Orthofix International N.V. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012. The filing identifies the registrant as Orthofix International N.V.
Business context and financial performance
Orthofix develops and sells medical devices and related products for spine and orthopedic applications. Its continuing operations are reported in the Spine and Orthopedics segments. The company sold Breg, a significant part of its Sports Medicine business, on May 24, 2012; Sports Medicine is presented as discontinued operations.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $114.8m | $117.3m | $350.3m | $347.0m |
| Gross profit / margin | $92.4m / 80.5% | $93.5m / 79.7% | $282.3m / 80.6% | $277.7m / 80.0% |
| Operating income | $21.5m | $23.6m | $64.5m | $15.5m |
| Continuing-operations net income (loss) | $13.1m | $13.0m | $39.3m | $(13.3)m |
| Net income (loss), including discontinued operations | $7.6m | $12.4m | $30.8m | $(13.5)m |
| Diluted EPS | $0.39 | $0.66 | $1.59 | $(0.74) |
- Q3 reported sales fell 2%; constant-currency sales grew 1%. Nine-month reported sales rose 1%, or 3% at constant currency. Foreign exchange reduced sales by $3.8m in Q3 and $8.3m year to date.
- Q3 Spine sales rose 4% to $79.4m, including 8% growth in Spine Regenerative Stimulation; Orthopedics sales declined 13% reported and 4% constant currency to $35.4m. Year-to-date Spine grew 5%; Orthopedics fell 6% reported but grew 1% constant currency.
- Q3 operating income declined despite improved gross margin. For the nine months, operating income increased substantially year over year, principally reflecting the $43m U.S. government resolution charge recorded in 2011; 2012 included $1.7m of related imputed interest charges.
- Research and development expense increased to $23.2m for the nine months from $17.7m, including a $3.1m arbitration charge, a $3m MTF strategic investment, and higher research and clinical spending. General and administrative expense declined to $42.7m from $50.1m, primarily due to lower legal costs and the absence of $3.2m in 2011 management succession charges.
Cash flow, balance sheet, and liquidity
- Nine-month operating cash flow was $68.4m, versus $39.6m in 2011. Investing activities provided $135.1m, principally reflecting $153.8m net proceeds from the Breg sale; financing activities used $183.2m, including $188.7m of debt repayments. Capital expenditures were $18.6m.
- At September 30, cash and cash equivalents were $53.6m and restricted cash was $67.3m, totaling $120.9m. Restricted cash is subject to credit-agreement restrictions; $32m received from the Blackstone escrow was earmarked for the settlement paid after quarter-end.
- Total debt was approximately $20.3m: $20m outstanding under the revolving facility and $0.3m of bank borrowings. The term loan was repaid in full. The revolving facility bears floating interest; the stated effective rate was 2.74%, and its principal is due August 30, 2015.
- Management said cash, projected operating cash flows, the $180m available revolving capacity, Italian credit lines, and debt capacity were sufficient for the next 12 months, including settlements, working capital, capital expenditures, and R&D. The company reported compliance with credit covenants and no defaults.
- Trade receivables were $156.0m, with an allowance for doubtful accounts of $13.4m. Days sales outstanding rose to 125 from 102 a year earlier, excluding former Sports Medicine. Inventory was $80.8m, down from $83.0m at December 2011.
Material developments, outlook, and risks
- The Breg sale generated a $1.3m after-tax gain. The business contributed $43.6m of sales and $14.3m of operating losses through its sale date in 2012. The transaction proceeds were largely applied to debt repayment.
- Orthofix agreed to pay $34.2m plus interest to settle the regenerative-stimulation government matter, along with a $7.8m criminal fine and a $400 special assessment under a plea agreement pending court approval. It also entered a five-year Corporate Integrity Agreement. The Blackstone settlement was $32m; payment was made October 30, 2012.
- The Promeca FCPA matter was resolved through a $5.2m disgorgement and a $2.2m fine, both paid in Q3. The company remains subject to obligations under a deferred prosecution agreement.
- Breg-sale indemnities and product-liability matters remain material uncertainties. The company accrued $4.2m for its indemnification exposure related to a July 2012 cold-therapy verdict, whose appeal and ultimate liability remain uncertain, and approximately $1.8m for certain other post-closing cold-therapy obligations. It said it could not reasonably estimate potential losses for other indemnities.
- Management provided no specific revenue or earnings guidance in the supplied filing text. It cited weaker Physio-Stim sales, competition and regulatory delays in Brazil, foreign-exchange exposure, reimbursement and competitive pressures, and uncertainty in litigation and government matters. A 1-percentage-point interest-rate change on quarter-end revolving debt would change annual interest expense by about $0.4m.
Investor facts to verify
- Whether the regenerative-stimulation plea agreement receives court approval and whether the related settlement obligations are fully paid as planned.
- Final outcomes and cash exposure from Breg-related indemnities and product-liability cases, including post-verdict motions and appeals.
- Whether higher Spine sales can offset Orthopedics’ product, competition, and Brazil-related challenges, and whether receivables and DSO improve.
- Availability of reported cash for general use, given restricted cash and subsidiary distribution restrictions, and continued covenant compliance.
- How results compare after the Breg disposal, which changes the continuing-business mix and makes comparisons with prior periods less like-for-like.