Orthofix Medical Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Financial statements are unaudited. The January 5, 2023 SeaSpine merger materially changed the company’s scope; reported year-over-year comparisons are therefore not like-for-like.
Business context and results
Orthofix is a global spine and orthopedics company with Global Spine and Global Orthopedics segments. Its products are distributed in approximately 68 countries. SeaSpine’s results are included from January 5 through March 31, 2023.
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $175.2 million | $106.4 million |
| Gross profit / margin | $110.3 million / 63.0% | $78.1 million / 73.4% |
| Operating loss | $59.7 million | $3.1 million |
| Net loss | $60.9 million | $4.5 million |
| Net loss per diluted share | $1.71 | $0.22 |
| Adjusted EBITDA (non-GAAP) | $3.2 million | $7.1 million |
| Operating cash flow | $(34.0) million | $(7.7) million |
| Free cash flow (non-GAAP) | $(45.9) million | $(13.4) million |
Sales increased 64.6% reported (65.7% constant currency). Global Spine sales rose 80.5%, including $60.9 million from SeaSpine; Global Orthopedics sales rose 9.4% reported (13.6% constant currency). Segment sales included Bone Growth Therapies of $47.7 million, Spinal Implants and Enabling Technologies of $60.9 million, and Biologics of $40.6 million.
Financial position and liquidity
- Cash and cash equivalents were $50.0 million at March 31, versus $50.7 million at year-end 2022.
- Total assets were $917.1 million and total liabilities $253.0 million. Current assets were $410.0 million; current liabilities were $137.6 million.
- The company had $45.0 million drawn on its $300.0 million secured revolving credit facility, at a 6.1% effective interest rate, and reported compliance with required financial covenants. It had no borrowings on available Italian credit lines of up to approximately $6.0 million.
- Operating cash use increased year over year; capital expenditures were $11.8 million. The company attributed cash-flow pressures in part to the larger net loss and inventory investment. Inventory was $221.9 million, and inventory turns declined to 0.7 from 1.3 a year earlier.
Material changes and unusual items
- The all-stock SeaSpine merger issued approximately 16.0 million Orthofix shares; acquisition consideration was valued at $376.7 million. Preliminary purchase accounting recorded $131.4 million of goodwill. The allocation remains subject to finalization, and adjustments could be material.
- Gross margin fell 10.4 percentage points, partly because of $11.6 million of expense from the acquisition-date inventory fair-value step-up and approximately $0.7 million in product-rationalization charges.
- Q1 included $22.3 million of merger integration costs and $13.0 million of share-based compensation. Higher operating expenses, acquired amortization, and merger-related charges contributed to the larger operating loss. SeaSpine generated $60.9 million in sales and a $27.9 million net loss for its included post-close period.
- The company approved restructuring activities and expects approximately $16.9 million of total pretax expense; $10.2 million had been incurred by quarter-end.
- Management’s pro forma information, prepared as if the merger closed January 1, 2022, showed Q1 2023 sales of $175.2 million and net loss of $45.2 million; Q1 2022 pro forma sales were $157.1 million and net loss was $42.6 million. The company cautions that these figures are illustrative, not indicative of actual results.
Outlook, risks and contingencies
- The filing provides no specific full-year revenue, earnings, or cash-flow guidance. Management highlighted the launch of the Lattus Lateral Access System and Fathom Pedicle-Based Retractor System, addressing an estimated $1.8 billion market, and cited commercial execution and merger integration as important factors.
- Management expects the merger restructuring charges noted above. Integration, expected synergies and cost savings, product launches, regulatory approvals, customer and distributor relationships, suppliers, and market conditions are among the forward-looking uncertainties identified.
- The company accrued $6.3 million for Italy’s medical-device payback program while challenging the measure’s legality; the ultimate liability could differ. It also recorded $11.5 million in estimated contingent consideration associated with Lattus, based on future product sales.
- The filing added a risk concerning uninsured cash deposits: balances may exceed government-insurance limits, and a bank failure could delay access to or result in loss of funds. Management reported disclosure controls were effective; SeaSpine was excluded from the company’s 2023 internal-control assessment as permitted for an acquired business.
Important facts for investors to verify
- Track comparable organic growth separately from SeaSpine’s acquired sales, and assess whether merger integration delivers expected benefits.
- Monitor gross margin recovery as acquisition-related inventory step-up costs and product rationalization run through results.
- Review operating cash use, elevated inventory and inventory turns, and the company’s ability to fund operations and capital expenditures.
- Follow restructuring costs against the approximately $16.9 million estimate, final purchase-price allocation, and the Lattus contingent liability.
- Assess the outcome and potential range of the Italian payback exposure, and the concentration and accessibility of cash deposits.
- Interpret adjusted EBITDA and free cash flow alongside GAAP results; both are non-GAAP measures and exclude specified costs.