Orthofix International N.V. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; the filing also provides unaudited fourth-quarter results. The filing identifies the registrant as Orthofix International N.V. and reports in U.S. dollars.
Business context and financial performance
Orthofix is a global medical-device company focused on spine and orthopedic repair and regenerative products. Its continuing operations comprise Spine and Orthopedics. The company sold its Sports Medicine business, including Breg, on May 24, 2012; its results are reported as discontinued operations.
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net sales | $462.3 million | $470.1 million |
| Gross profit / margin | $375.8 million / 81.3% | $377.5 million / 80.3% |
| Operating income | $89.0 million | $31.3 million |
| Continuing-operations net income (loss) | $53.9 million | $(1.7) million |
| Net income (loss), including discontinued operations | $51.3 million | $(1.1) million |
| Diluted EPS | $2.64 | $(0.06) |
| Cash from operating activities | $11.2 million | $64.8 million |
FY 2012 revenue fell about 2% year over year, including a $9.8 million adverse foreign-currency impact. Spine sales rose 3% to $311.9 million; Orthopedics sales fell 9% to $150.4 million. Trinity Evolution biologics growth supported Spine, while lower orthopedic stimulation sales weighed on Orthopedics. Operating income improved substantially, but the comparison is affected by $56.5 million of U.S. Government-resolution charges recorded in 2011. Gross margin rose due mainly to operating efficiencies and favorable product and geographic mix.
Unaudited Q4 2012 net sales were $112.0 million versus $123.1 million in Q4 2011; net income was $20.5 million versus $12.4 million. Q4 2012 continuing-operations net income was $14.6 million.
Liquidity, debt and cash flow
- At year-end, cash and cash equivalents were $31.1 million and restricted cash was $21.3 million; together these totaled $52.4 million, but restricted cash was not freely available to the parent.
- Total debt was approximately $20.0 million, down from $210.0 million at year-end 2011. The $100 million term loan was repaid and $20 million remained outstanding on the $200 million revolving facility, with $180 million available. The company reported covenant compliance and no defaults.
- Operating cash flow declined to $11.2 million. Management attributed the decline largely to payment of previously accrued government settlements and working-capital movements, including receivables. Investing cash flow was positive $125.0 million, primarily reflecting $153.8 million of net Breg-sale proceeds; financing cash outflow was $138.6 million, including $188.7 million of debt repayment.
- Receivables days increased to 123 from 99; inventory turns declined to 1.0 from 1.1. Year-end current assets were $340.4 million and current liabilities $68.8 million, including restricted cash within current assets.
Material changes, outlook and risks
- Breg divestiture: Sold for $157.5 million cash and generated a reported after-tax gain of $1.3 million. The sale reduced debt but ended Sports Medicine operations.
- Government matters: The company paid $34.2 million plus interest and $1.0 million in relator counsel fees to resolve regenerative-stimulation claims; it also paid a $7.8 million criminal fine. The Blackstone matter was settled for $32 million, funded from acquisition escrow. In the Promeca FCPA settlement, it paid $5.2 million in disgorgement and a $2.2 million fine. Orthofix Inc. pleaded guilty to obstruction of a federal audit and received five years’ probation. Orthofix is subject to a five-year Corporate Integrity Agreement and a three-year deferred prosecution agreement; noncompliance could lead to penalties, prosecution or exclusion from federal healthcare programs.
- Former Breg exposure: The company has indemnification obligations for specified infusion-pump and cold-therapy matters. It accrued $4.2 million for a cold-therapy verdict, which remains subject to appeal; additional exposure for other indemnified matters could not be reasonably estimated. A January 2013 arbitration award requires an insurer to reimburse approximately $13 million for past losses, with up to $15 million of potential future coverage.
- Other risks: Reimbursement and healthcare policy changes, regulatory clearance and compliance, product liability, human-tissue supply and classification, competition and product adoption, foreign exchange, and collection of receivables. Foreign currency reduced 2012 sales by $9.8 million. The company also cited possible effects of the U.S. Open Payments reporting rules.
- Outlook: The filing does not provide quantified earnings or revenue guidance. Management planned approximately $30 million of 2013 capital expenditures, principally funded from operating cash flow, and described continued investment in product development and market expansion.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting; management also concluded controls were effective at year-end.
Important facts for investors to verify
- Whether the Spine growth and improved gross margin can continue while overall sales remain pressured and Orthopedics recovers.
- Cash conversion and collections, particularly the rise in receivables days and the substantial decline in operating cash flow.
- Actual accessibility of cash, given $21.3 million of restricted cash and restrictions on subsidiary distributions.
- Compliance with the Corporate Integrity Agreement, deferred prosecution agreement and probation, and any resulting costs or sanctions.
- Ultimate costs and insurance recoveries for Breg-related indemnities, product-liability claims and the pending infusion-pump investigation.
- Delivery of the planned 2013 investment program and operating cash flow sufficient to fund it.