Orthofix International N.V. (Orthofix) — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2013; financial statements are unaudited. The filing was signed March 25, 2014, following substantial delays associated with an Audit Committee accounting review and restatement. The filing identifies the registrant as Orthofix International N.V.
Financial performance and position
Amounts below are in U.S. dollars; financial statement amounts are rounded to millions unless stated otherwise.
| Metric | Q3 2013 | Q3 2012, restated | Nine months 2013 | Nine months 2012, restated |
|---|---|---|---|---|
| Net sales | $92.7m | $107.9m | $294.4m | $330.2m |
| Gross profit / margin | $68.8m / 74.2% | $83.5m / 77.4% | $224.6m / 76.3% | $256.9m / 77.8% |
| Operating income (loss) | $(15.6)m | $18.8m | $1.3m | $51.0m |
| Net income (loss) | $(19.8)m | $5.0m | $(17.6)m | $21.7m |
| Basic EPS | $(1.10) | $0.26 | $(0.94) | $1.15 |
| Operating cash flow | Not separately provided | Not separately provided | $52.0m | $68.4m |
- Q3 sales fell 14% year over year (15% on a constant-currency basis); nine-month sales declined 11%. Q3 sales by segment: BioStim $31.6m (down 25%), Biologics $13.2m (up 2%), Spine Fixation $23.2m (down 7%) and Extremity Fixation $24.7m (down 10%).
- Q3 operating loss included $19.2m of goodwill impairment and $2.7m of accounting-review and restatement costs. The impairment fully wrote off goodwill assigned to Spine Fixation and Extremity Fixation. Nine-month operating income was $1.3m, also after these charges.
- Nine-month discontinued-operations loss was $11.3m, including costs and settlements tied to indemnification obligations from the former Breg business. Continuing-operations loss was $6.3m.
- At September 30, cash and cash equivalents were $22.2m and restricted cash was $22.7m, for $45.0m combined. Total assets were $430.1m; current liabilities were $66.0m. Long-term debt was $20.0m, all outstanding under the revolving facility. The company reported no bank borrowings.
- Nine-month investing cash outflow was $24.0m, including $19.4m of property and equipment spending and $4.5m of intangible-asset spending. Financing cash outflow was $37.4m, including $39.5m of share repurchases. Cash and cash equivalents decreased $8.8m during the period.
Material changes and management commentary
- BioStim’s Q3 decline was driven partly by about $6m less third-party-payor revenue after the company changed its billing approach to recognize revenue only when a full billable package was assembled. Management also cited distribution turnover and changes in payor policies for the nine-month decline.
- Extremity Fixation revenue was affected by adopting sell-through accounting for distributor transactions prospectively from April 1, 2013. Spine Fixation results were affected by lower average selling prices from discounting.
- The company began reporting four strategic business units—BioStim, Biologics, Spine Fixation and Extremity Fixation—effective July 1, 2013, and reallocated goodwill following the segment change.
- Management stated that available cash, projected operating cash flow and credit availability were expected to cover working capital, capital spending, research and development, and planned needs over the following 12 months. This outlook is subject to the risks below.
Restatement, risks and unusual matters
- The Audit Committee review found material errors in previously issued statements for 2010–2012 and Q1 2013, plus earlier-period errors. Principal issues involved distributor revenue recognition, inventory reserves and royalty classification. Restated Q3 and nine-month 2012 sales were reduced by $6.9m and $20.1m, respectively; continuing-operations net income was reduced by $2.5m and $10.3m. At December 31, 2012, restatement adjustments reduced accounts receivable by $43.0m, inventory by a net $5.4m, total assets by $31.4m and retained earnings by $33.7m.
- For certain distributor arrangements, the company concluded revenue should be recognized on a sell-through basis, in some cases using cash collection as the recognition basis. It also identified extra-contractual terms, extended payment terms, return or exchange rights, collection uncertainty, and commissions paid to customer-related parties.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at September 30, 2013 because of material weaknesses in distributor revenue controls, inventory-reserve controls and oversight of certain foreign subsidiaries. Remediation was underway, but not complete.
- The credit agreement required a limited waiver of timely quarterly financial statements and related covenant certificates through the earlier of March 31, 2014 or the day after filing. The company reported covenant compliance and no default at September 30, 2013. The $20m revolving balance was due August 30, 2015; the filing described up to $180m of remaining revolver availability.
- Nasdaq had granted a stay of delisting pending a hearing scheduled for March 27, 2014. The company expected its 2013 Form 10-K by March 31, 2014, but said there was no assurance the hearing panel would find the listing-rule violation remedied.
- Other stated risks include potential SEC enforcement action and securities litigation related to the restatement, a review of alleged improper payments involving the Brazil subsidiary, ongoing compliance obligations under a corporate integrity agreement and deferred prosecution agreement, and Breg-related product-liability and government-investigation indemnification exposure. The filing reported no material developments in the legal matters described in the 2012 Form 10-K/A.
Important facts for investors to verify
- Review the amended 2012 and Q1 2013 filings and Note 2 for the full restatement, including distributor revenue policies, cash-collection recognition and the effects on receivables and inventory.
- Check subsequent filings for whether control weaknesses were remediated and whether the 2013 Form 10-K was filed on time.
- Verify the outcome of the Nasdaq hearing and any resulting listing status, and monitor developments in SEC inquiries, securities litigation and the Brazil-related review.
- Track BioStim sales, payor billing and reimbursement trends, distributor performance, and whether reported revenue converts to cash under the revised recognition approach.
- Assess Breg indemnification costs and other contingencies, alongside cash availability, restricted cash, revolver covenants and the effect of share repurchases on liquidity.