Orthofix International N.V. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. The company is a global medical-device business reporting four segments: BioStim, Biologics, Extremity Fixation, and Spine Fixation. Unless stated otherwise, amounts are in U.S. dollars.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $108.9m | $104.1m | $211.7m | $202.8m |
| Gross profit / margin | $85.8m / 78.7% | $81.6m / 78.4% | $165.9m / 78.4% | $158.1m / 78.0% |
| Operating income (loss) | $8.0m | $(2.7)m | $13.9m | $4.4m |
| Continuing-operations income (loss) | $4.7m | $(6.3)m | $2.4m | $(1.8)m |
| Net income (loss), including discontinued operations | $3.9m | $(7.4)m | $1.2m | $(3.6)m |
| Diluted EPS | $0.21 | $(0.41) | $0.07 | $(0.20) |
Q2 sales rose 4.7% reported (5.1% constant currency); first-half sales rose 4.4% (4.9% constant currency). Q2 operating results improved in part because the prior-year period included $12.9m of U.S. Government resolution charges, which did not recur. First-half 2017 other expense included a $5.6m pretax other-than-temporary impairment of an eNeura debt security.
Segments and margins
- Q2 sales increased in BioStim (+5.4%), Biologics (+9.9%), and Spine Fixation (+17.1%); Extremity Fixation declined 7.7%. For the first half, the respective changes were +6.9%, +8.1%, +9.6%, and −5.5%.
- Management’s non-GAAP net margin (gross profit less sales and marketing) was $35.3m in Q2, down 0.6%, and $66.9m for the first half, down 0.5%. As a share of sales, it fell to 32.4% in Q2 from 34.1% and to 31.6% for the first half from 33.2%.
- Sales and marketing costs grew faster than gross profit, partly due to first-year distributor commissions and higher Extremity Fixation U.S. spending. Extremity Fixation’s decline reflected restructuring, lower international sales and cash collections, and currency effects; U.S. TL-HEX growth partially offset this.
Cash, liquidity, and debt
- Cash and cash equivalents were $44.3m at June 30, 2017, versus $39.6m at year-end 2016. Current assets were $198.6m and current liabilities $65.1m.
- First-half operating cash flow was $9.7m, down from $21.4m; capital expenditures were $8.6m, resulting in reported free cash flow of $1.1m versus $11.0m. The decline in operating cash flow reflected working-capital movements, including inventory growth and lower other current liabilities. The release of $14.4m of restricted cash contributed to reported operating cash flow.
- The company had no borrowings under its $125m secured revolving credit facility or its available €5.8m Italian line of credit and reported compliance with financial covenants. Total liabilities were $90.7m; the filing reports no material off-balance-sheet arrangements.
- Inventory was $75.9m, up from $63.3m at year-end. Inventory turns were 1.2 versus 1.5 a year earlier; days sales in receivables were 51 versus 49.
Outlook, risks, and unusual items
- The filing provides no quantified full-year guidance. Management cited sales-partner engagement, new distributor additions, and product introductions as contributors to growth.
- The company expects adoption of the revenue-recognition standard effective January 1, 2018 to materially affect timing, primarily for Extremity Fixation and Spine Fixation sales to stocking distributors currently recognized using the sell-through method. It expects to use modified retrospective adoption.
- A restructuring initiated in December 2016, primarily affecting Extremity Fixation, is expected to cost approximately $2.9m pretax; cumulative costs were $2.0m and the remaining accrual was $1.0m at June 30, 2017.
- For indemnification related to discontinued Breg operations, the company accrued $2.6m for a pending cold-therapy claim; actual liability could be higher or lower. It could not reasonably estimate potential loss for one remaining local-infusion-pump case.
- The IRS was examining federal tax returns for 2012 and 2013; the company could not determine whether the examinations would materially affect the financial statements. Interim tax rates were affected by jurisdictional earnings mix and losses in jurisdictions where no tax benefit was recognized.
- Management reported disclosure controls were effective as of June 30, 2017, with no material changes to internal control during the quarter. It reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether sales growth continues, particularly in Spine Fixation and Biologics, and whether Extremity Fixation stabilizes.
- Whether higher selling and administrative expenses constrain margins and cash generation.
- The cash-flow impact of inventory, receivables, and distributor collections, including the one-time restricted-cash release in first-half 2017.
- The eventual revenue-recognition transition impact and the fair value/recovery prospects of the eNeura security.
- Developments in Breg indemnification claims, the restructuring, and the IRS examinations.