Orthofix International N.V. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This is an annual filing, not a standalone fourth-quarter report. The company is a global medical-device business with Spine, Orthopedics and Sports Medicine segments.
Financial performance and position
| Metric | 2011 | 2010 |
|---|---|---|
| Net sales | $579.0 million | $564.4 million |
| Gross profit / margin | $439.8 million / 76.0% | $432.7 million / 76.7% |
| Operating income | $32.5 million | $89.0 million |
| Net income (loss) | $(1.1) million; $(0.06) per diluted share | $44.2 million; $2.47 per diluted share |
| Cash from operating activities | $64.8 million | $42.5 million |
| Capital expenditures | $25.8 million | $26.4 million |
| Total debt | $210.0 million | $220.0 million |
Revenue grew 3% year over year; foreign exchange contributed $6.5 million. Gross margin fell 0.7 percentage point, reflecting U.S. pricing pressure, product and geographic mix, and currency effects. Operating income included $56.5 million of charges related to U.S. Government matters. The 2011 income-tax provision was $21.8 million on pretax income of $20.7 million; management reported a 38.1% effective tax rate excluding the government-resolution charges.
Cash and cash equivalents were $80.3 million in total, including $47.1 million of restricted cash; unrestricted cash on the balance sheet was $33.2 million. Current assets were $404.6 million and current liabilities $175.4 million, including $82.5 million accrued for U.S. Government resolutions. Operating cash flow improved despite the net loss, supported in part by noncash items and changes in working capital. Receivables were 89 days sales outstanding versus 86 days a year earlier; inventory turns were 1.5 times in both years.
At year-end, $91.3 million was outstanding under the term loan and $117.4 million under the revolving facility, leaving $82.6 million available to draw. The facilities carry floating rates; the effective rate was 3.4%. A one-percentage-point rate increase would add approximately $2.1 million to annual interest expense, based on year-end balances. The company reported covenant compliance and no default.
Material changes versus 2010
- Orthopedics sales increased 11% to $165.9 million; Sports Medicine sales increased 8% to $103.0 million, including $4.7 million from added billing capability.
- Spine sales declined 1% to $304.2 million: stimulation sales fell 7%, partly offset by growth in implants and biologics.
- Research and development expense decreased to $25.1 million from $30.4 million. Sales and marketing expense rose slightly in dollars but declined as a share of sales.
- Operating income fell substantially, principally because of $56.5 million in U.S. Government-resolution charges and the absence of the $12.0 million 2010 gain on the vascular-business sale. Interest expense declined to $9.8 million from $17.2 million.
- Year-end total assets increased to $695.6 million from $604.0 million, while debt decreased by $10.0 million. Restricted cash increased to $47.1 million from $22.9 million.
Outlook, risks, contingencies and unusual items
- No earnings or revenue guidance was provided. Management planned approximately $28–30 million of 2012 capital expenditures, principally funded by operating cash flow, and intended to introduce new products.
- The company had reached an agreement in principle for a $43 million resolution of the regenerative-stimulation investigation, including an anticipated guilty plea by a subsidiary and a five-year Corporate Integrity Agreement. Definitive agreements were still being finalized.
- A separate $32 million Blackstone-related settlement was agreed in principle in January 2012. In February 2012, the company reported receiving approximately $42.5 million from the Blackstone escrow; approximately $32 million was allocated to the proposed settlement, with about $9.5 million net cash received after other fees. The filing recorded an approximately $6 million fourth-quarter 2011 charge related to previously recognized escrow receivables.
- The company recorded $7.5 million for the Promeca FCPA matter and was still discussing final resolutions with DOJ and SEC. It stated that additional loss beyond the accrual was considered remote, but gave no assurance of settlement on those terms.
- Breg faced product-liability claims involving former pain-infusion pumps and current cold-therapy products, plus a DOJ investigation concerning former pump marketing and labeling. The company said possible losses could not be reasonably estimated.
- Other notable exposures include reimbursement and healthcare-regulation changes, supplier dependence for human-tissue products, product acceptance and competition, foreign-exchange movements, and floating-rate debt. The Sports Medicine goodwill valuation exceeded carrying value by about 8%; management noted that combined adverse assumption changes could imply impairment.
- Management and the auditor reported effective internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Key facts for investors to verify
- Whether the proposed government settlements were finalized, their payment timing, and the terms and compliance requirements of any Corporate Integrity Agreement.
- How the Blackstone escrow proceeds and the $6 million fourth-quarter charge reconcile with the balance-sheet escrow receivable and settlement accruals.
- Cash available for general corporate use after excluding restricted cash, and the company’s ability to meet debt maturities and financial covenants.
- Whether Spine stimulation sales stabilize and whether Orthopedics and Sports Medicine growth persists without the billing-capability contribution.
- Developments in Breg product-liability and DOJ matters, as well as the FCPA matter and related unaccrued loss exposure.