Orthofix International N.V. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; filed May 4, 2012. Unaudited interim results. The filing identifies the registrant as Orthofix International N.V.
Business context and financial performance
Orthofix is a global medical-device company operating through Spine, Orthopedics and Sports Medicine, with corporate activities. Unless noted otherwise, amounts below are in U.S. dollars.
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $143.1 million | $139.2 million |
| Gross profit / margin | $110.3 million / 77% | $105.8 million / 76% |
| Operating income (loss) | $22.0 million | ($26.1 million) |
| Net income (loss) | $12.0 million | ($35.8 million) |
| Diluted earnings (loss) per share | $0.63 | ($2.00) |
| Operating cash flow | $49.0 million | $18.8 million |
| Capital expenditures | $6.5 million | $5.7 million |
- Reported sales grew 3%; management reported 4% growth on a constant-currency basis. Foreign exchange reduced year-over-year sales by $1.3 million.
- Spine sales increased 3% to $75.0 million; Orthopedics increased 1% reported and 4% constant currency to $41.0 million; Sports Medicine increased 10% to $27.1 million.
- Sales and marketing expense rose to $58.3 million; general and administrative expense fell to $20.9 million, principally reflecting lower legal costs; research and development expense increased to $7.7 million, including investment in the Musculoskeletal Transplant Foundation collaboration.
- The prior-year quarter included $46.0 million of charges related to U.S. Government resolutions. The absence of that charge in Q1 2012 is a major reason for the swing to operating and net income; the comparison is not solely reflective of underlying operating improvement.
Liquidity, cash flow and debt
- At March 31, 2012, cash and cash equivalents were $47.1 million and restricted cash was $79.4 million, totaling $126.4 million. Restricted cash was subject to credit-agreement restrictions and was not freely available to the parent.
- Operating cash flow included a $41.5 million receipt from the Blackstone escrow fund, recorded as restricted cash. Thus, reported operating cash generation included a significant unusual escrow-related inflow.
- Net cash used in investing activities was $6.5 million. Net cash used in financing activities was $28.9 million, including $3.75 million of term-loan repayments and a $32.3 million increase in restricted cash.
- Credit-facility borrowings totaled approximately $204.9 million: $87.5 million under the term loan and $117.4 million under the revolving facility. The balance sheet also reported $1.4 million of bank borrowings. The credit facilities carried a 3.4% effective interest rate and mature in 2015.
- The company reported $82.6 million of available revolving-credit capacity and approximately $8.3 million available under its Italian line of credit. Management stated it believed cash, projected operating cash flows and borrowing availability were sufficient for near-term settlement, working-capital and capital-expenditure needs. Management reported compliance with credit covenants at quarter-end.
- Current liabilities included $82.5 million accrued for U.S. Government resolutions. Credit-agreement restrictions also applied to certain subsidiary net assets and cash.
Material developments, outlook and risks
- Government matters: The company was finalizing definitive agreements for a proposed $32 million settlement concerning Blackstone-related matters. It expected the settlement to be funded from the Blackstone escrow proceeds. Separately, it had recorded a $43 million charge in Q1 2011 for a proposed resolution of regenerative-stimulation matters; definitive agreements remained in process. A five-year Corporate Integrity Agreement was expected in connection with these resolutions.
- Promeca/FCPA matter: The company had reached an agreement in principle with the DOJ and was discussing final terms with the DOJ and SEC. It had recorded cumulative charges of $7.5 million in 2011; the ultimate resolution remained uncertain.
- Breg sale after quarter-end: On April 23, 2012, the company agreed to sell Breg for $157.5 million cash, subject to closing adjustments. The deal would exit the Sports Medicine business, a significant part of which was Breg. Orthofix agreed to indemnify the buyer for specified government-investigation and product-liability matters, among others. The sale was pending, not completed, as of the filing.
- Contingencies: Breg faced product-liability claims involving previously sold infusion pumps and cold-therapy units, and a government investigation of the infusion-pump business. The company said it could not reasonably estimate possible losses or ranges for these matters; it also reported an insurance-coverage arbitration concerning certain infusion-pump claims.
- Other risks and outlook: The filing provided no specific revenue or earnings guidance. Management cautioned that interim results were not necessarily indicative of full-year results. Risks include unresolved legal and regulatory matters, product liability, reimbursement and regulatory changes, product acceptance, competition, foreign exchange and floating-rate debt exposure. A one-percentage-point rate change was estimated to affect annual interest expense by approximately $2.0 million.
- Management concluded disclosure controls and procedures were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the proposed government settlements were finalized, their final amounts and payment timing, and whether escrow proceeds fully cover the Blackstone settlement.
- Whether the Breg transaction closed, final proceeds after adjustments, and the scope and potential financial impact of the indemnities retained by Orthofix.
- Cash-flow sustainability excluding the $41.5 million escrow receipt, and the availability and restrictions applicable to cash balances.
- Current debt, refinancing and covenant capacity, especially given floating interest rates and the scheduled 2015 maturity.
- Developments and potential exposure in the Promeca investigation, Breg investigations and product-liability claims, including the insurance dispute.
- Whether sales growth, margins and operating performance continued after the quarter, particularly following the planned exit from Sports Medicine.