Orthofix Medical Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Orthofix is a global musculoskeletal medical-device company with Global Spine and Global Extremities reporting segments. Financial amounts are U.S. dollars.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $113.5 million | $111.7 million | $338.5 million | $332.0 million |
| Gross profit / margin | $88.6 million / 78.1% | $87.7 million / 78.5% | $264.0 million / 78.0% | $261.0 million / 78.6% |
| Operating income (loss) | $(18.9) million | $3.9 million | $(22.9) million | $17.7 million |
| Net income (loss) | $(40.5) million | $(1.2) million | $(40.1) million | $4.9 million |
| Diluted EPS | $(2.14) | $(0.07) | $(2.13) | $0.26 |
- Sales grew 1.6% reported and 2.5% at constant currency in Q3; nine-month growth was 2.0% reported and 3.1% constant currency.
- Global Spine sales increased 3.9% in Q3 and 4.5% year to date. Biologics grew 11.4% and 11.8%, respectively. Global Extremities sales declined 5.6% in Q3 and 6.1% year to date, partly reflecting foreign exchange and distributor-order timing.
- Q3 sales and marketing expense rose 9.8% to $54.8 million. Acquisition-related amortization and remeasurement rose to $23.6 million from $2.0 million, principally due to a $22.3 million increase in the estimated fair value of Spinal Kinetics revenue milestones.
- Other expense included a $6.5 million impairment of the eNeura debt security. The company recorded $13.7 million of Q3 income tax expense despite its pretax loss; management cited nondeductible acquisition-related expenses and executive compensation among the factors.
Cash flow, liquidity and obligations
- For the first nine months, operating cash flow was $20.1 million, versus $28.8 million a year earlier. Capital expenditures were $14.9 million; reported free cash flow, a non-GAAP measure, was $5.2 million versus $18.1 million.
- Cash, cash equivalents and restricted cash totaled $57.5 million at September 30, 2019, down from $72.2 million at year-end 2018. Management attributed much of the decline to the $15.0 million Spinal Kinetics FDA milestone payment.
- No borrowings were outstanding under the former $125 million revolving credit facility at September 30, and the company reported covenant compliance. On October 25, 2019, it entered into a new $300 million secured revolving facility maturing in 2024; no borrowing had been made as of October 28.
- There was no conventional long-term borrowing reported at quarter-end, but finance lease liabilities totaled $21.1 million. Total lease liabilities, including operating leases, were $27.1 million.
- Current assets were $237.8 million and current liabilities were $88.5 million at September 30. Trade receivables were $79.7 million and inventory was $81.0 million.
Material changes, outlook and risks
- The sharp deterioration in reported earnings primarily reflects acquisition-related milestone remeasurement. The remaining Spinal Kinetics contingent-consideration liability was estimated at $41.7 million, including $14.5 million classified as current; actual payments may differ from the estimate.
- The M6-C artificial cervical disc received FDA approval in February 2019 and launched in the U.S. The approval triggered the $15.0 million milestone payment. Management linked increased Motion Preservation sales to the launch, while noting legacy Spine Fixation distribution-channel disruption.
- On October 25, 2019, Orthofix settled the eNeura debt security for $4.0 million cash and agreed to transfer the warrant. The settlement followed the quarter-end impairment and is a subsequent event.
- Potential exposures include an estimated $4.5 million Italian medical-device payback accrual, subject to uncertainty over implementation, and a $1.6 million accrual related to a Brazilian distributor dispute. Approximately $0.7 million of Brazilian cash was restricted at quarter-end while the company appealed a judgment.
- No specific financial guidance or forecast is provided in the filing. The company reported no material changes to its previously disclosed risk factors or market risks. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether the Spinal Kinetics revenue milestones are achieved and how changes in sales forecasts affect the $41.7 million liability and future earnings.
- The operating trajectory of Global Extremities and legacy Spine Fixation, against growth in Biologics and M6-C-related Motion Preservation.
- Cash generation, working-capital trends, and the impact of higher sales and marketing spending on margins and free cash flow.
- Final recovery and accounting for the eNeura settlement, and developments in the Italian payback and Brazilian legal matters.
- Availability and covenant implications of the new $300 million secured facility; the filing reports no draw as of October 28, 2019.