Orthofix International N.V.
02/12/09

Orthofix International Announces 4th Quarter and Full Year 2008 Results and Full Year 2009 Guidance

BOSTON, Feb 12, 2009 (BUSINESS WIRE) -- Orthofix International N.V. (NASDAQ:OFIX) (the Company) announced today that total revenue for the fourth quarter ended December 31, 2008 increased 3% over the fourth quarter of 2007, to $132.3 million. Excluding the unfavorable $4.1 million impact of foreign currency rates on fourth quarter sales, revenue increased 6% on a constant currency basis.

Total revenue for the full year 2008 was $519.7 million, which was an increase of 6% compared with 2007, or 5% on a constant currency basis.

"We were encouraged with the sequential improvement in the operating performance of our spinal implant and biologic business during the fourth quarter. This improved performance included increased revenue, a higher gross profit margin and lower adjusted operating expenses as a percentage of revenue compared with the third quarter, as a result of recent investments and initiatives in this business unit," said President and CEO Alan Milinazzo. "With 74% of our total revenue for 2008 up an average of 15%, we also continued to be pleased with the fourth quarter results of our other core businesses, which performed well throughout the year."

The reported fourth quarter net loss totaled $717,000, or $0.04 per share. Excluding certain items summarized in the table below, fourth quarter adjusted net income amounted to $6.8 million, or $0.40 per share. This was a 77% increase compared with adjusted net income of $3.8 million, or $0.23 per share, in the fourth quarter of 2007.

The reported net loss for the full year 2008 was $228.6 million or $13.37 per share. Excluding certain items, including a $237.7 million non-cash impairment charge, among other items, adjusted net income was $27.0 million, or $1.57 per share for the full year. A reconciliation of full year adjusted net income is included in the Regulation G Supplemental Information Schedule attached to this release.

Additionally, adjusted net income, excluding specified non-cash items was $9.5 million, or $0.56 per share in the fourth quarter, as indicated in the table below, and $43.5 million, or $2.54 per share for the full year, as indicated in the Regulation G Supplemental Information Schedule attached to this release.

Guidance

In 2009 Orthofix expects to generate between $535 and $545 million of revenue, and expects reported earnings to be $1.38-$1.48 per share. This earnings estimate includes pretax costs of approximately $5.8 million, or $0.21 per share, associated with strategic initiatives, and $3.3 million, or $0.12 per share, related to the previously announced reorganization and consolidation of Blackstone Medical's operations.

The Company also provided the following additional full-year 2009 guidance:

The Company also expects Blackstone Medical to achieve a quarterly operating profit in the fourth quarter of 2009. The improvement in Blackstone's operating performance during 2009 is expected to result primarily from:

Non-GAAP Performance Measures

The table below presents a reconciliation between fourth quarter net income calculated in accordance with generally accepted accounting principles (GAAP) and two non-GAAP performance measures, referred to as "adjusted net income" and "adjusted net income, excluding specified non-cash items", that exclude from net income the items specified in the table. Additionally, a reconciliation of fourth quarter sports medicine revenue calculated in accordance with GAAP to a non-GAAP performance measure, referred to as "adjusted revenue", and a reconciliation between fourth quarter net income calculated in accordance with GAAP and the non-GAAP measure referred to as "Consolidated EBITDA" are included in the Regulation G Supplemental Information Schedule attached to this release. Management believes it is important to provide investors with the same non-GAAP metrics which it uses to supplement information regarding the performance and underlying trends of Orthofix's business operations, facilitate comparisons to its historical operating results and internally evaluate the effectiveness of the Company's operating strategies. A more detailed explanation of the items in the table below that are excluded from GAAP net income, as well as why management believes the non-GAAP measures are useful to them, is included in the Regulation G Supplemental Information schedule attached to this press release.

Reconciliation of Non-GAAP Performance Measures    
 
Fourth QuarterQ408Q407
($000's)EPS($000's)EPS
 
 
Reported GAAP net loss($717)($0.04)($10,515)($0.62)
 
Specified Items:

Unrealized, non-cash loss on interest rate swap

 

$5,184$0.30------
Corporate reorganization costs$913$0.05------
Foreign exchange (gain)/loss$1,103$0.06($618)($0.04)
Tax benefits ($3,358)($0.20)------
Strategic investments$3,640$0.21$944$0.06
Non-cash asset impairment charge------$12,803$0.76
Management transition costs   ---     ---   $1,200   $0.07  
Adjusted net income$6,765   $0.40   $3,814   $0.23  
 
Specified non-cash items:
Non-cash BREG amortization$816$0.05$861$0.05
Non-cash Blackstone amortization$137$0.01$1,796$0.11
Equity compensation expense (FAS 123R)$1,793   $0.10   $2,662   $0.16  
 
Adj. net income, excluding specified non-cash items$9,511   $0.56   $9,133   $0.55  
 
NOTE: Some calculations may be impacted by rounding

Revenue

Total fourth quarter sales in the Company's spine sector were up 2% year-over-year, at $65.8 million. Spine stimulation revenue increased 11%, to $37.4 million. Implant and biologic revenue was $28.2 million, including international revenue. This was 7% lower than the fourth quarter of 2007, but increased 9% sequentially from the prior quarter. The year-over-year decrease in implant and biologic revenue was driven by lower revenue from the Company's implant devices, partially offset by an increase in revenue from biologic products. The sequential growth in implant and biologic revenue was primarily due to a 23% increase in biologic sales and 9.5% growth in U.S. sales of thoracolumbar implants.

Reported fourth quarter revenue in the Company's orthopedic business was $32.2 million, which was an increase of 7%, or 16% on a constant currency basis, compared with the prior year. The reported revenue growth was driven primarily by a 20% increase in sales of Physio-Stim(TM) bone growth stimulation devices, 35% growth in internal fixation sales, and a 16% increase in revenue from the Company's deformity correction devices. Additionally, the Company's biologic sales, which were not material in the prior year, increased to approximately $1.1 million. This growth was partially offset by a 1% decline in external fixation revenue.

Sports medicine revenue in the fourth quarter grew 6% compared with 2007, to $24.3 million. However, after adjusting for the sale of the Company's line of infusion pumps in the first quarter of 2008, revenue increased 11% year-over-year. Fourth quarter revenue from the Company's core functional knee bracing products and cold therapy devices grew 13% and 15% year-over-year, respectively. The strong growth in these core product areas was a reflection of the continued popularity of the Company's Fusion(TM) functional knee braces and Kodiak(TM) cold therapydevices, as well as additional steps taken to enhance the transition to a hybrid sales force.

Gross Margin

The gross profit margin in the fourth quarter of 2008 was 73.7%, compared with 73.2% in the fourth quarter of 2007. The improvement is primarily due to a revenue mix shift that resulted in a larger portion of total revenue being generated from higher margin products, primarily the Company's spine stimulation devices. For the full year, the gross profit margin was 70.7% in 2008 compared with 73.7% in 2007. The decline in the full-year gross profit margin was due primarily to an $11.5 million inventory reserve recorded in the third quarter of 2008.

Operating Expenses

Fourth quarter sales and marketing (S&M) expenses as a percent of revenue increased 300 basis points year-over-year, to 40.3%. The higher S&M ratio included the impact of a $1.6 million ($1.1 million net of tax, or $0.06 per share) increase in sales tax expense compared with the fourth quarter of 2007. The higher sales tax expense was the result of rulings by certain U.S. states regarding the taxability of some Orthofix products, and related to sales that occurred over the past 43 months.

Full year 2008 S&M expenses increased by 170 basis points, to 39.8% of revenue, compared with 2007. The increase is due primarily to costs incurred in connection with the Company's potential divestiture of certain orthopedic fixation assets during the first and second quarters of 2008, as well as corporate reorganization expenses incurred in the third quarter.

Fourth quarter general and administrative (G&A) expenses in 2008 decreased by 180 basis points year-over-year, to 16.3% of sales. G&A expenses in the fourth quarter of 2008 included the impact of approximately $1.4 million ($913,000 net of tax, or $0.05 per share) in corporate reorganization expenses, primarily related to the reorganization and consolidation of the Company's spinal implant and biologic business. The year-over-year decrease is primarily attributable to the impact of approximately $1.7 million of employee transition costs and $1.5 million of expenses related to the Company's strategic initiatives that were included in G&A in the fourth quarter of 2007.

Full year 2008 G&A expenses increased 80 basis points, to 15.7% of revenue, compared with 2007. The increase is mainly due to costs incurred in connection with the Company's potential divestiture of certain orthopedic fixation assets during the first and second quarters of 2008, as well as corporate reorganization expenses incurred in the third and fourth quarter.

Research and development (R&D) expenses as a percent of revenue were 8.6% in the fourth quarter of 2008, compared with 4.6% in the prior year. R&D expenses in the fourth quarter of 2008 included $5.6 million ($3.6 million net of tax, or $0.21 per share) in costs associated with the Company's collaboration with the Musculoskeletal Transplant Foundation (MTF) on the development and commercialization of Trinity Evolution, a new adult stem cell-based allograft, which continued to progress ahead of schedule.

Full year 2008 R&D costs increased 10 basis points, to 5.9% of revenue, compared with 2007. The increase is primarily attributable to costs associated with the Company's collaboration with MTF on the development and commercialization of Trinity Evolution.

Other Income and Expenses

Fourth quarter net interest expense was $6.0 million, compared with interest expense of approximately $6.5 million in the fourth quarter of the prior year. The decrease primarily reflects a lower outstanding debt balance compared with the prior year.

During the fourth quarter the Company also incurred an unrealized, non-cash loss of approximately $8.0 million ($5.2 million net of tax, or $0.30 per share) which resulted from changes in the fair value of the Company's interest rate swap. Previously, the interest rate swap was designated and accounted for as an effective cash flow hedge, and changes in its value were recorded as part of accumulated other comprehensive income on the balance sheet. Due to declining interest rates and a LIBOR floor in the Company's amended credit facility, the effectiveness of the swap was no longer deemed highly effective; therefore cash flow accounting is no longer applied and mark-to-market adjustments are required to be reported in quarterly earnings through the expiration of the swap in June 2011. The swap continues to provide a hedge against interest expense on the $150 million portion of outstanding debt it covers, should the LIBOR interest rate rise above 3.73%. The unrealized non-cash impact of this interest rate swap is excluded from EBITDA as defined in accordance with the Company's amended credit facility.

The Company also incurred a foreign exchange loss of approximately $1.7 million ($1.1 million net of tax, or $0.06 per share) in the fourth quarter primarily due to unrealized, non-cash foreign currency adjustments resulting from a rapid strengthening of the U.S. dollar against various foreign currencies. A number of Orthofix's foreign subsidiaries have intercompany and trade accounts payable that are denominated in currencies, most notably the U.S. Dollar, other than their local currency, and movements in the relative values of those currencies have and will continue to result in foreign exchange gains and losses.

Taxes

The reported tax rate in the fourth quarter of 2008 was a benefit of 89%, which was higher than the Company's full-year guidance of 33%-34%. The fourth quarter tax benefit included $1.2 million, or $0.07 per share, resulting from the reversal of a previously recorded FIN 48 tax liability, and $2.2 million, or $0.13 per share, resulting from a favorable geographic mix of pretax gains and losses in certain tax jurisdictions. Excluding these favorable items, the Company's fourth quarter tax rate was 35%.

Cash and Liquidity

The total cash balance of $25.6 million at December 30, 2008 compared with $27.0 million at September 30th, and $41.5 million at December 31, 2007. The reduction of $1.4 million in cash during the fourth quarter included the impact of a previously announced $10 million prepayment of debt.

The Company continues to have a $45 million unused revolving credit facility, and at the end of the 4th quarter was in compliance with the financial covenants contained in its amended credit agreement. Orthofix's Consolidated EBITDA, as calculated in accordance with the Company's amended credit facility, was $23.1 million in the fourth quarter, which was a significant increase sequentially compared with the third quarter, and was $84.9 million for the full-year 2008. At the end of the fourth quarter the Company's leverage ratio, as defined in its amended credit facility, was 3.4, which was below the 4.0 maximum leverage ratio allowed in the amended credit facility.

During 2008 Orthofix repaid $17.0 million against the principal of its senior credit facility, and in total has paid $56.3 million since the inception of the credit facility in September 2006. Quarterly mandatory payments of approximately $825,000 will continue to be required until September of 2012, after which the remaining principal balance of the loan is required to be paid over the following four quarters beginning in December 2012.

Conference Call

Orthofix will host a conference call today at 4:30 PM Eastern time to discuss the Company's financial results for the fourth quarter and full year of 2008, and its guidance for 2009. Interested parties may access the conference call by dialing (866) 626-7622 in the U.S., and (706) 758-3283 outside the U.S., and providing the conference ID 84378131. A replay of the call will be available for one week by dialing (800) 642-1687 in the U.S., and (706) 645-9291 outside the U.S., and entering the conference ID 84378131.

About Orthofix

Orthofix International, N.V. is a global medical device company offering a broad line of minimally invasive surgical, and non-surgical, products for the spine, orthopedic, and sports medicine market sectors that address the lifelong bone-and-joint health needs of patients of all ages-helping them achieve a more active and mobile lifestyle. Orthofix's products are widely distributed around the world to orthopedic surgeons and patients via Orthofix's sales representatives and its subsidiaries, including BREG, Inc. and Blackstone Medical, Inc., and via partnerships with other leading orthopedic product companies. In addition, Orthofix is collaborating in R&D partnerships with leading medical institutions such as the Musculoskeletal Transplant Foundation, the Orthopedic Research and Education Foundation, Rutgers University, the Cleveland Clinic Foundation, and National Osteoporosis Institute. For more information about Orthofix, please visit www.orthofix.com.

FORWARD-LOOKING STATEMENTS

This communication contains certain forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements, which may include, but are not limited to, statements concerning the projections, financial condition, results of operations and businesses of Orthofix and its subsidiaries and are based on management's current expectations and estimates and involve risks and uncertainties that could cause actual results or outcomes to differ materially from those contemplated by the forward-looking statements.

Factors that could cause or contribute to such differences may include, but are not limited to, risks relating to the expected sales of its products, including recently launched products, unanticipated expenditures, changing relationships with customers, suppliers, strategic partners and lenders, risks relating to the protection of intellectual property, changes to the reimbursement policies of third parties, changes to and interpretation of governmental regulation of medical devices, the impact of competitive products, changes to the competitive environment, the acceptance of new products in the market, conditions of the orthopedic industry, credit markets and the economy, corporate development and market development activities, including acquisitions or divestitures, unexpected costs or operating unit performance related to recent acquisitions, unexpected difficulties meeting covenants contained in our secured bank credit facility and other factors described in our annual report on Form 10-K and other periodic reports filed by the Company with the Securities and Exchange Commission (SEC).

Additional Important Information

Ramius Capital and certain of its affiliates have filed a preliminary proxy statement with the SEC in connection with a special general meeting of shareholders at which Ramius proposes to make changes to the composition of Orthofix's board of directors. Orthofix intends to file with the SEC a proxy statement in opposition to Ramius' proposals. SHAREHOLDERS ARE URGED TO READ ORTHOFIX'S DEFINITIVE PROXY MATERIALS AND ANY OTHER RELEVANT SOLICITATION MATERIALS FILED WITH THE SEC WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION. Investors and shareholders may obtain (when they are available) a free copy of proxy statements filed with the SEC by Orthofix at the SEC's website at www.sec.gov or by contacting Georgeson, 199 Water Street, 26th Floor, New York, NY 10038 or by calling (212) 440-9800 (bankers and brokers) or toll-free (800) 323-4133 (all others).

Orthofix International N.V. and its directors and certain executive officers are participants in the solicitation of proxies in connection with the special general meeting of shareholders. The names of such persons are: James F. Gero, Peter J. Hewett, Jerry C. Benjamin, Charles W. Federico, Dr. Guy J. Jordan, Ph.D., Thomas J. Kester, CPA, Alan W. Milinazzo, Maria Sainz, Dr. Walter P. von Wartburg, Kenneth R. Weisshaar, Robert S. Vaters, Michael Simpson, Bradley R. Mason, Raymond C. Kolls, J.D., and Michael M. Finegan. Information regarding such participants, as well as each such person's respective interests in Orthofix by security holdings or otherwise, is set forth in Orthofix's Revocation Solicitation Statement dated January 12, 2009, which may be obtained free of charge at the SEC's website at www.sec.gov and Orthofix's website at www.orthofix.com. More current information regarding such persons, as well as each such person's respective interests in Orthofix by security holdings or otherwise, will be set forth in the definitive proxy statement materials to be filed with the SEC and distributed to shareholders by Orthofix as described above.

ORTHOFIX INTERNATIONAL N.V.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, U.S. Dollars, in thousands, except per share and share data)
             
 
Three Months Ended December 31,Year Ended December 31,
2008200720082007
 
Net sales $ 132,303 $ 128,835 $ 519,675 $ 490,323
Cost of sales   34,730     34,485     152,014     129,032  
Gross profit   97,573     94,350     367,661     361,291  
 
Operating expenses
Sales and marketing 53,261 48,036 206,913 186,984
General and administrative 21,554 23,283 81,806 72,902
Research and development 11,444 5,907 30,844 24,220
Amortization of intangible assets 1,874 4,446 17,094 18,156
Impairment of certain intangible assets 0 20,972 289,523 20,972

 

Gain on sale of Pain Care(R) Operations   0     0     (1,570 )   0  
  88,133     102,644     624,610     323,234  
 
Operating income (loss) 9,440 (8,294 ) (256,949 ) 38,057
 
Other income (expense)
Interest expense, net (5,966 ) (6,478 ) (19,674 ) (23,677 )
Unrealized non-cash loss on interest rate swap (7,975 ) 0 (7,975 ) 0
Loss on refinancing of senior secured term loan 0 0 (5,735 ) 0
Other, net   (1,965 )   122     (4,702 )   355  
Other income/(expense), net   (15,906 )   (6,356 )   (38,086 )   (23,322 )
Income (loss) before income taxes (6,466 ) (14,650 ) (295,035 ) 14,735
Income tax (expense) benefit   5,749     4,135     66,481     (3,767 )
Net income (loss)   ($717 )   ($10,515 )   ($228,554 ) $ 10,968  
 
Net income per common share - basic -$0.04 -$0.62 -$13.37 $ 0.66
 
Net income per common share - diluted -$0.04 -$0.62 -$13.37 $ 0.64
 
Weighted average number of common 17,102,141 16,913,322 17,095,416 16,638,873
shares outstanding - basic
 
Weighted average number of common
shares outstanding - diluted 17,102,141 16,913,322 17,095,416 17,047,587
ORTHOFIX INTERNATIONAL N.V.
CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S. Dollars, in thousands)
       
 
December 31,December 31,
20082007
 
Assets
Current assets:
Cash and cash equivalents $ 14,594 $ 25,064
Restricted cash 10,997 16,453
Trade accounts receivable, net 110,721 108,900
Inventory, net 91,185 93,952
Deferred income taxes 17,543 11,373
Prepaid expenses and other current assets   29,609   25,035
Total current assets 274,649 280,777
 
Investments 2,095 4,427
Property, plant and equipment, net 32,660 33,444
Patents and other intangible assets, net 53,547 230,305
Goodwill 182,581 319,938
Deferred taxes and other long-term assets   15,683   16,773
 
Total assets $ 561,215 $ 885,664
 
 
Liabilities and shareholders' equity
Current liabilities:
Bank borrowings $ 1,907 $ 8,704
Current portion of long-term debt 3,329 3,343
Trade accounts payable 23,865 24,715
Other current liabilities   45,895   36,544
Total current liabilities 74,996 73,306
 
Long-term debt 277,533 294,588
Deferred income taxes 4,509 75,908
Other long-term liabilities   2,116   7,922
Total liabilities   359,154   451,724
 
Shareholders' equity:
Common shares 1,710 1,704
Additional paid-in capital   167,818   157,349
169,528 159,053
Retained earnings 29,647 258,201
Accumulated other comprehensive income   2,886     16,686
Total shareholders' equity   202,061   433,940
 
Total liabilities and shareholders' equity $ 561,215 $ 885,664
External net sales by market sector
(In US$ millions)
             
 
Three Months Ended December 31,Year Ended December 31,
20082007% Increase20082007% Increase
 
Spine 65.8 64.2 2 % 252.2 243.2 4 %
 
Orthopedic 32.2 30.0 7 % 129.1 111.9 15 %
 
Sports Medicine 24.3 23.0 6 % 94.5 87.5 8 %
 
Vascular 4.5 4.6 -2 % 17.9 19.9 -10 %
 
Other Products   5.5   7.0 -21 %   26.0   27.8 -6 %
 
Total $ 132.3 $ 128.8 3 % $ 519.7 $ 490.3 6 %

Regulation G Supplemental Information Schedule

The information in this schedule is set up in three sections intended to address different aspects of Regulation G.

Section 1 includes a Reconciliation of a Non-GAAP Performance Measure for each non-GAAP metric included in the release to which this supplemental information is attached, except for the reconciliation pertaining to Adjusted Net Income and Adjusted Net Income, Excluding Specified Non-Cash Items for the 4th quarter of 2008, which is included in the body of the release to which this supplemental information is attached.

Section 2 contains explanations of each of the specified items and additional non-cash specified items listed in each Reconciliation of a Non-GAAP Performance Measure included in Section 1 of this Supplemental Information Schedule or in the text of the press release to which the schedule is attached.

Section 3 provides detailed disclosures indicating the reasons management believes our non-GAAP measures are useful.

Section 1

Consolidated EBITDA
($ In thousands)
       
 
Q4 2008FY 2008
 
GAAP Net Income (Loss) $ (717 ) $ (228,554 )
 
Depreciation and Amortization 5,297 31,320
Interest 6,038 20,216

Unrealized non-cash loss on interest rate swap

7,975 7,975
Allowable loss on refinancing of senior secured term loan - 3,660
Income tax benefit (5,749 ) (66,481 )
123R expense 2,758 10,614
Product commercialization investments 5,600 6,100
Impairment charge - 289,523
Strategic initiatives/relocation charges - 6,327
Other non-cash charges   1,887     4,170  
 
Consolidated EBITDA $ 23,089   $ 84,870  

NOTE: For the definition of Consolidated EBITDA please refer to a copy of the credit agreement, dated September 22, 2006, which was filed as Exhibit 10.1 to Orthofix's current report on Form 8-K filed on September 27, 2006, and a copy of the first amendment to the credit agreement, dated September 29, 2008, which was filed as Exhibit 10.1 to Orthofix's current report on Form 8-K filed on September 29, 2008. These documents can be found at the SEC's website at www.sec.gov

Reconciliation of Non-GAAP Performance Measures    
Full Year 2008FY2008
($000's)   EPS
 
 
Reported GAAP net loss($228,554)($13.37)
 
Specified Items:
Asset impairment & inventory charge$237,689$13.90

Unrealized, non-cash loss on swap

$5,184$0.30
Foreign exchange loss$1,772$0.10
Credit agreement amendment costs$3,579$0.21
Strategic initiatives$7,866$0.46
Tax adjustments($3,358)($0.20)
Reorganization/consolidation costs$2,785   $0.16  
Adjusted net income$26,963   $1.57  
 
Specified non-cash items:
Non-cash BREG & Blackstone amortization$9,917$0.58
Equity compensation expense (FAS 123R)$6,620   $0.39  
 
Adj. net income, excluding specified non-cash items$43,500   $2.54  
 
NOTE: Some calculations may be impacted by rounding
       
Reconciliation of Sports Medicine GAAP Q4 revenue
to adjusted revenue
Q408 Q407
 
Sports medicine reported revenue $ 24,316 $ 22,985
Pain therapy   ($104 )     ($1,087 )
 
Adjusted Q4 revenue $ 24,212     $ 21,898   10.57 % growth
 

NOTE: the pain therapy business was sold in March of 2008.

 

Section 2

Description of Full Year 2008 Specified Items

Description of Full Year 2008 Specified Non-Cash Items

Description of Fourth Quarter 2008 and 2007 Specified Items

Description of Fourth Quarter 2008 and 2007 Specified Non-Cash Items

Section 3

Management use of, and economic substance behind, Non-GAAP Performance Measures

Management uses non-GAAP measures, referred to as "adjusted net income", "adjusted net income, excluding additional specified non-cash items", and "EBITDA" (earnings before interest, taxes, depreciation and amortization) to evaluate performance period over period, to analyze the underlying trends in the Company's business, to assess its performance relative to its competitors, and to establish operational goals and forecasts that are used in allocating resources. In addition, following the Company's acquisition of Blackstone, and the related increase in Orthofix's debt, management has increased its focus on cash generation and debt reduction. Management uses these non-GAAP measures as the basis for assessing the ability of the underlying operations to generate cash for use in paying down debt. In addition, management uses these non-GAAP measures to further its understanding of the performance of the Company's business segments. The items excluded from Orthofix's non-GAAP measures are also excluded from the profit or loss reported by the Company's business segments for the purpose of analyzing their performance.

Material Limitations Associated with the Use of Non-GAAP Measures

The non-GAAP measures used in this release may have limitations as analytical tools, and should not be considered in isolation or as a replacement for GAAP performance measures. Some of the limitations associated with the use of these non-GAAP performance measures are that they exclude items that reflect an economic cost to the Company and can have a material effect on cash flows. For example, the impairment charge and the inventory reserve the Company took in the third quarter, and the ongoing amortization of purchased intangible assets does not directly affect Orthofix's cash flows, however, it does represent the reduction in value of those assets over time, and the expense associated with this reduction in value is not included in the Company's non-GAAP measures. Similarly, equity compensation expense does not directly impact cash flows, but is part of total compensation costs accounted for under GAAP.

Compensation for Limitations Associated with Use of Non-GAAP Measures

Orthofix compensates for the limitations of its non-GAAP performance measures by relying upon its GAAP results to gain a complete picture of the Company's performance. The GAAP results provide the ability to understand the Company's performance based on a defined set of criteria. The non-GAAP measures reflect the underlying operating results of the Company's businesses, excluding non-cash items, which management believes is an important measure of the Company's overall performance.

The Company provides a detailed reconciliation of the non-GAAP performance measures to their most directly comparable GAAP measures, and encourages investors to review this reconciliation.

Usefulness of Non-GAAP Measures to Investors

Orthofix believes that providing non-GAAP measures that exclude certain items provides investors with greater transparency to the information used by the Company's senior management in its financial and operational decision-making. Management believes that providing this information enables investors to better understand the performance of the Company's ongoing operations and to understand the methodology used by management to evaluate and measure such performance. Disclosure of these non-GAAP performance measures also facilitates comparisons of Orthofix's underlying operating performance with other companies in its industry that also supplement their GAAP results with non-GAAP performance measures.

SOURCE: Orthofix International

Orthofix International N.V.
Dan Yarbrough, 617-912-2903
Vice President of Investor Relations
danyarbrough@orthofix.com

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