Orthofix International N.V.
03/31/15

Orthofix International Reports Third Quarter 2014 Results and Announces Filing of Restated Financial Statements

LEWISVILLE, Texas--(BUSINESS WIRE)-- Orthofix International N.V. (NASDAQ:OFIX) (the "Company," "we," "us" or "our"), a diversified, global medical device company focused on improving patients' lives by providing superior reconstructive and regenerative orthopedic and spine solutions to physicians worldwide, today filed with the Securities and Exchange Commission restated financial statements for fiscal years 2011, 2012 and 2013 and the fiscal quarter ended March 31, 2014, while also filing its late Quarterly Reports on Form 10-Q for the fiscal quarters ended June 30, 2014 and September 30, 2014. The Company continues to work to complete the procedures needed to file its 2014 Annual Report on Form 10-K with the Securities and Exchange Commission. As requested by a letter from NASDAQ, on March 25, 2015, the Company provided a written update to the Hearings Panel regarding these matters. The Company has requested that the Hearings Panel grant the Company relief from delisting through April 30, 2015 while it completes the filing of its 2014 Annual Report on Form 10-K.

Net sales in the third quarter of 2014 were $101.0 million, increasing 10.0% from net sales of $91.8 million in the third quarter of 2013. Third quarter 2014 net income from continuing operations was $28 thousand, or $0.00 per diluted share, compared to a net loss from continuing operations of $16.5 million for the same period last year, or $0.91 per diluted share. Adjusted net income from continuing operations for the third quarter of 2014 was $3.3 million, or $0.17 per diluted share, compared to $4.0 million, or $0.22 per diluted share, in the third quarter of 2013.

"We are pleased to have completed the extensive technical accounting work reflected in the restated financial statements we filed today," commented President and Chief Executive Officer Brad Mason. "Despite this distraction, the underlying businesses remain solid as reflected in our financial and operating performance in the third quarter. Additionally, our year-to-date cash flow generation continued to strengthen our balance sheet and financial position."

Third Quarter 2014 Net Sales Results

BioStim

Net sales in the BioStim strategic business unit ("SBU") increased $7.6 million or 24.8% to $38.3 million in the third quarter of 2014 compared to $30.7 million for the same period in the prior year. The increase was primarily due to the 2013 reduction in third party payor revenue driven by our transition during the third quarter of 2013 to recognize revenue upon accumulation of the full billable package for third party payors, and to a lesser extent, order volume growth as a result of enhancements to the BioStim sales organization.

Biologics

Net sales in the Biologics SBU increased $0.7 million, or 5.3%, to $13.9 million in the third quarter of 2014 compared to $13.2 million for the same period in the prior year. The growth was primarily driven by an expanded sales channel as well as continued conversion to our next generation cell-based bone growth tissue technology (Trinity ELITE®).

Extremity Fixation

Net sales in the Extremity Fixation SBU increased $2.9 million, or 11.7%, to $27.6 million in the third quarter of 2014 compared to $24.7 million for the same period last year. The growth was driven by recent expanded product launches and an improvement in international sales, partially offset by declining revenue at our Brazil subsidiary, which has experienced significant disruption to the sales channel over the past year as we rebuild our sales organization.

Spine Fixation

Net sales in the Spine Fixation SBU decreased $2.0 million or 8.6% to $21.2 million in the third quarter of 2014 compared to $23.2 million for the same period last year primarily due to loss of sales momentum resulting from our efforts to reorganize the sales force in late 2013 through Q2 of 2014 to improve profitability.

Third Quarter 2014 Earnings Results and Adjusted EBITDA

Gross profit increased $9.0 million to $75.7 million in the third quarter of 2014 compared to $66.7 million for the same period last year. Gross profit as a percent of net sales was 75.0% for the third quarter of 2014 and 72.7% for 2013 during the same period. This increase was primarily driven by the change in third party payor revenue for the BioStim business in the third quarter of 2013, which recognized revenue upon accumulation of the full billable package for third party payors causing third quarter 2013 revenue to be lower. In addition, the third quarter of 2013 included additional reserves for excess and obsolete products in multiple SBUs.

Third quarter 2014 sales and marketing expense was $41.0 million, or 40.6% of net sales, compared to $39.1 million, or 42.6% of net sales, for the same period in the prior year. The expense increase was primarily due to higher commissions resulting from the increased BioStim sales.

General and administrative expense increased $5.9 million, or 45.5%, in the third quarter of 2014 to $18.8 million, compared to $12.9 million in the third quarter of 2013. General and administrative expense as a percent of net sales was 18.6% in the third quarter of 2014, compared to 14.2% for the same period in the prior year. The increase in G&A was primarily driven by investment in the following initiatives: implementation of an internal audit function; focused efforts on key process improvements; and remediation of material weaknesses and significant deficiencies. Further, $1.5 million has been spent in the first nine months of 2014 on our multi-year process and systems improvement effort, "Bluecore."

Research and development expense increased $0.2 million in the third quarter of 2014 to $6.6 million, compared to $6.4 million in the same period in the prior year, as a result of increased spending in both clinical and pre-clinical studies. Research and development expense as a percent of net sales was 6.5% in the third quarter of 2014, compared to 6.9% for the same period in 2013.

Third quarter 2014 adjusted EBITDA from continuing operations was $17.8 million for the period, or 17.6% of sales, compared to $14.4 million, or 15.7% of sales, for the same period in the prior year. The increase in adjusted EBITDA was due primarily to the higher sales mix from the BioStim SBU compared to the prior year.

Third quarter 2014 net income from continuing operations was $28 thousand, or $0.00 per diluted share, compared to a net loss of $16.5 million, or $0.91 per diluted share, for the same period in 2013. Adjusted net income from continuing operations for the third quarter of 2014 was $3.3 million, or $0.17 per diluted share, compared to $4.0 million, or $0.22 per diluted share, in the third quarter of 2013.

Year-to-Date (as of September 30, 2014) Net Sales Results

BioStim

Net sales in the BioStim SBU increased 8.6% to $114.9 million in the first nine months of 2014 compared to $105.8 million for the same period in the prior year, an increase of $9.1 million. This year-over-year increase was primarily due to the reduction in third party payor revenue driven by our billable package transition in the third quarter of 2013, and to a lesser extent, order volume growth as a result of enhancements to the BioStim sales organization.

Biologics

Net sales in the Biologics SBU increased $0.9 million, or 2.3%, to $40.7 million in the first nine months of 2014, compared to $39.8 million for the same period in the prior year, due to an expanded sales channel as well as continued conversion to our next generation cell-based bone growth tissue technology (Trinity ELITE®). This increase was reduced slightly as a result of a decrease in the marketing fees received from Musculoskeletal Transplant Foundation ("MTF") for Trinity products from 70% of retail price to 65% beginning April 2013.

Extremity Fixation

Net sales in the Extremity Fixation SBU increased $7.9 million, or 10.7%, to $82.0 million in the first nine months of 2014 compared to $74.1 million for the same period in 2013. Year-over-year revenue comparisons are impacted by the transition to sell-through accounting for certain of the Company's distributors in the second quarter of 2013. Recent expanded product launches also contributed to increased sales as well as increased sales in the U.S. for our TrueLok product line. These items were partially offset by declining revenues at our Brazil subsidiary, which has experienced significant disruption to the sales channel over the past year as we rebuild our Brazil sales organization.

Spine Fixation

Net sales in the Spine Fixation SBU decreased $7.7 million, or 10.6%, to $64.3 million in the first nine months of 2014, compared to $72.0 million for the same period in 2013. This decrease primarily was due to loss of sales momentum resulting from our efforts to reorganize the sales force in late 2013 and through Q2 of 2014 to improve profitability.

Year-to-Date (as of September 30, 2014) Earnings Results and Adjusted EBITDA

Gross profit increased $5.6 million to $224.5 million in the first nine months of 2014 compared to $218.9 million for the same period in the prior year. Gross profit as a percent of net sales was 74.4% for the first nine months of 2014 and 75.0% for 2013 during the same period. The decrease in gross margin was primarily driven by changes in the product and sales channel mix resulting from rebuilding our Brazil sales organization, and reserves for excess and obsolete products across multiple SBUs.

Sales and marketing expense, which includes variable expenses such as commissions and provisions for bad debt, decreased 4.1% for the first nine months of 2014 compared to the prior year. Tighter cost controls on non-variable sales and marketing expenses, lower commission rates due to the reorganization of the Brazil and U.S. Spine Fixation sales forces, and lower Spine sales, resulted in an overall decrease in expense of $5.3 million to $124.2 million, compared to $129.5 million for the same period in the prior year. As a percent of net sales, sales and marketing related expense was 41.1% compared to 44.4% for the same period in 2013.

General and administrative expense increased $7.3 million, or 15.7%, in the first nine months of 2014 to $53.6 million compared to $46.4 million in the first nine months of 2013. General and administrative expense as a percent of net sales was 17.8% for the first nine months of 2014, compared to 15.9% for the same period in the prior year. This increase was primarily driven by investment in the following initiatives: implementation of an internal audit function; focused efforts on key process improvements; and remediation of material weaknesses and significant deficiencies. Additionally, medical insurance payouts have been unusually high in 2014 whereas in 2013 the payouts were unusually low. This has caused a large fluctuation from the prior year because the Company is self-insured up to a stop loss threshold. Approximately $1.5 million has been spent in the first nine months of 2014 on our multi-year process and systems improvement effort, "Bluecore."

Research and development expense decreased $1.9 million in the first nine months of 2014 to $18.8 million, compared to $20.7 million in the first nine months of 2013. As a percent of net sales, research and development expense was 6.3% in the first nine months of 2014 compared to 7.1% for the same period in the prior year. The decrease was primarily driven by a $2.0 million payment to Musculoskeletal Transplant Foundation ("MTF") in the second quarter of 2013 for the development and commercialization of Trinity ELITE®, which was released in the first half of 2013.

Year-to-date (as of September 30, 2014) adjusted EBITDA from continuing operations was $49.0 million for the period, or 16.2% of sales, compared to $47.4 million, 16.2% of sales, in the same period in the prior year. The increase in adjusted EBITDA on a dollar basis was due to the $10.3 million increase in net sales.

Year-to-date (as of September 30, 2014) net income from continuing operations was $1.3 million compared to a net loss of $8.6 million for the same period in the prior year. Adjusted net income from continuing operations was $11.1 million, or $0.60 per diluted share, compared to $14.2 million, or $0.75 per diluted share, for the same period in the prior year.

Summary of Restated Financial Statements

On March 24, 2014, the Company filed restated financial statements for the fiscal years ended December 31, 2012, 2011 and 2010 and the fiscal quarter ended March 31, 2013 (the "Original Restatement"). Subsequently, in connection with the Company's preparation of its consolidated interim quarterly financial statements for the fiscal quarter ended June 30, 2014, the Company determined that certain entries with respect to previously filed financial statements were not properly accounted for under U.S. generally accepted accounting principles ("U.S. GAAP"). Due to these errors, the Company determined in August 2014 to restate its consolidated financial statements for the fiscal years ended December 31, 2013, 2012 and 2011 (including the interim quarterly periods therein) and the fiscal quarter ended March 31, 2014, and that the previously filed financial statements for these periods should no longer be relied upon.

Today, the Company has filed amendments to its Annual Report on Form 10-K for the fiscal year ended December 31, 2013 (the "2013 Form 10-K/A") and its Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2014 (the "2014 First Quarter Form 10-Q/A"), as well as its late Quarterly Reports on Form 10-Q for the fiscal quarters ended June 30, 2014 and September 30, 2014, respectively (the "2014 Second Quarter Form 10-Q" and the "2014 Third Quarter Form 10-Q"). Restated consolidated financial statements for the fiscal years ended December 31, 2013, 2012 and 2011 are contained in the 2013 Form 10-K/A, and restated condensed consolidated financial statements for the fiscal quarters ended March 31, 2014 and 2013 are contained in the 2014 First Quarter Form 10-Q/A. In addition, restated condensed consolidated financial statements for the fiscal quarters ended June 30, 2013 and September 30, 2013 are contained in the 2014 Second Quarter Form 10-Q and the 2014 Third Quarter Form 10-Q, respectively. The Company refers to the restated consolidated financial statements for these periods contained in these filings as the "Further Restatement." The errors corrected by the Further Restatement are as follows:

Conference Call

Orthofix anticipates hosting a conference call in April in conjunction with the announcement of the Company's financial results for the fourth quarter of 2014 and the full 2014 fiscal year.

About Orthofix

Orthofix International N.V. is a diversified, global medical device company focused on improving patients' lives by providing superior reconstructive and regenerative orthopedic and spine solutions to physicians worldwide. Headquartered in Lewisville, TX, the Company has four strategic business units that include BioStim, Biologics, Extremity Fixation and Spine Fixation. Orthofix products are widely distributed via the Company's sales representatives, distributors and its subsidiaries. In addition, Orthofix is collaborating on research and development activities with leading clinical organizations such as the Musculoskeletal Transplant Foundation, the Orthopedic Research and Education Foundation and the Texas Scottish Rite Hospital for Children. For more information, 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, 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.

The forward-looking statements in this release do not constitute guarantees or promises of future performance. Factors that could cause or contribute to such differences may include, but are not limited to: risks relating to our restatements of our financial statements for prior periods and related legal proceedings (including potential action by the Division of Enforcement of the SEC and pending securities class action litigation); our pending Nasdaq Hearing Panel proceeding; the Company's review of allegations of improper payments involving the Company's Brazil-based subsidiary; the expected sales of the Company's products, including recently launched products; unanticipated expenditures; changing relationships with customers, suppliers, strategic partners and lenders; changes to and the interpretation of governmental regulations; the resolution of pending litigation matters (including the Company's indemnification obligations with respect to certain product liability claims against, and the government investigation of, the Company's former sports medicine global business unit); the Company's ongoing compliance obligations under a corporate integrity agreement with the Office of Inspector General of the Department of Health and Human Services (and related terms of probation), a deferred prosecution agreement with the U.S. Department of Justice and a Consent Decree with the SEC; risks relating to the protection of intellectual property; changes to the reimbursement policies of third parties; 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; and other risks described in Item 1A under the heading "Risk Factors" in the 2013 Form 10-K/A, as well as in other subsequent periodic reports filed by the Company with the SEC. Existing and prospective investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to update or revise the information contained in this press release.

The following tables present sales and constant currency sales growth by SBU for the three months and nine months ended September 30, 2014, and 2013, respectively. Some calculations may be impacted by rounding.

   

Net Sales by SBU
Three Months Ended September 30,

(Unaudited, U.S. Dollars in thousands)

2014     2013    

Reported
Growth

   

Constant
Currency
Growth

(Restated)
BioStim $ 38,285 $ 30,654 25 % 25 %
Biologics $ 13,856 $ 13,216 5 % 5 %
Extremity Fixation $ 27,636 $ 24,705 12 % 9 %
Spine Fixation $ 21,217 $ 23,231 (9 )% (9 )%
Total Net Sales $ 100,994 $ 91,806 10 % 9 %
 
   

Net Sales by SBU
Nine Months Ended September 30,

(Unaudited, U.S. Dollars in thousands)

2014     2013    

Reported
Growth

   

Constant
Currency
Growth

(Restated)
BioStim $ 114,937 $ 105,828 9 % 9 %
Biologics $ 40,718 $ 39,816 2 % 2 %
Extremity Fixation $ 82,005 $ 74,112 11 % 9 %
Spine Fixation $ 64,333 $ 71,969 (11 )% (11 )%
Total Net Sales $ 301,933 $ 291,725 3 % 3 %
 

The following table presents net margin, which we define as gross profit less sales and marketing expenses, by SBU for the three months and nine months ended September 30, 2014, and 2013, respectively, as well as reconciliations to operating income. Some calculations may be impacted by rounding.

Net Margin by SBU     Three Months Ended September 30,       Nine Months Ended September 30,

(Unaudited, U.S. Dollars in thousands)

2014     2013 2014     2013
(Restated) (Restated)
Net Margin
BioStim $ 16,442 $ 13,397 $ 49,168 $ 48,614
Biologics 6,504 6,737 19,500 18,463
Extremity Fixation 8,361 7,089 21,952 17,980
Spine Fixation 3,958 913 11,147 5,796
Corporate   (537 )   (470 )   (1,411 )   (1,376 )
Total net margin $ 34,728   $ 27,666   $ 100,356   $ 89,477  
General and administrative 18,814 12,933 53,643 46,355
Research and development 6,572 6,361 18,818 20,653

Amortization of intangible assets

508 616 1,753 1,725
Costs related to the accounting review and restatement 2,326 2,664 12,959 2,664
Impairment of goodwill       19,193         19,193  

Operating income (loss)

$ 6,508   $ (14,101 ) $ 13,183   $ (1,113 )
 

The following table reconciles reported net income from continuing operations to EBITDA and adjusted EBITDA for the three months ended March 31, 2013, June 30, 2013, September 30, 2013, December 31, 2013, March 31, 2014, June 30, 2014, and September 30, 2014. Some calculations may be impacted by rounding. Please refer to the Non-GAAP Performance Measures section at the end of this press release for more information about the specified items below.

    Three Months Ended
(Unaudited, U.S. Dollars, in thousands) 9/30/2014   6/30/2014   3/31/2014   12/31/2013   9/30/2013   6/30/2013   3/31/2013

Net income (loss) from continuing operations

$ 28 $ 3,266 $ (1,948 ) $ (9,639 ) $ (16,504 ) $ 2,012 $ 5,926
Other income and expenses1 1,927 324 531 (427 ) 1,615 1,507 (23 )
Income tax expense 4,763 3,309 1,179 (392 ) 383 3,247 4,363
Depreciation and amortization 5,578 5,913 5,603 5,778 5,302 5,201 5,046
Stock-based compensation   1,729     1,187     1,187     1,553     1,277     1,494     1,943  
EBITDA $

14,025

  $

13,999

  $

6,552

  $

(3,127

) $ (7,927 ) $

13,461

  $ 17,255  
Strategic Investments in MTF 0 0 0 0 500 2,000 0
Accounting review and restatement 2,326 2,327 8,306 10,280 2,665 0 0
Infrastructure investments 1,452 0 0 0 0 0 0
Succession charges 0 0 0 0 0 1,071 3,537
Demutualization of a mutual insurance company 0 0 0 0 0 0 (4,406 )
Goodwill impairment   0     0     0     0     19,193     0     0  
Adjusted EBITDA $ 17,803   $

16,326

  $

14,858

  $ 7,153   $ 14,431   $

16,532

  $ 16,386  
 
As a % of Sales 17.6 % 16.2 % 14.9 % 6.8 % 15.7 % 16.9 % 16.0 %
1. Other income and expense represents foreign exchange gain/loss and interest expense
 

The following table reconciles reported net income from continuing operations to EBITDA and adjusted EBITDA for the nine months ended September 30, 2013 and September 30, 2014. Some calculations may be impacted by rounding. Please refer to the Non-GAAP Performance Measures section at the end of this press release for more information about the specified items below.

    Nine Months Ended
(Unaudited, U.S. Dollars, in thousands) 9/30/2014     9/30/2013
Net income (loss) from continuing operations 1,346 (8,566 )
Other income and expenses1 2,781 3,099
Income tax expense 9,251 7,993
Depreciation and amortization 17,094

15,585

Stock-based compensation   4,103     4,714  
EBITDA $ 34,575   $

22,825

 
Strategic Investments in MTF 0 2,500
Accounting review and restatement 12,959 2,664
Infrastructure investments 1,452 0
Succession charges 0 4,608
Demutualization of a mutual insurance company 0 (4,406 )
Goodwill impairment   0     19,193  
Adjusted EBITDA $ 48,986   $

47,384

 
 
As a % of Sales 16.2 % 16.2 %
1. Other income and expense represents foreign exchange gain/loss and interest expense
 

The following table reconciles reported net income from continuing operations to adjusted net income from continuing operations for the three months ended March 31, 2013, June 30, 2013, September 30, 2013, December 31, 2013, March 31, 2014, June 30, 2014, and September 30, 2014. Some calculations may be impacted by rounding and are shown net of tax. Please refer to the Non-GAAP Performance Measures section at the end of this press release for more information about the specified items below.

    Three Months Ended
(Unaudited, U.S. Dollars, in thousands) 9/30/2014   6/30/2014   3/31/2014   12/31/2013   9/30/2013   6/30/2013   3/31/2013
Net income (loss) from continuing operations $ 28 $ 3,266 $ (1,948 ) $ (9,639 ) $ (16,504 ) $ 2,012 $ 5,926
Strategic Investments in MTF - - - - 315 1,260 -
Accounting review and restatement 1,465 1,466 5,233 6,476 1,679 - -
Infrastructure investments 914 - - - - - -
Succession charges - - - - - 834 2,756
Foreign exchange (gain)/loss 850 (158 ) (43 ) (561 ) 631 629 (393 )
Demutualization of a mutual insurance company - - - - - - (2,776 )
Goodwill impairment   -   -     -     -     17,849     -   -  
Adjusted net income (loss) from continuing operations $

3,257

$ 4,574   $

3,242

  $

(3,721

) $ 3,970   $

4,735

$

5,513

 
 

The following table reconciles reported net income from continuing operations per diluted share to adjusted net income from continuing operations per diluted share for the three months ended March 31, 2013, June 30, 2013, September 30, 2013, December 31, 2013, March 31, 2014, June 30, 2014, and September 30, 2014. Some calculations may be impacted by rounding and are shown net of tax. Please refer to the Non-GAAP Performance Measures section at the end of this press release for more information about the specified items below.

    Three Months Ended
(Unaudited, per diluted share) 9/30/2014   6/30/2014   3/31/2014   12/31/2013   9/30/2013   6/30/2013   3/31/2013
EPS from continuing operations $ 0.00 $ 0.18 $ (0.11 ) $ (0.53 ) $ (0.91 ) $ 0.10 $ 0.30
Strategic Investments in MTF - - - - 0.02 0.07 -
Accounting review and restatement 0.08 0.08 0.29 0.36 0.09 - -
Infrastructure investments 0.05 - - - - - -
Succession charges - - - - - 0.04 0.14
Foreign exchange (gain)/loss 0.05 (0.01 ) (0.00 ) (0.03 ) 0.03 0.03 (0.02 )
Demutualization of a mutual insurance company - - - - - - (0.14 )
Goodwill impairment   -   -     -     -     0.98     -   -  
Adjusted EPS from continuing operations $ 0.17 $ 0.25   $ 0.18   $ (0.21 ) $ 0.22   $ 0.25 $ 0.28  
 

The following table reconciles reported net income from continuing operations to adjusted net income from continuing operations for the nine months ended September 30, 2013 and September 30, 2014, respectively. Some calculations may be impacted by rounding and are shown net of tax. Please refer to the Non-GAAP performance measures section at the end of this press release for more information about the specified items below.

    Nine Months Ended
(Unaudited, U.S. Dollars, in thousands) 9/30/2014     9/30/2013
Net income (loss) from continuing operations $ 1,346 $ (8,566 )
Strategic Investments in MTF - 1,575
Accounting review and restatement 8,164 1,679
Infrastructure investments 914 -
Succession charges - 3,590
Foreign exchange (gain)/loss 648 867
Demutualization of a mutual insurance company - (2,776 )
Goodwill impairment   -   17,849  
Adjusted net income from continuing operations $

11,072

$ 14,218  
 

The following table reconciles reported net income from continuing operations per diluted share to adjusted net income from continuing operations per diluted share for the nine months ended September 30, 2013 and September 30, 2014, respectively. Some calculations may be impacted by rounding and are shown net of tax. Please refer to the Non-GAAP performance measures section at the end of this press release for more information about the specified items below.

    Nine Months Ended
(Unaudited, per diluted share) 9/30/2014     9/30/2013
EPS from continuing operations $ 0.07 $ (0.45 )
Strategic Investments in MTF - 0.08
Accounting review and restatement 0.44 0.09
Infrastructure investments 0.05 -
Succession charges - 0.19
Foreign exchange (gain)/loss 0.03 0.05
Demutualization of a mutual insurance company - (0.15 )
Goodwill impairment   -   0.94  
Adjusted EPS from continuing operations $ 0.60 $ 0.75  
 
         
ORTHOFIX INTERNATIONAL N.V.
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
For the three and nine months ended September 30, 2014 and 2013
 
Three Months Ended Nine Months Ended
September 30, September 30,

(Unaudited U.S. Dollars, in thousands, except share and per share data)

2014     2013 2014     2013
(Restated) (Restated)
 
Product sales $ 88,296 $ 80,037 $ 265,175 $ 256,207
Marketing service fees   12,698     11,769     36,818     35,518  
Net sales 100,994 91,806 301,993 291,725
Cost of sales   25,268     25,064     77,455     72,789  
Gross profit 75,726 66,742 224,538 218,936
Operating expenses
Sales and marketing 40,998 39,076 124,182 129,459
General and administrative 18,814 12,933 53,643 46,355
Research and development 6,572 6,361 18,818 20,653
Amortization of intangible assets 508 616 1,753 1,725
Costs related to the accounting review and restatement 2,326 2,664 12,959 2,664

Impairment of goodwill

      19,193         19,193  
  69,218     80,843     211,355     220,049  

Operating income (loss)

6,508 (14,101 ) 13,183 (1,113 )
Other income and (expense)
Interest expense, net (395 ) (539 ) (1,355 ) (1,536 )

Other income (expense), net

  (1,322 )   (1,481 )   (1,231 )   2,076  
  (1,717 )   (2,020 )   (2,586 )   540  

Income (loss) before income taxes

4,791 (16,121 ) 10,597 (573 )
Income tax expense   (4,763 )   (383 )   (9,251 )   (7,993 )

Net income (loss) from continuing operations

  28     (16,504 )   1,346     (8,566 )
Discontinued operations
Income (loss) from discontinued operations 260 (2,375 ) (6,363 ) (14,427 )
Income tax benefit (expense)   164     43     2,278     4,593  

Net income (loss) from discontinued operations

  424     (2,332 )   (4,085 )   (9,834 )

Net income (loss)

$ 452   $ (18,836 ) $ (2,739 ) $ (18,400 )
Net income (loss) per common share—basic:

Net income (loss) from continuing operations

$ 0.00 $ (0.91 ) $ 0.07 $ (0.45 )

Net income (loss) from discontinued operations

  0.02     (0.13 )   (0.22 )   (0.52 )

Net income (loss) per common share—basic

$ 0.02   $ (1.04 ) $ (0.15 ) $ (0.97 )
Net income (loss) per common share—diluted:

Net income (loss) from continuing operations

$ 0.00 $ (0.91 ) $ 0.07 $ (0.45 )

Net income (loss) from discontinued operations

  0.02     (0.13 )   (0.22 )   (0.52 )

Net income (loss) per common share—diluted

$ 0.02   $ (1.04 ) $ (0.15 ) $ (0.97 )
Weighted average number of common shares:
Basic 18,577,540 18,142,935 18,408,238 18,897,887
Diluted 18,773,386 18,142,935 18,564,522 18,897,887
Other comprehensive income (loss), before tax:

Unrealized gain (loss) on derivative instrument, net of tax

$

112

$

583

$

184

$

487

Foreign currency translation adjustment

 

  (3,302 )   3,206     (2,728 )   (184 )

Comprehensive income (loss)

$ (2,738 ) $ (15,047 ) $ (5,283 ) $ (18,097 )
 
       
ORTHOFIX INTERNATIONAL N.V.
Condensed Consolidated Balance Sheets
 
September 30, December 31,

(Unaudited U.S. Dollars, in thousands except share and per share data)

2014 2013
(Restated)
Assets
Current assets:
Cash and cash equivalents $ 29,825 $ 28,924
Restricted cash 34,630 23,761

Trade accounts receivable, less allowance for doubtful accounts of $8,118 and $9,111 at September 30, 21014 and December 31, 2013, respectively

62,505 70,811
Inventories 64,266 72,678
Deferred income taxes 39,847 39,999
Prepaid expenses and other current assets   39,272   28,933
Total current assets 270,345 265,106
Property, plant and equipment, net 49,616 54,372
Patents and other intangible assets, net 7,455 9,046
Goodwill 53,565 53,565
Deferred income taxes 21,226 22,394
Other long-term assets   8,838   7,492
Total assets $ 411,045 $ 411,975
Liabilities and shareholders' equity
Current liabilities:
Bank borrowings $ $
Trade accounts payable 13,233 20,674
Other current liabilities   68,148   48,225
Total current liabilities 81,381 68,899
Long-term debt 20,000
Deferred income taxes 12,886 13,026
Other long-term liabilities   11,762   12,736
Total liabilities 106,029 114,661
Contingencies
Shareholders' equity

Common shares $0.10 par value; 50,000,000 shares authorized; 18,604,197 and 18,102,335 issued and outstanding as of September 30, 2014 and December 31, 2013, respectively

1,861 1,810
Additional paid-in capital 231,038 216,653
Retained earnings 71,158 73,897
Accumulated other comprehensive income   959   3,503
Total shareholders' equity   305,016   295,863
Total liabilities and shareholders' equity $ 411,045 $ 410,524
 
   
ORTHOFIX INTERNATIONAL N.V.
Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30, 2014 and 2013
 
Nine Months Ended September, 30,

(Unaudited U.S. Dollars, in thousands)

2014     2013
(Restated)
Cash flows from operating activities:

Net loss

$ (2,739 ) $ (18,400 )

Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation and amortization 17,094 15,585
Amortization of debt costs 490 540
Amortization of exclusivity agreements 1,698 1,069
Provision for doubtful accounts 539 2,754
Deferred income taxes 75 (223 )
Share-based compensation 4,103 4,714
Impairment of goodwill - 19,193
Excess income tax benefit on employee stock-based awards (202 ) (82 )
Other 1,581 (1,165 )

Changes in operating assets and liabilities:

Trade accounts receivable 6,118 30,374
Inventories 5,545 (8,777 )
Prepaid expenses and other current assets 5,002 6,405
Trade accounts payable (6,782 ) (8,028 )
Other current liabilities 3,401 9,485
Other long-term assets 66 (1,425 )
Other long-term liabilities   (23 )   (116 )
Net cash provided by operating activities 35,966 51,903
Cash flows from investing activities:
Capital expenditures for property, plant and equipment (11,324 ) (19,427 )
Capital expenditures for intangible assets (170 ) (4,525 )
Purchase of other investments (1,457 ) (1,232 )
Sale of other investments   32      

Net cash used in investing activities

(12,919 ) (25,184 )
Cash flows from financing activities:
Net proceeds from issuance of common shares 10,333 3,431
Repayment of bank borrowings, net (16 )
Repayments of long-term debt (20,000 ) -
Changes in restricted cash (11,023 ) (1,371 )
Repurchase of treasury shares - (39,494 )
Excess income tax benefit on employee stock-based awards   202     82  
Net cash used in financing activities (20,488 ) (37,368 )
Effect of exchange rate changes on cash   (1,658 )   611  

Net increase (decrease) in cash and cash equivalents

901 (10,038 )

Cash and cash equivalents at the beginning of the period

  28,924     30,767  

Cash and cash equivalents at the end of the period

$ 29,825   $ 20,729  
 

Non-GAAP Performance Measures

The tables in this press release present reconciliations of net income from continuing operations and net income from continuing operations per diluted share calculated in accordance with GAAP to non-GAAP performance measures, referred to as "Net Margin," "EBITDA," "Adjusted EBITDA," "Adjusted net income (loss) from continuing operations" and "Adjusted net income (loss) from continuing operations per diluted share," that exclude the items specified in the tables. A more detailed explanation of the items excluded from these non-GAAP measures, as well as why management believes the non-GAAP measures are useful to them, is included in the Regulation G Supplemental Information below.

Reconciliations of Non-GAAP Performance Measures

Adjusted EBITDA Reconciling Items

Adjusted Net Income from Continuing Operations and Adjusted Net Income from Continuing Operations Per Diluted Share Reconciling Items

Note: The reconciling items were tax affected in the current period at the prevailing rate within the respective jurisdictions.

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

Management uses non-GAAP measures 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. Management uses these non-GAAP measures as the basis for assessing the ability of the underlying operations to generate cash. In addition, management uses these non-GAAP measures to further its understanding of the performance of the Company's business units. The items excluded from Orthofix's non-GAAP measures are also excluded from the profit or loss reported by the Company's business units for the purpose of analyzing their performance.

Material Limitations Associated with the Use of Non-GAAP Measures

The non-GAAP measures used in this press 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. 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 it is important to provide investors with the same non-GAAP metrics it uses to supplement information regarding the performance and underlying trends of Orthofix's business operations in order to facilitate comparisons to its historical operating results and internally evaluate the effectiveness of the Company's operating strategies. 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.

Orthofix International N.V.
Investor Contact:
Mark Quick, 214-937-2924
markquick@orthofix.com
or
Media Contact:
Denise Landry, 214-937-2529
deniselandry@orthofix.com

Source: Orthofix International N.V.

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