Orthofix Medical Inc. — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; filed March 5, 2024. Orthofix completed its all-stock merger with SeaSpine on January 5, 2023, and reports Global Spine and Global Orthopedics segments. The 2023 results include nearly a full year of SeaSpine, so reported year-over-year comparisons are not like-for-like.
Financial performance and liquidity
| Metric | 2023 | 2022 |
|---|---|---|
| Net sales | $746.6 million | $460.7 million |
| Gross profit / margin | $486.3 million / 65.1% | $337.2 million / 73.2% |
| Operating loss | $139.1 million | $13.3 million |
| Net loss | $151.4 million | $19.7 million |
| Adjusted EBITDA (non-GAAP) | $46.3 million | $48.6 million reported; $27.4 million on a pro forma basis as cited by management |
| Cash from operating activities | $(45.8) million | $(11.5) million |
| Capital expenditures / free cash flow (non-GAAP) | $62.1 million / $(107.8) million | $23.2 million / $(34.7) million |
- Reported sales increased 62.1% (61.6% constant currency); pro forma sales were $746.6 million versus $698.2 million in 2022, an increase of about 6.9%.
- Global Spine sales were $631.3 million, up 78.8% reported, including SeaSpine. Bone Growth Therapies grew 13.5%; Spinal Implants, Biologics and Enabling Technologies grew 152.4%, primarily reflecting the merger. Global Orthopedics sales rose 7.2% reported and 5.2% constant currency.
- Gross margin declined 8.1 percentage points. Management cited $36.0 million of acquired-inventory fair-value step-up amortization and about $6.0 million of merger-related product rationalization charges, in addition to the changed business mix.
- Cash, cash equivalents and restricted cash totaled $37.8 million at year-end, down from $50.7 million. Year-end current assets were $420.4 million and current liabilities $165.2 million. Inventory was $222.2 million, versus $100.2 million in 2022.
- At December 31, 2023, the company had $100 million principal outstanding under its new term loan (94.4 million carrying value after discounts and costs). The facility also provides a $25 million delayed-draw term loan and a $25 million revolver. The company subsequently borrowed $15 million under the revolver on January 10, 2024. Debt is floating-rate, secured by substantially all company and guarantor assets, and subject to financial covenants.
- Research and development expense was $80.2 million, up from $49.1 million. Interest expense, net, increased to $8.6 million from $1.3 million.
Material changes and unusual items
- The SeaSpine merger contributed $258.9 million of 2023 sales. Acquisition consideration was valued at $376.7 million; the company recorded $123.6 million of merger-related goodwill in Global Spine.
- Merger integration and restructuring costs totaled $37.7 million in 2023. The company expects approximately $18.2 million of pre-tax restructuring expense in total; $7.0 million remained accrued at year-end.
- Operating expenses also included $14.5 million of litigation and investigation costs, reflected among adjusted EBITDA reconciliation items. General and administrative expense included approximately $10.0 million associated with the Board-directed independent investigation and related activities.
- Net loss attributable to SeaSpine was $84.0 million for 2023. Reported 2023 loss includes substantial acquisition accounting, integration, share-based compensation and other costs; adjusted EBITDA is a non-GAAP measure and excludes various items.
Outlook, risks and contingencies
- The filing provides no quantified revenue or earnings guidance. Management describes continued product launches, commercial-channel expansion, integration and cost-savings efforts as priorities. It anticipated further 7D FLASH navigation enhancements and a commercial launch of FLASH EVD in 2024, subject to regulatory review.
- Management reported a material weakness in internal control over financial reporting involving management review controls for business combinations and goodwill. The weakness did not result in identified financial-statement misstatements; remediation was underway and expected to extend beyond 2023. The auditor issued an adverse opinion on internal control. SeaSpine, representing about 52% of year-end assets and 35% of 2023 revenue, was excluded from the control assessment under SEC guidance.
- Three former executives were terminated for cause following an independent investigation. They filed arbitration claims in January 2024 alleging wrongful termination and other claims; Orthofix disputes the allegations and intends to defend itself. The company said it could not reasonably estimate a possible loss or range.
- The company accrued $7.6 million for Italy’s medical-device payback program while disputing its legality; the ultimate obligation may differ. It also disclosed $8.5 million estimated fair value for contingent consideration tied to Lattus product sales.
- Additional risks include ongoing SeaSpine integration and uncertain synergies; negative operating and free cash flow; inventory levels and obsolescence; floating-rate secured debt and covenant compliance; reimbursement and pricing pressure; regulatory clearance and EU MDR requirements; dependence on third-party suppliers and tissue sources; competition; and product-liability, cybersecurity and foreign-exchange exposures.
- MTF marketing service fees were $53.3 million in 2023, approximately 32% of Biologics revenue; MTF is a key source for certain allografts.
Most important facts for investors to verify
- Assess underlying growth using pro forma results, distinguishing merger-driven reported growth from organic performance and segment trends.
- Track whether gross margin recovers as acquired inventory step-up amortization and rationalization charges subside, and whether integration produces durable savings.
- Monitor cash burn, capital spending, inventory, and funding needs, including the post-year-end revolver borrowing and any delayed-draw borrowing.
- Review remediation progress and auditor conclusions regarding the material weakness, particularly given the acquired business’s exclusion from the control assessment.
- Follow the former-executive arbitrations, Italian payback dispute, and Lattus contingent consideration for changes in exposure or cash requirements.
- Test growth and concentration risks in Bone Growth Therapies, navigation, and MTF-supported biologics, including reimbursement, regulatory and supply developments.