Orthofix International N.V. (Orthofix Medical Inc.) — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless noted. Amounts are U.S. dollars. The filing identifies the registrant as Orthofix International N.V. and reports four businesses: BioStim, Biologics, Extremity Fixation and Spine Fixation.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $98.7 million | $89.8 million |
| Gross profit / margin | $76.5 million / 77.6% | $70.4 million / 78.5% |
| Operating income (loss) | $7.1 million | ($7.2 million) |
| Net income (loss) | $3.9 million | ($8.4 million) |
| Diluted EPS | $0.21 | ($0.45) |
| Cash from operations | $4.4 million | $2.5 million |
- Sales rose 9.9% reported and 11.8% at constant currency. Segment sales: BioStim $41.0 million (+8.9%); Biologics $14.1 million (+1.0%); Extremity Fixation $24.7 million (+13.3% reported; +20.9% constant currency); Spine Fixation $18.8 million (+15.6%).
- Gross margin declined 0.9 percentage point, which management attributed mainly to a higher sales mix of lower-margin fixation products. Operating expenses fell 10.6% to $69.4 million, including lower G&A and restatement-related costs, partly offset by higher R&D spending.
- Income tax expense from continuing operations was $4.3 million, a 48.1% effective rate; management cited earnings mix across tax jurisdictions, state taxes, and losses in jurisdictions where no tax benefit was recognized. Net loss from discontinued operations was $0.7 million.
- Operating cash flow improved, but working capital used $9.0 million. Investing activities used $7.4 million and financing activities used $21.5 million, primarily reflecting share repurchases. Cash declined to $39.8 million from $63.7 million at year-end 2015.
- Total assets were $362.8 million and total liabilities $87.3 million at March 31, 2016. No borrowings were outstanding under the $125 million secured revolving facility; the company reported compliance with its financial covenants. The filing also reports an unused Italian credit line of €5.8 million ($6.6 million).
Material changes and notable items
- Results turned profitable from a year-earlier loss. Lower restatement-related costs ($0.2 million versus $5.9 million) and lower G&A contributed to the improvement. Sales and marketing expense was nearly flat; R&D increased 30.6%, including investment in the tissue supplier’s processing and storage capabilities.
- Other income was $1.8 million, with management citing favorable foreign-exchange effects; Q1 2015 included a $3.1 million gain on sale of the Tempus Cervical Plate product line. Q1 2016 also included a $0.8 million additional unrealized impairment of the eNeura debt security, recorded in other comprehensive loss. The company continued to classify the impairment as temporary.
- The company repurchased 676,259 shares for $26.5 million in Q1 at an average $39.13 per share. $37.0 million remained under the $75 million authorization at quarter-end; an additional 136,816 shares for $5.8 million were repurchased through April 25.
Outlook, risks and contingencies
- No quantified revenue or earnings guidance is provided. Management’s 2016 priorities include expanding sales channels, launching products, investing in clinical research, and improving operating margins. It expected cost savings and fixed-cost absorption to support higher margins over the following four to six quarters.
- Products launched or planned for 2016 include spine interbody and fixation products, expanded TruLok Hex software, next-generation BioStim products, and a hip fracture system. The company cautions that Q1 results are not necessarily indicative of full-year results.
- Risks include the SEC investigation related to prior accounting reviews and restatements; the extended DOJ deferred prosecution agreement, then scheduled to run through July 17, 2016, and the Brazil subsidiary improper-payment review; and continued compliance obligations. The company said it could not reasonably estimate potential losses from the SEC matter or potential criminal prosecution.
- The securities class-action settlement was subject to final court approval at an April 29, 2016 hearing; insurers were expected to cover the settlement payment if approved. The IMSS settlement called for $1.0 million cash plus $3.0 million of products and training, and was accrued in 2015. The company had accrued $6.0 million for certain former Breg cold-therapy liabilities; outcomes of other product-liability claims remained uncertain.
- Other exposures include foreign currency, credit concentration, reimbursement and competitive pressures, and tax examinations. Management reported disclosure controls were effective as of March 31, 2016, and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales growth, particularly in Extremity and Spine Fixation, continued and translated into sustained operating-margin improvement.
- Cash needs and capital allocation after the substantial Q1 buyback, including subsequent repurchases and use of the revolving facility.
- Resolution and financial consequences of the SEC investigation, DOJ agreement and Brazil review, and pending litigation and indemnification matters.
- Recoverability and valuation of the eNeura note, and whether its option and investment assumptions change.
- Full-year tax burden, working-capital trends, and the commercial performance of planned product launches.