Orthofix Medical Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. Orthofix is a global musculoskeletal medical-device company reporting Global Spine and Global Extremities. The company cautions that interim results are not necessarily indicative of full-year results.
Key financial results
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $109.1 million | $108.7 million |
| Gross profit / margin | $85.4 million / 78.3% | $84.6 million / 77.8% |
| Operating income (loss) | $(4.4) million | $7.9 million |
| Net income | $0.9 million | $5.2 million |
| Diluted EPS | $0.05 | $0.27 |
| EBITDA, company-defined non-GAAP | $0.9 million | $15.2 million |
| Cash from operating activities | $(1.0) million | $(3.6) million |
| Free cash flow, company-defined non-GAAP | $(6.0) million | $(7.0) million |
Net loss before tax was $5.1 million, offset by a $6.0 million income-tax benefit; the reported effective tax rate was 117.6%. Sales grew 0.4% as reported and 1.9% at constant currency. Cash, cash equivalents and restricted cash totaled $49.2 million at quarter-end, down from $72.2 million at December 31, 2018. Current assets were $224.3 million and current liabilities $63.7 million. Orthofix had no borrowings on its $125 million secured revolving facility or its Italian line of credit and reported compliance with financial covenants. Lease liabilities totaled $28.0 million; these are not reported as borrowings under the credit facilities.
Changes and operating drivers
- Global Spine sales increased 5.8% to $85.9 million: Bone Growth Therapies +2.4%, Spinal Implants +10.6%, and Biologics +9.7%. Growth included $3.1 million of international M6 disc sales and improved biologics volumes.
- Global Extremities sales fell 15.7% to $23.2 million, primarily due to timing of emerging-market distributor orders and unfavorable currency effects.
- Gross margin improved 0.5 percentage point, largely from product mix, partly offset by $0.5 million of acquired-inventory fair-value amortization.
- Profitability deteriorated despite slightly higher sales. Operating expenses rose, including research and development (+33%) and acquisition-related amortization and remeasurement ($6.5 million versus $0.1 million). The latter included a $5.4 million increase in the fair value of Spinal Kinetics contingent consideration.
- EBITDA declined $14.3 million, from $15.2 million to $0.9 million. Segment EBITDA was $10.6 million for Global Spine, $(0.2) million for Global Extremities and $(9.5) million for Corporate.
- Other income/expense shifted from $2.9 million income to $0.4 million expense, including a foreign-currency remeasurement loss and the absence of a prior-year investment valuation gain.
Outlook, notable items and risks
- The filing provides no quantified full-year revenue or earnings guidance. Management said the impact of legacy U.S. spinal sales-force disruption is expected to lessen as new distributors gain traction; it also cited the M6-C launch and market expansion as investment priorities.
- FDA approval of the Spinal Kinetics M6-C artificial cervical disc was received February 6, 2019. It triggered a $15.0 million milestone payment, paid February 14. Additional revenue-based milestones could total up to $45.0 million; their March 31 fair value was $19.0 million, and actual payments may differ.
- CEO transition and retirement-related share-award modifications generated approximately $2.1 million of share-based compensation expense in the quarter.
- The company restructured its eNeura debt investment, extending maturity to the earlier of March 2022, a change of control or an IPO. The note is accounted for as a troubled debt restructuring; management’s cash-collection estimates are judgmental and lower collections could cause bad-debt expense.
- Orthofix accrued $3.9 million for Italy’s uncertain medical-device payback measure; the final obligation could be higher or lower. Approximately $2.5 million of cash frozen in Brazil was released and returned in April 2019 after a court order.
- Adoption of lease accounting standards added lease assets and liabilities at January 1, 2019; the company reported no material effect on quarterly earnings or cash flows. It also changed segment reporting to Global Spine and Global Extremities and restated prior-period segment data.
Important facts for investors to verify
- Whether Global Extremities’ decline and the legacy spinal sales-force disruption reverse, and whether new distributors sustain growth.
- The assumptions behind the $19.0 million contingent-consideration valuation and potential future milestone cash payments.
- Cash generation and liquidity after the milestone payment, Options Medical asset acquisition and other investment spending.
- The recoverability and expected collection timing of the restructured eNeura note, and the eventual Italian payback obligation.
- How the M6-C launch, elevated operating expenses and CEO transition affect margins and earnings in subsequent quarters.