Orthofix Medical Inc. quarterly report, Q1 FY2021

Orthofix Medical Inc. — Q1 2021 Form 10-Q

Reporting period: Three months ended March 31, 2021. Orthofix is a global medical device and biologics company operating through Global Spine and Global Orthopedics, with products distributed in more than 70 countries. Amounts below are U.S. dollars.

Financial performance and liquidity

Metric	Q1 2021	Q1 2020
Net sales	$105.6 million	$104.8 million
Gross profit / margin	$79.7 million / 75.5%	$81.4 million / 77.7%
Operating income (loss)	($2.9 million)	$6.9 million
Net income (loss)	($5.8 million); ($0.30) per diluted share	$25.7 million; $1.32 per diluted share
EBITDA, company-defined non-GAAP	$1.8 million	$12.4 million
Operating cash flow	$2.4 million	$12.5 million
Free cash flow, non-GAAP	($2.3 million)	$7.5 million

Cash, cash equivalents and restricted cash totaled $95.1 million at quarter-end, versus $96.8 million at December 31, 2020. Current assets were $263.4 million and current liabilities $99.1 million. The company had no borrowings on its secured revolving facility or Italian credit lines and reported compliance with financial covenants. Finance lease liabilities were $22.8 million; total lease liabilities, including operating leases, were $27.5 million.

Material changes versus prior year

Sales rose 0.7% as reported, but declined 0.8% at constant currency. Global Spine sales were essentially flat at $82.3 million; Global Orthopedics increased 3.3% as reported to $23.3 million, but declined 2.5% at constant currency.
Spinal Implants grew 12.1% to $25.7 million, including 19.2% growth in U.S. Spinal Implants. Bone Growth Therapies fell 5.5% to $42.9 million; Biologics fell 1.8% to $13.7 million.
Gross margin decreased 2.2 percentage points. Management cited product mix, fewer complex surgeries amid COVID-19 restrictions, and FITBONE manufacturing-transition and integration costs.
Operating results were affected by acquisition-related amortization and remeasurement: a $4.5 million expense in Q1 2021 versus a $7.6 million benefit in Q1 2020. The 2021 charge included a $1.5 million increase in the estimated fair value of Spinal Kinetics contingent consideration, $2.0 million of acquired-intangible amortization and $1.0 million of acquired in-process R&D.
The prior-year net result also included a $20.0 million income tax benefit, which the filing says was reversed in the quarter ended June 30, 2020. These unusual items make the year-over-year earnings comparison less representative of underlying operations.
Other expense increased to $2.7 million from $0.8 million, primarily due to foreign-currency remeasurement losses. EBITDA declined to $1.8 million, including Global Spine EBITDA of $11.9 million versus $22.4 million; Global Orthopedics and Corporate reported EBITDA losses of $2.2 million and $7.8 million.
Operating cash flow declined by $10.0 million year over year. Cash capital expenditures were $4.8 million, and free cash flow was negative $2.3 million.

Outlook, risks and unusual items

The filing provides no numerical revenue or earnings guidance. Management said the 2021 and longer-term effects of COVID-19 remained uncertain, citing elective-procedure slowdowns, possible localized shutdowns, hospital capacity, patient willingness to return, case waves and insurance coverage.
Management attributed lower Bone Growth Therapies sales in part to COVID-19 impacts and February winter storms. Global Orthopedics faced procedure-volume headwinds in some markets, partly offset by FITBONE growth; FITBONE sales were $1.6 million.
A $15.0 million Spinal Kinetics revenue milestone was triggered by trailing-12-month artificial-disc sales exceeding $30.0 million and was expected to be paid in Q2 2021. The remaining contingent-consideration liability was valued at $36.9 million, including that milestone; actual payments may differ from the estimate.
A related-party technology asset acquisition from a company partially owned and controlled by the CEO’s wife provides for up to $10.0 million of consideration, including $9.0 million contingent on milestones, plus royalties of 2%–4% of net sales after commercialization. The filing says the Audit and Finance Committee supervised the negotiations and the CEO was excluded from the transaction’s administration and related decisions.
The company accrued $7.1 million for Italy’s medical-device payback measure; the law’s implementation remained unclear and the eventual liability could differ. It also reported a $1.5 million accrual for a Brazilian distributor dispute and approximately $0.5 million of restricted cash related to that matter.
Medicare began recouping the company’s $13.9 million CMS advance payment in April 2021. At March 31, $13.7 million was classified as current contract liability and $0.2 million as long term. Deferred employer Social Security taxes of $0.6 million were repaid in January 2021.
After quarter-end, Orthofix signed an exclusive U.S. and Canada license and distribution agreement with IGEA, with payments of up to $4.0 million, including an FDA-milestone contingency, and minimum purchase requirements.
Management reported effective disclosure controls as of March 31, 2021, no material changes to internal control over financial reporting, and no material changes to previously disclosed risk factors.

Important facts for investors to verify

Whether procedure volumes and COVID-19 conditions support the company’s sales assumptions, especially for Bone Growth Therapies and Global Orthopedics.
The timing, cash impact and valuation assumptions for the Spinal Kinetics milestone payments and remaining contingent consideration.
The terms, milestone outcomes, royalty exposure and related-party governance for the technology acquisition involving the CEO’s wife’s company.
The timing and cash-flow effect of CMS advance-payment recoupments, along with the eventual resolution and financial impact of the Italian payback measure and Brazilian dispute.
Whether FITBONE transition costs, EU regulatory compliance spending and other operating costs affect margins and cash generation in subsequent periods.