Orthofix Medical Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited; U.S. dollars. Financial amounts below are in millions unless noted.
Business context
Orthofix is a global medical-device company focused on spine and orthopedics, selling in more than 60 countries. Its reporting segments are Global Spine and Global Orthopedics.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $114.0 | $112.4 | $338.5 | $339.4 |
| Gross profit / margin | $83.4 / 73.2% | $84.1 / 74.8% | $248.0 / 73.3% | $257.8 / 75.9% |
| Operating income (loss) | $(5.8) | $(0.3) | $(2.2) | $1.0 |
| Net income (loss) | $(10.7) | $(2.2) | $(12.7) | $(5.6) |
| Net loss per diluted share | $(0.53) | $(0.11) | $(0.63) | $(0.28) |
| EBITDA, company-reported non-GAAP | $(1.5) | $5.0 | $11.9 | $19.7 |
Q3 sales increased 1.4% reported and 4.8% at constant currency. Global Orthopedics grew 19.0% at constant currency; Global Spine was up 0.4%. For the first nine months, sales declined 0.3% reported but increased 2.0% at constant currency.
Q3 gross margin fell 1.6 percentage points. Management cited higher inventory reserves, shipping and manufacturing overhead costs, and unfavorable currency movements, partly offset by sales mix. Nine-month gross margin declined 2.7 points. Q3 operating and net losses widened; the nine-month operating result also shifted from income to loss. Segment EBITDA for Q3 was $10.1 million in Global Spine, $(0.5) million in Global Orthopedics, and $(11.2) million in Corporate.
Cash, liquidity and debt
- Cash and cash equivalents were $51.7 million at September 30, 2022, down from $87.8 million at December 31, 2021.
- Nine-month operating cash flow was negative $13.9 million, versus positive $6.7 million a year earlier. Capital expenditures were $17.3 million; company-reported free cash flow was negative $31.1 million, versus negative $6.1 million.
- Inventory rose to $100.3 million from $83.0 million at year-end. Inventory turns were 1.2 versus 1.3 a year earlier; days sales in receivables increased to 61 from 56.
- Current assets were $246.9 million and current liabilities $77.6 million. No borrowings were outstanding under the secured revolving facility or available Italian credit lines; the company reported compliance with financial covenants. Finance lease liabilities totaled approximately $20.0 million.
Material changes, outlook and notable items
- Spinal Implants sales fell 8.1% in Q3, attributed to U.S. procedure mix, nonrecurrence of prior-year large international orders, and competition. Bone Growth Therapies rose 3.0%, and Biologics rose 7.7%, supported by product introductions. Management cited hospital restrictions and staffing constraints as factors affecting complex procedures earlier in the year.
- Other expense increased, mainly due to foreign-exchange movements, particularly the stronger U.S. dollar against the euro. The company also recorded $1.4 million of acquired in-process R&D expense for its CGBio license agreement.
- A $17.2 million nine-month noncash benefit from remeasuring Spinal Kinetics contingent consideration reduced acquisition-related expense. The remaining revenue milestone, potentially up to $30 million, was valued at zero because management did not expect it to be achieved by its April 30, 2023 deadline.
- On October 10, 2022, after quarter-end, Orthofix agreed to an all-stock merger of equals with SeaSpine. The transaction was expected to close in Q1 2023, subject to shareholder approvals, regulatory approvals, and other conditions. The fixed exchange ratio is 0.4163 Orthofix shares per SeaSpine share; expected ownership of the combined company is approximately 56.5% for Orthofix shareholders and 43.5% for SeaSpine shareholders.
- No specific financial guidance or quantified forward outlook is provided in the supplied filing text. Management identified potential business impacts from supply-chain disruption, inflationary costs, foreign exchange, procedure volumes and staffing, and the pending merger.
- The company accrued $5.3 million for Italy’s medical-device payback measure; the law’s implementation and ultimate liability remained uncertain. The CMS advance-payment recoupment was completed in Q2 2022. Management reported effective disclosure controls and no material change to internal control over financial reporting.
Important facts for investors to verify
- Whether sales momentum at constant currency converts into improved reported growth, particularly in Global Spine and Spinal Implants.
- Whether gross-margin pressure, inventory growth, and negative operating and free cash flow improve in subsequent periods.
- Whether Orthofix and SeaSpine obtain required shareholder and regulatory approvals, meet closing conditions, and realize expected merger benefits; assess termination, integration, and execution risks.
- How Italian authorities clarify the payback measure and whether the $5.3 million accrual adequately reflects the eventual obligation.
- Cash needs and contingent payments, including lease obligations, license milestones, and the potential effect of foreign-exchange changes.