Orthofix Medical Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Orthofix is a global medical-device company focused on musculoskeletal products and therapies, with Global Spine and Global Extremities reporting segments. Financial statements are unaudited.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Net sales | $104.8 million | $109.1 million; down 3.9% reported and 3.4% constant currency |
| Gross profit / margin | $81.4 million / 77.7% | $85.4 million / 78.3% |
| Operating income (loss) | $6.9 million | ($4.4 million) |
| Net income | $25.7 million; diluted EPS $1.32 | $0.9 million; diluted EPS $0.05 |
| Operating cash flow | $12.5 million | ($1.0 million) |
| Capital expenditures / free cash flow | $4.9 million / $7.5 million | $4.9 million / ($6.0 million) |
| Cash, cash equivalents and restricted cash | $58.3 million at March 31 | $70.4 million at December 31, 2019 |
| Debt and credit availability | No borrowings at March 31; $300 million revolving facility available | Borrowed $100 million under the facility on April 16, after quarter-end |
At March 31, current assets were $240.0 million and current liabilities were $66.0 million. Total liabilities were $138.1 million, including $22.8 million of finance-lease liabilities. The company reported compliance with credit-facility covenants at quarter-end.
Reported net income was substantially affected by a $20.0 million income-tax benefit, including a $17.8 million benefit from statute expirations on unrecognized tax benefits and a $3.0 million CARES Act benefit. Operating results also benefited from a $9.0 million noncash reduction in contingent-consideration fair value; acquisition-related amortization and remeasurement was a net benefit of $7.6 million, compared with $6.5 million of expense in Q1 2019. These items make the year-over-year increase in net income less representative of underlying operating performance.
Changes and operating drivers
- Global Spine sales fell 4.2% to $82.3 million; Global Extremities sales fell 3.0% to $22.5 million. Bone Growth Therapies declined 3.9%, Spinal Implants were broadly flat, and Biologics declined 11.3%.
- Management attributed weaker sales in part to COVID-19-related delays and cancellations of elective procedures. Biologics also faced the loss of a key distributor and certain large accounts. Extremities sales were affected by currency and lower U.S. procedure volumes.
- Gross margin decreased 0.6 percentage points. Management cited lower sales and higher inventory-reserve expense associated with COVID-19.
- Total EBITDA, a company-defined non-GAAP measure, was $12.4 million versus $0.9 million. Global Spine EBITDA rose to $22.4 million from $10.6 million; Global Extremities EBITDA was negative $1.9 million versus negative $0.2 million.
- Operating cash flow improved, while investing cash use included the $18.0 million FITBONE acquisition. The acquisition closed March 26 and added a limb-lengthening system; preliminary purchase accounting included $11.1 million of goodwill.
Outlook, risks and notable items
- The filing gives no quantified revenue or earnings guidance. Management said the duration and financial impact of COVID-19 were uncertain and expected elective-procedure reductions to materially affect future results and liquidity.
- Risks identified include further procedure delays, customer payment delays, supply-chain or facility disruptions, workforce constraints, economic weakness, and reduced access to financing. The company also cited potential cybersecurity exposure from remote work.
- After quarter-end, Orthofix borrowed $100.0 million to preserve financial flexibility, received $13.9 million through the CMS Accelerated and Advance Payment Program (repayment through claim offsets begins after 120 days), and received $4.7 million from the Provider Relief Fund, subject to eligibility criteria. It also initiated temporary U.S. salary reductions and suspended its 401(k) match through September 30, 2020.
- The remaining Spinal Kinetics revenue-based contingent consideration was valued at $33.7 million, with potential payments up to $45.0 million. Its valuation depends on uncertain sales forecasts and could change materially.
- Other matters include a $5.2 million accrual for the uncertain Italian medical-device payback measure and a $1.3 million accrual relating to a Brazilian distributor dispute; approximately $0.5 million of cash in Brazil was restricted.
- The FDA planned an advisory review of whether bone-growth-stimulator devices should be reclassified from Class III. A change could increase competition; meeting timing was unclear due to the pandemic.
Important facts for investors to verify
- How elective-procedure volumes, sales trends and customer collections developed after March 31, and the resulting effect on cash flow.
- The terms, interest cost, covenant headroom and repayment plans for the $100 million post-quarter borrowing.
- Whether the $4.7 million Provider Relief Fund payment can be retained and the timing and impact of CMS accelerated-payment offsets.
- The sustainability of reported earnings excluding the unusual tax benefit and contingent-consideration remeasurement gain.
- Final FITBONE purchase-price allocation and the eventual value and timing of Spinal Kinetics milestone payments.
- Developments in the Italian payback matter, Brazilian litigation, and FDA review of bone-growth-stimulator classification.