Orthofix Medical Inc. — Q2 2023 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2023. Unaudited; U.S. dollars. Orthofix completed its all-stock merger with SeaSpine on January 5, 2023, so reported comparisons include SeaSpine only in 2023 and are not directly comparable with 2022.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $187.0m | $118.1m | $362.2m | $224.5m |
| Gross profit / margin | $119.6m / 63.9% | $86.5m / 73.2% | $229.9m / 63.5% | $164.6m / 73.3% |
| Operating income (loss) | $(36.6)m | $6.6m | $(96.3)m | $3.6m |
| Net income (loss) | $(39.4)m | $2.5m | $(100.4)m | $(2.0)m |
| Diluted loss per share | $(1.07) | $0.12 income per share | $(2.77) | $(0.10) |
| Adjusted EBITDA | $9.9m | $11.4m | $13.1m | $18.5m |
Q2 sales increased 58.4% reported and 58.1% at constant currency; SeaSpine contributed $64.4m of Q2 sales and $125.3m for the half. Unaudited pro forma Q2 sales, as if the merger had closed January 1, 2022, were $187.0m versus $174.4m; pro forma net loss was $30.1m versus $27.1m.
- Sales mix: Q2 Global Spine sales rose 74.0% to $158.0m; Bone Growth Therapies rose 10.3% to $52.7m, while Spinal Implants, Biologics and Enabling Technologies rose 144.8% to $105.3m, primarily reflecting SeaSpine. Global Orthopedics sales increased 6.4% to $29.0m.
- Margins and expenses: Gross margin fell 9.3 percentage points in Q2. Management cited $9.4m of acquired-inventory fair-value step-up amortization and about $4.2m of merger-related product rationalization charges. Operating expenses also reflected merger integration costs, higher share-based compensation and acquired operations.
- Cash flow: Six-month operating cash use was $39.5m, versus $12.6m in 2022. Capital expenditures were $24.7m and free cash flow was negative $64.2m, compared with negative $24.3m. Cash declined $13.1m to $37.6m; cash acquired in the merger contributed $29.4m to investing cash flow.
- Liquidity and debt: Current assets were $399.3m and current liabilities $141.8m at June 30. Borrowings under the secured revolving facility were $51.0m; the effective rate was 6.4%, and $0.6m of interest was accrued. An additional $8.0m was borrowed July 5. The facility was amended to $175m, matures October 25, 2024, and is secured by substantially all of the borrowers’ and guarantors’ personal property. Orthofix reported covenant compliance at quarter-end.
Material changes, outlook and risks
- The merger substantially expanded the business and increased reported sales, assets, liabilities and share count. The preliminary purchase-price allocation included $120.4m of goodwill; valuation work remained incomplete and adjustments could be material.
- Merger integration and restructuring costs totaled $30.4m in the first half. Management expected approximately $16.7m of total pre-tax restructuring expense; $13.6m had been incurred by June 30, with $8.9m remaining accrued.
- Management attributed Bone Growth Therapies growth to complex spine procedures, commercial-channel investment and the AccelStim launch. Spinal product growth also reflected SeaSpine, new high-volume distribution partners and product launches. The filing provides no specific financial guidance or quantified full-year outlook.
- Key risks include the ability to integrate SeaSpine and realize anticipated synergies, execute restructuring, meet future credit-facility covenants, and manage cash needs. The company cautioned that future covenant compliance is not assured. It also noted that operating cash is held in bank accounts that may exceed insured limits.
- Orthofix accrued $6.8m for the disputed Italian Medical Device Payback; the eventual amount could differ. It was negotiating a potential distributor-business acquisition after receiving an exercise notice; exercise of all related agreements could result in about 1.3m shares issued. Lattus contingent consideration was valued at $9.9m, with actual payments potentially higher or lower.
- The company reported no material off-balance-sheet arrangements and no material changes to previously disclosed market risks. Management concluded disclosure controls were effective as of June 30, 2023.
Investor verification priorities
- Assess underlying sales trends apart from SeaSpine contributions, particularly against the pro forma comparison and by product category.
- Track gross-margin recovery as acquired inventory is sold and product rationalization and integration effects change.
- Monitor operating cash use, inventory levels and turns, capital spending, and the need for additional borrowing.
- Review debt availability, interest costs and covenant headroom under the amended, secured facility, including the July borrowing.
- Follow restructuring costs and savings, final merger purchase accounting, the Italian payback proceedings, and the distributor buyout negotiations.