule 16a-1(f) under the Exchange Act, (ii) Covered Employees or (iii) officers of the Company who are delegated authority by the Committee pursuant to this Section 3.1.4, or (c) to interpret the Plan or any Award.  Any delegation hereunder shall be subject to the restrictions and limits that the Committee specifies at the time of such delegation or thereafter.  Nothing in the Plan shall be construed as obligating the Committee to delegate authority to any officer of the Company, and the Committee may at any time rescind the authority delegated to an officer of the Company appointed hereunder and delegate authority to one or more other officers of the Company.  At all times, an officer of the Company delegated authority pursuant to this Section 3.1.4 shall serve in such capacity at the pleasure of the Committee.  Any action undertaken by any such officer of the Company in accordance with the Committee’s delegation of authority shall have the same force and effect as if undertaken directly by the Committee, and any reference in the Plan to the “Committee” shall, to the extent consistent with the terms and limitations of such delegation, be deemed to include a reference to each such officer.

3.2Board.

The Board from time to time may exercise any or all of the powers and authorities related to the administration and implementation of the Plan, as set forth in Section 3.1 and other applicable provisions of the Plan, as the Board shall determine, consistent with the Company’s articles of association and Applicable Laws.

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3.3Terms of Awards.

3.3.1Committee Authority.

Subject to the other terms and conditions of the Plan, the Committee shall have full and final authority to:

(a) designate Grantees;

(b) determine the type or types of Awards to be made to a Grantee;

(c) determine the number of shares of Stock to be subject to an Award;

(d) establish the terms and conditions of each Award (including the Option Price of any Option or the purchase price for Restricted Stock), the nature and duration of any restriction or condition (or provision for lapse thereof) relating to the vesting, exercise, transfer, or forfeiture of an Award or the shares of Stock subject thereto, the treatment of an Award in the event of a Change in Control (subject to applicable agreements), and any terms or conditions that may be necessary to qualify Options as Incentive Stock Options;

(e) prescribe the form of each Award Agreement evidencing an Award; and

(f) subject to the limitation on repricing in Section 3.4, amend, modify or supplement the terms of any outstanding Award, which authority shall include the authority, in order to effectuate the purposes of the Plan but without amending the Plan, to make Awards or to modify outstanding Awards made to eligible natural persons who are foreign nationals or are natural persons who are employed outside the United States to reflect differences in local law, tax policy, or custom, provided that, notwithstanding the foregoing, no amendment, modification or supplement of the terms of any outstanding Award shall, without the consent of the Grantee thereof, impair such Grantee’s rights under such Award.

The Committee shall have the right, in its discretion, to make Awards in substitution or exchange for any award granted under another compensatory plan of the Company, an Affiliate, or any business entity acquired or to be acquired by the Company or an Affiliate or with which the Company or an Affiliate has combined or will combine.

3.3.2Forfeiture; Recoupment.

The Committee may reserve the right in an Award Agreement to cause a forfeiture of the gain realized by a Grantee with respect to an Award thereunder on account of actions taken by, or failed to be taken by, such Grantee in violation or breach of or in conflict with any (a) employment agreement, (b) non-competition agreement, (c) agreement prohibiting solicitation of Employees or clients of the Company or an Affiliate, (d) confidentiality obligation with respect to the Company or an Affiliate, (e) Company policy or procedure, (f) other agreement, or (g) any other obligation of such Grantee to the Company or an Affiliate, as and to the extent specified in such Award Agreement. The Committee may annul an outstanding Award if the Grantee thereof is an Employee of the Company or an Affiliate and is terminated for Cause as

10

defined in the Plan or the applicable Award Agreement or for “cause” as defined in any other agreement between the Company or such Affiliate and such Grantee, as applicable.

Any Award granted pursuant to the Plan shall be subject to mandatory repayment by the Grantee to the Company to the extent the Grantee is, or in the future becomes, subject to (a) any Company “clawback” or recoupment policy that is adopted to comply with the requirements of any Applicable Law, rule or regulation, or otherwise, or (b) any law, rule or regulation which imposes mandatory recoupment, under circumstances set forth in such law, rule or regulation.

3.4No Repricing.

Except in connection with a corporate transaction involving the Company (including, without limitation, any stock dividend, distribution (whether in the form of cash, shares of Stock, other securities or other property), stock split, extraordinary cash dividend, recapitalization, change in control, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of shares of Stock or other securities or similar transaction), the Company may not, without obtaining shareholder approval: (a) amend the terms of outstanding Options or SARs to reduce the exercise price of such outstanding Options or SARs; (b) cancel or surrender outstanding Options or SARs in exchange for or substitution of Options or SARs with an exercise price that is less than the exercise price of the original Options or SARs; or (c) cancel or surrender outstanding Options or SARs with an exercise price above the current stock price in exchange for or substitution of cash or other securities.

3.5Deferral Arrangement.

The Committee may permit or require the deferral of any payment pursuant to any Award into a deferred compensation arrangement, subject to such rules and procedures as it may establish, which may include provisions for the payment or crediting of interest or Dividend Equivalent Rights and, in connection therewith, provisions for converting such credits into Stock Units and for restricting deferrals to comply with hardship distribution rules affecting tax-qualified retirement plans subject to Code Section 401(k)(2)(B)(IV), provided that no Dividend Equivalent Rights may be granted in connection with, or related to, an Award of Options or SARs. Any such deferrals shall be made in a manner that complies with Code Section 409A, including, if applicable, with respect to when a Separation from Service occurs as defined under Section 409A.

3.6No Liability.

No member of the Board or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Award or Award Agreement.

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3.7Registration; Share Certificates.

Notwithstanding any provision of the Plan to the contrary, the ownership of the shares of Stock issued under the Plan may be evidenced in such a manner as the Committee, in its sole discretion, deems appropriate, including by book-entry or direct registration (including transaction advices) or the issuance of one or more share certificates.

4.STOCK SUBJECT TO THE PLAN

4.1Number of Shares of Stock Available for Awards.

Subject to such additional shares of Stock as shall be available for issuance under the Plan pursuant to Section 4.2, and subject to adjustment pursuant to Section 16, the maximum number of shares of Stock available for issuance under the Plan shall be equal to the sum of (x) one million six hundred thousand (1,600,000) shares of Stock plus (y) the number of shares of Stock available for future awards under the Prior Plan as of the date of shareholder approval of the Plan plus (z) the number of shares of Stock related to awards outstanding under the Prior Plan as of the date of shareholder approval of the Plan which thereafter terminate by expiration, forfeiture, cancellation, or otherwise without the issuance of such shares. Such shares of Stock may be authorized and unissued shares of Stock or treasury shares of Stock or any combination of the foregoing, as may be determined from time to time by the Board or by the Committee. Any of the shares of Stock available for issuance under the Plan may be used for any type of Award under the Plan, and any or all of the shares of Stock available for issuance under the Plan shall be available for issuance pursuant to Incentive Stock Options.

4.2Adjustments in Authorized Shares of Stock.

In connection with mergers, reorganizations, separations, or other transactions to which Code Section 424(a) applies, the Committee shall have the right to cause the Company to assume awards previously granted under a compensatory plan by another business entity that is a party to such transaction and to substitute Awards under the Plan for such awards. The number of shares of Stock available for issuance under the Plan pursuant to Section 4.1 shall be increased by the number of shares of Stock subject to any such assumed awards and substitute Awards. Shares available for issuance under a shareholder-approved plan of a business entity that is a party to such transaction (as appropriately adjusted, if necessary, to reflect such transaction) may be used for Awards under the Plan and shall not reduce the number of shares of Stock otherwise available for issuance under the Plan, subject to applicable rules of any Stock Exchange on which the Stock is listed.

4.3Share Usage.

(a) Shares of Stock subject to an Award shall be counted as used as of the Grant Date.

(b) Any shares of Stock, including shares of Stock acquired through dividend reinvestment pursuant to Section 10.4, that are subject to an Award other than an Award of Options or SARs

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shall be counted against the share issuance limit set forth in Section 4.1 as one and 84/100 (1.84) shares for every one (1) share of Stock subject to such Award. Any shares of Stock that are subject to an Award of Options shall be counted against the share issuance limit set forth in Section 4.1 as one (1) share of Stock for every one (1) share of Stock subject to such Award.  The number of shares of Stock subject to an Award of SARs shall be counted against the share issuance limit set forth in Section 4.1 as one (1) share of Stock for every one (1) share of Stock subject to such Award regardless of the number of shares of Stock actually issued to settle such SARs upon the exercise thereof.  The target number of shares issuable under a Performance Share grant shall be counted against the share issuance limit set forth in Section 4.1 as of the Grant Date, but such number shall be adjusted to equal the actual number of shares issued upon settlement of the Performance Shares to the extent different from such target number of shares.

(c) Notwithstanding anything to the contrary in Section 4.1, any shares of Stock related to Awards under the Plan or the Prior Plan which thereafter terminate by expiration, forfeiture, cancellation, or otherwise without the issuance of such shares shall be available again for issuance under the Plan in the same amount as such shares were counted against the limit set forth in Section 4.1, provided that any shares covered by an award granted under a Prior Plan will again be available for making Awards under the Plan in the same ratio as Awards under Section 4.1.  Shares of Stock tendered or withheld or subject to an Award other than an Option or SAR surrendered in connection with the purchase of shares of Stock or deducted or delivered from payment of an Award other than Option or SAR in connection with the Company’s tax withholding obligations as provided in Section 18.3 shall be available again for issuance under the Plan in the same amount as such shares were counted against the limit set forth in Section 4.1, provided that any shares covered by an award granted under a Prior Plan will again be available for making Awards under the Plan in the same ratio as Awards under Section 4.1

(d) The number of shares of Stock available for issuance under the Plan shall not be increased by the number of shares of Stock (i) tendered or withheld or subject to an Award surrendered in connection with the purchase of shares of Stock upon exercise of an Option as provided in Section 12.2, (ii) deducted or delivered from payment of an Award in connection with the Company’s tax withholding obligations as provided in Section 18.3 or (iii) purchased by the Company with proceeds from Option exercises.

5.EFFECTIVE DATE; TERM; AMENDMENT AND TERMINATION

5.1Effective Date.

The Plan shall be effective as of the Effective Date, subject to approval of the Plan by the Company’s shareholders within one year of the Effective Date.  Upon approval of the Plan by the shareholders of the Company as set forth above, all Awards made under the Plan on or after the Effective Date shall be fully effective as if the shareholders of the Company had approved the Plan on the Effective Date.  If the shareholders fail to approve the Plan within one year of the Effective Date, any Awards made hereunder shall be null and void and of no effect.  Following shareholder approval of the Plan, no awards shall be made under the Prior Plan. Notwithstanding the foregoing, shares of Stock reserved under the Prior Plan to settle awards, including

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performance-based awards, which are made under the Prior Plan prior to the Effective Date may be issued and delivered following the Effective Date to settle such awards.

5.2Term.

The Plan shall terminate automatically ten (10) years after the Effective Date and may be terminated on any earlier date as provided in Section 5.3.

5.3Amendment and Termination.

The Board may, at any time and from time to time, amend, suspend or terminate the Plan as to any shares of Stock as to which Awards have not been made. The effectiveness of any amendment to the Plan shall be contingent on approval of such amendment by the Company’s shareholders to the extent provided by the Board or required by Applicable Laws (including the rules of any Stock Exchange on which the Stock is then listed), provided that no amendment shall be made to the no-repricing provisions of Section 3.4 or the Option pricing provisions of Section 8.1 without the approval of the Company’s shareholders. No amendment, suspension or termination of the Plan shall impair rights or obligations under any Award theretofore made under the Plan without the consent of the Grantee thereof.

6.AWARD ELIGIBILITY AND LIMITATIONS

6.1Eligible Grantees.

Subject to this Section 6, Awards may be made under the Plan to (i) any Service Provider, as the Committee shall determine and designate from time to time and (ii) any other individual whose participation in the Plan is determined to be in the best interests of the Company by the Committee.

6.2Limitation on Shares of Stock Subject to Awards and Cash Awards.

During any time when the Company has a class of equity security registered under Section 12 of the Exchange Act:

(a) the maximum number of shares of Stock subject to Options or SARs that may be granted under the Plan in a calendar year to any person eligible for an Award under Section 6 is four hundred thousand (400,000) shares;

(b) the maximum number of shares of Stock that may be granted under the Plan, other than pursuant to Options or SARs, in a calendar year to any person eligible for an Award under Section 6 is two hundred thousand (200,000) shares; and

(c) the maximum amount that may be paid as a cash-settled Performance-Based Award for a Performance Period of twelve (12) months or less to any person eligible for an Award shall be three million dollars ($3,000,000) and the maximum amount that may be paid as a cash-settled Performance-Based Award for a Performance Period of greater than twelve (12) months to any person eligible for an Award shall be six million dollars ($6,000,000).

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The preceding limitations in this Section 6.2 are subject to adjustment as provided in Section 17.

6.3Stand-Alone, Additional, Tandem and Substitute Awards.

Subject to Section 3.4, Awards granted under the Plan may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with, or in substitution or exchange for, (a) any other Award, (b) any award granted under another plan of the Company, an Affiliate, or any business entity that has been a party to a transaction with the Company or an Affiliate, or (c) any other right of a Grantee to receive payment from the Company or an Affiliate. Such additional, tandem and substitute or exchange Awards may be granted at any time. If an Award is granted in substitution or exchange for another Award, or for an award granted under another plan of the Company, an Affiliate, or any business entity that has been a party to a transaction with the Company or an Affiliate, the Committee shall require the surrender of such other Award or award under such other plan in consideration for the grant of such substitute or exchange Award. In addition, Awards may be granted in lieu of cash compensation, including in lieu of cash payments under other plans of the Company or an Affiliate. Notwithstanding Section 8.1 and Section 9.1, but subject to Section 3.4, the Option Price of an Option or the SAR Price of a SAR that is a Substitute Award may be less than one hundred percent (100%) of the Fair Market Value of a share of Stock on the original Grant Date; provided that such Option Price or SAR Price is determined in accordance with the principles of Code Section 424 for any Incentive Stock Option and consistent with Code Section 409A for any other Option or SAR.

7.AWARD AGREEMENT

Each Award granted pursuant to the Plan shall be evidenced by an Award Agreement, which shall be in such form or forms as the Committee shall from time to time determine. Award Agreements employed under the Plan from time to time or at the same time need not contain similar provisions, but shall be consistent with the terms of the Plan. Each Award Agreement evidencing an Award of Options shall specify whether such Options are intended to be Non-qualified Stock Options or Incentive Stock Options, and, in the absence of such specification, such Options shall be deemed to constitute Non-qualified Stock Options.

8.TERMS AND CONDITIONS OF OPTIONS

8.1Option Price.

The Option Price of each Option shall be fixed by the Committee and stated in the Award Agreement evidencing such Option. Except in the case of Substitute Awards, the Option Price of each Option shall be at least the Fair Market Value of one (1) share of Stock on the Grant Date; provided that in the event that a Grantee is a Ten Percent Shareholder, the Option Price of an Option granted to such Grantee that is intended to be an Incentive Stock Option shall be not less than one hundred ten percent (110%) of the Fair Market Value of one (1) share of Stock on the Grant Date. In no case shall the Option Price of any Option be less than the par value of a share of Stock.

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8.2Vesting.

Subject to Sections 8.3 and 17.3, each Option granted under the Plan shall become exercisable at such times and under such conditions as shall be determined by the Committee and stated in the Award Agreement, in another agreement with the Grantee or otherwise in writing, provided that no Option shall be granted to persons who are entitled to overtime under applicable state or federal laws, that will vest or be exercisable within a six-month period starting on the Grant Date.

8.3Term.

Each Option granted under the Plan shall terminate, and all rights to purchase shares of Stock thereunder shall cease, upon the expiration of ten (10) years from the Grant Date of such Option, or under such circumstances and on such date prior thereto as is set forth in the Plan or as may be fixed by the Committee and stated in the Award Agreement relating to such Option; provided that in the event that the Grantee is a Ten Percent Shareholder, an Option granted to such Grantee that is intended to be an Incentive Stock Option shall not be exercisable after the expiration of five (5) years from its Grant Date; and provided, further, that, to the extent deemed necessary or appropriate by the Committee to reflect differences in local law, tax policy, or custom with respect to any Option granted to a Grantee who is a foreign national or is a natural person who is employed outside the United States, such Option may terminate, and all rights to purchase shares of Stock thereunder may cease, upon the expiration of such period longer than ten (10) years from the Grant Date of such Option as the Committee shall determine.

8.4Termination of Service.

Each Award Agreement with respect to the grant of an Option shall set forth the extent to which the Grantee thereof, if at all, shall have the right to exercise such Option following termination of such Grantee’s Service. Such provisions shall be determined in the sole discretion of the Committee, need not be uniform among all Options issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination of Service.

8.5Limitations on Exercise of Option.

Notwithstanding any other provision of the Plan, in no event may any Option be exercised, in whole or in part, prior to the date the Plan is approved by the shareholders of the Company as provided herein or after the occurrence of an event referred to in Section 17 which results in the termination of such Option.

8.6Method of Exercise.

Subject to the terms of Section 12 and Section 18.3, an Option that is exercisable may be exercised by the Grantee’s delivery to the Company or its designee or agent of notice of exercise on any business day, at the Company’s principal office or the office of such designee or agent, on

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the form specified by the Company and in accordance with any additional procedures specified by the Committee. Such notice shall specify the number of shares of Stock with respect to which such Option is being exercised and shall be accompanied by payment in full of the Option Price of the shares of Stock for which such Option is being exercised plus the amount (if any) of federal and/or other taxes which the Company may, in its judgment, be required to withhold with respect to the exercise of such Option.

8.7Rights of Holders of Options.

Unless otherwise stated in the applicable Award Agreement, a Grantee or other person holding or exercising an Option shall have none of the rights of a shareholder of the Company (for example, the right to receive cash or dividend payments or distributions attributable to the shares of Stock subject to such Option, to direct the voting of the shares of Stock subject to such Option, or to receive notice of any meeting of the Company’s shareholders) until the shares of Stock subject thereto are fully paid and issued to such Grantee or other person. Except as provided in Section 17, no adjustment shall be made for dividends, distributions or other rights with respect to any shares of Stock subject to an Option for which the record date is prior to the date of issuance of such shares of Stock.

8.8Delivery of Stock.

Promptly after the exercise of an Option by a Grantee and the payment in full of the Option Price with respect thereto, such Grantee shall be entitled to receive such evidence of such Grantee’s ownership of the shares of Stock subject to such Option as shall be consistent with Section 3.7.

8.9Transferability of Options.

Except as provided in Section 8.10, during the lifetime of a Grantee of an Option, only such Grantee (or, in the event of such Grantee’s legal incapacity or incompetency, such Grantee’s guardian or legal representative) may exercise such Option. Except as provided in Section 8.10, no Option shall be assignable or transferable by the Grantee to whom it is granted, other than by will or the laws of descent and distribution.

8.10Family Transfers.

If authorized in the applicable Award Agreement and by the Committee, in its sole discretion, a Grantee may transfer, not for value, all or part of an Option which is not an Incentive Stock Option to any Family Member. For the purpose of this Section 8.10, a transfer “not for value” is a transfer which is (a) a gift, (b) a transfer under a domestic relations order in settlement of marital property rights or (c) unless Applicable Laws do not permit such transfer, a transfer to an entity in which more than fifty percent (50%) of the voting interests are owned by Family Members (and/or the Grantee) in exchange for an interest in such entity. Following a transfer under this Section 8.10, any such Option shall continue to be subject to the same terms and conditions as were applicable immediately prior to such transfer, and the shares of Stock

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acquired pursuant to such Option shall be subject to the same restrictions with respect to transfers of such shares of Stock as would have applied to the Grantee thereof. Subsequent transfers of transferred Options shall be prohibited except to Family Members of the original Grantee in accordance with this Section 8.10 or by will or the laws of descent and distribution. The provisions of Section 8.4 relating to termination of Service shall continue to be applied with respect to the original Grantee of the Option, following which such Option shall be exercisable by the transferee only to the extent, and for the periods specified, in Section 8.4.

8.11Limitations on Incentive Stock Options.

An Option shall constitute an Incentive Stock Option only (a) if the Grantee of such Option is an Employee of the Company or any corporate Subsidiary, (b) to the extent specifically provided in the related Award Agreement and (c) to the extent that the aggregate Fair Market Value (determined at the time such Option is granted) of the shares of Stock with respect to which all Incentive Stock Options held by such Grantee become exercisable for the first time during any calendar year (under the Plan and all other plans of the Company and its Affiliates) does not exceed one hundred thousand dollars ($100,000). Except to the extent provided in the regulations under Code Section 422, this limitation shall be applied by taking Options into account in the order in which they were granted.

8.12Notice of Disqualifying Disposition.

If any Grantee shall make any disposition of shares of Stock issued pursuant to the exercise of an Incentive Stock Option under the circumstances provided in Code Section 421(b) (relating to certain disqualifying dispositions), such Grantee shall notify the Company of such disposition within ten (10) days thereof.

9.TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS

9.1Right to Payment and Grant Price.

A SAR shall confer on the Grantee to whom it is granted a right to receive, upon exercise thereof, the excess of (x) the Fair Market Value of one (1) share of Stock on the date of exercise over (y) the per share exercise price of such SAR (the “SAR Price”) as determined by the Committee. The Award Agreement for a SAR shall specify the SAR Price, which shall be no less than the Fair Market Value of one (1) share of Stock on the Grant Date of such SAR. SARs may be granted in tandem with all or part of an Option granted under the Plan or at any subsequent time during the term of such Option, in combination with all or any part of any other Award or without regard to any Option or other Award; provided that a SAR that is granted subsequent to the Grant Date of a related Option must have a SAR Price that is no less than the Fair Market Value of one (1) share of Stock on the Grant Date of such SAR.

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9.2Other Terms.

The Committee shall determine, on the Grant Date or thereafter, the time or times at which and the circumstances under which a SAR may be exercised in whole or in part (including based on achievement of performance goals and/or future Service requirements), the time or times at which SARs shall cease to be or become exercisable following termination of Service or upon other conditions, the method of exercise, method of settlement, form of consideration payable in settlement, method by or forms in which shares of Stock shall be delivered or deemed to be delivered to Grantees, whether or not a SAR shall be granted in tandem or in combination with any other Award, and any and all other terms and conditions of any SAR.

9.3Term.

Each SAR granted under the Plan shall terminate, and all rights thereunder shall cease, upon the expiration of ten (10) years from the Grant Date of such SAR or under such circumstances and on such date prior thereto as is set forth in the Plan or as may be fixed by the Committee and stated in the Award Agreement relating to such SAR.

9.4Transferability of SARS.

Except as provided in Section 9.5, during the lifetime of a Grantee of a SAR, only the Grantee (or, in the event of such Grantee’s legal incapacity or incompetency, such Grantee’s guardian or legal representative) may exercise such SAR. Except as provided in Section 9.5, no SAR shall be assignable or transferable by the Grantee to whom it is granted, other than by will or the laws of descent and distribution.

9.5Family Transfers.

If authorized in the applicable Award Agreement and by the Committee, in its sole discretion, a Grantee may transfer, not for value, all or part of a SAR to any Family Member. For the purpose of this Section 9.5, a transfer “not for value” is a transfer which is (a) a gift, (b) a transfer under a domestic relations order in settlement of marital property rights or (c) unless Applicable Laws do not permit such transfer, a transfer to an entity in which more than fifty percent (50%) of the voting interests are owned by Family Members (and/or the Grantee) in exchange for an interest in such entity. Following a transfer under this Section 9.5, any such SAR shall continue to be subject to the same terms and conditions as were in effect immediately prior to such transfer, and shares of Stock acquired pursuant to a SAR shall be subject to the same restrictions on transfers of such shares of Stock as would have applied to the Grantee or such SAR. Subsequent transfers of transferred SARs shall be prohibited except to Family Members of the original Grantee in accordance with this Section 9.5 or by will or the laws of descent and distribution.

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10.TERMS AND CONDITIONS OF RESTRICTED STOCK AND STOCK UNITS

10.1Grant of Restricted Stock or Stock Units.

Awards of Restricted Stock and Stock Units may be made for consideration or for no consideration, other than the par value of the shares of Stock, which shall be deemed paid by past Service or, if so provided in the related Award Agreement or a separate agreement, the promise by the Grantee to perform future Service to the Company or an Affiliate.

10.2Restrictions.

At the time a grant of Restricted Stock or Stock Units is made, the Committee may, in its sole discretion, (a) establish a period of time (a “Restricted Period”) applicable to such Restricted Stock or Stock Units and (b) prescribe restrictions in addition to or other than the expiration of the Restricted Period, including the achievement of corporate or individual performance goals, which may be applicable to all or any portion of such Restricted Stock or Stock Units as provided in Section 14. Awards of Restricted Stock and Stock Units may not be sold, transferred, assigned, pledged or otherwise encumbered or disposed of during the Restricted Period or prior to the satisfaction of any other restrictions prescribed by the Committee with respect to such Awards.

10.3Registration; Restricted Share Certificates.

Pursuant to Section 3.7, to the extent that ownership of Restricted Stock is evidenced by a book-entry registration or direct registration (including transaction advices), such registration shall be notated to evidence the restrictions imposed on such Award of Restricted Stock under the Plan and the applicable Award Agreement. Subject to Section 3.7 and the immediately following sentence, the Company may issue, in the name of each Grantee to whom Restricted Stock has been granted, share certificates representing the total number of shares of Restricted Stock granted to the Grantee, as soon as reasonably practicable after the Grant Date of such Restricted Stock. The Committee may provide in an Award Agreement with respect to an Award of Restricted Stock that either (a) the Secretary of the Company shall hold such share certificates for such Grantee’s benefit until such time as such shares of Restricted Stock are forfeited to the Company or the restrictions applicable thereto lapse and such Grantee shall deliver a stock power to the Company with respect to each share certificate, or (b) such share certificates shall be delivered to such Grantee, provided that such share certificates shall bear legends that comply with applicable securities laws and regulations and make appropriate reference to the restrictions imposed on such Award of Restricted Stock under the Plan and such Award Agreement.

10.4Rights of Holders of Restricted Stock.

Unless the Committee otherwise provides in an Award Agreement, holders of Restricted Stock shall have the right to vote such shares of Restricted Stock and the right to receive any dividends declared or paid with respect to such shares of Restricted Stock. The Committee may provide that any dividends paid on Restricted Stock must be reinvested in shares of Stock, which may or may not be subject to the same vesting conditions and restrictions as the vesting conditions and restrictions applicable to such Restricted Stock. Dividends paid on Restricted

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Stock which vests or is earned based upon the achievement of performance goals shall not vest unless such performance goals for such Restricted Stock are achieved, and if such performance goals are not achieved, the Grantee of such Restricted Stock shall promptly forfeit and repay to the Company such dividend payments. All stock distributions, if any, received by a Grantee with respect to Restricted Stock as a result of any stock split, stock dividend, combination of stock, or other similar transaction shall be subject to the vesting conditions and restrictions applicable to such Restricted Stock.

10.5Rights of Holders of Stock Units.

10.5.1Voting and Dividend Rights.

Holders of Stock Units shall have no rights as shareholders of the Company (for example, the right to receive cash or dividend payments or distributions attributable to the shares of Stock subject to such Stock Units, to direct the voting of the shares of Stock subject to such Stock Units, or to receive notice of any meeting of the Company’s shareholders). The Committee may provide in an Award Agreement evidencing a grant of Stock Units that the holder of such Stock Units shall be entitled to receive, upon the Company’s payment of a cash dividend on its outstanding shares of Stock, a cash payment for each such Stock Unit which is equal to the per-share dividend paid on such shares of Stock. Dividends paid on Stock Units which vests or is earned based upon the achievement of performance goals shall not vest unless such performance goals for such Stock Units are achieved, and if such performance goals are not achieved, the Grantee of such Stock Units shall promptly forfeit and repay to the Company such dividend payments. Such Award Agreement also may provide that such cash payment shall be deemed reinvested in additional Stock Units at a price per unit equal to the Fair Market Value of a share of Stock on the date on which such cash dividend is paid. Such cash payments paid in connection with Stock Units which vest or are earned based upon the achievement of performance goals shall not vest unless such performance goals for such Stock Units are achieved, and if such performance goals are not achieved, the Grantee of such Stock Units shall promptly forfeit and repay to the Company such cash payments.

10.5.2Creditor’s Rights.

A holder of Stock Units shall have no rights other than those of a general unsecured creditor of the Company. Stock Units represent unfunded and unsecured obligations of the Company, subject to the terms and conditions of the applicable Award Agreement.

10.6Termination of Service.

Unless the Committee otherwise provides in an Award Agreement, in another agreement with the Grantee or otherwise in writing after such Award Agreement is entered into, but prior to termination of Grantee’s Service, upon the termination of such Grantee’s Service, any Restricted Stock or Stock Units held by such Grantee that have not vested, or with respect to which all applicable restrictions and conditions have not lapsed, shall immediately be deemed forfeited.

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Upon forfeiture of such Restricted Stock or Stock Units, the Grantee thereof shall have no further rights with respect thereto, including any right to vote such Restricted Stock or any right to receive dividends with respect to such Restricted Stock or Stock Units.

10.7Purchase of Restricted Stock and Shares of Stock Subject to Stock Units.

The Grantee of an Award of Restricted Stock or vested Stock Units shall be required, to the extent required by Applicable Laws, to purchase such Restricted Stock or the shares of Stock subject to such vested Stock Units from the Company at a purchase price equal to the greater of (x) the aggregate par value of the shares of Stock represented by such Restricted Stock or such vested Stock Units or (y) the purchase price, if any, specified in the Award Agreement relating to such Restricted Stock or such vested Stock Units. Such purchase price shall be payable in a form provided in Section 12 or, in the sole discretion of the Committee, in consideration for Service rendered or to be rendered to the Company or an Affiliate.

10.8Delivery of Shares of Stock.

Upon the expiration or termination of any Restricted Period and the satisfaction of any other conditions prescribed by the Committee, including but not limited to any delayed delivery period, the restrictions applicable to Restricted Stock or Stock Units settled in shares of Stock shall lapse, and, unless otherwise provided in the applicable Award Agreement, a book-entry or direct registration (including transaction advices) or a share certificate evidencing ownership of such shares of Stock shall, consistent with Section 3.7, be issued, free of all such restrictions, to the Grantee thereof or such Grantee’s beneficiary or estate, as the case may be. Neither the Grantee, nor the Grantee’s beneficiary or estate, shall have any further rights with regard to a Stock Unit once the shares of Stock represented by such Stock Unit have been delivered in accordance with this Section 10.8.

11.TERMS AND CONDITIONS OF UNRESTRICTED STOCK AWARDS AND OTHER EQUITY-BASED AWARDS

11.1Unrestricted Stock Awards.

The Committee may, in its sole discretion, grant (or sell at the par value of a share of Stock or at such other higher purchase price as shall be determined by the Committee) an Award to any Grantee pursuant to which such Grantee may receive shares of Stock free of any restrictions (“Unrestricted Stock”) under the Plan. Unrestricted Stock Awards may be granted or sold to any Grantee as provided in the immediately preceding sentence in respect of past Service or, if so provided in the related Award Agreement or a separate agreement, the promise by the Grantee to perform future Service, to the Company or an Affiliate or other valid consideration, or in lieu of, or in addition to, any cash compensation due to such Grantee.

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11.2Other Equity-Based Awards.

The Committee may, in its sole discretion, grant Awards in the form of Other Equity-Based Awards, as deemed by the Committee to be consistent with the purposes of the Plan. Awards granted pursuant to this Section 11.2 may be granted with vesting, value and/or payment contingent upon the achievement of one or more performance goals. The Committee shall determine the terms and conditions of Other Equity-Based Awards at the Grant Date or thereafter. Unless the Committee otherwise provides in an Award Agreement, in another agreement with the Grantee, or otherwise in writing after such Award Agreement is issued, upon the termination of a Grantee’s Service, any Other Equity-Based Awards held by such Grantee that have not vested, or with respect to which all applicable restrictions and conditions have not lapsed, shall immediately be deemed forfeited. Upon forfeiture of any Other Equity-Based Award, the Grantee thereof shall have no further rights with respect to such Other Equity-Based Award.

12.FORM OF PAYMENT FOR OPTIONS AND RESTRICTED STOCK

12.1General Rule.

Payment of the Option Price for the shares of Stock purchased pursuant to the exercise of an Option or the purchase price, if any, for Restricted Stock shall be made in cash or in cash equivalents acceptable to the Company.

12.2Surrender of Shares of Stock.

To the extent that the applicable Award Agreement so provides, payment of the Option Price for shares of Stock purchased pursuant to the exercise of an Option or the purchase price, if any, for Restricted Stock may be made all or in part through the tender or attestation to the Company of shares of Stock, which shall be valued, for purposes of determining the extent to which such Option Price or purchase price has been paid thereby, at their Fair Market Value on the date of such tender or attestation.

12.3Cashless Exercise.

To the extent permitted by Applicable Laws and to the extent the Award Agreement so provides, payment of the Option Price for shares of Stock purchased pursuant to the exercise of an Option may be made all or in part by delivery (on a form acceptable to the Committee) of an irrevocable direction to a licensed securities broker acceptable to the Company to sell shares of Stock and to deliver all or part of the proceeds of such sale to the Company in payment of such Option Price and any withholding taxes described in Section 18.3, or, with the consent of the Company, by issuing the number of shares of Stock equal in value to the difference between such Option Price and the Fair Market Value of the shares of Stock subject to the portion of such Option being exercised.

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12.4Other Forms of Payment.

To the extent the Award Agreement so provides and/or unless otherwise specified in an Award Agreement, payment of the Option Price for shares of Stock purchased pursuant to exercise of an Option or the purchase price, if any, for Restricted Stock may be made in any other form that is consistent with Applicable Laws, including (a) Service by the Grantee thereof to the Company or an Affiliate and (b) by withholding shares of Stock that would otherwise vest or be issuable in an amount equal to the Option Price or purchase price and the required tax withholding amount.

13.TERMS AND CONDITIONS OF DIVIDEND EQUIVALENT RIGHTS

13.1Dividend Equivalent Rights.

A Dividend Equivalent Right is an Award entitling the recipient thereof to receive credits based on cash distributions that would have been paid on the shares of Stock specified in such Dividend Equivalent Right (or other Award to which such Dividend Equivalent Right relates) if such shares of Stock had been issued to and held by the recipient of such Dividend Equivalent Right as of the record date. A Dividend Equivalent Right may be granted hereunder to any Grantee, provided that no Dividend Equivalent Rights may be granted in connection with, or related to, an Award of Options or SARs. The terms and conditions of Dividend Equivalent Rights shall be specified in the Award Agreement therefor. Dividend equivalents credited to the holder of a Dividend Equivalent Right may be paid currently (with or without being subject to forfeiture or a repayment obligation) or may be deemed to be reinvested in additional shares of Stock, which may thereafter accrue additional Dividend Equivalent Rights (with or without being subject to forfeiture or a repayment obligation). Any such reinvestment shall be at the Fair Market Value thereof on the date of such reinvestment. Dividend Equivalent Rights may be settled in cash or shares of Stock or a combination thereof, in a single installment or in multiple installments, all as determined in the sole discretion of the Committee. A Dividend Equivalent Right granted as a component of another Award may provide that such Dividend Equivalent Right shall be settled upon exercise, settlement, or payment of, or lapse of restrictions on, such other Award, and that such Dividend Equivalent Right shall expire or be forfeited or annulled under the same conditions as such other Award. A Dividend Equivalent Right granted as a component of another Award also may contain terms and conditions which are different from the terms and conditions of such other Award, provided that Dividend Equivalent Rights credited pursuant to a Dividend Equivalent Right granted as a component of another Award which vests or is earned based upon the achievement of performance goals shall not vest unless such performance goals for such underlying Award are achieved, and if such performance goals are not achieved, the Grantee of such Dividend Equivalent Rights shall promptly forfeit and repay to the Company payments made in connection with such Dividend Equivalent Rights.

13.2Termination of Service.

Unless the Committee otherwise provides in an Award Agreement, in another agreement with the Grantee, or otherwise in writing after such Award Agreement is issued, a Grantee’s

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rights in all Dividend Equivalent Rights shall automatically terminate upon such Grantee’s termination of Service for any reason.

14.TERMS AND CONDITIONS OF PERFORMANCE-BASED AWARDS

14.1Grant of Performance-Based Awards.

Subject to the terms and provisions of the Plan, the Committee, at any time and from time to time, may grant Performance-Based Awards to a Plan participant in such amounts and upon such terms as the Committee shall determine.

14.2Value of Performance-Based Awards.

Each grant of a Performance-Based Award shall have an actual or target number of shares of Stock or initial value that is established by the Committee at the time of grant. The Committee shall set performance goals in its discretion which, depending on the extent to which they are achieved, shall determine the value and/or number of shares of Stock subject to a Performance-Based Award that will be paid out to the Grantee thereof.

14.3Earning of Performance-Based Awards.

Subject to the terms of the Plan, in particular Section 14.6.3, after the applicable Performance Period has ended, the Grantee of Performance-Based Awards shall be entitled to receive a payout on the number of the Performance-Based Awards or value earned by such Grantee over such Performance Period.

14.4Form and Timing of Payment of Performance-Based Awards.

Payment of earned Performance-Based Awards shall be made in the manner described in the applicable Award Agreement as determined by the Committee. Subject to the terms of the Plan, the Committee, in its sole discretion, may pay earned Performance-Based Awards in the form of cash or shares of Stock (or a combination thereof) equal to the value of such earned Performance-Based Awards and shall pay the Awards that have been earned at the close of the applicable Performance Period, or as soon as reasonably practicable after the Committee has determined that the performance goal or goals relating thereto have been achieved; provided that, unless specifically provided in the Award Agreement for such Awards, such payment shall occur no later than the 15th day of the third month following the end of the calendar year in which such Performance Period ends. Any shares of Stock paid out under such Performance-Based Awards may be granted subject to any restrictions deemed appropriate by the Committee. The determination of the Committee with respect to the form of payout of such Performance-Based Awards shall be set forth in the Award Agreement therefor.

14.5Performance Conditions.

The right of a Grantee to exercise or receive a grant or settlement of any Performance-Based Award, and the timing thereof, may be subject to such performance conditions as may be

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specified by the Committee. The Committee may use such business criteria and other measures of performance as it may deem appropriate in establishing any performance conditions. If and to the extent required under Code Section 162(m), any power or authority relating to an Award intended to qualify under Code Section 162(m) shall be exercised by the Committee and not by the Board.

14.6Performance-Based Awards Granted to Designated Covered Employees.

If and to the extent that the Committee determines that a Performance-Based Award to be granted to a Grantee should constitute “qualified performance-based compensation” for purposes of Code Section 162(m), the grant, exercise and/or settlement of such Award shall be contingent upon achievement of pre-established performance goals and other terms set forth in this Section 14.6.

14.6.1Performance Goals Generally.

The performance goals for Performance-Based Awards shall consist of one or more business criteria and a targeted level or levels of performance with respect to each of such criteria, as specified by the Committee consistent with this Section 14.6. Performance goals shall be objective and shall otherwise meet the requirements of Code Section 162(m), including the requirement that the level or levels of performance targeted by the Committee result in the achievement of performance goals being “substantially uncertain.” The Committee may determine that such Awards shall be granted, exercised and/or settled upon achievement of any single performance goal or of two (2) or more performance goals. Performance goals may differ for Awards granted to any one Grantee or to different Grantees.

14.6.2Timing For Establishing Performance Goals.

Performance goals for any Performance-Based Award shall be established not later than the earlier of (a) 90 days after the beginning of any Performance Period applicable to such Award, and (b) the date on which twenty-five percent (25%) of any Performance Period applicable to such Award has expired, or at such other date as may be required or permitted for compensation payable to a Covered Employee to constitute Performance-Based Compensation.

14.6.3Payment of Awards; Other Terms.

Payment of Performance-Based Awards shall be in cash, shares of Stock, or other Awards, including an Award that is subject to additional Service-based vesting, as determined in the sole discretion of the Committee. The Committee may, in its sole discretion, reduce the amount of a payment otherwise to be made in connection with such Awards. The Committee shall specify the circumstances in which such Performance-Based Awards shall be paid or forfeited in the event of termination of Service by the Grantee prior to the end of a Performance Period or settlement of such Awards.  In the event payment of the Performance-Based Award is made in the form of another Award subject to Service-based vesting, the Committee shall specify the circumstances in which the payment Award will be paid or forfeited in the event of a termination of Service.

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14.6.4Performance Measures.

The performance goals upon which the payment or vesting of a Performance-Based Award to a Covered Employee that is intended to qualify as Performance-Based Compensation may be conditioned shall be limited to the following Performance Measures, with or without adjustment:

(a) net earnings or net income;

(b) operating earnings;

(c) pretax earnings;

(d) earnings per share;

(e) share price, including growth measures and total shareholder return;

(f) earnings before interest and taxes;

(g) earnings before interest, taxes, depreciation and/or amortization;

(h) earnings before interest, taxes, depreciation and/or amortization as adjusted to exclude any one or more of the following:

·stock-based compensation expense;

·income from discontinued operations;

·gain on cancellation of debt;

·debt extinguishment and related costs;

·restructuring, separation and/or integration charges and costs;

·reorganization and/or recapitalization charges and costs;

·impairment charges;

·gain or loss related to investments;

·sales and use tax settlement; and

·gain on non-monetary transaction.

(i) sales or revenue growth, whether in general, by type of product or service, or by type of customer;

(j) gross or operating margins;

(k) return measures, including return on assets, capital, investment, equity, sales or revenue;

(l) cash flow, including:

·operating cash flow;

·free cash flow, defined as earnings before interest, taxes, depreciation and/or amortization (as adjusted to exclude any one or more of the items that may be

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excluded pursuant to the Performance Measure specified in clause (h) above) less capital expenditures;

·levered free cash flow, defined as free cash flow less interest expense;

·cash flow return on equity; and

·cash flow return on investment;

(m) productivity ratios;

(n) expense targets;

(o) market share;

(p) financial ratios as provided in credit agreements of the Company and its Subsidiaries;

(q) working capital targets;

(r) completion of acquisitions of businesses or companies;

(s) completion of divestitures and asset sales; or

(t) any combination of the foregoing business criteria.

Performance under any of the foregoing Performance Measures (a) may be used to measure the performance of (i) the Company and its Subsidiaries and other Affiliates as a whole, (ii) the Company, any Subsidiary, and/or any other Affiliate or any combination thereof, or (iii) any one or more business units of the Company, any Subsidiary, and/or any other Affiliate, as the Committee, in its sole discretion, deems appropriate and (b) may be compared to the performance of one or more other companies or one or more published or special indices designated or approved by the Committee for such comparison, as the Committee, in its sole discretion, deems appropriate. In addition, the Committee, in its sole discretion, may select performance under the Performance Measure specified in clause (e) above for comparison to performance under one or more stock market indices designated or approved by the Committee. The Committee also shall have the authority to provide for accelerated vesting of any Performance-Based Award based on the achievement of performance goals pursuant to the Performance Measures specified in this Section 14.

14.6.5Evaluation of Performance.

The Committee may provide in any Performance-Based Award that any evaluation of performance may include or exclude any of the following events that occur during a Performance Period: (a) asset write-downs; (b) litigation or claims, judgments or settlements; (c) the effect of changes in tax laws, accounting principles or other laws or provisions affecting reported results; (d) any reorganization or restructuring events or programs; (e) extraordinary, non-core, non-operating or non-recurring items; (f) acquisitions or divestitures; and (g) foreign exchange gains and losses. To the extent such inclusions or exclusions affect Awards to Covered Employees that

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are intended to qualify as Performance-Based Compensation, such inclusions or exclusions shall be prescribed in a form that meets the requirements of Code Section 162(m) for deductibility.

14.6.6Adjustment of Performance-Based Compensation.

The Committee shall have the sole discretion to adjust Awards that are intended to qualify as Performance-Based Compensation, either on a formula or discretionary basis, or on any combination thereof, as the Committee determines consistent with the requirements of Code Section 162(m) for deductibility.

14.6.7Committee Discretion.

In the event that Applicable Laws change to permit Committee discretion to alter the governing Performance Measures without obtaining shareholder approval of such changes, the Committee shall have sole discretion to make such changes without obtaining shareholder approval, provided that the exercise of such discretion shall not be inconsistent with the requirements of Code Section 162(m). In addition, in the event that the Committee determines that it is advisable to grant Awards that shall not qualify as Performance-Based Compensation, the Committee may make such grants without satisfying the requirements of Code Section 162(m) and base vesting on Performance Measures other than those set forth in Section 14.6.4.

14.7Status of Awards Under Code Section 162(m).

It is the intent of the Company that Performance-Based Awards under Section 14.6 granted to persons who are designated by the Committee as likely to be Covered Employees within the meaning of Code Section 162(m) and the regulations promulgated thereunder shall, if so designated by the Committee, constitute “qualified performance-based compensation” within the meaning of Code Section 162(m). Accordingly, the terms of Section 14.6, including the definitions of Covered Employee and other terms used therein, shall be interpreted in a manner consistent with Code Section 162(m). If any provision of the Plan or any agreement relating to any such Performance-Based Award does not comply or is inconsistent with the requirements of Code Section 162(m), such provision shall be construed or deemed amended to the extent necessary to conform to such requirements.

15.PARACHUTE LIMITATIONS

If any Grantee is a “disqualified individual,” as defined in Code Section 280G(c), then, notwithstanding any other provision of the Plan or of any other agreement, contract, or understanding heretofore or hereafter entered into by such Grantee with the Company or an Affiliate, except an agreement, contract, or understanding that expressly addresses Code Section 280G or Code Section 4999 (an “Other Agreement”), and notwithstanding any formal or informal plan or other arrangement for the direct or indirect provision of compensation to the Grantee (including groups or classes of Grantees or beneficiaries of which the Grantee is a member), whether or not such compensation is deferred, is in cash, or is in the form of a benefit

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to or for the Grantee (a “Benefit Arrangement”), any right of the Grantee to any exercise, vesting, payment, or benefit under the Plan shall be reduced or eliminated:

(a) to the extent that such right to exercise, vesting, payment, or benefit, taking into account all other rights, payments, or benefits to or for the Grantee under the Plan, all Other Agreements, and all Benefit Arrangements, would cause any exercise, vesting, payment, or benefit to the Grantee under the Plan to be considered a “parachute payment” within the meaning of Code Section 280G(b)(2) as then in effect (a “Parachute Payment”); and

(b) if, as a result of receiving such Parachute Payment, the aggregate after-tax amounts received by the Grantee from the Company under the Plan, all Other Agreements, and all Benefit Arrangements would be less than the maximum after-tax amount that could be received by the Grantee without causing any such payment or benefit to be considered a Parachute Payment.

The Company shall accomplish such reduction by first reducing or eliminating any cash payments (with the payments to be made furthest in the future being reduced first), then by reducing or eliminating any accelerated vesting of Performance-Based Awards, then by reducing or eliminating any accelerated vesting of Options or SARs, then by reducing or eliminating any accelerated vesting of Restricted Stock or Stock Units, then by reducing or eliminating any other remaining Parachute Payments.

16.REQUIREMENTS OF LAW

16.1General.

The Company shall not be required to offer, sell or issue any shares of Stock under any Award, whether pursuant to the exercise of an Option or SAR or otherwise, if the offer, sale or issuance of such shares of Stock would constitute a violation by the Grantee, the Company or an Affiliate, or any other person, of any provision of Applicable Laws, including any federal or state securities laws or regulations. If at any time the Company shall determine, in its discretion, that the listing, registration or qualification of any shares of Stock subject to an Award on any Stock Exchange or under any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the offering, issuance, sale or purchase of shares of Stock in connection with any Award, no shares of Stock may be offered, issued or sold to the Grantee or any other person under such Award, whether pursuant to the exercise of an Option or SAR or otherwise, unless such listing, registration or qualification shall have been effected or obtained free of any conditions not acceptable to the Company, and any delay caused thereby shall in no way affect the date of termination of such Award. Without limiting the generality of the foregoing, upon the exercise of any Option or any SAR that may be settled in shares of Stock or the delivery of any shares of Stock underlying an Award, unless a registration statement under the Securities Act is in effect with respect to the shares of Stock subject to such Award, the Company shall not be required to offer, sell or issue such shares of Stock unless the Committee shall have received evidence satisfactory to it that the Grantee or any other person exercising such Option or SAR or accepting delivery of such shares may acquire such shares of Stock pursuant to an exemption from registration under the Securities Act. Any determination in this connection by the Committee shall be final, binding, and conclusive. The Company may register, but shall in no

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event be obligated to register, any shares of Stock or other securities issuable pursuant to the Plan pursuant to the Securities Act. The Company shall not be obligated to take any affirmative action in order to cause the exercise of an Option or a SAR or the issuance of shares of Stock or other securities issuable pursuant to the Plan or any Award to comply with any Applicable Laws. As to any jurisdiction that expressly imposes the requirement that an Option or SAR that may be settled in shares of Stock shall not be exercisable until the shares of Stock subject to such Option or SAR are registered under the securities laws thereof or are exempt from such registration, the exercise of such Option or SAR under circumstances in which the laws of such jurisdiction apply shall be deemed conditioned upon the effectiveness of such registration or the availability of such an exemption.

16.2Rule 16b-3.

During any time when the Company has a class of equity security registered under Section 12 of the Exchange Act, it is the intention of the Company that Awards pursuant to the Plan and the exercise of Options and SARs granted hereunder that would otherwise be subject to Section 16(b) of the Exchange Act shall qualify for the exemption provided by Rule 16b-3 under the Exchange Act. To the extent that any provision of the Plan or action by the Committee does not comply with the requirements of such Rule 16b-3, such provision or action shall be deemed inoperative with respect to such Awards to the extent permitted by Applicable Laws and deemed advisable by the Committee, and shall not affect the validity of the Plan. In the event that such Rule 16b-3 is revised or replaced, the Board may exercise its discretion to modify the Plan in any respect necessary or advisable in its judgment to satisfy the requirements of, or to permit the Company to avail itself of the benefits of, the revised exemption or its replacement.

17.EFFECT OF CHANGES IN CAPITALIZATION

17.1Changes in Stock.

If the number of outstanding shares of Stock is increased or decreased or the shares of Stock are changed into or exchanged for a different number of shares or kind of capital stock or other securities of the Company on account of any recapitalization, reclassification, stock split, reverse stock split, spin-off, combination of stock, exchange of stock, stock dividend or other distribution payable in capital stock, or other increase or decrease in shares of Stock effected without receipt of consideration by the Company occurring after the Effective Date, the number and kinds of shares of stock for which grants of Options and other Awards may be made under the Plan, including the share limits set forth in Section 6.2, shall be adjusted proportionately and accordingly by the Committee. In addition, the number and kind of shares of stock for which Awards are outstanding shall be adjusted proportionately and accordingly by the Committee so that the proportionate interest of the Grantee therein immediately following such event shall, to the extent practicable, be the same as immediately before such event. Any such adjustment in outstanding Options or SARs shall not change the aggregate Option Price or SAR Price payable with respect to shares that are subject to the unexercised portion of such outstanding Options or SARs, as applicable, but shall include a corresponding proportionate adjustment in the per share Option Price or SAR Price, as the case may be. The conversion of any convertible securities of

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the Company shall not be treated as an increase in shares effected without receipt of consideration. Notwithstanding the foregoing, in the event of any distribution to the Company’s shareholders of securities of any other entity or other assets (including an extraordinary dividend, but excluding a non-extraordinary dividend, declared and paid by the Company) without receipt of consideration by the Company, the Board or the Committee constituted pursuant to Section 3.1.2 shall, in such manner as the Board or the Committee deems appropriate, adjust (a) the number and kind of shares of stock subject to outstanding Awards and/or (b) the aggregate and per share Option Price of outstanding Options and the aggregate and per share SAR Price of outstanding SARs as required to reflect such distribution.

17.2Reorganization in Which the Company Is the Surviving Entity Which Does not Constitute a Change in Control.

Subject to Section 17.3, if the Company shall be the surviving entity in any reorganization, merger or consolidation of the Company with one or more other entities which does not constitute a Change in Control, any Option or SAR theretofore granted pursuant to the Plan shall pertain to and apply to the securities to which a holder of the number of shares of Stock subject to such Option or SAR would have been entitled immediately following such reorganization, merger or consolidation, with a corresponding proportionate adjustment of the per share Option Price or SAR Price so that the aggregate Option Price or SAR Price thereafter shall be the same as the aggregate Option Price or SAR Price of the shares of Stock remaining subject to the Option or SAR as in effect immediately prior to such reorganization, merger, or consolidation. Subject to any contrary language in an Award Agreement or in another agreement with the Grantee, or otherwise set forth in writing, any restrictions applicable to such Award shall apply as well to any replacement shares received by the Grantee as a result of such reorganization, merger or consolidation. In the event of any reorganization, merger or consolidation of the Company referred to in this Section 17.2, Performance-Based Awards shall be adjusted (including any adjustment to the Performance Measures applicable to such Awards deemed appropriate by the Committee) so as to apply to the securities that a holder of the number of shares of Stock subject to the Performance-Based Awards would have been entitled to receive immediately following such reorganization, merger or consolidation.

17.3Change in Control in which Awards are not Assumed.

Except as otherwise provided in the applicable Award Agreement or in another agreement with the Grantee, or as otherwise set forth in writing, upon the occurrence of a Change in Control in which outstanding Options, SARs, Restricted Stock, Stock Units, Dividend Equivalent Rights or Other Equity-Based Awards are not being assumed or continued, the following provisions shall apply to such Award, to the extent not assumed or continued:

(a) in each case with the exception of Performance-Based Awards, all outstanding Restricted Stock shall be deemed to have vested, all Stock Units shall be deemed to have vested and the shares of Stock subject thereto shall be delivered, and all Dividend Equivalent Rights shall be deemed to have vested and the shares of Stock subject thereto shall be delivered,

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immediately prior to the occurrence of such Change in Control, and either of the following two actions shall be taken:

(i) fifteen (15) days prior to the scheduled consummation of such Change in Control, all Options and SARs outstanding hereunder shall become immediately exercisable and shall remain exercisable for a period of fifteen (15) days, which exercise shall be effective upon such consummation; or

(ii) the Committee may elect, in its sole discretion, to cancel any outstanding Awards of Options, SARs, Restricted Stock, Stock Units and/or Dividend Equivalent Rights and pay or deliver, or cause to be paid or delivered, to the holder thereof an amount in cash or securities having a value (as determined by the Committee acting in good faith), in the case of Restricted Stock or Stock Units and Dividend Equivalent Rights (for shares of Stock subject thereto), equal to the formula or fixed price per share paid to holders of shares of Stock pursuant to such Change in Control and, in the case of Options or SARs, equal to the product of the number of shares of Stock subject to such Options or SARs (the “Award Stock”) multiplied by the amount, if any, by which (x) the formula or fixed price per share paid to holders of shares of Stock pursuant to such transaction exceeds (y) the Option Price or SAR Price applicable to such Award Stock.

(b) For Performance-Based Awards denominated in Stock, if less than half of the Performance Period has lapsed, such Awards shall be treated as though target performance has been achieved. If at least half the Performance Period has lapsed, actual performance to date shall be determined as of a date reasonably proximal to the date of consummation of the Change in Control as determined by the Committee in its sole discretion, and that level of performance thus determined shall be treated as achieved immediately prior to occurrence of the Change in Control. For purposes of the preceding sentence, if, based on the discretion of the Committee, actual performance is not determinable, the Awards shall be treated as though target performance has been achieved. After application of this Section 17.3(b), if any Awards arise from application of this Section 17, such Awards shall be settled under the applicable provision of Section 17.3(a).

(c) Other Equity-Based Awards shall be governed by the terms of the applicable Award Agreement.

With respect to the Company’s establishment of an exercise window, (A) any exercise of an Option or SAR during the fifteen (15)-day period referred to above shall be conditioned upon the consummation of the applicable Change in Control and shall be effective only immediately before the consummation thereof, and (B) upon consummation of any Change in Control, the Plan and all outstanding but unexercised Options and SARs shall terminate. The Committee shall send notice of an event that shall result in such a termination to all natural persons and entities who hold Options and SARs not later than the time at which the Company gives notice thereof to its shareholders.

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17.4Change in Control in which Awards are Assumed.

Except as otherwise provided in the applicable Award Agreement or in another agreement with the Grantee, or as otherwise set forth in writing, upon the occurrence of a Change in Control in which outstanding Options, SARs, Restricted Stock, Stock Units, Dividend Equivalent Rights or Other Equity-Based Awards are being assumed or continued, the following provisions shall apply to such Award, to the extent assumed or continued:

The Plan and the Options, SARs, Restricted Stock, Stock Units, Dividend Equivalent Rights and Other Equity-Based Awards granted under the Plan shall continue in the manner and under the terms so provided in the event of any Change in Control to the extent that provision is made in writing in connection with such Change in Control for the assumption or continuation of such Options, SARs, Restricted Stock, Stock Units, Dividend Equivalent Rights and Other Equity-Based Awards, or for the substitution for such Options, SARs, Restricted Stock, Stock Units, Dividend Equivalent Rights and Other Equity-Based Awards of new common stock options, stock appreciation rights, restricted stock, common stock units, dividend equivalent rights and other equity-based awards relating to the stock of a successor entity, or a parent or subsidiary thereof, with appropriate adjustments as to the number of shares (disregarding any consideration that is not common stock) and option and stock appreciation rights exercise prices. In the event an Award is assumed, continued or substituted upon the consummation of any Change in Control and the employment of such Grantee with the Company or an Affiliate is terminated without Cause within one year following the consummation of such Change in Control, such Award shall be fully vested and may be exercised in full, to the extent applicable, beginning on the date of such termination and for the one-year period immediately following such termination or for such longer period as the Committee shall determine.

17.5Adjustments

Adjustments under this Section 17 related to shares of Stock or other securities of the Company shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive. No fractional shares or other securities shall be issued pursuant to any such adjustment, and any fractions resulting from any such adjustment shall be eliminated in each case by rounding downward to the nearest whole share. The Committee may provide in the applicable Award Agreement at the time of grant, in another agreement with the Grantee, or otherwise in writing at any time thereafter with the consent of the Grantee, for different provisions to apply to an Award in place of those provided in Sections 17.1, 17.2, 17.3 and 17.4. This Section 17 shall not limit the Committee’s ability to provide for alternative treatment of Awards outstanding under the Plan in the event of a change in control event involving the Company that is not a Change in Control.

17.6No Limitations on Company.

The making of Awards pursuant to the Plan shall not affect or limit in any way the right or power of the Company to make adjustments, reclassifications, reorganizations, or changes of its capital or business structure or to merge, consolidate, dissolve, or liquidate, or to sell or transfer

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all or any part of its business or assets (including all or any part of the business or assets of any Subsidiary or other Affiliate) or engage in any other transaction or activity.

18.GENERAL PROVISIONS

18.1Disclaimer of Rights.

No provision in the Plan or in any Award or Award Agreement shall be construed to confer upon any individual the right to remain in the employ or Service of the Company or an Affiliate, or to interfere in any way with any contractual or other right or authority of the Company or an Affiliate either to increase or decrease the compensation or other payments to any natural person or entity at any time, or to terminate any employment or other relationship between any natural person or entity and the Company or an Affiliate. In addition, notwithstanding anything contained in the Plan to the contrary, unless otherwise stated in the applicable Award Agreement, in another agreement with the Grantee, or otherwise in writing, no Award granted under the Plan shall be affected by any change of duties or position of the Grantee thereof, so long as such Grantee continues to provide Service. The obligation of the Company to pay any benefits pursuant to the Plan shall be interpreted as a contractual obligation to pay only those amounts provided herein, in the manner and under the conditions prescribed herein. The Plan and Awards shall in no way be interpreted to require the Company to transfer any amounts to a third-party trustee or otherwise hold any amounts in trust or escrow for payment to any Grantee or beneficiary under the terms of the Plan.

18.2Nonexclusivity of the Plan.

Neither the adoption of the Plan nor the submission of the Plan to the shareholders of the Company for approval shall be construed as creating any limitations upon the right and authority of the Board to adopt such other incentive compensation arrangements (which arrangements may be applicable either generally to a class or classes of individuals or specifically to a particular individual or particular individuals) as the Board in its discretion determines desirable.

18.3Withholding Taxes.

The Company or an Affiliate, as the case may be, shall have the right to deduct from payments of any kind otherwise due to a Grantee any federal, state, or local taxes of any kind required by law to be withheld with respect to the vesting of or other lapse of restrictions applicable to an Award or upon the issuance of any shares of Stock upon the exercise of an Option or pursuant to any other Award. At the time of such vesting, lapse, or exercise, the Grantee shall pay in cash to the Company or an Affiliate, as the case may be, any amount that the Company or such Affiliate may reasonably determine to be necessary to satisfy such withholding obligation; provided that if there is a same-day sale of shares of Stock subject to an Award, the Grantee shall pay such withholding obligation on the day on which such same-day sale is completed. Subject to the prior approval of the Company or an Affiliate, which may be withheld by the Company or such Affiliate, as the case may be, in its sole discretion, the Grantee may elect

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to satisfy such withholding obligation, in whole or in part, (a) by causing the Company or such Affiliate to withhold shares of Stock otherwise issuable to the Grantee or (b) by delivering to the Company or such Affiliate shares of Stock already owned by the Grantee. The shares of Stock so withheld or delivered shall have an aggregate Fair Market Value equal to such withholding obligation. The Fair Market Value of the shares of Stock used to satisfy such withholding obligation shall be determined by the Company or such Affiliate as of the date on which the amount of tax to be withheld is to be determined. A Grantee who has made an election pursuant to this Section 18.3 may satisfy such Grantee’s withholding obligation only with shares of Stock that are not subject to any repurchase, forfeiture, unfulfilled vesting, or other similar requirements. The maximum number of shares of Stock that may be withheld from any Award to satisfy any federal, state or local tax withholding requirements upon the exercise, vesting, or lapse of restrictions applicable to any Award or payment of shares of Stock pursuant to such Award, as applicable, may not exceed such number of shares of Stock having a Fair Market Value equal to the minimum statutory amount required by the Company or the applicable Affiliate to be withheld and paid to any such federal, state or local taxing authority with respect to such exercise, vesting, lapse of restrictions, or payment of shares of Stock. Notwithstanding Section 2.20 or this Section 18.3, for purposes of determining taxable income and the amount of the related tax withholding obligation pursuant to this Section 18.3, for any shares of Stock subject to an Award that are sold by or on behalf of a Grantee on the same date on which such shares may first be sold pursuant to the terms of the related Award Agreement, the Fair Market Value of such shares shall be the sale price of such shares on such date (or if sales of such shares are effectuated at more than one sale price, the weighted average sale price of such shares on such date), so long as such Grantee has provided the Company, or its designee or agent, with advance written notice of such sale.  In such case, the percentage of shares of Stock withheld shall equal the applicable minimum withholding rate.

18.4Captions.

The use of captions in the Plan or any Award Agreement is for convenience of reference only and shall not affect the meaning of any provision of the Plan or such Award Agreement.

18.5Construction.

Unless the context otherwise requires, all references in the Plan to “including” shall mean “including without limitation.”

18.6Other Provisions.

Each Award granted under the Plan may contain such other terms and conditions not inconsistent with the Plan as may be determined by the Committee, in its sole discretion.

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18.7Number and Gender.

With respect to words used in the Plan, the singular form shall include the plural form and the masculine gender shall include the feminine gender, as the context requires.

18.8Severability.

If any provision of the Plan or any Award Agreement shall be determined to be illegal or unenforceable by any court of law in any jurisdiction, the remaining provisions hereof and thereof shall be severable and enforceable in accordance with their terms, and all provisions shall remain enforceable in any other jurisdiction.

18.9Governing Law.

The validity and construction of the Plan and the instruments evidencing the Awards hereunder shall be governed by, and construed and interpreted in accordance with, the laws of the State of Texas, other than any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of the Plan and the instruments evidencing the Awards granted hereunder to the substantive laws of any other jurisdiction.

18.10Section 409A of the Code.

The Company intends to comply with Code Section 409A, or an exemption to Code Section 409A, with regard to Awards hereunder that constitute nonqualified deferred compensation within the meaning of Code Section 409A. To the extent that the Company determines that a Grantee would be subject to the additional twenty percent (20%) tax imposed on certain nonqualified deferred compensation plans pursuant to Code Section 409A as a result of any provision of any Award granted under the Plan, such provision shall be deemed amended to the minimum extent necessary to avoid application of such additional tax. The nature of any such amendment shall be determined by the Committee.

*    *    *

To record adoption of the Plan by the Board as of April 13, 2012, and approval of the Plan by the shareholders on June 21, 2012, the Company has caused its authorized officer to execute the Plan.

ORTHOFIX INTERNATIONAL N.V.
By:	/s/ Jeffrey M. Schumm
Name:	Jeffrey M. Schumm
Title:	Senior Vice President, General Counsel and Corporate Secretary

37

EX-10.11

Exhibit 10.11

Nonqualified Stock Option Agreement under

the Orthofix International N.V.

2012 Long-Term Incentive Plan

This Option Agreement (the “Agreement”) is made this      day of                    20     (the “Grant Date”) between Orthofix International N.V., a Curacao company (the “Company”), and the person signing this Agreement adjacent to the caption “Optionee” on the signature page hereof (the “Optionee”). Capitalized terms used and not otherwise defined herein shall have the meanings attributed thereto in the Orthofix International N.V. 2012 Long-Term Incentive Plan (the “Plan”).

WHEREAS, pursuant to the Plan, the Company desires to afford the Optionee the opportunity to purchase shares of Stock (“Common Shares”) on the terms and conditions set forth herein;

NOW, THEREFORE, in connection with the mutual covenants hereinafter set forth and for other good and valuable consideration, the parties hereto agree as follows:

1.           Grant of Option. Subject to the provisions of this Agreement and the Plan, the Company hereby grants to the Optionee the right and option (the “Option”) to purchase                  Common Shares at an exercise price of $    .     per share (the “Exercise Price”).

2.           Incorporation of Plan. The Optionee acknowledges receipt of the Plan, a copy of which is annexed hereto, and represents that he or she is familiar with its terms and provisions and hereby accepts this Option subject to all of the terms and provisions of the Plan and all interpretations, amendments, rules and regulations which may, from time to time, be promulgated and adopted pursuant to the Plan. The Plan is incorporated herein by reference. In the event of any conflict or inconsistency between the Plan and this Agreement, the Plan shall govern and this Agreement shall be interpreted to minimize or eliminate any such conflict or inconsistency.

3.           Non-Qualified Stock Option. The Option is not intended to be an incentive stock option under Section 422 of the Internal Revenue Code and will be interpreted accordingly.

4.           Vesting. Subject to earlier termination in accordance with the Plan or this Agreement and the terms and conditions herein or therein, the Option shall vest and become exercisable with respect to 33 1/3% of the shares covered thereby on each of the first, second and third anniversaries of the Grant Date; provided, however, that the exercisability of any portion of the Option relating to a fractional share shall be deferred until such time, if any, that such portion can be exercised as a whole Common Share.

5.           Term. The Option shall expire and no longer be exercisable 10 years from the Grant Date, subject to earlier termination in accordance with the Plan or this Agreement.

6.           Termination of Service.

(a)         Termination of Service Other than for Cause, Death, Disability or Voluntary Termination. If, prior to vesting, the Optionee’s Service is terminated or the Optionee retires in accordance with the Company’s retirement policies, the Option shall be considered vested and be immediately exercisable as of the date of such termination of Service with respect to the aggregate number of Common Shares as to which the Option would have been vested as of December 31 of the year in which such termination of Service occurs. The Optionee shall have the right, subject to the other terms and conditions set forth in this Agreement and the Plan, to exercise the Option, to the extent it has vested as of the date of such termination of Service, at any time within 180 days after the date of such termination of Service, subject to the earlier expiration of the Option as provided in Section 5 hereof. To the extent the vested portion of the Option is not exercised within such 180 day period, the Option shall be cancelled and revert back to the Company and the Optionee shall have no further right or interest therein. The unvested portion of any Option shall be cancelled and revert back to the Company as of the date of the Optionee’s termination of Service and the Optionee shall have no further right or interest therein. In no event shall this Section 6(a) apply if the termination of Service is (i) for Cause, (ii) by reason of death or Disability or (iii) as a result of a Voluntary Termination.

(b)         Termination of Service for Cause; Voluntary Termination. If, prior to vesting, (i) the Optionee’s Service is terminated by the Company or any of its Subsidiaries for Cause, or (ii) Optionee terminates Service under circumstances constituting a Voluntary Termination, the unvested portion of the Option shall be cancelled and revert back to the Company as of the date of such termination of Service, and the Optionee shall have no further right or interest therein unless the Committee in its sole discretion shall determine otherwise. The Optionee shall have the right, subject to the other terms and conditions set forth in this Agreement and the Plan, to exercise the Option, to the extent it has vested as of the date of termination of Service, at any time within three months after the date of such termination, subject to the earlier expiration of the Option as provided in Section 5 hereof.

(c)         Termination of Service for Death or Disability. If the Optionee’s Service terminates by reason of death or Disability, the Option shall automatically vest and become immediately exercisable in full as of the date of such termination of Service.  The Option shall remain exercisable by the Optionee (or any person entitlded to do so) at any time within 12 months after the date of such termination of Service, subject to the earlier expiration of the Option as provided in Section 5 hereof. To the extent the Option is not exercised within such 12 month period, the Option shall be cancelled and revert back to the Company and the Optionee or any permitted transferee pursuant to Section 11, as applicable, shall have no further right or interest therein.

(d)          Effect of Employment Agreements Generally.  The Company and Optionee agree that notwithstanding anything to the contrary in any Employment Agreement, the terms of an Employment Agreement expressly defining whether and in what manner (including upon termination of employment) the unvested portion of an Option shall vest, be exerciseable or be cancelled shall not control over the terms of this Agreement, and shall be disregarded in their entirety with respect to the terms of this Award.

7.           Change in Control. Upon the occurrence of a Change in Control, the Option shall automatically vest and become immediately exercisable in full and shall remain exercisable in accordance with the terms of Section 6 hereof, subject to the earlier expiration of the Option as provided in Section 5 hereof.

8.           Method of Exercising Option.

(a)         Notice of Exercise. Subject to the terms and conditions of this Agreement, the Option may be exercised by written or electronic notice to the Company, from the Optionee or a person who proves to the Company’s satisfaction that he or she is entitled to do so, stating the number of Common Shares in respect of which the Option is being exercised and specifying how such Common Shares should be registered (e.g., in Optionee’s name only or in Optionee’s and his or her spouse’s names as joint tenants with right of survivorship). Such notice shall be accompanied by payment of the Exercise Price for all Common Shares purchased pursuant to the exercise of such Option. The date of exercise of the Option shall be the later of (i) the date on which the Company receives the notice of exercise or (ii) the date on which the conditions set forth in Sections 8(b) and 8(e) are satisfied. Notwithstanding any other provision of this Agreement, the Optionee may not exercise the Option and no Common Shares will be issued by the Company with respect to any attempted exercise when such exercise is prohibited by law or any Company policy then in effect. The Option may not be exercised at any one time as to less than 100 shares (or such number of shares as to which the Option is then exercisable if less than 100). In no event shall the Option be exercisable for a fractional share.

(b)         Payment. Prior to the issuance of the Common Shares pursuant to Section 8(e) hereof in respect of which all or a portion of the Option shall have been exercised, the Optionee shall have paid to the Company the Exercise Price for all Common Shares purchased pursuant to the exercise of such Option. Payment may be made by personal check, bank draft or postal or express money order (such modes of payment are collectively referred to as “cash”) payable to the order of the Company in U.S. dollars. Payment may also be made in mature Common Shares owned by the Optionee, or in any combination of cash or such mature shares as the Committee in its sole discretion may approve. The Company may also permit the Optionee to pay for such Common Shares by directing the Company to withhold Common Shares that would otherwise be received by the Optionee, pursuant to such rules as the Committee may establish from time to time. In the discretion of the Committee, and in accordance with rules and procedures established by the Committee, the Optionee may be permitted to make a “cashless” exercise of all or a portion of the Option.

(c)         Shareholder Rights. The Optionee shall have no rights as a shareholder with respect to any Common Shares issuable upon exercise of the Option until the Optionee shall become the holder of record thereof, and no adjustment shall be made for dividends or distributions or other rights in respect of any Common Shares for which the record date is prior to the date upon which the Optionee shall become the holder of record thereof.

(d)         Limitation on Exercise. The Option shall not be exercisable unless the offer and sale of Common Shares pursuant thereto has been registered under the Securities Act of 1933, as amended (the “1933 Act”), and qualified under applicable state “blue sky” laws or the Company has determined that an exemption from registration under the 1933 Act and from qualification under such state “blue sky” laws is available.

(e)         Issuance of Common Shares. The issuance of all Common Stock purchased pursuant to the exercise of this Option shall be evidenced in such a manner as the Company, in its discretion, will deem appropriate, including, without limitation, book-entry registration or issuance of one or more stock certificates.

9.           Adjustment of and Changes in Common Shares. In the event of any merger, consolidation, recapitalization, reclassification, stock dividend, extraordinary dividend, or other event or change in corporate structure affecting the Common Shares, the Committee shall make such adjustments, if any, as it deems appropriate in the number and class of shares subject to, and the exercise price of, the Option. The foregoing adjustments shall be determined by the Committee in its sole discretion.

10.         Tax Withholding. The Company shall have the right, prior to the issuance of any Common Shares upon full or partial exercise of the Option (whether by the Optionee or any person entitlded to do so), to require the Optionee to remit to the Company any amount sufficient to satisfy the minimum required federal, state or local tax withholding requirements, as well as all applicable withholding tax requirements of any other country or jurisdiction. The Company may permit the Optionee to satisfy, in whole or in part, such obligation to remit taxes, by directing the Company to withhold Common Shares that would otherwise be received by the Optionee, pursuant to such rules as the Committee may establish from time to time. The Company shall also have the right to deduct from all cash payments made pursuant to, or in connection with, the Option, the minimum federal, state or local taxes required to be withheld with respect to such payments.

11.         Transfers. Except as provided in this Section 11, during Optionee’s lifetime, only Optionee (or in the event of Optionee’s legal incapacity or incompetency, his or her guardian or legal representative) may exercise the Option, and the Option shall not be assignable or transferable by Optionee, other than by designation of beneficiary, will or the laws of descent and distribution.  Optionee may transfer all or part of this Option, not for value, to any Family Member, provided that Optionee provides prior written notice to the Company, of such transfer.  For the purpose of this section, a “not for value” transfer is a transfer which is (i) a gift, (ii) a transfer under a domestic relations order in settlement of marital property rights, or (iii) a transfer to an entity in which more than fifty percent (50%) of the voting interests are owned by Family Members (or Optionee) in exchange for an interest in such entity.  Subsequent transfers of transferred portions of the Option are prohibited except to Optionee’s Family Members in accordance with this Section 11 or by will or the laws of descent and distribution.  In the event of Optionee’s termination of service, this Agreement shall continue to be applied with respect to Optionee, following which the Option shall be exercisable by the transferee only to the extent, and for the periods specified herein.

12.         Prohibition on Repricing.  The Agreement may not be amended to (a) reduce the Exercise Price of the Option granted hereunder, nor (b) cancel or replace the Option hereunder with an Option having a lower exercise price.

13.         Miscellaneous Provisions.

(a)         Notices. Any notice required by the terms of this Agreement shall be delivered or made electronically, over the Internet or otherwise (with request for assurance of receipt in a manner typical with respect to communications of that type), or given in writing.  Any notice given in writing shall be deemed effective upon personal delivery or upon deposit with the United States Postal Service, by registered or certified mail, with postage

and fees prepaid, and shall be addressed to the Company at its principal executive office and to the Optionee at the address that he or she has most recently provided to the Company.   Any notice given electronically shall be deemed effective on the date of transmission.

(b)         Headings. The headings of sections and subsections are included solely for convenience of reference and shall not affect the meaning of the provisions of this Agreement.

(c)         Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument.

(d)         Entire Agreement. This Agreement and the Plan constitute the entire agreement between the parties hereto with regard to the subject matter hereof. They supersede all other agreements, representations or understandings (whether oral or written and whether express or implied) that relate to the subject matter hereof.  In the event the Optionee has an Employment Agreement, any conflicts or ambiguities shall be resolved first by reference to the Plan, then to this Agreement, and finally to the Employment Agreement.  In the event such conflict or ambiguity cannot be resolved by reference to the Plan, reference shall be made to this Agreement.  Finally, and only in the event such conflict or ambiguity cannot be resolved by reference to the Plan and this Agreement, reference shall be made to the Employment Agreement.

(e)         Amendments. The Board and the Committee shall have the power to alter or amend the terms of the Option as set forth herein from time to time, in any manner consistent with the provisions of Sections 5.3 and 18.10 of the Plan, and any alteration or amendment of the terms of the Option by the Board or the Committee shall, upon adoption, become and be binding on all persons affected thereby without requirement for consent or other action with respect thereto by any such person. The Committee shall give notice to the Optionee of any such alteration or amendment as promptly as practicable after the adoption thereof. The foregoing shall not restrict the ability of the Optionee and the Board or the Committee by mutual written consent to alter or amend the terms of the Option in any manner which is consistent with the Plan.

(f)          Binding Effect. This Agreement shall be binding upon the heirs, executors, administrators and successors of the parties hereto and may only be amended by written agreement of the parties hereto.

(g)         Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Texas, without regard to the choice of law provisions thereof.

(h)         No Employment or Other Rights. This Option grant does not confer upon the Optionee any right to be continued in the employment of, or otherwise provide Services to, the Company or any Subsidiary or other affiliate thereof, or interfere with or limit in any way the right of the Company or any Subsidiary or other affiliate thereof to terminate such Optionee’s employment at any time. For purposes of this Agreement only, the term “employment” shall include circumstances under which Optionee provides consulting or other Services to the Company or any of its Subsidiaries as an independent contractor, but such Optionee is not, nor shall be considered, an employee; provided, however, nothing in this Section 13(h) or this Agreement shall create an employment relationship between such person and the Company or its applicable Subsidiary, as the usages described in this Section are for convenience only.

15.         Definitions. For purposes of this Agreement, the following capitalized words shall have the meanings set forth below.

“Employment Agreement” shall mean a written employment, change in control or change of control, or other similar agreement between the Optionee and the Company and/or a Subsidiary.

“Voluntary Termination” shall occur when the Optionee voluntarily ceases Service for any reason or no reason (e.g., the Optionee elects to cease being an employee or director or providing consulting services or the Optionee resigns or quits). For the avoidance of doubt, a Voluntary Termination shall not occur as a result of termination of Service as a result of death, Disability (as provided hereunder), or termination for “good reason” or similar words (to the extent permitted pursuant to an Employment Agreement) or as the result of the Optionee’s retirement in accordance with the Company’s retirement policies.

EXECUTED as of the date first written above.

COMPANY:	ORTHOFIX INTERNATIONAL N.V.
	By:
	Name:
	Title:
OPTIONEE:
	By:
	Name:
	Title:

EX-10.23

Exhibit 10.24

Orthofix International N.V.

Director Compensation Policy

Directors are traditionally elected each year at the Annual General Meeting of Shareholders, usually held in May or June.  Other director appointments occur from time to time as determined by the Board, for instance, in the event of vacancies on the Board resulting from a director’s death or resignation.

The Board has adopted a director compensation philosophy providing for a 50th percentile goal for total director compensation.  This philosophy is consistent with the total compensation philosophy applied to the compensation levels of the executive officers.  Non-employee directors receive a mix of cash and equity-based compensation as consideration for serving on the Board.  Current Board compensation levels were determined by the Board based upon consideration of Towers Watson’s September 2011 compensation analysis, which included a competitive market analysis to determine competitive compensation levels for our directors.  Towers Watson’s analysis concluded that the Board’s cash fees were in line with its philosophy, but that our equity-based compensation for directors was below our peer group as compared to our preferred percentile goals.

Upon election or appointment to the Board, each Board member is currently entitled to an annual fee of $60,000 for his services, pro-rated for any partial year of service.  Chairmen of committees are entitled to additional compensation ranging from $5,000 to $15,000 for serving in those capacities, and the Chairman of the Board receives an annual fee of $220,000 in his role as chairman.  We do not pay any other meeting fees.  Each director may elect at the time of election to the Board or at a subsequent increase in fees to have their director fee paid either in U.S. Dollars or in the director’s local currency.  If a director does not elect to have his director fee paid in his local currency, the Company will pay the director fee in U.S. Dollars.  Directors are each offered the opportunity to enter into a director indemnification agreement.

Directors have historically received grants of stock options under the 2004 LTIP and, if approved, they will continue to receive grants under the 2012 LTIP.  These grants typically include, subject to share availability, (i) a grant of 30,000 options, granted on the date of such director’s first election to the Board, with such options generally vesting in one-fifth increments over a 5-year period (so long as a director remains on the Board and subject to earlier vesting in the event of a change in control), and (ii) a grant of 5,000 options, granted on the date of any re-election or re-appointment to the Board, with such options generally vesting in one-third increments on the anniversary of each grant (so long as a director remains on the Board and subject to earlier vesting in the event of a change in control).

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Robert S. Vaters, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Orthofix International N.V.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has material affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: July 30, 2012	By:	/s/ Robert S. Vaters
		Name:	Robert S.Vaters
		Title:	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Brian McCollum, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Orthofix International N.V.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has material affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: July 30, 2012	By:	/s/ Brian McCollum
		Name:	Brian McCollum
		Title:	Senior Vice President of Finance and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Orthofix International N.V. (“Orthofix”) on Form 10-Q for the period ended June 30, 2012 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, I, Robert S. Vaters, Chief Executive Officer and President of Orthofix, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Orthofix.

Dated:  July 30, 2012	/s/ Robert S. Vaters
	Name:	Robert S. Vaters
	Title:	President and Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Orthofix International N.V. (“Orthofix”) on Form 10-Q for the period ended June 30, 2012 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, I, Brian McCollum, Chief Financial Officer and Senior Vice President of Finance of Orthofix, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Orthofix.

Dated:  July 30, 2012	/s/ Brian McCollum
	Name:	Brian McCollum
	Title:	Senior Vice President of Finance and Chief Financial Officer

XML

Derivative instruments (Details)	3 Months Ended		6 Months Ended		3 Months Ended		6 Months Ended
	Jun. 30, 2012 USD ($)	Jun. 30, 2011 USD ($)	Jun. 30, 2012 USD ($)	Jun. 30, 2011 USD ($)	Jun. 30, 2012 Cross-currency swap USD ($)	Jun. 30, 2011 Cross-currency swap USD ($)	Jun. 30, 2012 Cross-currency swap USD ($)	Jun. 30, 2011 Cross-currency swap USD ($)	Dec. 31, 2011 Cross-currency swap USD ($)	Sep. 30, 2010 Terminated hedges Cross-currency swap USD ($)	Dec. 31, 2006 Terminated hedges Cross-currency swap USD ($)	Sep. 30, 2010 Cash flow hedges Cross-currency swap Pay Euros EUR (€)	Sep. 30, 2010 Cash flow hedges Cross-currency swap Receive U.S. dollars USD ($)
Fair value of derivatives
Derivative assets					$ 2,321,000		$ 2,321,000		$ 1,011,000
Unrealized gain (loss) recorded in other comprehensive income (loss), net of taxes	(585,000)	199,000	(76,000)	1,301,000	(585,000)	199,000	(76,000)	1,301,000
Amortization term of instrument (in years)											10 years
Fixed rate (as a percent)												5.00%	4.635%
Notional amount											63,000,000	33,500,000	45,500,000
Cash settlement amount										$ 450,000

XML

Sale of Breg and Disposition of Sports Medicine GBU (Details) (USD $)	3 Months Ended	6 Months Ended	1 Months Ended	6 Months Ended		3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2012	May 31, 2012 Breg Orthofix Holdings, Inc. M	Jun. 30, 2012 Breg Orthofix Holdings, Inc. Y	May 24, 2012 Breg Orthofix Holdings, Inc.	Jun. 30, 2012 Sports Medicine global business unit	Jun. 30, 2011 Sports Medicine global business unit	Jun. 30, 2012 Sports Medicine global business unit	Jun. 30, 2011 Sports Medicine global business unit	Dec. 31, 2011 Sports Medicine global business unit
Sale of Breg and Disposition of Sports Medicine GBU
Proceeds from sale of outstanding shares of Breg			$ 157,500,000	$ (157,500,000)
Prepayment of outstanding company indebtedness			145,000,000
Period of operational support with respect to the transferred assets, maximum (in months)			12
Fair value of liability				2,000,000	2,000,000
Period of indemnification (in years)				3
Gain on Sale of Discontinued Operations
Cash Proceeds			(157,500,000)	157,500,000
Less:
Working Capital				(7,532,000)
Transaction related expenses				(4,057,000)
Fair Value of Indemnification				(2,000,000)
Tangible assets				(8,292,000)
Intangible assets				(28,164,000)
Goodwill				(106,200,000)
Gain on sale of Breg				1,255,000
Income tax expense				(215,000)
Gain on sale of Breg, net of taxes	1,040,000	1,040,000		1,040,000
Net sales						16,300,000	26,900,000	43,400,000	53,000,000
Operating income (loss)						(2,500,000)	(800,000)	(2,900,000)	600,000
Assets Held for Sale
Restricted cash										1,629,000
Trade accounts receivable, less allowance										13,711,000
Inventories, net										8,277,000
Property, plant and equipment, net										8,756,000
Intangible assets, net										29,279,000
Goodwill										106,279,000
Deferred income taxes, prepaid expenses and other assets										3,254,000
Assets Held for Sale										171,185,000
Liabilities Held for Sale
Trade accounts payable										3,616,000
Deferred income taxes and other liabilities										19,060,000
Liabilities Held for Sale										$ 22,676,000

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Business segment information (Details 2) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Market sector information
Total Net Sales	$ 119,492	$ 116,670	$ 235,534	$ 229,731
Reported Growth (as a percent)	2.00%		3.00%
Constant Currency Growth (as a percent)	5.00%		4.00%
Spine
Market sector information
Total Net Sales	81,795	76,542	156,823	149,117
Reported Growth (as a percent)	7.00%		5.00%
Constant Currency Growth (as a percent)	7.00%		5.00%
Spine Repair Implants and Regenerative Biologics
Market sector information
Total Net Sales	38,501	36,882	74,258	70,839
Reported Growth (as a percent)	4.00%		5.00%
Constant Currency Growth (as a percent)	4.00%		5.00%
Spine Regenerative Stimulation
Market sector information
Total Net Sales	43,294	39,660	82,565	78,278
Reported Growth (as a percent)	9.00%		5.00%
Constant Currency Growth (as a percent)	9.00%		5.00%
Orthopedics
Market sector information
Total Net Sales	$ 37,697	$ 40,128	$ 78,711	$ 80,614
Reported Growth (as a percent)	(6.00%)		(2.00%)
Constant Currency Growth (as a percent)	2.00%		3.00%

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Description of business (Details) (USD $) In Thousands, unless otherwise specified	1 Months Ended	6 Months Ended
	May 31, 2012	Jun. 30, 2012
Description of business
Number of reporting segments		2
Breg | Orthofix Holdings, Inc.
Sale of Breg and Disposition of Sports Medicine GBU
Proceeds from sale of outstanding shares of Breg	$ 157,500	$ (157,500)

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Goodwill (Tables)

6 Months Ended

Jun. 30, 2012

Goodwill

Schedule of changes in the net carrying amount of goodwill

(US$ in thousands)	Total
At December 31, 2011	$	73,094
Foreign currency	17
At June 30, 2012	$	73,111

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Earnings per share (Details)	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Earnings per share
Weighted average common share-basic	18,827,452	18,110,607	18,751,573	18,024,913
Effect of diluted securities:
Unexercised stock options net of treasury share repurchase	388,532	430,613	417,367
Weighted average common shares-diluted	19,215,984	18,541,220	19,168,940	18,024,913
Common stock equivalents
Antidilutive Securities Excluded from Computation of Earnings Per Share
Outstanding options not included in diluted earnings per share				350,233
Options to purchase common stock
Antidilutive Securities Excluded from Computation of Earnings Per Share
Outstanding options not included in diluted earnings per share	796,851	1,601,560	768,269	1,594,274

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Bank borrowings (Details) In Millions, unless otherwise specified	Jun. 30, 2012 USD ($)	Dec. 31, 2011 USD ($)	Jun. 30, 2012 Italian line of credit USD ($)	Jun. 30, 2012 Italian line of credit EUR (€)	Dec. 31, 2011 Italian line of credit USD ($)	Dec. 31, 2011 Italian line of credit EUR (€)
Bank borrowings
Amount outstanding under line of credit	$ 0.5	$ 1.3
Weighted average interest rate on borrowings under lines of credit (as a percent)	3.41%	4.02%
Maximum borrowing capacity			$ 8.7	€ 6.9	$ 8.1	€ 6.3

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Business segment information (Details 3) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Business segment information - operating income (loss)
Operating Income (Loss) by GBU	$ 20,565,000	$ 19,396,000	$ 42,996,000	$ (8,101,000)
Charges related to U.S. Government resolutions			1,364,000	46,000,000
Spine
Business segment information - operating income (loss)
Operating Income (Loss) by GBU	21,029,000	22,292,000	42,594,000	5,866,000
Charges related to U.S. Government resolutions			1,200,000	36,500,000
Arbitration resolution charges related to 2008 co-development agreement			3,100,000
Orthopedics
Business segment information - operating income (loss)
Operating Income (Loss) by GBU	4,093,000	4,972,000	9,073,000	1,340,000
Charges related to U.S. Government resolutions			200,000	6,500,000
Corporate
Business segment information - operating income (loss)
Operating Income (Loss) by GBU	(4,557,000)	(7,868,000)	8,671,000	(15,307,000)
Charges related to U.S. Government resolutions				3,000,000
Senior management succession charges		$ 3,200,000		$ 3,200,000

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Patents and other intangible assets

6 Months Ended

Jun. 30, 2012

Patents and other intangible assets

Patents and other intangible assets

4.Patents and other intangible assets

(US$ in thousands)	June 30, 2012			December 31, 2011
Cost
Patents and developed technologies	$	32,480		$	37,683
Trademarks — definite lived (subject to amortization)	548			545
	33,028			38,228
Accumulated amortization
Patents and developed technologies	(25,339		)	(29,611		)
Trademarks — definite lived (subject to amortization)	(395		)	(381		)
Patents and other intangible assets, net	$	7,294		$	8,236

Amortization expense for intangible assets is estimated to be approximately $1 million for the remainder of 2012 and $2 million, $1.3 million, $1.3 million, $0.9 million and $0.8 million for the periods ending December 31, 2013, 2014, 2015, 2016 and 2017 and thereafter, respectively.

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Share-based compensation (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Share-based compensation
Share-based compensation expense	$ 1,305	$ 2,372	$ 2,378	$ 3,768
Common stock issued under Employee Stock Purchase Plan (in shares)	218,324	218,831	481,037	515,318
Cost of sales
Share-based compensation
Share-based compensation expense	106	35	283	72
Sales and marketing
Share-based compensation
Share-based compensation expense	397	511	842	1,110
General and administrative
Share-based compensation
Share-based compensation expense	772	1,777	1,542	2,489
Research and development
Share-based compensation
Share-based compensation expense	$ 30	$ 49	$ 71	$ 97

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Earnings per share (Tables)

6 Months Ended

Jun. 30, 2012

Earnings per share

Schedule of reconciliation of weighted average shares used in calculation of basic and diluted earnings per share

	Three Months Ended June 30,		Six Months Ended June 30,
	2012	2011	2012	2011
Weighted average common shares-basic	18,827,452	18,110,607	18,751,573	18,024,913
Effect of dilutive securities:
Unexercised stock options net of treasury share repurchase	388,532	430,613	417,367	—
Weighted average common shares-diluted	19,215,984	18,541,220	19,168,940	18,024,913

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Comprehensive income (loss) (Tables)

6 Months Ended

Jun. 30, 2012

Comprehensive income (loss)

Schedule of the components of and changes in accumulated other comprehensive income

(US$ in thousands)	Foreign Currency Translation Adjustments			Fair Value of Cross-Currency Swap			Accumulated Other Comprehensive Income
Balance at December 31, 2011	$	1,893		$	(132	)	$	1,761
Unrealized gain on cross-currency swap, net of tax of $(44)	—			(76		)	(76		)
Foreign currency translation adjustment (1)	(1,597		)	—			(1,597		)
Balance at June 30, 2012	$	296		$	(208	)	$	88

(1)As the cash generally remains permanently invested in the non-U.S. dollar denominated foreign subsidiaries, no deferred taxes are recognized on the related foreign currency translation adjustment.

Schedule of comprehensive income (loss)

	Three Months Ended June 30,					Six Months Ended June 30,
(US$ in thousands)	2012			2011		2012			2011
Net income (loss)	$	11,205		$	9,958	$	23,221		$	(25,843	)
Other comprehensive income (loss):
Unrealized gain (loss) on cross-currency swap, net of tax	(585		)	199		(76		)	1,301
Foreign currency translation adjustment	(3,798		)	1,636		(1,597		)	3,624
Total comprehensive income (loss)	$	6,822		$	11,793	$	21,548		$	(20,918	)

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Income taxes (Details) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011	Dec. 31, 2011
Income taxes
Provision for income tax	$ 5,993,000	$ 6,337,000	$ 13,356,000	$ 12,056,000
Income tax effective rate (as a percent)			33.80%	(85.10%)
Income tax effective rate excluding the impact of the charges related to the U.S. Government resolutions (as a percent)			37.00%	37.90%
Discontinued operations
Income tax benefit (expense)	2,044,000	235,000	2,350,000	(298,000)
Income tax effective rate (as a percent)			44.20%	44.00%
Income tax effective rate excluding gain on sale of the Breg, Inc. (as a percent)			37.00%
Gross unrecognized tax benefit	600,000		600,000		700,000
Accrued interest and penalties related to unrecognized tax benefits	$ 500,000		$ 500,000		$ 500,000

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Share-based compensation (Tables)

6 Months Ended

Jun. 30, 2012

Share-based compensation

Schedule of share-based compensation by line item in the condensed consolidated statements of operations

	Three Months Ended June 30,				Six Months Ended June 30, 2011
(US$ in thousands)	2012		2011		2012		2011
Cost of sales	$	106	$	35	$	283	$	72
Sales and marketing	397		511		842		1,110
General and administrative	772		1,777		1,542		2,489
Research and development	30		49		71		97
Total	$	1,305	$	2,372	$	2,378	$	3,768

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Business segment information (Tables)

6 Months Ended

Jun. 30, 2012

Business segment information

Schedule of external net sales for continuing operations by GBU

	External Net Sales by GBU
	Three Months Ended June 30,
(US$ in thousands)	2012		2011		Reported Growth		Constant Currency Growth
Spine
Spine Repair Implants and Regenerative Biologics	$	38,501	$	36,882	4	%	4	%
Spine Regenerative Stimulation	43,294		39,660		9	%	9	%
Total Spine	81,795		76,542		7	%	7	%
Orthopedics	37,697		40,128		(6	)%	2	%
Total Net Sales	$	119,492	$	116,670	2	%	5	%

	External Net Sales by GBU
	Six Months Ended June 30,
(US$ in thousands)	2012		2011		Reported Growth		Constant Currency Growth
Spine
Spine Repair Implants and Regenerative Biologics	$	74,258	$	70,839	5	%	5	%
Spine Regenerative Stimulation	82,565		78,278		5	%	5	%
Total Spine	156,823		149,117		5	%	5	%
Orthopedics	78,711		80,614		(2	)%	3	%
Total Net Sales	$	235,534	$	229,731	3	%	4	%

Operating income (loss) by GBU

Operating Income (Loss) by GBU	Three Months Ended June 30,						Six Months Ended June 30,
(US$ in thousands)	2012			2011			2012			2011
Spine (1)	$	21,029		$	22,292		$	42,594		$	5,866
Orthopedics (2)	4,093			4,972			9,073			1,340
Corporate (3)	(4,557		)	(7,868		)	(8,671		)	(15,307		)
Total	$	20,565		$	19,396		$	42,996		$	(8,101	)

(1)For the six months ended June 30, 2012 and 2011, the operating income for the Spine GBU included $1.2 million and $36.5 million, respectively, of expenses in connection with charges related to U.S. Government resolutions. For the six months ended June 30, 2012, the operating income for the Spine GBU included a $3.1 million charge for an arbitration resolution related to a 2008 co-development agreement.

(2)For the six months ended June 30, 2012 and 2011, the operating income for the Orthopedics GBU included $0.2 million and $6.5 million, respectively, of expenses in connection with charges related to U.S. Government resolutions.

(3)For the six months ended June 30, 2011, the operating loss for the Corporate GBU included $3 million of expenses in connection with charges related to U.S. Government resolutions. For the three and six months ended June 30, 2011, the operating loss for the Corporate GBU included $3.2 million of senior management succession charges.

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Inventories

6 Months Ended

Jun. 30, 2012

Inventories

Inventories

3.Inventories

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

Inventories were as follows:

(US$ in thousands)	June 30, 2012			December 31, 2011
Raw materials	$	8,017		$	10,115
Work-in-process	5,874			5,606
Finished products	44,244			49,141
Field inventory	38,954			39,400
Consignment inventory	7,317			7,551
	104,406			111,813
Less reserve for obsolescence	(25,983		)	(28,844		)
	$	78,423		$	82,969

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Sale of Breg and Disposition of Sports Medicine GBU (Tables)

6 Months Ended

Jun. 30, 2012

Sale of Breg and Disposition of Sports Medicine GBU

Schedule of information related to sale of Breg

(US$ in thousands)	Total
Cash proceeds	$	157.500
Less:
Working Capital	(7,532		)
Transaction related expenses	(4,057		)
Fair Value of Indemnification	(2,000		)
Tangible assets	(8,292		)
Intangible assets	(28,164		)
Goodwill	(106,200		)
Gain on sale of Breg	1,255
Income tax expense	(215		)
Gain on sale of Breg, net of taxes	$	1,040

Schedule of assets and liabilities of discontinued operations

(US$ in thousands)	December 31, 2011
Assets Held for Sale
Restricted cash	$	1,629
Trade accounts receivable, less allowance	13,711
Inventories, net	8,277
Property, plant and equipment, net	8,756
Intangible assets, net	29,279
Goodwill	106,279
Deferred income taxes, prepaid expenses and other assets	3,254
Assets Held for Sale	$	171,185
Liabilities Held for Sale
Trade accounts payable	3,616
Deferred income taxes and other liabilities	19,060
Liabilities Held for Sale	$	22,676

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Fair value measurements (Details) (USD $) In Thousands, unless otherwise specified	6 Months Ended	12 Months Ended	1 Months Ended
	Jun. 30, 2012 Revolving Credit Facility	Dec. 31, 2011 Revolving Credit Facility	Jun. 30, 2012 Revolving Credit Facility LIBOR	Dec. 31, 2011 Revolving Credit Facility LIBOR	Jun. 30, 2012 Recurring Fair value	Dec. 31, 2011 Recurring Fair value	Jun. 30, 2012 Recurring Level 2	Dec. 31, 2011 Recurring Level 2
Fair value of financial assets and liabilities
Cross currency hedge					$ 2,321	$ 1,011	$ 2,321	$ 1,011
Variable rate basis	LIBOR	LIBOR	one month LIBOR rate of 0.25%
Margin on variable rate (as a percent)			3.00%	3.00%

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Condensed Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Current assets:
Cash and cash equivalents	$ 50,089	$ 33,207
Restricted cash	72,913	45,476
Trade accounts receivable, less allowance for doubtful accounts of $11,072 and $9,376 at June 30, 2012 and December 31, 2011, respectively	149,472	132,828
Inventories, net	78,423	82,969
Deferred income taxes	20,106	16,349
Escrow receivable		41,537
Prepaid expenses and other current assets	25,386	26,069
Assets held for sale		171,185
Total current assets	396,389	549,620
Property, plant and equipment, net	45,267	43,368
Patents and other intangible assets, net	7,294	8,236
Goodwill	73,111	73,094
Deferred income taxes	18,444	18,584
Other long-term assets	12,815	11,570
Total assets	553,320	704,472
Current liabilities:
Bank borrowings	499	1,318
Current portion of long-term debt		17,500
Trade accounts payable	11,551	16,488
Accrued charges related to U.S. Government resolutions	83,864	82,500
Other current liabilities	50,132	45,327
Liabilities held for sale		22,676
Total current liabilities	146,046	185,809
Long-term debt	40,000	191,195
Deferred income taxes	9,781	9,778
Other long-term liabilities	3,277	2,519
Total liabilities	199,104	389,301
Contingencies (Note 16)
Shareholders' equity:
Common shares $0.10 par value; 50,000,000 shares authorized; 18,946,481 and 18,465,444 issued and outstanding as of June 30, 2012 and December 31, 2011, respectively	1,895	1,846
Additional paid-in capital	231,758	214,310
Retained earnings	120,475	97,254
Accumulated other comprehensive income	88	1,761
Total shareholders' equity	354,216	315,171
Total liabilities and shareholders' equity	$ 553,320	$ 704,472

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Business segment information (Details)	6 Months Ended
	Jun. 30, 2012 segment unit
Business segment information
Number of GBUs	2
Number of reporting segments	2

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Description of business

6 Months Ended

Jun. 30, 2012

Description of business

Description of business

1.Description of business

Orthofix International N.V. (the “Company”) is a diversified, global medical device company focused on developing and delivering innovative repair and regenerative technologies to the spine and orthopedic markets. The Company is comprised of two reportable segments: Spine and Orthopedics that are supported by Corporate activities.

On May 24, 2012 (the “Closing Date” of the Transaction), Orthofix Holdings Inc. (“Orthofix Holdings”) completed the sale of all of the outstanding shares of Breg, Inc (“Breg”) for $157.5 million in cash. Beginning June 30, 2012, the former sports medicine business is presented as discontinued operations for all periods.  As a result of the sale of Breg, the Company completed its exit from the Sports Medicine global business unit (“GBU”), of which Breg was a significant component. The operations and cash flows of the former Sports Medicine GBU have been eliminated from the ongoing operations, and there is no significant continuing involvement in the sold business. See Note 15 for detailed information on the discontinued operations.

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Patents and other intangible assets (Details) (USD $)	6 Months Ended
	Jun. 30, 2012	Dec. 31, 2011
Intangible assets
Cost	$ 33,028,000	$ 38,228,000
Patents and other intangible assets, net	7,294,000	8,236,000
Future Amortization expense
2012 (Remainder of the period)	1,000,000
2013	2,000,000
2014	1,300,000
2015	1,300,000
2016	900,000
2017 and thereafter	800,000
Patents and developed technologies
Intangible assets
Cost	32,480,000	37,683,000
Accumulated amortization	(25,339,000)	(29,611,000)
Trademarks - definite lived (subject to amortization)
Intangible assets
Cost	548,000	545,000
Accumulated amortization	$ (395,000)	$ (381,000)

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Summary of significant accounting policies (Policies)

6 Months Ended

Jun. 30, 2012

Summary of significant accounting policies

Basis of presentation

(a)Basis of presentation

The accompanying Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S.”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Pursuant to these rules and regulations, certain information and note disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S., have been condensed or omitted. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. The balance sheet at December 31, 2011 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements. For further information, refer to the Consolidated Financial Statements and Notes thereto of the Company’s Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 2011.

Reclassifications

(b)Reclassifications

The Company has reclassified certain line items to conform to the current year presentation. The reclassifications have no effect on previously reported net earnings or shareholders’ equity.

Use of estimates

(c)Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, the Company evaluates its estimates including those related to the resolution of U.S. government matters, contractual allowances, doubtful accounts, inventories, taxes, shared-based compensation, and potential goodwill and intangible asset impairment. Actual results could differ from these estimates.

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Goodwill (Details) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2012
Change in the net carrying amount of goodwill
Balance at the beginning of the period	$ 73,094
Foreign currency	17
Balance at the end of the period	$ 73,111

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Patents and other intangible assets (Tables)

6 Months Ended

Jun. 30, 2012

Patents and other intangible assets

Schedule of patents and other intangible assets

(US$ in thousands)	June 30, 2012			December 31, 2011
Cost
Patents and developed technologies	$	32,480		$	37,683
Trademarks — definite lived (subject to amortization)	548			545
	33,028			38,228
Accumulated amortization
Patents and developed technologies	(25,339		)	(29,611		)
Trademarks — definite lived (subject to amortization)	(395		)	(381		)
Patents and other intangible assets, net	$	7,294		$	8,236

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Summary of significant accounting policies

6 Months Ended

Jun. 30, 2012

Summary of significant accounting policies

Summary of significant accounting policies

2.Summary of significant accounting policies

(a)Basis of presentation

The accompanying Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S.”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Pursuant to these rules and regulations, certain information and note disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S., have been condensed or omitted. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. The balance sheet at December 31, 2011 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements. For further information, refer to the Consolidated Financial Statements and Notes thereto of the Company’s Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 2011.

(b)Reclassifications

The Company has reclassified certain line items to conform to the current year presentation. The reclassifications have no effect on previously reported net earnings or shareholders’ equity.

(c)Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, the Company evaluates its estimates including those related to the resolution of U.S. government matters, contractual allowances, doubtful accounts, inventories, taxes, shared-based compensation, and potential goodwill and intangible asset impairment. Actual results could differ from these estimates.

(d)Recently Issued Accounting Standards

On June 16, 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-05, Presentation of Comprehensive Income. This ASU eliminates the current option to present other comprehensive income and its components in the statement of changes in shareholders’ equity and increases the prominence of other comprehensive income in the statements by providing an alternative to present the components of net income and comprehensive income as either one continuous or two separate but consecutive financial statements. Companies are also required to present reclassification adjustments for items that are reclassified from other comprehensive income to net income within these statements. This standard is to be applied retrospectively and is effective for fiscal years beginning after December 15, 2011 with early adoption permitted. The Company adopted this ASU as of March 31, 2012 and it did not have a material impact on the Company’s Consolidated financial statements.

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Condensed Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Condensed Consolidated Balance Sheets
Trade accounts receivable, allowance for doubtful accounts (in dollars)	$ 11,072	$ 9,376
Common shares, par value (in dollars per share)	$ 0.10	$ 0.10
Common shares, shares authorized	50,000,000	50,000,000
Common shares, shares issued	18,946,481	18,465,444
Common shares, shares outstanding	18,946,481	18,465,444

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Share-based compensation

6 Months Ended

Jun. 30, 2012

Share-based compensation

Share-based compensation

12.Share-based compensation

All share-based compensation costs are measured at the grant date, based on the estimated fair value of the award, and are recognized as expense in the condensed consolidated statements of operations over the requisite service period.

The following table shows the detail of share-based compensation by line item in the condensed consolidated statements of operations:

	Three Months Ended June 30,				Six Months Ended June 30, 2011
(US$ in thousands)	2012		2011		2012		2011
Cost of sales	$	106	$	35	$	283	$	72
Sales and marketing	397		511		842		1,110
General and administrative	772		1,777		1,542		2,489
Research and development	30		49		71		97
Total	$	1,305	$	2,372	$	2,378	$	3,768

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

During the three and six months ended June 30, 2012, there were 218,324 and 481,037 shares, respectively, of common stock issued related to stock purchase plan issuances, stock option exercises and the vesting of restricted stock awards. During the three and six months ended June 30, 2011, there were 218,831 and 515,318 shares, respectively, of common stock issued related to stock purchase plan issuances, stock option exercises and the vesting of restricted stock awards.

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Document and Entity Information	6 Months Ended
	Jun. 30, 2012	Jul. 26, 2012
Document and Entity Information
Entity Registrant Name	ORTHOFIX INTERNATIONAL N V
Entity Central Index Key	0000884624
Document Type	10-Q
Document Period End Date	Jun. 30, 2012
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		18,968,031
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q2

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Income taxes

6 Months Ended

Jun. 30, 2012

Income taxes

Income taxes

13.Income taxes

Continuing Operations

The Company recognized a $13.4 million and $12.1 million provision for income tax on continuing operations which reflects an effective tax rate of 33.8% on pre-tax income and (85.1%) on a pre-tax loss for the six months ended June 30, 2012 and 2011, respectively.  Excluding the impact of discrete charges related to the U.S. Government resolutions, the effective tax rate on continuing operations for the first six months of 2012 and 2011 was 37.0% and 37.9%, respectively, The principal factors affecting the Company’s effective tax rate for the first six months of 2012 were the tax benefit of discrete items related to the U.S. Government resolutions, the Company’s mix of earnings among various tax jurisdictions, state taxes and current period losses in certain jurisdictions for which the Company does not currently provide a tax benefit.  The effective tax rate for the first six months of 2011 was impacted by discrete charges related to U.S. Government inquiries, for which no tax benefit was recorded, the mix of earnings among tax jurisdictions, state taxes and current period losses in certain foreign jurisdictions for which the Company does not currently provide a tax benefit.

Discontinued Operations

The Company recognized a $2.4 million benefit and $0.3 million provision for income tax on discontinued operations which reflect an effective tax rate of 44.2% on a pre-tax loss and 44.0% on a pre-tax income for the six months ended June 30, 2012 and 2011, respectively.  The effective tax rate on discontinued operations for the first six months of 2012 was 37.0% excluding the impact of the gain on the sale of Breg, Inc. in 2012.  The principal factors affecting the Company’s effective tax rate for the first six months of 2012 and 2011 were the tax benefit of discrete items, the Company’s mix of earnings among various tax jurisdictions, state taxes and current period losses in certain jurisdictions for which the Company does not currently provide a tax benefit.

As of June 30, 2012 and December 31, 2011, the Company’s gross unrecognized tax benefit was $0.6 million and $0.7 million, respectively.  The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits in income tax expense.  The Company had approximately $0.5 million accrued for payment of interest and penalties as of June 30, 2012 and December 31, 2011.  The entire amount of unrecognized tax benefits, including interest, would favorably impact the Company’s effective tax rate if recognized.  As of June 30, 2012, the Company does not expect the amount of unrecognized tax benefits to change significantly over the next twelve months.

The Company files a consolidated income tax return in the U.S. federal jurisdiction and numerous consolidated and separate income tax returns in many state and foreign jurisdictions.  The statute of limitations with respect to federal tax authorities is closed for years prior to December 31, 2008.  The statute of limitations for the various state tax filings is closed in most instances for years prior to December 31, 2007.  The statute of limitations with respect to the major foreign tax filing jurisdictions is closed for years prior to December 31, 2006.

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Condensed Consolidated Statements of Operations (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Net sales	$ 119,492	$ 116,670	$ 235,534	$ 229,731
Cost of sales	23,676	23,186	45,616	45,527
Gross profit	95,816	93,484	189,918	184,204
Operating expenses
Sales and marketing	49,810	49,960	99,331	97,399
General and administrative	14,295	17,344	28,865	36,130
Research and development	9,252	6,229	16,302	11,673
Amortization of intangible assets	530	555	1,060	1,103
Charges related to U.S. Government resolutions (Note 16)	1,364		1,364	46,000
Total operating expenses	75,251	74,088	146,922	192,305
Operating income (loss)	20,565	19,396	42,996	(8,101)
Other income and expense
Interest expense, net	(1,265)	(2,198)	(3,486)	(4,613)
Other income (expense), net	660	(342)	29	(1,451)
Total other income (expense)	(605)	(2,540)	(3,457)	(6,064)
Income (loss) before income taxes	19,960	16,856	39,539	(14,165)
Income tax expense	(5,993)	(6,337)	(13,356)	(12,056)
Net income (loss) from continuing operations, net of tax	13,967	10,519	26,183	(26,221)
Discontinued operations (Note 15)
Gain on sale of Breg, Inc., net of tax	1,040		1,040
Income (loss) from discontinued operations	(5,846)	(796)	(6,352)	676
Income tax benefit (expense)	2,044	235	2,350	(298)
Net income (loss) from discontinued operations, net of tax	(2,762)	(561)	(2,962)	378
Net Income (loss)	11,205	9,958	23,221	(25,843)
Net income (loss) per common share- basic:
Net income (loss) from continuing operations, net of tax (in dollars per share)	$ 0.74	$ 0.58	$ 1.40	$ (1.45)
Net income (loss) from discontinued operations, net of tax (in dollars per share)	$ (0.15)	$ (0.03)	$ (0.16)	$ 0.02
Net income (loss) per common share- basic (in dollars per share)	$ 0.59	$ 0.55	$ 1.24	$ (1.43)
Net income (loss) per common share- diluted:
Net income (loss) from continuing operations, net of tax (in dollars per share)	$ 0.73	$ 0.57	$ 1.37	$ (1.45)
Net income (loss) from discontinued operations, net of tax (in dollars per share)	$ (0.15)	$ (0.03)	$ (0.16)	$ 0.02
Net income (loss) per common share- diluted: (in dollars per share)	$ 0.58	$ 0.54	$ 1.21	$ (1.43)
Weighted average number of common shares:
Basic (in shares)	18,827,452	18,110,607	18,751,573	18,024,913
Diluted (in shares)	19,215,984	18,541,220	19,168,940	18,024,913
Comprehensive income (loss)	$ 6,822	$ 11,793	$ 21,548	$ (20,918)

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Long-term debt

6 Months Ended

Jun. 30, 2012

Long-term debt

Long-term debt

7.Long-term debt

On August 30, 2010, the Company’s wholly-owned U.S. holding company, Orthofix Holdings, Inc. (“Orthofix Holdings”) entered into a Credit Agreement (the “Credit Agreement”) with certain domestic direct and indirect subsidiaries of the Company (the “Guarantors”), JPMorgan Chase Bank, N.A., as Administrative Agent, RBS Citizens, N.A., as Syndication Agent, and certain lender parties thereto.

The Credit Agreement provides for a five year, $200.0 million secured revolving credit facility (the “Revolving Credit Facility”), and a five year, $100.0 million secured term loan facility (the “Term Loan Facility”, and together with the Revolving Credit Facility, the “Credit Facilities”). Orthofix Holdings has the ability to increase the amount of the Credit Facilities by an aggregate amount of up to $50 million upon satisfaction of certain conditions.

In May 2012, the Company used a portion of the proceeds from the sale of Breg, Inc. (see Note 15) to repay in full the remaining $87.5 million balance on the Term Loan Facility and pay down $57.5 million of amounts outstanding under the Revolving Credit Facility. This use of proceeds was required by the lenders’ consent dated April 23, 2012 to the Credit Agreement. As a result of the sale of Breg, Breg ceased to be a subsidiary of the Company and, therefore, Breg was released as a credit party under the Credit Agreement. In June 2012, the Company paid down an additional $20 million of amounts outstanding under the Revolving Credit Facility. As a result, at June 30, 2012, the Term Loan Facility had been repaid in full and there was $40 million outstanding under the Revolving Credit Facility.  As of December 31, 2011 the Company had $91.3 million outstanding under the Term Loan Facility and $117.4 million outstanding under the Revolving Credit Facility. Borrowings under the Credit Facilities bear interest at a floating rate, which is, at Orthofix Holdings’ option, either the London Inter-Bank Offered Rate (“LIBOR”) plus an applicable margin or a base rate (as defined in the Credit Agreement) plus an applicable margin (in each case subject to adjustment based on financial ratios). Such applicable margin will be up to 3.25% for LIBOR borrowings and up to 2.25% for base rate borrowings depending upon a measurement of the consolidated leverage ratio with respect to the immediately preceding four fiscal quarters. As of June 30, 2012, the entire Revolving Credit Facility was at the LIBOR rate plus a margin of 3.00%.  As of December 31, 2011, the entire Term Loan Facility and $100 million of the Revolving Credit Facility was at the LIBOR rate plus a margin of 3.00%. As of December 31, 2011, the remaining $17.4 million of the Revolving Credit Facility was at a base rate (as defined in the Credit Agreement) plus a margin of 2.00%. The effective interest rate on the Credit Facilities as of June 30, 2012 and December 31, 2011 was 3.3% and 3.4%, respectively.

Outstanding principal on the Revolving Credit Facility is due on August 30, 2015.

Borrowings under the Revolving Credit Facility, which may be made in the future, will be used for working capital, capital expenditures and other general corporate purposes of Orthofix Holdings and its subsidiaries. The Guarantors have guaranteed repayment of Orthofix Holdings’ obligations under the Credit Agreement. The obligations of Orthofix Holdings and each of the Guarantors with respect to the Credit Facilities are secured by a pledge of substantially all of the assets of Orthofix Holdings and each of the Guarantors.

In May 2011, the Company obtained an amendment to the Credit Agreement to provide additional capacity under the various restrictive negative covenants for the Company’s payment of the Specified Settlement Amounts (as defined in the Credit Agreement, as amended) associated with each of the potential settlements (See Note 16).  The amendment updates the definition of Consolidated EBITDA to exclude Specified Settlement Amounts of up to $50 million in the aggregate.

The Credit Agreement, as amended, requires Orthofix Holdings and the Company to comply with coverage ratios on a consolidated basis and contains affirmative and negative covenants, including limitations on additional debt, liens, investments and acquisitions. The Credit Agreement, as amended, also includes events of default customary for facilities of this type. Upon the occurrence of an event of default, all outstanding loans may be accelerated and/or the lenders’ commitments terminated.  The Company was in compliance with the affirmative and negative covenants at June 30, 2012 and there were no events of default.

Certain subsidiaries of the Company have restrictions on their ability to pay dividends or make intercompany loan advances pursuant to the Company’s Credit Facilities. The net assets of Orthofix Holdings and its subsidiaries are restricted for distributions to the parent company. Domestic subsidiaries of the Company, as parties to the credit agreement, have access to these net assets for operational purposes. The amount of restricted net assets of Orthofix Holdings and its subsidiaries as of June 30, 2012 and December 31, 2011 was $200 million and $186.0 million, respectively. In addition, the Credit Agreement restricts the Company and subsidiaries that are not parties to the Credit Agreement, as amended, from access to cash held by Orthofix Holdings and its subsidiaries. The amount of restricted cash of the Company as of June 30, 2012 and December 31, 2011 was $72.9 million and $45.5 million, respectively.

In conjunction with obtaining the Credit Facilities and the Credit Agreement, as amended, the Company incurred debt issuance costs of $5 million. These costs are being amortized using the effective interest method over the life of the Credit Facilities. In conjunction with the Term Loan Facility repayment in May 2012, the Company wrote off $0.8 million of related debt issuance costs. As of June 30, 2012 and December 31, 2011, debt issuance costs, net of accumulated amortization, related to the Credit Agreement were $2.1 million and $3.5 million, respectively.

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Bank borrowings

6 Months Ended

Jun. 30, 2012

Bank borrowings

Bank borrowings

6.Bank borrowings

Borrowings under lines of credit consist of borrowings in Euros used to fund international operations. The borrowings under such facilities were $0.5 million and $1.3 million at June 30, 2012 and December 31, 2011, respectively. The weighted average interest rates on borrowings under lines of credit as of June 30, 2012 and December 31, 2011 were 3.41% and 4.02%, respectively.

The Company had an unused available line of credit of €6.9 million ($8.7 million) and €6.3million ($8.1 million) at June 30, 2012 and December 31, 2011, respectively in its Italian line of credit. This line of credit is unsecured and provides the Company the option to borrow amounts in Italy at rates which are determined at the time of borrowing.

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Inventories (Tables)

6 Months Ended

Jun. 30, 2012

Inventories

Schedule of Inventories

(US$ in thousands)	June 30, 2012			December 31, 2011
Raw materials	$	8,017		$	10,115
Work-in-process	5,874			5,606
Finished products	44,244			49,141
Field inventory	38,954			39,400
Consignment inventory	7,317			7,551
	104,406			111,813
Less reserve for obsolescence	(25,983		)	(28,844		)
	$	78,423		$	82,969

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Business segment information

6 Months Ended

Jun. 30, 2012

Business segment information

Business segment information

14.Business segment information

The Company’s segment information is prepared on the same basis that management reviews the financial information for operational decision making purposes. At this time, the Company’s Chief Operating Decision Maker (the “CODM”) only uses global business units (“GBUs”) reporting for Sales and Operating Income to assess operating performance. Items below operating income are not considered when measuring the profitability of a segment.  In the future, the CODM may decide to review other financial metrics by GBU. Goodwill is also assigned to specific GBUs. The Company neither discretely allocates assets, other than goodwill, to its operating segments nor evaluates the operating segments using discrete asset information.  The Company manages its business by its two GBUs, which are comprised of Spine and Orthopedics supported by Corporate activities. These GBUs represent the segments for which the CODM reviews financial information and makes resource allocation decisions among business units. Accordingly, the Company’s segment information (as provided below) has been prepared based on the Company’s two GBUs reporting segments. These segments are discussed below.

Spine

Spine provides a portfolio of repair and regenerative products that allow physicians to successfully treat a variety of spinal conditions.  This global business unit specializes in the design, development and marketing of the Company’s spinal repair products along with regenerative stimulation and biologics products used in spine applications.  Spine distributes its products through a network of distributors, sales representatives and affiliates.  This global business unit uses both direct and distributor sales representatives to sell and market spine products to hospitals, doctors and other healthcare providers, globally.

Orthopedics

Orthopedics provides a comprehensive portfolio of repair and regenerative products that allow physicians to successfully treat a variety of orthopedic conditions unrelated to spine.  This global business unit specializes in the design, development and marketing of the Company’s orthopedic repair products along with regenerative stimulation and biologics products used in orthopedic applications. Orthopedics distributes its products through a network of distributors, sales representatives and affiliates.  This global business unit uses both direct and distributor sales representatives to sell and market orthopedics products to hospitals, doctors and other healthcare providers, globally.

Corporate

Corporate activities are comprised of the operating expenses of Orthofix International N.V. and its U.S. holding company subsidiary, Orthofix Holdings, Inc., along with activities not necessarily identifiable with the two GBUs.

The tables below present external net sales for continuing operations by GBU reporting segments:

	External Net Sales by GBU
	Three Months Ended June 30,
(US$ in thousands)	2012		2011		Reported Growth		Constant Currency Growth
Spine
Spine Repair Implants and Regenerative Biologics	$	38,501	$	36,882	4	%	4	%
Spine Regenerative Stimulation	43,294		39,660		9	%	9	%
Total Spine	81,795		76,542		7	%	7	%
Orthopedics	37,697		40,128		(6	)%	2	%
Total Net Sales	$	119,492	$	116,670	2	%	5	%

	External Net Sales by GBU
	Six Months Ended June 30,
(US$ in thousands)	2012		2011		Reported Growth		Constant Currency Growth
Spine
Spine Repair Implants and Regenerative Biologics	$	74,258	$	70,839	5	%	5	%
Spine Regenerative Stimulation	82,565		78,278		5	%	5	%
Total Spine	156,823		149,117		5	%	5	%
Orthopedics	78,711		80,614		(2	)%	3	%
Total Net Sales	$	235,534	$	229,731	3	%	4	%

The table below presents operating income (loss) for continuing operations by GBU reporting segments:

Operating Income (Loss) by GBU	Three Months Ended June 30,						Six Months Ended June 30,
(US$ in thousands)	2012			2011			2012			2011
Spine (1)	$	21,029		$	22,292		$	42,594		$	5,866
Orthopedics (2)	4,093			4,972			9,073			1,340
Corporate (3)	(4,557		)	(7,868		)	(8,671		)	(15,307		)
Total	$	20,565		$	19,396		$	42,996		$	(8,101	)

(1)For the six months ended June 30, 2012 and 2011, the operating income for the Spine GBU included $1.2 million and $36.5 million, respectively, of expenses in connection with charges related to U.S. Government resolutions. For the six months ended June 30, 2012, the operating income for the Spine GBU included a $3.1 million charge for an arbitration resolution related to a 2008 co-development agreement.

(2)For the six months ended June 30, 2012 and 2011, the operating income for the Orthopedics GBU included $0.2 million and $6.5 million, respectively, of expenses in connection with charges related to U.S. Government resolutions.

(3)For the six months ended June 30, 2011, the operating loss for the Corporate GBU included $3 million of expenses in connection with charges related to U.S. Government resolutions. For the three and six months ended June 30, 2011, the operating loss for the Corporate GBU included $3.2 million of senior management succession charges.

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Comprehensive income (loss)

6 Months Ended

Jun. 30, 2012

Comprehensive income (loss)

Comprehensive income (loss)

10.Comprehensive income (loss)

Accumulated other comprehensive income is comprised of foreign currency translation adjustments and the effective portion of the gain (loss) on the Company’s cross-currency swap, which is designated and accounted for as a cash flow hedge (See Note 8). The components of and changes in accumulated other comprehensive income were as follows:

(US$ in thousands)	Foreign Currency Translation Adjustments			Fair Value of Cross-Currency Swap			Accumulated Other Comprehensive Income
Balance at December 31, 2011	$	1,893		$	(132	)	$	1,761
Unrealized gain on cross-currency swap, net of tax of $(44)	—			(76		)	(76		)
Foreign currency translation adjustment (1)	(1,597		)	—			(1,597		)
Balance at June 30, 2012	$	296		$	(208	)	$	88

(1)As the cash generally remains permanently invested in the non-U.S. dollar denominated foreign subsidiaries, no deferred taxes are recognized on the related foreign currency translation adjustment.

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

	Three Months Ended June 30,					Six Months Ended June 30,
(US$ in thousands)	2012			2011		2012			2011
Net income (loss)	$	11,205		$	9,958	$	23,221		$	(25,843	)
Other comprehensive income (loss):
Unrealized gain (loss) on cross-currency swap, net of tax	(585		)	199		(76		)	1,301
Foreign currency translation adjustment	(3,798		)	1,636		(1,597		)	3,624
Total comprehensive income (loss)	$	6,822		$	11,793	$	21,548		$	(20,918	)

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Derivative instruments

6 Months Ended

Jun. 30, 2012

Derivative instruments

Derivative instruments

8.Derivative instruments

The tables below disclose the types of derivative instruments the Company owns, the classifications and fair values of these instruments within the balance sheet, and the amount of gain (loss) recognized in other comprehensive income (loss) (“OCI”) or net income (loss).

(US$ in thousands)As of June 30, 2012	Fair value: favorable (unfavorable)		Balance sheet location
Cross-currency swap	$	2,321	Other long-term assets

As of December 31, 2011
Cross-currency swap	$	1,011	Other long-term assets

	Three Months Ended June 30,					Six Months Ended June 30,
(US$ in thousands)	2012			2011		2012			2011
Cross-currency swap unrealized gain (loss) recorded in other comprehensive income (loss), net of taxes	$	(585	)	$	199	$	(76	)	$	1,301

Cross-currency swap

In 2006, the Company entered into a cross-currency swap agreement with Wells Fargo to manage its cash flows related to foreign currency exposure for a portion of the Company’s intercompany receivable of a U.S. dollar functional currency subsidiary that is denominated in Euro. The derivative instrument, a ten-year fully amortizable agreement with an initial notional amount of $63.0 million, was scheduled to expire on December 30, 2016. Upon executing the Company’s Credit Agreement (See Note 7), the Company terminated this cross-currency swap agreement on September 30, 2010. Also on September 30, 2010, the Company entered into a new cross-currency swap agreement (the “replacement swap”) agreement with JPMorgan Chase Bank and Royal Bank of Scotland PLC (the “counterparties”).Upon the termination of the cross-currency swap agreement with Wells Fargo on September 30, 2010, the amount representing the current fair value of the terminated cross-currency swap was $450,000 (the “cash settlement amount”). The cash settlement amount paid to Wells Fargo was recorded in other long-term assets on the condensed consolidated balance sheets and is being amortized over the remaining life of the underlying transaction, assuming such payments remain probable.

Under the terms of the replacement swap agreement, the Company pays Euros based on a €33.5 million notional value and a fixed rate of 5.00% and receives U.S. dollars based on a notional value of $45.5 million and a fixed rate of 4.635%. The expiration date is December 30, 2016, the date upon which the underlying intercompany debt, to which the replacement swap agreement applies, matures. The replacement swap agreement is designated as a cash flow hedge and therefore the Company recognized an unrealized gain (loss) on the change in fair value, net of tax, within other comprehensive income (loss).

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Fair value measurements

6 Months Ended

Jun. 30, 2012

Fair value measurements

Fair value measurements

9.Fair value measurements

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

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

As of June 30, 2012, the Company’s financial instruments included cash equivalents, restricted cash, accounts receivable, short-term bank borrowings, accounts payable, long-term secured debt and a cross-currency derivative contract. Cash equivalents consist of short-term highly liquid, income-producing investments, all of which have original maturities of 90 days or less, including money market funds. The carrying amount of restricted cash, accounts receivable, short-term bank borrowings and accounts payable approximate fair value due to the short-term maturities of these instruments. The Company’s Credit Facilities carry a floating rate of interest.  The fair value of our Credit Facilities approximates book value as of June 30, 2012 because our interest rate was at the one month LIBOR plus an applicable margin.  See Note 7 for further discussion of our Credit Facilities.

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

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

(US$ in thousands)	Balance June 30, 2012		Level 1		Level 2		Level 3
Derivative financial instruments (1)
Cash flow hedges
Cross-currency hedge	$	2,321	$	—	$	2,321	$	—

(1)            See Note 8, “Derivative Instruments”

(US$ in thousands)	Balance December 31, 2011		Level 1		Level 2		Level 3
Derivative financial instruments(1)
Cash flow hedges
Cross currency hedge	$	1,011	$	—	$	1,011	$	—

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Earnings per share

6 Months Ended

Jun. 30, 2012

Earnings per share

Earnings per share

11.Earnings per share

For the three and six months ended June 30, 2012 and 2011, there were no adjustments to net income (loss) for purposes of calculating basic and diluted net income (loss) available to common shareholders. The following is a reconciliation of the weighted average shares used in the basic and diluted net income (loss) per common share computations.

	Three Months Ended June 30,		Six Months Ended June 30,
	2012	2011	2012	2011
Weighted average common shares-basic	18,827,452	18,110,607	18,751,573	18,024,913
Effect of dilutive securities:
Unexercised stock options net of treasury share repurchase	388,532	430,613	417,367	—
Weighted average common shares-diluted	19,215,984	18,541,220	19,168,940	18,024,913

No adjustment has been made in the six months ended June 30, 2011 for any common stock equivalents because their effects would be anti-dilutive.  For the six months ended June 30, 2011, potentially dilutive shares totaled 350,233.

Options to purchase shares of common stock with exercise prices in excess of the average market price of common shares are not included in the computation of diluted earnings per share. There were 796,851 and 768,269 outstanding options not included in the diluted earnings per share computation for the three and six months ended June 30, 2012, respectively, because the inclusion of these options was anti-dilutive. There were 1,601,560 and 1,594,274 outstanding options not included, respectively, in the diluted earnings per share computation for the three and six months ended June 30, 2011, respectively, because the inclusion of these options was anti-dilutive.

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Inventories (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Inventories
Raw materials	$ 8,017	$ 10,115
Work-in-process	5,874	5,606
Finished products	44,244	49,141
Field inventory	38,954	39,400
Consignment inventory	7,317	7,551
Total	104,406	111,813
Less reserve for obsolescence	(25,983)	(28,844)
Inventories, net	$ 78,423	$ 82,969

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Contingencies

6 Months Ended

Jun. 30, 2012

Contingencies

Contingencies

16.Contingencies

The Company is a party to outstanding legal proceedings, investigations and claims as described below. The Company believes that it is unlikely that the outcome of each of these matters, including the matters discussed below, will have a material adverse effect on the Company and its subsidiaries as a whole, notwithstanding that the unfavorable resolution of any matter may have a material effect on the Company’s net earnings (if any) in any particular quarter. However, the Company cannot predict with any certainty the final outcome of any legal proceedings, investigations (including any settlement discussions with the government seeking to resolve such investigations) or claims made against it or its subsidiaries described in the paragraphs below, and there can be no assurance that the ultimate resolution of any such matter will not have a material adverse impact on the Company’s consolidated financial position, results of operations, or cash flows.

The Company records accruals for certain of its outstanding legal proceedings, investigations or claims when it is probable that a liability will be incurred and the amount of the loss can be reasonably estimated. The Company evaluates, on a quarterly basis, developments in legal proceedings, investigations and claims that could affect the amount of any accrual, as well as any developments that would make a loss contingency both probable and reasonably estimable. When a loss contingency is not both probable and reasonably estimable, the Company does not accrue the loss. However, if the loss (or an additional loss in excess of the accrual) is at least a reasonable possibility and material, then the Company discloses a reasonable estimate of the possible loss or range of loss, if such reasonable estimate can be made. If the Company cannot make a reasonable estimate of the possible loss, or range of loss, then that is disclosed.

The assessments of whether a loss is probable or a reasonable possibility, and whether the loss or range of loss is reasonably estimable, often involve a series of complex judgments about future events. Among the factors that the Company considers in this assessment are the nature of existing legal proceedings, investigations and claims, the asserted or possible damages or loss contingency (if reasonably estimable), the progress of the matter, existing law and precedent, the opinions or views of legal counsel and other advisers, the involvement of the U.S. Government and its agencies in such proceedings, the Company’s experience in similar matters and the experience of other companies, the facts available to the Company at the time of assessment, and how the Company intends to respond, or has responded, to the proceeding, investigation or claim. The Company’s assessment of these factors may change over time as individual proceedings, investigations or claims progress. For matters where the Company is not currently able to reasonably estimate a range of reasonably possible loss, the factors that have contributed to this determination include the following: (i) the damages sought are indeterminate, or an investigation has not manifested itself in a filed civil or criminal complaint, (ii) the matters are in the early stages, (iii) the matters involve novel or unsettled legal theories or a large or uncertain number of actual or potential cases or parties, and/or (iv) discussions with the government or other parties in matters that may be expected ultimately to be resolved through negotiation and settlement have not reached the point where the Company believes a reasonable estimate of loss, or range of loss, can be made. In such instances, the Company believes that there is considerable uncertainty regarding the timing or ultimate resolution of such matters, including a possible eventual loss, fine, penalty or business impact, if any.

In addition to the matters described in the paragraphs below, in the normal course of our business, the Company is involved in various lawsuits from time to time and may be subject to certain other contingencies. To the extent losses related to these contingencies are both probable and reasonably estimable, the Company accrues appropriate amounts in the accompanying financial statements and provides disclosures as to the possible range of loss in excess of the amount accrued, if such range is reasonably estimable. The Company believes losses are individually and collectively immaterial as to a possible loss and range of loss.

Litigation

Matters Related To Blackstone Medical, Inc. and Related Escrow Claims

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

On or about January 7, 2008, the Company received a federal grand jury subpoena from the U.S. Attorney’s Office for the District of Massachusetts (“Boston USAO”). The subpoena sought documents from the Company for the period January 1, 2000 through July 15, 2007. The Company believes that the subpoena concerned the compensation of physician consultants and related matters, and further believes that it was associated with HHS-OIG’s investigation of such matters. On September 18, 2008, the Company submitted a claim for indemnification from the escrow fund established in connection with the Blackstone Merger Agreement for any losses to the Company resulting from this matter. On or about April 29, 2009, counsel received a HIPAA subpoena issued by the U.S. Department of Justice (“DOJ”). The subpoena sought documents from the Company for the period January 1, 2000 through July 15, 2007. The Company believes that the subpoena concerned the compensation of physician consultants and related matters, and further believes that it was associated with HHS-OIG’s investigation of such matters, as well as the January 7, 2008 federal grand jury subpoena. On or about August 26, 2010, counsel for Orthofix Inc. and Blackstone executed a tolling agreement with the Boston USAO (the “Tolling Agreement”) that extended an agreement tolling the statute of limitations applicable to any criminal, civil, or administrative proceedings that the government might later initiate to include the period from December 1, 2008 through and including October 31, 2010. On or about February 1, 2011, the parties further extended the tolling of the statute of limitations through and including May 31, 2011 with respect to any criminal proceedings that the government might later initiate.

On or about December 5, 2008, the Company obtained a copy of a qui tam complaint filed by Susan Hutcheson and Philip Brown against Blackstone and the Company in the U.S. District Court for the District of Massachusetts. A qui tam action is a civil lawsuit brought by an individual for an alleged violation of a federal statute, in which DOJ has the right to intervene and take over the prosecution of the lawsuit at its option. On September 18, 2008, after being informed of the existence of the lawsuit by representatives of DOJ and prior to the unsealing of the complaint (which was unsealed by the court on or about November 24, 2008), the Company submitted a claim for indemnification from the escrow fund established in connection with the Blackstone Merger Agreement for any losses to the Company resulting from this matter. On November 21, 2008, the U.S. Department of Justice filed a notice of non-intervention in the case. The complaint was served on Blackstone on or about March 24, 2009. Counsel for the plaintiffs filed an amended complaint on June 4, 2009. The amended complaint sets forth a cause of action against Blackstone under the False Claims Act for alleged inappropriate payments and other items of value conferred on physician consultants; Orthofix is not named as a defendant in the amended complaint. The Company understands that this lawsuit was related to the matters described above involving the HHS-OIG, the Boston USAO, and DOJ. On or about March 12, 2010, the United States District Court for the District of Massachusetts granted Blackstone’s motion to dismiss and, on March 15, 2010, entered judgment in favor of Blackstone. On June 1, 2011, the United States Court of Appeals for the First Circuit reversed the motion to dismiss and remanded to the district court for further proceedings. In response to a joint motion to stay the action, on August 22, 2011, the United States District Court for the District of Massachusetts entered an order administratively closing the lawsuit for a period of no more than ninety (90) days. On August 30, 2011, Blackstone filed with the United States Supreme Court a Petition for a Writ of Certiorari to review the June 1, 2011 judgment of the United States Court of Appeals for the First Circuit, which was denied on December 5, 2011.

In January 2012, after a series of ongoing discussions and negotiations with the Boston USAO, the Company’s board of directors approved an agreement in principle to pay $32 million to resolve the matters described in the immediately preceding paragraphs. The Company is currently in discussions with the Boston USAO, the DOJ, and HHS-OIG, as to the terms of definitive written agreements to finally resolve these matters. As part of the resolution of this matter (and matters described below related to the Company’s regenerative stimulation business), on June 6, 2012, Orthofix International N.V., Orthofix Inc. and Blackstone Medical, Inc. entered into a five-year Corporate Integrity Agreement with HHS-OIG.  (The Corporate Integrity Agreement is further described below under the subheading “Corporate Integrity Agreement with HHS-OIG”.)  Based on information currently available, the Company believes that it is probable that a final written definitive settlement agreement with the U.S. Government will be entered into on these economic terms, which, as described below, would be fully funded from the escrow fund established in connection with the Blackstone Merger Agreement. There can be no assurance that the Company will enter into a consensual resolution of these matters, or what the final terms of any such resolution might be; however, the Company believes that the likelihood of any such additional material loss in excess of this amount is remote.

In 2007 and 2008, the Company received certain other subpoenas from state and federal entities related to Blackstone’s financial relationship with physicians, which the Company has described in prior reports.  The Company has fully responded to each of these subpoenas, and there are currently no pending proceedings related to any of these matters.

Under the Blackstone Merger Agreement, the former shareholders of Blackstone agreed to indemnify the Company for breaches of representations and warranties under the agreement as well as certain other specified matters. These post-closing indemnification obligations of the former Blackstone shareholders were limited to a cumulative aggregate amount of $66.6 million. At closing, an escrow fund was established pursuant to the terms of the Blackstone Merger Agreement to fund timely submitted indemnification claims. The initial amount of the escrow fund was $50.0 million. As of December 31, 2011, the escrow fund contained $47.5 million.

In February 2012, the Company reached an agreement with the representative of the former shareholders of Blackstone resolving all outstanding escrow and indemnification claims under the Blackstone Merger Agreement.  Under this agreement, approximately $42.5 million was distributed from the escrow fund to the Company (which will be used, among other things, to fund the proposed $32 million settlement in principle described above).  Each of the Company and the former shareholders of Blackstone also mutually released each other from all further claims against each other related to these matters.  As of September 30, 2011, the Company had recognized $15.5 million as an “escrow receivable” on the consolidated balance sheet, reflecting previously incurred expenses that the Company believed were reasonably assured of collection.  The Company received approximately $9.5 million in cash from the escrow fund after application of (i) the $32 million allocated to the settlement in principle described above with the government and (ii) approximately $1 million of other fees incurred with respect to this matter since September 30, 2011. As a result, the Company recorded a charge of approximately $6 million during the fourth quarter of 2011 for previously incurred legal fees that were reflected in this escrow receivable balance as of September 30, 2011. The Company recorded a charge of $0.2 million in the second quarter of 2012 which represents imputed interest on the settlement accrued through June 30, 2012.

Matters Related to Regenerative Stimulation Business

On or about April 10, 2009, the Company received a HIPAA subpoena (“HIPAA subpoena”) issued by the Boston USAO. The subpoena sought documents concerning, among other things, the Company’s promotion and marketing of its regenerative stimulator devices (which the Company has also described in the past as its “bone growth stimulator devices”). The Boston USAO issued several subsequent document and testimony subpoenas.  The Company cooperated with these requests.

On or about April 14, 2009, the Company obtained a copy of a qui tam complaint filed by Jeffrey J. Bierman in the U.S. District Court for the District of Massachusetts against the Company, Orthofix Inc. and other companies that have allegedly manufactured regenerative stimulation devices, including Orthologic Corp., DJO Incorporated, Reable Therapeutics, Inc., the Blackstone Group, L.P., Biomet, Inc., EBI, L.P., EBI Holdings, Inc., EBI Medical Systems, Inc., Bioelectron, Inc., LBV Acquisition, Inc., and Smith & Nephew, Inc. The complaint, as subsequently amended in 2010, alleged various causes of action under the federal False Claims Act and state and city false claims acts premised on the contention that the defendants improperly promoted the sale, as opposed to the rental, of regenerative stimulation devices. The complaint also included claims against the defendants for, among other things, allegedly misleading physicians and purportedly causing them to file false claims and for allegedly violating the Anti-Kickback Act by providing free products to physicians, waiving patients’ insurance co-payments and providing inducements to independent sales agents to generate business.

On April 28, 2011, after a series of ongoing discussions and negotiations with the Boston USAO, the Company’s board of directors approved an agreement in principle proposed by the Boston USAO to resolve the criminal and civil matters described in the immediately preceding two paragraphs. On June 6, 2012, the Company entered into a definitive settlement agreement with the United States of America, acting through DOJ and on behalf of HHS-OIG, the TRICARE Management Activity, through its General Counsel, the Office of Personnel Management, in its capacity as administrator of the Federal Employees Health Benefits Program, the United States Department of Veteran Affairs and Mr. Bierman.  This settlement agreement finally resolves these matters.

In connection with the settlement agreement, the Company’s wholly-owned subsidiary, Orthofix Inc., entered into a plea agreement with the Boston USAO and DOJ on June 7, 2012 under which Orthofix Inc. agreed to plead guilty to one felony count of obstruction of a June 2008 federal audit (§18 U.S.C. 1516).  This plea agreement currently remains subject to review and approval by the U.S. District Court for the District of Massachusetts, and there can be no assurance that the plea agreement will be approved by the court on the terms proposed.

The Company has agreed to pay $34.2 million (plus interest at a rate of 3% from May 5, 2011 through the day before payment is made) under the terms of the settlement agreement.  Under the plea agreement, Orthofix Inc. has agreed to pay (i) a criminal fine of $7.8 million, and (ii) a mandatory special assessment of $400.  In addition, the Company agreed in July 2012 to pay Mr. Bierman’s counsel $1.0 million in fees.  The Company previously recorded a charge of $43 million during the first quarter of 2011 in anticipation of the settlement.  The Company recorded a charge of $1.2 million in the second quarter of 2012 which represents imputed interest on the settlement accrued through June 30, 2012.

The settlement is neither an admission of liability by the Company or its subsidiaries nor a concession by the United States or the civil qui tam relator that their claims are not well founded, except as to such admissions as Orthofix Inc. makes in connection with its guilty plea under the Plea Agreement.

Corporate Integrity Agreement with HHS-OIG

On June 6, 2012, in connection with the Company’s settlement of the matters described above related to the Company’s regenerative stimulation business, and in anticipation of a final settlement of the government investigation and related qui tam complaint described above related to Blackstone Medical, Inc., the Company also entered into a five-year corporate integrity agreement with HHS-OIG (the “CIA”).  The CIA acknowledges the existence of the Company’s current compliance program, and requires that the Company continue to maintain during the term of the CIA a compliance program designed to promote compliance with federal healthcare and Food and Drug Administration (“FDA”) requirements.  The Company is also required to maintain several elements of the existing program during the term of the CIA, including maintaining a Chief Compliance Officer, a Compliance Committee, and a Code of Conduct.  The CIA requires that the Company conduct certain additional compliance-related activities during the term of the CIA, including various training and monitoring procedures, and maintaining a disciplinary process for compliance obligations.  Pursuant to the CIA, the Company is required to notify the HHS-OIG in writing, among other things, of: (i) any ongoing government investigation or legal proceeding involving an allegation that the Company has committed a crime or has engaged in fraudulent activities; (ii) any other matter that a reasonable person would consider a probable violation of applicable criminal, civil, or administrative laws related to compliance with Federal healthcare programs or FDA requirements; and (iii) any change in location, sale, closing, purchase, or establishment of a new business unit or location related to items or services that may be reimbursed by Federal healthcare programs.  The Company is also subject to periodic reporting and certification requirements attesting that the provisions of the CIA are being implemented and followed, as well as certain document and record retention mandates.  The CIA provides that in the event of an uncured material breach of the CIA, the Company could be excluded from participation in Federal healthcare programs and/or subject to monetary penalties.

Matters Related to Promeca

During the second quarter of 2010 internal management review of Promeca S.A. de C.V. (“Promeca”), one of the Company’s Mexican subsidiaries, the Company received allegations of improper payments by certain of Promeca’s local employees in Mexico to employees of a Mexican governmental healthcare entity. The Company engaged Hogan Lovells US LLP and Deloitte Financial Advisory Services LLP to conduct an internal investigation (the “Promeca Internal Investigation”) focusing on compliance with the Foreign Corrupt Practices Act (“FCPA”) and voluntarily contacted the Securities and Exchange Commission (the “SEC”) and DOJ to advise both agencies that an internal investigation was underway. Promeca accounted for approximately one percent of the Company’s consolidated net sales and consolidated total assets.

The Company completed the Promeca Internal Investigation in April 2011 and commenced settlement discussions with the U.S. Government regarding this matter in May 2011. In January 2012, the Company reached an agreement in principle to settle these matters with the DOJ, and on July 10, 2012, the Company entered into definitive agreements with DOJ and the SEC agreeing to settle this matter.  As part of the settlement, the Company has entered into (i) a consent to final judgment (the “SEC Consent”) with the SEC in a civil matter filed by the SEC on the same date in the U.S. District Court for the Eastern District of Texas and (ii) a deferred prosecution agreement (the “DPA”) with DOJ.  These agreements remain subject to review and approval by the U.S. District Court for the Eastern District of Texas, and there can be no assurance that they will be approved by the court on the terms proposed.

Under the terms of the SEC Consent, the Company will settle civil claims related to this matter by voluntarily disgorging profits to the United States government in an amount of $5.2 million, inclusive of pre-judgment interest.  The Company has also agreed to pay a fine of $2.2 million to the U.S. Government pursuant to the terms of the DPA.  The Company previously recorded charges of $3.0 million during the first quarter of 2011 and $4.5 million during the fourth quarter of 2011 to establish an accrual in anticipation of a future final resolution of these matters with both DOJ and the SEC.  The Company made payment of the amounts owed pursuant to the DPA in July 2012, and expects to make payments pursuant to the SEC Consent in the third fiscal quarter of 2012.

As part of the DPA, which has a term of three years, DOJ has agreed not to pursue any criminal charges against the Company in connection with this matter if the Company complies with the terms of the DPA.  The DPA takes note of the Company’s self-reporting of this matter to DOJ and the SEC, and of remedial measures, including the implementation of an enhanced compliance program, previously undertaken by the Company.  The DPA provides that the Company shall continue to cooperate fully with DOJ in any future matters related to corrupt payments, false books and records or inadequate internal controls.  In that regard, the Company has represented that the Company has implemented and will continue to implement a compliance and ethics program designed to prevent and detect violations of the FCPA and other applicable anti-corruption laws.  The Company will periodically report to DOJ during the term of the DPA regarding such remediation and implementation of compliance measures.

In addition, under the terms of the SEC Consent, the Company will periodically report to the SEC during a two-year term regarding the status of such remediation and implementation of compliance measures.  The SEC Consent and the DPA do not provide for the appointment of any independent external monitor by DOJ or the SEC.

Matters Related to the Company’s Former Breg Subsidiary and Possible Indemnification Obligations

On May 24, 2012, the Company sold Breg to an affiliate of Water Street Healthcare Partners II, L.P. (“Water Street”) pursuant to a stock purchase agreement (the “Breg SPA”).  Under the terms of the Breg SPA, upon closing of the sale, the Company and its subsidiary, Orthofix Holdings, Inc., agreed to indemnify Water Street and Breg with respect to certain specified matters, including (i) the government investigation and product liability matters regarding the previously owned infusion pump product line described above, and (ii) pre-closing sales of cold therapy units and certain post-closing sales of cold therapy units, including the product liability cases with respect to such products described above.  The Company has established an accrual of $2.0 million, and had recorded the related charge to discontinued operations,  for its indemnification obligations in connection with the July 2012 verdict described in the preceding paragraph, however, actual liability in this case could be higher or lower than the amount accrued.  The Company has not established any accrual in connection with its other indemnification obligations under the Breg SPA, and currently cannot reasonably estimate the possible loss, or range of loss, in connection with such obligations.

The Company’s former subsidiary, Breg, which the Company divested in May 2012, was engaged in the manufacturing and sale of local infusion pumps for pain management from 1999 to 2008. Since 2008, numerous product liability cases have been filed in the United States alleging that the local anesthetic, when dispensed by such infusion pumps inside a joint, causes a rare arthritic condition called “chondrolysis.” The Company believes that meritorious defenses exist to these claims and Breg is vigorously defending these cases. One of the Company’s insurance carriers has asserted to the Company that certain potential losses related to this matter are not covered by its insurance coverage, and the Company currently is in arbitration with this carrier.

On or about August 2, 2010, Breg received a HIPAA subpoena issued by the DOJ. The subpoena seeks documents from the Company and its subsidiaries for the period of January 1, 2000 through the date of the subpoena. The Company believes that document production in response to the subpoena is completed as of July 2012. The Company believes that this subpoena relates to an investigation by the DOJ into whether Breg’s sale, marketing and labeling of local infusion pumps for pain management, prior to Breg’s divestiture of this product line in 2008, complied with FDA regulations and federal law.  On January 27, 2012, the Company was orally notified by a U.S. Government official that a civil investigation of Breg was pending in connection with this matter.  The Company is currently cooperating with the U.S. Government in connection with this matter.

At the time of its divestiture by the Company, Breg was currently and had been engaged in the manufacturing and sales of motorized cold therapy units used to reduce pain and swelling. Several domestic product liability cases have been filed in recent years, mostly in California state court, alleging that the use of cold therapy causes skin and/or nerve injury and seeking damages on behalf of individual plaintiffs who were allegedly injured by such units. The majority of these cases are at an early stage and no conclusion can be drawn at the present time regarding their potential outcome. However, the Company believes that meritorious defenses exist to these claims.  In July 2012, a jury in one case returned a verdict providing for approximately $2.0 million in compensatory damages to the plaintiff against Breg, and could assess additional exemplary damages in the future.  The Company expects the $2.0 million compensatory award to be covered by existing insurance policies, while any exemplary portion of an award will not be covered by insurance.  The case remains subject to further post-verdict motions and appeals.

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Derivative instruments (Tables)

6 Months Ended

Jun. 30, 2012

Derivative instruments

Schedule of fair values of derivative instruments

(US$ in thousands)As of June 30, 2012	Fair value: favorable (unfavorable)		Balance sheet location
Cross-currency swap	$	2,321	Other long-term assets

As of December 31, 2011
Cross-currency swap	$	1,011	Other long-term assets

Schedule of gain (loss) recognized on derivative instruments

	Three Months Ended June 30,						Six Months Ended June 30,
(US$ in thousands)		2012			2011			2012			2011
Cross-currency swap unrealized gain (loss) recorded in other comprehensive income (loss), net of taxes		$	(585	)	$	199		$	(76	)	$	1,301

XML

Contingencies (Details) (USD $)	3 Months Ended		6 Months Ended			1 Months Ended			1 Months Ended	3 Months Ended		1 Months Ended			3 Months Ended		9 Months Ended				1 Months Ended	3 Months Ended					6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011	Dec. 31, 2011	Feb. 29, 2012 Blackstone Merger Escrow Fund	Dec. 31, 2011 Blackstone Merger Escrow Fund	Sep. 22, 2006 Blackstone Merger Escrow Fund	Jun. 30, 2012 Orthofix Inc	Jun. 30, 2012 Orthofix Inc	Mar. 31, 2011 Orthofix Inc	Feb. 29, 2012 Litigation related to Blackstone	Jan. 31, 2012 Litigation related to Blackstone	Aug. 31, 2011 Litigation related to Blackstone D	Jun. 30, 2012 Litigation related to Blackstone Y	Dec. 31, 2011 Litigation related to Blackstone	Jun. 30, 2012 Litigation related to Blackstone Y	Sep. 30, 2011 Litigation related to Blackstone	Sep. 22, 2006 Litigation related to Blackstone	Jun. 30, 2012 Litigation related to Bone Growth Stimulation Business Y	Jul. 31, 2012 Litigation related to Promeca	Dec. 31, 2011 Litigation related to Promeca	Mar. 31, 2011 Litigation related to Promeca	Jul. 10, 2012 Litigation related to Promeca Y	Jun. 30, 2012 Litigation related to Promeca Promeca S.A. de C.V. Consolidated Net Sales Geographic Concentration Risk	Jun. 30, 2012 Litigation related to Promeca Promeca S.A. de C.V. Consolidated Total Assets Geographic Concentration Risk	Jun. 30, 2012 Litigation related to Breg
Contingencies
Period for closure of lawsuit, maximum (in days)														90
Amount approved to be paid under the agreement									$ 34,200,000				$ 32,000,000								$ 5,200,000
Corporate Integrity Agreement period (in years)															5		5			5
Post-closing indemnification obligations of former Blackstone shareholders																			66,600,000
Escrow fund assets as of acquisition date								50,000,000
Escrow fund assets, subsequent to acquisition date							47,500,000
Distribution from the escrow fund to the Company						42,500,000
Escrow receivable					41,537,000													15,500,000
Change in escrow receivable												9,500,000
Other fees incurred with respect to estimated loss contingency																6,000,000	1,000,000
Interest rate on settlement amount approved to be paid under the agreement (as a percent)									3.00%	3.00%
Receipts from escrow fund related to estimated loss contingency												9,500,000
Litigation provision											43,000,000											4,500,000	3,000,000				2,000,000
Concentration risk percentage																									1.00%	1.00%
Net sales	119,492,000	116,670,000	235,534,000	229,731,000
Operating income	20,565,000	19,396,000	42,996,000	(8,101,000)
Compensatory damages awarded																											2,000,000
Criminal fine									7,800,000												2,200,000
Mandatory special assessment									400
Counseling fees									1,000,000
Deferred prosecution agreement period (in years)																								3
Period for reporting to SEC (in years)																								2
Charge for imputed interest on the settlement accrued										$ 1,200,000					$ 200,000

XML

Comprehensive income (loss) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Components of and changes in accumulated other comprehensive income
Balance at beginning of the period			$ 1,761
Unrealized gain on cross-currency swap, net of tax	(585)	199	(76)	1,301
Foreign currency translation adjustment	(3,798)	1,636	(1,597)	3,624
Balance at end of the period	88		88
Unrealized gain on derivative instrument, taxes			(44)
Comprehensive income (loss)
Net income (loss)	11,205	9,958	23,221	(25,843)
Other comprehensive income (loss):
Unrealized gain on cross-currency swap, net of tax	(585)	199	(76)	1,301
Foreign currency translation adjustment	(3,798)	1,636	(1,597)	3,624
Total comprehensive income (loss)	6,822	11,793	21,548	(20,918)
Foreign Currency Translation Adjustments
Components of and changes in accumulated other comprehensive income
Balance at beginning of the period			1,893
Foreign currency translation adjustment			(1,597)
Balance at end of the period	296		296
Other comprehensive income (loss):
Foreign currency translation adjustment			(1,597)
Fair Value of Cross-Currency Swap
Components of and changes in accumulated other comprehensive income
Balance at beginning of the period			(132)
Unrealized gain on cross-currency swap, net of tax			(76)
Balance at end of the period	(208)		(208)
Other comprehensive income (loss):
Unrealized gain on cross-currency swap, net of tax			(76)
Accumulated Other Comprehensive Income
Components of and changes in accumulated other comprehensive income
Balance at beginning of the period			1,761
Unrealized gain on cross-currency swap, net of tax			(76)
Foreign currency translation adjustment			(1,597)
Balance at end of the period	88		88
Other comprehensive income (loss):
Unrealized gain on cross-currency swap, net of tax			(76)
Foreign currency translation adjustment			$ (1,597)

XML

Condensed Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Cash flows from operating activities:
Net income (loss)	$ 23,221	$ (25,843)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	11,018	11,324
Amortization of debt costs	1,375	643
Provision for doubtful accounts	5,324	4,545
Deferred income taxes	(1,653)	(2,680)
Share-based compensation	3,000	3,997
Provision for inventory obsolescence	836	2,116
Gain on sale of Breg, Inc.	(1,040)
Excess tax benefit on non-qualified stock options	(1,156)	(1,004)
Other	(6,060)	335
Change in operating assets and liabilities, net of effect of disposition:
Trade accounts receivable	(24,437)	(5,353)
Inventories	2,247	(12,423)
Escrow receivable	41,537	(326)
Prepaid expenses and other current assets	335	3,704
Trade accounts payable	(4,391)	(2,312)
Charges related to U.S. Government resolutions	1,364	46,000
Other current liabilities	6,236	680
Net cash provided by operating activities	57,756	23,403
Cash flows from investing activities:
Capital expenditures for property, plant and equipment	(12,794)	(10,963)
Capital expenditures for intangible assets	(214)	(335)
Payment made in connection with acquisition		(5,250)
Net proceeds from the sale of Breg, Inc.	153,092
Net cash provided by (used in) investing activities	140,084	(16,548)
Cash flows from financing activities:
Net proceeds from issuance of common shares	13,341	13,453
Repayments of long-term debt	(168,695)	(2,500)
Payment of refinancing fees		(758)
Repayment of bank borrowings, net	(831)	(1,653)
Changes in restricted cash	(25,831)	(2,285)
Cash payment for purchase of minority interest in subsidiary		(517)
Excess tax benefit on non-qualified stock options	1,156	1,004
Net cash (used in) provided by financing activities	(180,860)	6,744
Effect of exchange rate changes on cash	(98)	325
Net increase in cash and cash equivalents	16,882	13,924
Cash and cash equivalents at the beginning of the period	33,207	13,561
Cash and cash equivalents at the end of the period	$ 50,089	$ 27,485

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Goodwill

6 Months Ended

Jun. 30, 2012

Goodwill

Goodwill

5.Goodwill

The following table presents the changes in the net carrying value of goodwill:

(US$ in thousands)	Total
At December 31, 2011	$	73,094
Foreign currency	17
At June 30, 2012	$	73,111

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Fair value measurements (Tables)

6 Months Ended

Jun. 30, 2012

Fair value measurements

Schedule of financial assets and liabilities recorded at fair value on a recurring basis

(US$ in thousands)	Balance June 30, 2012		Level 1		Level 2		Level 3
Derivative financial instruments (1)
Cash flow hedges
Cross-currency hedge	$	2,321	$	—	$	2,321	$	—

(1)            See Note 8, “Derivative Instruments”

(US$ in thousands)	Balance December 31, 2011		Level 1		Level 2		Level 3
Derivative financial instruments(1)
Cash flow hedges
Cross currency hedge	$	1,011	$	—	$	1,011	$	—

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Long-term debt (Details) (USD $)	6 Months Ended			1 Months Ended	6 Months Ended				1 Months Ended			6 Months Ended	12 Months Ended		1 Months Ended			1 Months Ended		12 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Dec. 31, 2011	May 31, 2011 New Credit Agreement	Jun. 30, 2012 New Credit Agreement quater	Dec. 31, 2011 New Credit Agreement	Jun. 30, 2012 New Credit Agreement LIBOR Maximum	Jun. 30, 2012 New Credit Agreement Base rate Maximum	Jun. 30, 2012 Revolving Credit Facility	May 31, 2012 Revolving Credit Facility	Aug. 31, 2010 Revolving Credit Facility Y	Jun. 30, 2012 Revolving Credit Facility	Dec. 31, 2011 Revolving Credit Facility	Aug. 30, 2010 Revolving Credit Facility	Jun. 30, 2012 Revolving Credit Facility LIBOR	Dec. 31, 2011 Revolving Credit Facility LIBOR	Dec. 31, 2011 Revolving Credit Facility Base rate	May 31, 2012 Term Loan Facility	Aug. 31, 2010 Term Loan Facility Y	Dec. 31, 2011 Term Loan Facility	Dec. 31, 2011 Term Loan Facility LIBOR
Long-term debt
Debt instrument term (in years)											5								5
Maximum borrowing capacity														$ 200,000,000
Maximum borrowing capacity																			100,000,000
Repayment of debt obligation									20,000,000	57,500,000
Repayment of debt obligation	168,695,000	2,500,000																87,500,000
Amount outstanding	500,000		1,300,000						40,000,000			40,000,000	117,400,000
Amount outstanding	40,000,000		191,195,000																	91,300,000
Variable rate basis												LIBOR	LIBOR		one month LIBOR rate of 0.25%					LIBOR
Margin on variable rate (as a percent)							3.25%	2.25%							3.00%	3.00%	2.00%				3.00%
Maximum additional borrowing capacity available					50,000,000
Preceding number of quarters in which consolidated leverage ratio is measured					4
Portion of credit facility charged at variable rate																100,000,000	17,400,000
Effective interest rate (as a percent)					3.30%	3.40%
Specified settlement amounts excluded from EBITDA under amended agreement				50,000,000
Amount of restricted net assets	200,000,000		186,000,000
Restricted cash	72,913,000		45,476,000
Debt issuance costs incurred					5,000,000
Write-off of debt issue costs																		800,000
Deferred debt issuance costs, net					$ 2,100,000	$ 3,500,000

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Sale of Breg and Disposition of Sports Medicine GBU

6 Months Ended

Jun. 30, 2012

Sale of Breg and Disposition of Sports Medicine GBU

Sale of Breg and Disposition of Sports Medicine GBU

15.Sale of Breg and Disposition of Sports Medicine GBU

On April 23, 2012, the Company’s subsidiary Orthofix Holdings and Breg entered into a stock purchase agreement (the “SPA”) with Breg Acquisition Corp. (“Buyer”), a newly formed affiliate of Water Street Healthcare Partners II, L.P., pursuant to which Buyer agreed to acquire from Orthofix Holdings all the outstanding shares of Breg, subject to the terms and conditions contained therein (the “Transaction”).  Under the terms of the SPA, upon closing of the sale, Orthofix Holdings and the Company agreed to indemnify Buyer with respect to certain specified matters, including the government investigation and product liability matters regarding a previously owned infusion pump product line, and pre-closing sales of cold therapy units and certain post-closing sales of cold therapy units.  (See “Matters Related to the Company’s former Breg Subsidiary and Possible Indemnification Obligations under Note 16.) On May 24, 2012 (the “Closing Date”), Orthofix Holdings completed the sale of all of the outstanding shares of Breg for $157.5 million in cash. After adjustments for working capital and indebtedness in accordance with the terms of the SPA, Orthofix Holdings used $145 million of the net proceeds to prepay outstanding Company indebtedness, as required by a lender consent received in connection with the Company’s existing Credit Agreement. As a result of the closing of this Transaction, Breg ceased to be a subsidiary of the Company and, therefore, Breg was released as a credit party under the Credit Agreement. The Company also agreed to enter into certain transition arrangements at the closing, including a transition services agreement pursuant to which the Company agreed to continue to provide administrative operational support for a period of up to twelve months.  As a result of the sale of Breg, the Company completed its exit from the Sports Medicine GBU, of which Breg was a significant component.

The portion of indemnification related to post closing claims related to post-closing sales of cold therapy has created a guarantee under Accounting Standards Codification “ASC 460 — Guarantees” and the fair value of the liability has been recorded under the initial recognition criteria in the amount of $2 million at the Closing Date of the transaction.  The Company will amortize the fair value of the noncontingent liability ratably over the period of indemnification which is three years.  The Company’s obligations under this guarantee were approximately $2 million as of June 30, 2012.

Gain on Sale of Discontinued Operations

The following table presents the value of the asset disposition, proceeds received, net of various working capital adjustments and indebtedness and net gain on sale of Breg as shown in the condensed consolidated statement of operations for the six months ended June 30, 2012.

(US$ in thousands)	Total
Cash proceeds	$	157.500
Less:
Working Capital	(7,532		)
Transaction related expenses	(4,057		)
Fair Value of Indemnification	(2,000		)
Tangible assets	(8,292		)
Intangible assets	(28,164		)
Goodwill	(106,200		)
Gain on sale of Breg	1,255
Income tax expense	(215		)
Gain on sale of Breg, net of taxes	$	1,040

The Sports Medicine GBU contributed $43.4 million and $53 million of net sales in the six months ended June 30, 2012 and 2011, respectively. The Sports Medicine global business unit contributed $16.3 million and $26.9 million of net sales in the three months ended June 30, 2012 and 2011, respectively. The Sports Medicine global business unit had $2.9 million of operating loss and $0.6 million of operating income in the six months ended June 30, 2012 and 2011, respectively. The Sports Medicine global business unit had $2.5 million and $0.8 million of operating loss in the three months ended June 30, 2012 and 2011, respectively.  The financial information above includes the financial results of Breg operations up to the date of sale.

The Company’s consolidated financial statements and related footnote disclosures reflect the Sports Medicine global business unit as discontinued operations.  Income (loss) associated with the Sports Medicine global business unit, net of applicable income taxes is shown as income (loss) from discontinued operations for all periods presented in accordance with ASC 205-20 Discontinued Operations.  In addition, the assets and liabilities of the discontinued entity have been reclassified and presented as assets held for sale and liabilities held for sale in the Company’s balance sheet as of December 31, 2011.

The assets and liabilities of the discontinued operations are as follows:

(US$ in thousands)	December 31, 2011
Assets Held for Sale
Restricted cash	$	1,629
Trade accounts receivable, less allowance	13,711
Inventories, net	8,277
Property, plant and equipment, net	8,756
Intangible assets, net	29,279
Goodwill	106,279
Deferred income taxes, prepaid expenses and other assets	3,254
Assets Held for Sale	$	171,185
Liabilities Held for Sale
Trade accounts payable	3,616
Deferred income taxes and other liabilities	19,060
Liabilities Held for Sale	$	22,676