Orthofix International N.V. (Orthofix Medical Inc.) — Q1 2018 10-Q
Business context and period: Global medical-device company focused on musculoskeletal healing products and services, reported through BioStim, Extremity Fixation, Spine Fixation and Biologics. This unaudited report covers the three months ended March 31, 2018; amounts below are U.S. dollars unless noted.
Financial results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $108.7 million | $102.7 million |
| Gross profit / gross margin | $84.6 million / 77.8% | $80.2 million / 78.0% |
| Operating income / margin | $7.9 million / 7.2% | $5.9 million / 5.8% |
| Net income (loss) | $5.2 million | ($2.7 million) |
| Diluted EPS | $0.27 | ($0.15) |
| Operating cash flow | ($3.6 million) | ($10.9 million) |
| Free cash flow (non-GAAP) | ($7.0 million) | ($14.8 million) |
Non-GAAP net margin, defined by the company as gross profit less sales and marketing expense, was $34.3 million, or 31.5% of sales, versus $31.6 million, or 30.8%. Cash and cash equivalents were $77.1 million at quarter-end, down $4.1 million from year-end. Current assets were $263.1 million and current liabilities $65.2 million. The company reported no borrowings under its $125 million revolving facility or its available Italian credit line and was in compliance with financial covenants. Capital expenditures were $3.4 million.
Changes and drivers
- Reported sales increased 5.8%; growth was 3.3% on a constant-currency basis. Extremity Fixation rose 14.9% reported (4.3% constant currency), Spine Fixation 7.5%, and BioStim 3.6%; Biologics declined 4.4%.
- Extremity Fixation’s reported growth included a $2.5 million favorable foreign-exchange effect. Biologics was pressured by pricing and a contractual reduction in marketing fees, partly offset by higher volume.
- Revenue-standard adoption materially affects comparison: Topic 606 added $7.3 million to Q1 2018 sales and $5.4 million to operating income versus the company’s former accounting. On the former accounting basis, Q1 2018 sales would have been $101.4 million; prior-year results were not restated. Adoption also increased opening retained earnings by $4.8 million.
- Other income was $2.9 million versus a $4.3 million expense a year earlier. Q1 2018 included a $1.6 million gain on Bone Biologics investments; Q1 2017 included a $5.6 million impairment of the eNeura debt security. The improvement in net income therefore reflects these unusual items as well as stronger operating income.
Outlook, events and risks
- No specific financial guidance or quantified outlook is provided. Management highlighted U.S. FDA and European CE Mark approvals for next-generation PhysioStim bone growth stimulators and its STIM onTrack mobile application.
- After quarter-end, on April 30, 2018, the company completed its Spinal Kinetics acquisition for $45 million cash, funded from cash on hand, with up to $60 million in contingent milestone payments tied to regulatory approval and sales targets.
- At March 31, the company had accrued €2.6 million ($3.2 million) for the Italian Medical Device Payback measure; the ultimate obligation remains uncertain pending clarification by Italian authorities. A Breg-related post-close cold-therapy product-liability claim remained pending; the company accrued $1.7 million, and the final liability could differ.
- The effective tax rate on continuing operations was 50.7%. Management cited jurisdictional earnings mix, losses in jurisdictions where no tax benefit is recognized, and nondeductible expenses. The company recorded a $0.5 million tax benefit in Q1 related to supplemental Tax Act guidance and said its analysis remained provisional.
- Management reported no material changes to previously disclosed risk factors or market risks. It cautioned that interim results are not necessarily indicative of full-year results and identified revenue recognition, receivables allowances, inventory, impairment, litigation and taxes among estimates subject to judgment.
Investor verification points
- Assess sales and earnings on a comparable basis given the first-time Topic 606 adoption and its material effect on reported Q1 results.
- Track receivables and collections: days sales in receivables were 64, versus 52 a year earlier; management attributed much of the increase to Topic 606 adoption.
- Confirm the cash and liquidity impact of the Spinal Kinetics purchase and potential milestone payments, alongside ongoing negative operating and free cash flow.
- Monitor the final Italian payback assessment, the Breg claim, and the valuation and recoverability of the eNeura debt security and Bone Biologics investments.