Orthofix Medical Inc. — Q3 2023 Form 10-Q
Business context and reporting period
For the quarter and nine months ended September 30, 2023. Orthofix completed its all-stock merger with SeaSpine on January 5, 2023, and reports two segments: Global Spine and Global Orthopedics. Accordingly, 2023 reported results include SeaSpine while the 2022 reported comparisons do not. SeaSpine contributed $62.9 million of Q3 sales and $188.2 million for the nine-month period.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $184.0 million | $114.0 million | $546.2 million | $338.5 million |
| Gross profit / margin | $119.8 million / 65.1% | $83.4 million / 73.2% | $349.6 million / 64.0% | $248.0 million / 73.3% |
| Operating loss | $(24.4) million | $(5.8) million | $(120.8) million | $(2.2) million |
| Net loss | $(28.9) million | $(10.7) million | $(129.2) million | $(12.7) million |
| Adjusted EBITDA | $13.5 million | $14.3 million | $26.6 million | $32.8 million |
- Reported sales rose 61% in Q3 and 61% year to date; constant-currency growth was 60% and 61%, respectively. The increase largely reflects the merger. Unaudited pro forma sales, as if the merger closed at the start of 2022, were $184.0 million versus $181.1 million in Q3 and $546.2 million versus $512.6 million for nine months. Pro forma net losses were $21.2 million versus $32.5 million and $96.5 million versus $102.4 million, respectively.
- Q3 segment sales: Global Spine $154.4 million, up 79%; Global Orthopedics $29.7 million, up 7%. Bone Growth Therapies sales grew 15%; Spinal Implants, Biologics, and Enabling Technologies grew 155%, primarily reflecting SeaSpine.
- Margin pressure included $7.9 million of Q3 and $29.0 million of nine-month amortization of acquired inventory fair-value step-up, plus product-rationalization inventory charges. The filing reports 2023 inventory reserve expenses of $24.0 million in the nine-month cash-flow reconciliation.
- Nine-month operating cash use was $39.1 million versus $13.9 million in 2022. Capital expenditures were $47.0 million, resulting in negative free cash flow of $86.1 million versus negative $31.1 million. Cash and equivalents were $33.7 million at quarter end, down from $50.7 million at December 31, 2022.
- Quarter-end current assets were $393.7 million and current liabilities $152.5 million. Inventory was $221.7 million, up from $100.2 million at year-end; accounts receivable was $114.1 million, up from $82.9 million.
- Borrowings under the prior secured revolving facility were $70.0 million at September 30, 2023, bearing an effective rate of 7.3%; the company borrowed a further $9.0 million in October. On November 6, it refinanced that facility with a fully funded $100 million senior secured term loan under a new agreement maturing in 2027, plus $25 million delayed-draw and $25 million revolving facilities, both undrawn as of November 8. New borrowings have floating-rate pricing of Adjusted Term SOFR plus 7.25% or base rate plus 6.25%, and are secured by substantially all company and guarantor assets.
Material changes, outlook, and risks
- Reported comparisons are significantly affected by the SeaSpine acquisition. Other notable costs include $35.7 million of merger integration costs for the nine months and higher share-based compensation; the company also recorded $26.9 million of acquisition-related fair-value adjustments in the nine-month adjusted-EBITDA reconciliation.
- The company expects approximately $18.3 million of pretax restructuring expense. It had recorded $16.7 million of restructuring charges and an $11.0 million related liability by September 30. The program includes severance, retention, payroll taxes, and international spine restructuring.
- In September, the company announced the termination of its former CEO, CFO, and Chief Legal Officer. It reported $3.4 million of Q3 and nine-month costs for an independent board investigation; the leadership changes also triggered an interim goodwill assessment. Global Spine goodwill remained unimpaired at September 30. Management said disclosure controls were effective; SeaSpine was excluded from the 2023 annual internal-control assessment as permitted for an acquired business.
- No specific revenue or earnings guidance is provided in the supplied filing text. Management cites integration, synergy realization, sales execution, product launches, regulatory clearances, suppliers, customer and distributor relationships, and litigation as forward-looking uncertainties.
- The company accrued $7.0 million for the Italian Medical Device Payback matter and is challenging the measure; the final liability could differ. A distributor exercised a buyout option, and negotiations on a potential acquisition were ongoing. A separate Lattus contingent-consideration liability was valued at $9.1 million. The filing says other ordinary-course legal matters are not expected to be material.
- The new credit agreement imposes liquidity, leverage, and asset-coverage covenants and restricts certain transactions. The company said it expected future compliance but cautioned that failure could trigger default and have a material adverse effect. It was compliant with required financial covenants at September 30.
Important facts for investors to verify
- How much reported sales growth and segment performance is sustained on a comparable, post-merger basis, and whether anticipated merger synergies are realized.
- Whether gross margins recover as acquired inventory step-up amortization and product-rationalization charges run off, and whether inventory levels and turns improve.
- Cash-burn and working-capital trends, capital-expenditure needs, and liquidity under the new debt facilities and their covenants.
- The final purchase-price allocation, restructuring costs and savings, distributor buyout outcome, Italian payback exposure, and other contingent liabilities.
- Effects of executive turnover and the board investigation on operations, governance, and the company’s internal-control assessment.