Orthofix International N.V. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; filed May 8, 2014. The filing registrant is Orthofix International N.V. (the request identifies Orthofix Medical Inc.). Financial statements are unaudited; the 2013 comparative period was restated.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $101.3 million | $103.4 million |
| Gross profit / gross margin | $78.7 million / 77.7% | $77.8 million / 75.2% |
| Operating income | $2.5 million | $8.1 million |
| Continuing operations net income (loss) | $(0.2) million | $7.6 million |
| Net income (loss), including discontinued operations | $(0.8) million; $(0.04) per share | $4.5 million; $0.23 per share |
| Cash flow from operations | $(10.2) million | $15.1 million |
| Cash and restricted cash at period end | $46.0 million total, including $19.3 million restricted | $54.2 million total at Dec. 31, 2013 |
| Debt | $20.0 million revolving facility outstanding | $20.0 million at Dec. 31, 2013 |
At March 31, current assets were $278.4 million and current liabilities were $55.5 million. The company reported $180 million undrawn on its $200 million revolving facility, subject to facility terms, plus an unused Italian credit line of approximately $8 million. Management said available cash, expected operating cash flow, credit availability and debt capacity were sufficient for anticipated needs over the next 12 months. The company reported compliance with credit covenants and no defaults.
Changes and operating results
- Sales fell 2% year over year. BioStim sales rose 1%, Biologics fell 3%, Extremity Fixation rose 3% (4% constant currency), and Spine Fixation fell 11%.
- Gross margin improved, which management attributed to geographic sales mix and lower costs, primarily inventory-related. However, operating income declined, including $8.3 million of accounting review and restatement costs not present in Q1 2013.
- Sales and marketing expense decreased to $43.9 million from $45.1 million; G&A decreased to $17.5 million from $18.3 million. R&D increased to $5.9 million from $5.7 million.
- Other income/expense shifted from $4.8 million income in Q1 2013 to $0.3 million expense in Q1 2014. The prior-year figure included $4.4 million received from an insurance-company demutualization.
- Operating cash flow deteriorated, with working capital using $19.9 million, compared with providing $1.2 million in the prior-year quarter. Investing activities used $3.7 million. Financing activities provided $10.1 million, including $4.5 million from changes in restricted cash and $5.5 million from share issuances.
Outlook, risks and unusual items
- The filing provides no specific revenue, earnings or margin guidance; management cautions that quarterly results are not necessarily indicative of full-year results.
- The company restated prior financial statements after identifying revenue-recognition errors, including distributor transactions with extra-contractual payment or return terms, and adjustments involving inventory reserves and royalties. It reported material weaknesses in revenue recognition, inventory reserves, oversight of certain foreign subsidiaries, and manual journal-entry controls. Disclosure controls were considered ineffective as of March 31, 2014; remediation was ongoing and not complete.
- The filing identifies risks involving the accounting review and restatement, related legal proceedings and potential SEC enforcement, an investigation of alleged improper payments involving the Brazil subsidiary, product-liability indemnification, and compliance obligations under a corporate integrity agreement, deferred prosecution agreement and SEC consent decree.
- Q1 discontinued-operations loss included $0.8 million of expense for indemnification obligations related to the 2012 sale of Breg. The company also disclosed ongoing legal proceedings, investigations and claims, with no material developments since its 2013 Form 10-K.
- Foreign-exchange and floating-rate debt exposure remain relevant. The company had $20 million of floating-rate debt; it estimated a one-percentage-point interest-rate change would affect annual interest expense by about $0.2 million. Its cross-currency swap had a fair-value liability of approximately $1.0 million.
Most important facts for investors to verify
- Progress and effectiveness of remediation for the four disclosed material weaknesses, and whether further restatements or adjustments arise.
- Status and potential financial impact of the SEC, Brazil-related and other legal or government matters, including Breg indemnification claims.
- Drivers of the cash-flow decline and whether operating cash flow improves as working-capital balances change.
- Spine Fixation sales weakness, Biologics fee-rate changes, and the sustainability of gross-margin improvement.
- Availability of revolving credit, covenant compliance and the amount of cash that remains restricted from parent-company use.