Orthofix Medical Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; unaudited. Orthofix is a global musculoskeletal medical-device company operating through Global Spine and Global Extremities.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $73.1 million | $115.9 million | $178.0 million | $225.0 million |
| Gross profit / margin | $50.0 million / 68.3% | $90.0 million / 77.7% | $131.4 million / 73.8% | $175.4 million / 78.0% |
| Operating income (loss) | $(21.0) million | $0.5 million | $(14.1) million | $(4.0) million |
| Net income (loss) | $(18.4) million | $(0.5) million | $7.2 million | $0.4 million |
| EBITDA, non-GAAP | $(9.0) million | $6.4 million | $3.4 million | $7.3 million |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $30.1 million | $8.3 million |
| Free cash flow, non-GAAP | Not presented quarterly | Not presented quarterly | $20.8 million | $(2.0) million |
Q2 sales fell 36.9% year over year (36.6% at constant currency); first-half sales declined 20.9%. Q2 sales declines were broad: Bone Growth Therapies -43.4%, Spinal Implants -19.9%, Biologics -33.6%, and Global Extremities -41.7%. U.S. Motion Preservation sales reached a record $3.6 million in the quarter, up 24% sequentially.
Lower procedure volumes and fixed-cost under-absorption, along with higher noncash inventory reserves, reduced gross margin. Q2 sales and marketing and general and administrative expenses declined in dollars, but rose as a share of sales. First-half net income included a $17.8 million benefit from expiration of statutes of limitation on certain unrecognized tax benefits; Q2 recorded a $3.0 million reversal of an anticipated CARES Act tax benefit.
Financial position and liquidity
- At June 30, cash and cash equivalents were $172.9 million, restricted cash $0.5 million, and total assets $595.7 million.
- Current assets were $343.6 million and current liabilities $89.6 million. Accounts receivable, net, was $67.4 million; inventory was $82.0 million.
- Long-term debt was $100.0 million, drawn under a $300 million secured revolver. The company reported covenant compliance at quarter-end. It repaid $50.0 million in July, leaving $50.0 million outstanding.
- Six-month cash increased $103.0 million, primarily reflecting the $100.0 million revolver draw and $18.5 million in CARES Act-related receipts. Operating cash flow included working-capital effects, notably the $13.9 million CMS advance payment.
Material developments, outlook and risks
- COVID-19: Deferred and cancelled elective procedures materially reduced sales, especially in April and May. Management said procedure volumes generally began recovering in June and July, but the pace and durability of recovery were uncertain. No specific financial guidance was provided.
- Liquidity measures: The company temporarily reduced U.S. employee and director salaries for two months, suspended its 401(k) match for the rest of 2020, and restricted travel and hiring. The $13.9 million CMS advance must be repaid through offsets to submitted claims beginning in August 2020; the company expected to recognize it as sales during 2020. A separate $4.7 million Provider Relief Fund amount was recognized as other income and was deemed eligible to be retained.
- Acquisitions: Orthofix paid $18.0 million for FITBONE limb-lengthening assets in March 2020 and recognized preliminary goodwill of $11.3 million. In July, it agreed to acquire distributor assets for consideration of up to $7.6 million.
- Contingencies: The estimated fair value of Spinal Kinetics revenue-based contingent consideration was $35.8 million, including $14.5 million classified current. Its valuation depends on uncertain future sales; COVID-19-driven forecast changes reduced the liability by $6.9 million in the first half. The company accrued $5.7 million for Italy’s medical-device payback measure, whose final implementation remained unclear, and $1.3 million for a Brazilian distributor dispute; approximately $0.5 million of cash in Brazil was restricted.
- Regulatory risk: An FDA advisory committee hearing was scheduled for September 8, 2020 on whether bone growth stimulators should be reclassified from Class III to Class II. Reclassification could increase competition.
- Management also cited possible renewed elective-surgery restrictions, hospital capacity constraints, customer payment problems, supply-chain disruption, and interruptions at key facilities in Texas and Italy. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification priorities
- Track elective-procedure recovery and subsequent sales by product category and segment.
- Reconcile cash generation with borrowing, CMS claim offsets, and the July $50 million debt repayment; monitor revolver covenants and remaining availability.
- Assess receivable collection trends: days sales in receivables rose to 84 days from 63 a year earlier, and the expected-credit-loss allowance was $6.4 million.
- Verify the final FITBONE purchase-price allocation, the July distributor acquisition terms, and future contingent-consideration payments.
- Follow the FDA bone-growth-stimulator classification process and resolution of the Italian payback and Brazilian legal matters.