Orthofix Medical Inc. — Q2 2021 Form 10-Q
Business and reporting period: Global spine and orthopedics medical-device company selling in more than 60 countries through its Global Spine and Global Orthopedics segments. This unaudited filing covers the quarter and six months ended June 30, 2021; amounts below are in U.S. dollars unless indicated.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $121.4 million | $73.1 million | $227.0 million | $178.0 million |
| Gross profit and margin | $94.0 million; 77.4% | $50.0 million; 68.3% | $173.6 million; 76.5% | $131.4 million; 73.8% |
| Operating income (loss) | $4.3 million | $(21.0) million | $1.4 million | $(14.1) million |
| Net income (loss) | $2.4 million | $(18.4) million | $(3.4) million | $7.2 million |
| Diluted EPS | $0.12 | $(0.96) | $(0.17) | $0.37 |
| EBITDA, company-defined non-GAAP | $12.8 million | $(9.0) million | $14.6 million | $3.4 million |
Q2 sales rose 66% year over year (63.2% at constant currency) and were 5% above Q2 2019. Six-month sales increased 27.6% (25.5% at constant currency). All product categories and both segments grew year over year. Q2 segment sales were $94.7 million in Global Spine and $26.7 million in Global Orthopedics. For the first half, they were $177.0 million and $50.0 million, respectively.
Q2 gross margin improved 9.1 percentage points year over year; the company attributed improvement to recovering sales, better fixed-cost absorption, and the absence of significant prior-year inventory charges. Operating expenses rose in dollars, including sales and marketing and research and development, but fell as a share of Q2 sales. First-half net loss, despite higher operating income, reflected weaker other income and a less favorable tax comparison, among other items.
Cash flow, liquidity, and obligations
- Cash, cash equivalents, and restricted cash totaled $80.5 million at June 30, down $16.3 million from year-end 2020. Cash and cash equivalents alone were $80.0 million.
- First-half operating cash flow was $0.3 million, versus $30.1 million in the prior-year period. Capital expenditures were $9.8 million; company-defined free cash flow was negative $9.5 million, versus positive $20.8 million.
- Management cited working-capital changes, including accounts receivable and recoupment of the CMS advance payment, as important factors in the operating cash-flow decline. Days sales in receivables improved to 55 from 84 a year earlier.
- No borrowings were outstanding under the secured revolving facility or the available Italian credit lines at June 30; the company reported compliance with financial covenants. Finance lease liabilities were $22.7 million; total lease liabilities, including operating leases, were $27.1 million.
- Current assets were $258.5 million and current liabilities $81.6 million. The $11.0 million remaining CMS advance-payment contract liability was classified as current. Medicare recoupments began in April 2021.
Changes, outlook, and risks
- Management described procedure volumes as recovering toward pre-pandemic levels, while some complex procedures remained below historical levels. Strong Q2 products included U.S. spinal implants and the M6-C artificial cervical disc and FITBONE system, which together generated approximately $9 million in sales.
- The filing provides no specific full-year 2021 revenue or earnings guidance. Management said the pandemic’s future effects remained uncertain, including the potential impact of case waves and variants, patient willingness to return, elective-procedure restrictions, insurance coverage, and hospital capacity.
- The company identified COVID-related supply-chain and raw-material risks, including a global semiconductor shortage affecting components in certain products. Limited suppliers could make substitution, redesign, or regulatory approval costly or slow.
- Spinal Kinetics contingent consideration: a $15.0 million revenue milestone was paid in Q2 after the threshold was met; the remaining liability was valued at $20.7 million. The ultimate remaining payment could be $30.0 million or zero, depending on whether the milestone is met within the required period.
- Contingencies include a $7.3 million accrual for Italy’s medical-device payback measure, whose implementation remains uncertain, and a $1.7 million accrual related to a Brazilian distributor dispute; approximately $0.6 million of Brazilian cash was restricted.
- A related-party technology agreement with a company partly owned and controlled by the CEO’s wife provides for up to $10.0 million in consideration, including $9.0 million contingent on milestones, plus royalties of 2% to 4% of sales after commercialization. The filing says the Audit and Finance Committee supervised negotiations and the CEO was excluded from the related oversight.
- An IGEA license agreement provides for up to $4.0 million in payments, including milestone-contingent amounts; $0.5 million was paid in Q2. The agreement also includes minimum purchase requirements.
Key facts for investors to verify
- Whether procedure-volume recovery and growth persist, particularly as COVID-19 conditions and hospital capacity evolve.
- Whether operating cash flow improves and how CMS recoupments and other working-capital needs affect liquidity.
- Exposure to semiconductor and other supplier disruptions, and any resulting product or regulatory delays.
- Timing and eventual amount of the remaining Spinal Kinetics milestone, and assumptions behind its $20.7 million fair value.
- Final obligations under the Italian payback measure, the Brazilian dispute, and the related-party and IGEA agreements.