Orthofix International N.V. (Orthofix Medical Inc. in request metadata) — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Amounts below are U.S. dollars; financial statement figures are in millions unless stated otherwise. The filing identifies the registrant as Orthofix International N.V.
Business context and financial performance
Orthofix is a global medical-device company with four reportable businesses: BioStim, Biologics, Extremity Fixation and Spine Fixation.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $104.1 | $101.0 | $202.8 | $190.7 |
| Gross profit / margin | $81.6 / 78.4% | $79.0 / 78.3% | $158.1 / 78.0% | $149.5 / 78.4% |
| Operating income (loss) | $(2.6) | $4.9 | $4.5 | $(2.3) |
| Net income (loss) | $(7.4) | $3.6 | $(3.5) | $(4.8) |
| Operating cash flow | Not separately reported | Not separately reported | $21.3 | $9.0 |
Q2 diluted loss per share was $0.41, versus diluted earnings per share of $0.19 in Q2 2015. Six-month diluted loss per share was $0.19, versus $0.26 in the prior-year period. The Q2 2016 effective tax rate on continuing operations was an unusual negative 141.5%; the filing attributes the rate primarily to nondeductible government-resolution charges, jurisdictional earnings mix and losses in jurisdictions where no tax benefit was recorded.
At June 30, cash and cash equivalents were $40.5, down from $63.7 at December 31, 2015. Total assets were $364.7 and total liabilities were $106.5. The company reported no borrowings under its $125 million secured revolving facility and compliance with its financial covenants. It also reported no borrowings on its Italian line, with €5.8 million ($6.4 million) available. The filing reports no material off-balance-sheet arrangements.
Material changes and operating trends
- Sales rose 3.1% in Q2 and 6.3% for the first half; first-half growth was 7.2% at constant currency.
- BioStim sales increased 10.0% in Q2 and 9.4% year to date, supported by customer growth and order-to-cash improvements. Extremity Fixation grew 4.8% in Q2 and 8.7% year to date; constant-currency year-to-date growth was 12.2%.
- Biologics sales declined 6.7% in Q2 and 3.0% year to date, with Trinity Elite volume affected by exclusion from a large hospital account and competing products. Spine Fixation sales fell 5.9% in Q2, attributed to lost surgeon customers, hospital-account exclusion and timing of international collections; first-half sales increased 3.9%.
- Q2 operating results included $12.9 million of charges related to potential U.S. government resolutions. General and administrative expense and restatement-related costs declined from the prior year, while sales and marketing and research and development expenses increased.
- First-half operating cash flow improved by $12.3 million year over year, including an $8.2 million working-capital source of cash. Investing used $14.0 million; financing used $30.7 million, principally reflecting $43.9 million of share repurchases. Cash declined $23.2 million during the half.
Outlook, contingencies and other notable items
- No numerical full-year revenue or earnings guidance is provided. Management expected recent and planned product launches to support revenue growth and said continuous-improvement initiatives and fixed-cost absorption could raise operating margins over the next four to six quarters. New Spine products launched in Q2 included Firebird NXG, the second-generation LoneStar Cervical Standalone System and Stabilink.
- The company accrued approximately $8.3 million in connection with an agreement in principle with SEC Enforcement Staff regarding the accounting review and restatements. It also accrued $4.6 million for a potential resolution of Brazil-related allegations; the company estimated an additional loss of up to $1.5 million could result. The discussions remained ongoing and final terms were not assured. These charges were accrued but unpaid at June 30.
- The DOJ deferred prosecution agreement expired July 17, 2016; the dismissal of the underlying Promeca-related case was filed July 28. SEC discussions concerning the Brazil allegations continued. The company also remained subject to a corporate integrity agreement and related compliance obligations.
- For former subsidiary Breg, the company reported $5.8 million accrued for specified cold-therapy liabilities; some outstanding claims could not be reasonably estimated. It incurred $0.5 million in settlements and judgments for infusion-pump claims during the first half.
- The eNeura convertible note’s fair value was $9.4 million at June 30 after $3.9 million of cumulative unrealized losses in the first half, including a $3.0 million Q2 impairment. The company classified the impairment as temporary. Its exclusive acquisition option was due to expire in September 2016; exercising it could require payments of up to $65 million.
- The board’s $75 million repurchase authorization had $19.5 million remaining at June 30. The company repurchased $43.9 million of shares during the first half and made an additional $2.1 million of repurchases through July 29.
- Project Bluecore’s U.S. and Italy Oracle ERP implementations entered production in Q2 and Q3, respectively. Management expected a further $1.9 million of project spending.
Key facts for investors to verify
- Progress, final amounts and payment timing for the SEC resolutions, including the Brazil-related exposure above the accrued amount.
- Whether sales weakness in Biologics and Q2 Spine Fixation persists, and the commercial traction of new products and BioStim.
- Cash-generation durability after working-capital contributions, ongoing repurchases and potential government-resolution payments.
- The eNeura option decision, note valuation and any potential acquisition funding requirement.
- Developments in Breg indemnification claims and whether recorded accruals remain adequate.
- Whether management’s expected margin improvement over the next four to six quarters materializes; the filing provides no numerical earnings guidance.