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Orthofix Reports Second Quarter 2020 Results

August 06, 2020
  • Net sales of $73.1 million, a decrease of 37% compared to prior year on a reported and constant currency basis
  • Record Motion Preservation sales quarter of $3.6 million in the U.S., an increase of 24% sequentially
  • New product innovation cadence building momentum with new regulatory clearances

LEWISVILLE, Texas--(BUSINESS WIRE)--Aug. 6, 2020-- Orthofix Medical Inc. (NASDAQ:OFIX) today reported its financial results for the second quarter ended June 30, 2020. Net sales were $73.1 million, earnings per share (“EPS”) was ($0.96) and adjusted EPS was ($0.59).

“Despite the significant impact of COVID-19 in the second quarter, we continued to execute successfully against our strategic initiatives,” said Orthofix President and Chief Executive Officer Jon Serbousek. “In particular, with the regulatory clearances of the Firebird SI Fusion System and the JuniOrtho Plating System, we believe we are making progress in creating a high-velocity new product innovation program.”

Mr. Serbousek continued, “After reaching a low point in April, revenues rebounded sequentially in both May and June in large part due to the business continuity initiatives we put into place as well our emphasis on accelerating our commercial efforts. For example, even in spite of the lower elective procedure volumes during the quarter, Motion Preservation U.S. sales continued to outperform our expectations, with rapid adoption of the M6-C™ artificial cervical disc. Looking to the balance of the year, we are optimistic about the continued recovery in our business and markets and intend to continue to invest in our strategic initiatives aimed at driving growth in the business while maintaining the strength of our balance sheet to best position Orthofix for long-term success. However, we believe it is still difficult to accurately predict the ongoing disruption that will be caused by the pandemic.”

Financial Results Overview

The following table provides net sales by major product category by reporting segment:

 

 

Three Months Ended June 30,

 

(Unaudited, U.S. Dollars, in thousands)

 

2020

 

 

2019

 

 

Change

 

 

Constant
Currency
Change

 

Bone Growth Therapies

 

$

28,379

 

 

$

50,109

 

 

 

(43.4

%)

 

 

(43.4

%)

Spinal Implants

 

 

18,594

 

 

 

23,226

 

 

 

(19.9

%)

 

 

(19.7

%)

Biologics

 

 

11,125

 

 

 

16,744

 

 

 

(33.6

%)

 

 

(33.6

%)

Global Spine

 

 

58,098

 

 

 

90,079

 

 

 

(35.5

%)

 

 

(35.4

%)

Global Extremities

 

 

15,037

 

 

 

25,771

 

 

 

(41.7

%)

 

 

(40.5

%)

Net sales

 

$

73,135

 

 

$

115,850

 

 

 

(36.9

%)

 

 

(36.6

%)

Gross profit decreased $40.1 million to $50.0 million, primarily attributable to the decline in net sales as a result of COVID-19. Gross margin decreased to 68.3% compared to 77.7% in the prior year period.

Net loss was ($18.4) million, or ($0.96) per share, compared to net loss of ($0.5) million, or ($0.03) per share in the prior year period. Adjusted net loss was ($11.3) million, or ($0.59) per share, compared to adjusted net income of $5.5 million, or $0.28 per share in the prior year period.

EBITDA was ($9.0) million, compared to $6.4 million in the prior year period. Adjusted EBITDA was ($5.6) million, or (7.6%) of net sales, compared to $17.3 million, or 14.9% of net sales, in the prior year period.

Liquidity

As of June 30, 2020, cash, cash equivalents, and restricted cash totaled $173.4 million compared to $70.4 million as of December 31, 2019. As of June 30, 2020, the Company had $100.0 million in borrowings under the five year $300 million secured revolving credit facility. Cash flow from operations increased $21.8 million to $30.1 million, while free cash flow increased $22.8 million to $20.8 million.

In July 2020, the Company repaid $50.0 million related to its borrowings under the secured revolving credit facility. Subsequent to this payment, the Company had $50.0 million in borrowings under the secured revolving credit facility.

COVID-19 Impact

The global Coronavirus Disease 2019 ("COVID-19") pandemic is significantly affecting the Company’s patients, communities, employees and business operations. The pandemic has led to the temporary closure of businesses, restrictions on travel and the implementation of physical distancing measures around the world. However, the Company remains focused on protecting the health and wellbeing of its employees, partners, patients, and the communities in which it operates while assuring the continuity of its business operations.

At this time, the future trajectory of the COVID-19 pandemic remains very uncertain, both in the U.S. and in other markets. Given these various uncertainties, it is unclear the extent to which lingering slowdowns in elective procedures will affect the Company’s business during the second half of 2020 and beyond. The expected effects of COVID-19 on the Company’s business will depend on various factors including (i) the comfort level of patients in returning to clinics and hospitals, (ii) the extent to which localized elective surgery shutdowns occur, (iii) the unemployment rate’s effect on potential patients lacking medical insurance coverage, and (iv) general hospital capacity constraints occurring because of the need to treat high volumes of COVID-19 patients. As such, the Company is not providing quantitative guidance for the third quarter of 2020 or for the full year at this time.

Conference Call

Orthofix will host a conference call today at 8:30 AM Eastern time to discuss the Company's financial results for the second quarter 2020. Interested parties may access the conference call by dialing (844) 809-1992 in the U.S. and (612) 979-9886 outside the U.S., and referencing the conference ID 7289908. A replay of the call will be available for two weeks by dialing (855) 859-2056 in the U.S. and (404) 537-3406 outside the U.S., and entering the conference ID 7289908. A webcast of the conference call may be accessed by going to the Company's website at www.orthofix.com, by clicking on the Investors link and then the Events and Presentations page.

About Orthofix

Orthofix Medical Inc. is a global medical device company focused on musculoskeletal products and therapies. The Company’s mission is to improve patients' lives by providing superior reconstruction and regenerative musculoskeletal solutions to physicians worldwide. Headquartered in Lewisville, Texas, Orthofix’s spine and orthopedic extremities products are distributed in over 70 countries via the Company's sales representatives and distributors. For more information, please visit www.orthofix.com.

Forward-Looking Statements

This communication contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (“the Exchange Act”), and Section 27A of the Securities Act of 1933, as amended, relating to our business and financial outlook, which are based on our current beliefs, assumptions, expectations, estimates, forecasts and projections. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “intends,” “predicts,” “potential,” or “continue” or other comparable terminology. These forward-looking statements are not guarantees of our future performance and involve risks, uncertainties, estimates and assumptions that are difficult to predict, including the risks described in Part II Item 1A under the heading Risk Factors of our quarterly report on Form 10-Q for the quarter ended June 30, 2020; Part I, Item 1A under the heading Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”); Part II, Item 1A under the heading Risk Factors of our Quarterly report on Form 10-Q for the quarterly periodly ended March 31, 2020; and other Securities and Exchange Commission (“SEC”) filings. In addition to the risks described there, factors that could cause or contribute to such differences may include, but are not limited to, risks relating to the effects of the COVID-19 pandemic on our business, including (i) surgeries that use our products being delayed or cancelled as a result of hospitals and surgery centers being closed or limited to life-threatening and/or essential procedures, (ii) portions of our global workforce being unable to work fully and/or effectively due to illness, quarantines, government actions (including "shelter in place" orders or advisories), facility closures or other reasons related to the pandemic, (iii) disruptions to our supply chain, (iv) volatility in global capital markets limiting our access to financing for potential acquisitions or working capital, (v) customers and payors being unable to satisfy contractual obligations to us, including the ability to make timely payment for purchases, (vi) general economic weakness in markets in which we operate affecting customer spending, and (vii) other unpredictable aspects of the pandemic. To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in Part I, Item 1A under the heading Risk Factors in our 2019 Form 10-K, such as our need to generate sufficient cash flows to service indebtedness and our ability to protect our information technology networks and infrastructure from unauthorized access, misuse, malware, phishing and other events that could have a security impact as a result of our remote working environment or otherwise. As a result of these various risks, our actual outcomes and results may differ materially from those expressed in these forward-looking statements.

This list of risks, uncertainties and other factors is not complete. We discuss some of these matters more fully, as well as certain risk factors that could affect our business, financial condition, results of operations, and prospects, in reports we file from time-to-time with the SEC, which our available to read at www.sec.gov. Any or all forward-looking statements that we make may turn out to be wrong (due to inaccurate assumptions that we make or otherwise), and our actual outcomes and results may differ materially from those expressed in these forward-looking statements. You should not place undue reliance on any of these forward-looking statements. Further, any forward-looking statement speaks only as of the date hereof, unless it is specifically otherwise stated to be made as of a different date. We undertake no obligation to update, and expressly disclaim any duty to update, our forward-looking statements, whether as a result of circumstances or events that arise after the date hereof, new information, or otherwise.

 

ORTHOFIX MEDICAL INC.

Condensed Consolidated Statements of Operations

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

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

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(unaudited)

 

 

(unaudited)

 

Net sales

 

$

73,135

 

 

$

115,850

 

 

$

177,958

 

 

$

224,962

 

Cost of sales

 

 

23,166

 

 

 

25,812

 

 

 

46,575

 

 

 

49,520

 

Gross profit

 

 

49,969

 

 

 

90,038

 

 

 

131,383

 

 

 

175,442

 

Sales and marketing

 

 

43,479

 

 

 

56,864

 

 

 

97,792

 

 

 

110,558

 

General and administrative

 

 

15,047

 

 

 

21,935

 

 

 

32,912

 

 

 

42,407

 

Research and development

 

 

8,765

 

 

 

8,980

 

 

 

18,729

 

 

 

18,209

 

Acquisition-related amortization and remeasurement

 

 

3,678

 

 

 

1,808

 

 

 

(3,904

)

 

 

8,265

 

Operating income (loss)

 

 

(21,000

)

 

 

451

 

 

 

(14,146

)

 

 

(3,997

)

Interest income (expense), net

 

 

(901

)

 

 

457

 

 

 

(1,324

)

 

 

200

 

Other income (expense), net

 

 

5,069

 

 

 

(236

)

 

 

4,271

 

 

 

(640

)

Income (loss) before income taxes

 

 

(16,832

)

 

 

672

 

 

 

(11,199

)

 

 

(4,437

)

Income tax benefit (expense)

 

 

(1,592

)

 

 

(1,219

)

 

 

18,440

 

 

 

4,787

 

Net income (loss)

 

$

(18,424

)

 

$

(547

)

 

$

7,241

 

 

$

350

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.96

)

 

$

(0.03

)

 

$

0.38

 

 

$

0.02

 

Diluted

 

 

(0.96

)

 

 

(0.03

)

 

 

0.37

 

 

 

0.02

 

Weighted average number of common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

19,215,392

 

 

 

18,834,886

 

 

 

19,149,523

 

 

 

18,790,612

 

Diluted

 

 

19,215,392

 

 

 

18,834,886

 

 

 

19,271,467

 

 

 

19,179,057

 

 

ORTHOFIX MEDICAL INC.

Condensed Consolidated Balance Sheets

 

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

 

June 30,
2020

 

 

December 31,
2019

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

172,888

 

 

$

69,719

 

Restricted cash

 

 

503

 

 

 

684

 

Accounts receivable, net of allowances of $6,364 and $3,987, respectively

 

 

67,407

 

 

 

86,805

 

Inventories

 

 

82,046

 

 

 

82,397

 

Prepaid expenses and other current assets

 

 

20,726

 

 

 

20,948

 

Total current assets

 

 

343,570

 

 

 

260,553

 

Property, plant and equipment, net

 

 

65,113

 

 

 

62,727

 

Intangible assets, net

 

 

57,527

 

 

 

54,139

 

Goodwill

 

 

82,997

 

 

 

71,177

 

Deferred income taxes

 

 

36,476

 

 

 

35,117

 

Other long-term assets

 

 

10,026

 

 

 

11,907

 

Total assets

 

$

595,709

 

 

$

495,620

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

14,911

 

 

$

19,886

 

Current portion of finance lease liability

 

 

449

 

 

 

323

 

Other current liabilities

 

 

74,236

 

 

 

64,674

 

Total current liabilities

 

 

89,596

 

 

 

84,883

 

Long-term portion of finance lease liability

 

 

22,506

 

 

 

20,648

 

Other long-term liabilities

 

 

38,562

 

 

 

62,458

 

Long-term debt

 

 

100,000

 

 

 

 

Total liabilities

 

 

250,664

 

 

 

167,989

 

Contingencies

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

 

Common shares $0.10 par value; 50,000,000 shares authorized; 19,209,063 and

19,022,619 issued and outstanding as of June 30, 2020 and December 31, 2019,

respectively

 

 

1,921

 

 

 

1,902

 

Additional paid-in capital

 

 

282,287

 

 

 

271,019

 

Retained earnings

 

 

64,103

 

 

 

57,749

 

Accumulated other comprehensive loss

 

 

(3,266

)

 

 

(3,039

)

Total shareholders’ equity

 

 

345,045

 

 

 

327,631

Total liabilities and shareholders’ equity

$

595,709

$

495,620

 

ORTHOFIX MEDICAL INC. 

Non-GAAP Financial Measures

The following tables present reconciliations of operating income (loss), net income (loss), EPS, and net cash from operating activities, in each case calculated in accordance with U.S. generally accepted accounting principles (“GAAP”), to, as applicable, non-GAAP financial measures, referred to as "EBITDA," "Adjusted EBITDA," "Adjusted net income," "Adjusted EPS," and "Free cash flow" that exclude items specified in the tables. A more detailed explanation of the items excluded from these non-GAAP financial measures, as well as why management believes the non-GAAP financial measures are useful to them, is included following the reconciliations.

EBITDA and Adjusted EBITDA

 

 

Three Months Ended June 30, 2020

 

(Unaudited, U.S. Dollars, in thousands)

 

Global Spine

 

 

Global Extremities

 

 

Corporate

 

 

Total Orthofix

 

Operating income (loss)

 

$

(7,927

)

 

$

(5,373

)

 

$

(7,700

)

 

$

(21,000

)

Other income (expense), net

 

 

160

 

 

 

214

 

 

 

4,695

 

 

 

5,069

 

Depreciation and amortization

 

 

2,650

 

 

 

1,632

 

 

 

1,082

 

 

 

5,364

 

Amortization of acquired intangibles

 

 

1,410

 

 

 

168

 

 

 

 

 

 

1,578

 

EBITDA

 

$

(3,707

)

 

$

(3,359

)

 

$

(1,923

)

 

$

(8,989

)

Share-based compensation

 

 

1,568

 

 

 

529

 

 

 

1,757

 

 

 

3,854

 

Foreign exchange impact

 

 

(137

)

 

 

(286

)

 

 

(42

)

 

 

(465

)

Strategic investments

 

 

3

 

 

 

248

 

 

 

281

 

 

 

532

 

Acquisition-related fair value adjustments

 

 

2,100

 

 

 

48

 

 

 

 

 

 

2,148

 

(Gain) loss on investment securities

 

 

 

 

 

 

 

 

 

 

 

 

Legal judgments/settlements

 

 

(21

)

 

 

58

 

 

 

(3

)

 

 

34

 

Succession and transition charges

 

 

948

 

 

 

(1

)

 

 

250

 

 

 

1,197

 

Medical device regulation

 

 

149

 

 

 

143

 

 

 

180

 

 

 

472

 

Business interruption - COVID-19

 

 

8

 

 

 

86

 

 

 

(4,435

)

 

 

(4,341

)

Adjusted EBITDA

 

$

911

 

 

$

(2,534

)

 

$

(3,935

)

 

$

(5,558

)

 

 

Six Months Ended June 30, 2020

 

(Unaudited, U.S. Dollars, in thousands)

 

Global Spine

 

 

Global Extremities

 

 

Corporate

 

 

Total Orthofix

 

Operating income (loss)

 

$

10,632

 

 

$

(8,079

)

 

$

(16,699

)

 

$

(14,146

)

Other income (expense), net

 

 

135

 

 

 

(327

)

 

 

4,463

 

 

 

4,271

 

Depreciation and amortization

 

 

5,115

 

 

 

2,985

 

 

 

2,173

 

 

 

10,273

 

Amortization of acquired intangibles

 

 

2,828

 

 

 

168

 

 

 

 

 

 

2,996

 

EBITDA

 

$

18,710

 

 

$

(5,253

)

 

$

(10,063

)

 

$

3,394

 

Share-based compensation

 

 

3,092

 

 

 

1,155

 

 

 

3,366

 

 

 

7,613

 

Foreign exchange impact

 

 

(86

)

 

 

223

 

 

 

(29

)

 

 

108

 

Strategic investments

 

 

15

 

 

 

256

 

 

 

726

 

 

 

997

 

Acquisition-related fair value adjustments

 

 

(6,900

)

 

 

48

 

 

 

 

 

 

(6,852

)

(Gain) loss on investment securities

 

 

 

 

 

 

 

 

219

 

 

 

219

 

Legal judgments/settlements

 

 

(452

)

 

 

279

 

 

 

373

 

 

 

200

 

Succession and transition charges

 

 

1,081

 

 

 

1,098

 

 

 

684

 

 

 

2,863

 

Medical device regulation

 

 

354

 

 

 

292

 

 

 

479

 

 

 

1,125

 

Business interruption - COVID 19

 

 

341

 

 

 

265

 

 

 

(4,424

)

 

 

(3,818

)

Adjusted EBITDA

 

$

16,155

 

 

$

(1,637

)

 

$

(8,669

)

 

$

5,849

 

 

 

Three Months Ended June 30, 2019

 

(Unaudited, U.S. Dollars, in thousands)

 

Global Spine

 

 

Global Extremities

 

 

Corporate

 

 

Total Orthofix

 

Operating income (loss)

 

$

12,696

 

 

$

1,353

 

 

$

(13,598

)

 

$

451

 

Other income (expense), net

 

 

175

 

 

 

71

 

 

 

(482

)

 

 

(236

)

Depreciation and amortization

 

 

2,314

 

 

 

1,326

 

 

 

1,200

 

 

 

4,840

 

Amortization of acquired intangibles

 

 

1,338

 

 

 

 

 

 

 

 

 

1,338

 

EBITDA

 

$

16,523

 

 

$

2,750

 

 

$

(12,880

)

 

$

6,393

 

Share-based compensation

 

 

1,733

 

 

 

607

 

 

 

2,454

 

 

 

4,794

 

Foreign exchange impact

 

 

(168

)

 

 

(116

)

 

 

1

 

 

 

(283

)

Strategic investments

 

 

591

 

 

 

 

 

 

4,234

 

 

 

4,825

 

Acquisition-related fair value adjustments

 

 

647

 

 

 

 

 

 

 

 

 

647

 

(Gain) loss on investment securities

 

 

 

 

 

 

 

 

491

 

 

 

491

 

Legal judgments/settlements

 

 

(555

)

 

 

(318

)

 

 

(4

)

 

 

(877

)

Succession charges

 

 

132

 

 

 

 

 

 

1,136

 

 

 

1,268

 

Adjusted EBITDA

 

$

18,903

 

 

$

2,923

 

 

$

(4,568

)

 

$

17,258

 

 

 

Six Months Ended June 30, 2019

 

(Unaudited, U.S. Dollars, in thousands)

 

Global Spine

 

 

Global Extremities

 

 

Corporate

 

 

Total Orthofix

 

Operating income (loss)

 

$

20,426

 

 

$

358

 

 

$

(24,781

)

 

$

(3,997

)

Other income (expense), net

 

 

(224

)

 

 

(407

)

 

 

(9

)

 

 

(640

)

Depreciation and amortization

 

 

4,501

 

 

 

2,626

 

 

 

2,383

 

 

 

9,510

 

Amortization of acquired intangibles

 

 

2,395

 

 

 

 

 

 

 

 

 

2,395

 

EBITDA

 

$

27,098

 

 

$

2,577

 

 

$

(22,407

)

 

$

7,268

 

Share-based compensation

 

 

3,313

 

 

 

1,133

 

 

 

3,907

 

 

 

8,353

 

Foreign exchange impact

 

 

225

 

 

 

342

 

 

 

23

 

 

 

590

 

Strategic investments

 

 

1,249

 

 

 

 

 

 

5,645

 

 

 

6,894

 

Acquisition-related fair value adjustments

 

 

6,579

 

 

 

 

 

 

 

 

 

6,579

 

(Gain) loss on investment securities

 

 

 

 

 

 

 

 

 

 

 

 

Legal judgments/settlements

 

 

(500

)

 

 

(273

)

 

 

21

 

 

 

(752

)

Succession charges

 

 

132

 

 

 

 

 

 

3,868

 

 

 

4,000

 

Adjusted EBITDA

 

$

38,096

 

 

$

3,779

 

 

$

(8,943

)

 

$

32,932

 

Adjusted Net Income

 

 

Three Months Ended
June 30,

 

 

Six Months Ended
June 30,

 

(Unaudited, U.S. Dollars, in thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net income (loss)

 

$

(18,424

)

 

$

(547

)

 

$

7,241

 

 

$

350

 

Foreign exchange impact

 

 

(465

)

 

 

(283

)

 

 

108

 

 

 

590

 

Strategic investments

 

 

532

 

 

 

4,825

 

 

 

997

 

 

 

6,894

 

Acquisition-related fair value adjustments

 

 

2,148

 

 

 

647

 

 

 

(6,852

)

 

 

6,579

 

Amortization of acquired intangibles

 

 

1,846

 

 

 

1,338

 

 

 

3,264

 

 

 

2,395

 

Interest and (gain) loss on investment securities

 

 

 

 

 

(96

)

 

 

219

 

 

 

(689

)

Legal judgments/settlements

 

 

34

 

 

 

(877

)

 

 

200

 

 

 

(752

)

Succession and transition charges

 

 

1,197

 

 

 

1,268

 

 

 

2,863

 

 

 

4,000

 

Medical device regulation

 

 

472

 

 

 

 

 

 

1,125

 

 

 

 

Business interruption - COVID-19

 

 

(4,341

)

 

 

 

 

 

(3,818

)

 

 

 

Long-term income tax rate adjustment

 

 

5,751

 

 

 

(804

)

 

 

(14,906

)

 

 

(8,723

)

Adjusted net income (loss)

 

$

(11,250

)

 

$

5,471

 

 

$

(9,559

)

 

$

10,644

 

Adjusted EPS

 

 

Three Months Ended
June 30,

 

 

Six Months Ended
June 30,

 

(Unaudited, per diluted share)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

EPS

 

$

(0.96

)

 

$

(0.03

)

 

$

0.37

 

 

$

0.02

 

Foreign exchange impact

 

 

(0.02

)

 

 

(0.01

)

 

 

0.01

 

 

 

0.03

 

Strategic investments

 

 

0.03

 

 

 

0.25

 

 

 

0.05

 

 

 

0.36

 

Acquisition-related fair value adjustments

 

 

0.11

 

 

 

0.03

 

 

 

(0.36

)

 

 

0.34

 

Amortization of acquired intangibles

 

 

0.10

 

 

 

0.07

 

 

 

0.17

 

 

 

0.12

 

Interest and (gain) loss on investment securities

 

 

 

 

 

 

 

 

0.01

 

 

 

(0.04

)

Legal judgments/settlements

 

 

 

 

 

(0.05

)

 

 

0.01

 

 

 

(0.04

)

Succession and transition charges

 

 

0.06

 

 

 

0.07

 

 

 

0.15

 

 

 

0.21

 

Medical device regulation

 

 

0.02

 

 

 

 

 

 

0.06

 

 

 

 

Business interruption - COVID-19

 

 

(0.23

)

 

 

 

 

 

(0.20

)

 

 

 

Long-term income tax rate adjustment

 

 

0.30

 

 

 

(0.05

)

 

 

(0.77

)

 

 

(0.45

)

Adjusted EPS

 

$

(0.59

)

 

$

0.28

 

 

$

(0.50

)

 

$

0.55

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of diluted common shares (treasury stock method)

 

 

19,215,392

 

 

 

19,272,139

 

 

 

19,149,523

 

 

 

19,280,140

 

Free Cash Flow

 

 

Six Months Ended
June 30,

 

(Unaudited, U.S. Dollars, in thousands)

 

2020

 

 

2019

 

Net cash from operating activities

 

$

30,094

 

 

$

8,344

 

Capital expenditures

 

 

(9,332

)

 

 

(10,338

)

Free cash flow

 

$

20,762

 

 

$

(1,994

)

Constant Currency

Constant currency is a non-GAAP measure, which is calculated by using foreign currency rates from the comparable, prior-year period, to present net sales at comparable rates. Constant currency can be presented for numerous GAAP measures, but is most commonly used by management to analyze net sales without the impact of changes in foreign currency rates.

EBITDA

EBITDA is a non-GAAP financial measure, which is calculated by adding interest expense, net; income tax expense (benefit); and depreciation and amortization to net income. EBITDA provides management with additional insight to its results of operations. EBITDA is the primary metric used by our Chief Operating Decision Maker in managing our business.

Adjusted EBITDA, Adjusted Net Income and Adjusted EPS

These non-GAAP financial measures provide management with additional insight to its results of operations and are calculated using the following adjustments:

  • Share-based compensation – costs related to our share-based compensation plans, which include stock options, restricted stock awards, market-based restricted stock awards and our stock purchase plan; see the share-based compensation footnote in our Form 10-Q for the quarter ended June 30, 2020 for a detail of these costs by consolidated statement of income line item; however, certain share-based compensation costs have been included within succession and transition charges for 2019 and 2020
  • Foreign exchange impact – gains and losses related to foreign currency transactions, which are recorded as other expense, net
  • Strategic investments – costs related to our strategic investments, such as due diligence and integration costs, or costs associated with the evaluation and completion of changing the Company’s jurisdiction of organization from Curacao to the State of Delaware, which are primarily recorded as general and administrative expenses
  • Acquisition-related fair value adjustments – comprised of i) gains and losses related to remeasurement of contingent consideration to fair value, which are recorded as operating expenses and ii) the amortization of an adjustment made to inventory acquired to reflect the expected selling price of the acquired inventory less the cost of expected selling efforts and a reasonable profit allowance for the selling effort for finished goods inventory, which is recorded as cost of sales
  • Amortization of acquired intangibles – amortization of intangible assets acquired in business combinations or asset acquisitions, including items such as developed technologies, customer relationships, trade names, manufacturing agreements, and other intangible assets, which are recorded as operating expenses
  • Interest and (gain) loss on investment securities – net gains or losses recognized (realized or unrealized) within other expense, net or interest income recognized relating to our investments in eNeura Inc. and Bone Biologics, Inc.
  • Legal judgments/settlements – adverse or favorable legal judgments or negotiated legal settlements, which are recorded as general and administrative expenses
  • Succession and transition charges – costs related to the transition of certain named executive officers and certain targeted restructuring costs, including any cessation and onboarding amounts, accelerated share-based compensation expense, consulting services, and other related expenses, which are primarily recorded as general and administrative expenses
  • Medical Device Regulation – incremental costs incurred to establish the initial compliance with the regulations set forth by the European Union Medical Device Regulation (“MDR”) and the U.S. Food and Drug Administration related to our currently-approved medical devices; the new European Union MDR provides a transition period until May 2021 for currently-approved medical devices to meet the additional requirements and for certain devices this transition period can be extended until May 2024; the incremental costs to comply with these regulations primarily include third-party consulting costs necessary to supplement our internal resources and are recorded as research and development expenses
  • Business interruption – COVID-19 – gains and losses related to the realized effects the COVID-19 pandemic has had on our business operation, which consist primarily of i) certain proceeds received as part of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which are recognized in other income, and ii) inventory reserve adjustments related to product set to expire, which are reflected in cost of sales
  • Long-term income tax rate adjustment – reflects management’s expectation of a long-term normalized effective tax rate of 27% for 2019 and 2020 results and outlook, which is based on current tax law and current expected adjusted income; actual reported tax expense will ultimately be based on GAAP earnings and may differ from the expected long-term normalized effective tax rate due to a variety of factors, including the resolutions of issues arising from tax audits with various tax authorities, the ability to realize deferred tax assets, and the tax impact of certain reconciling items that are excluded in determining Adjusted Net Income

Free Cash Flow

Free cash flow is a non-GAAP financial measure, which is calculated by subtracting capital expenditures from cash flow from operating activities. Free cash flow is an important indicator of how much cash is generated or used by our normal business operations, including capital expenditures. Management uses free cash flow as a measure of progress on its capital efficiency and cash flow initiatives.

Usefulness and Limitations of Non-GAAP Financial Measures

Management uses non-GAAP measures to evaluate performance period-over-period, to analyze the underlying trends in our business, to assess performance relative to 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 our business units.

Material Limitations Associated with the Use of Non-GAAP Financial 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 financial measures. Some of the limitations associated with the use of these non-GAAP financial measures are that they exclude items that reflect an economic cost and can have a material effect on cash flows. Similarly, certain non-cash expenses, such as equity compensation, do not directly impact cash flows, but are part of total compensation costs accounted for under GAAP.

Compensation for Limitations Associated with Use of Non-GAAP Financial Measures

We compensate for the limitations of our non-GAAP financial measures by relying upon GAAP results to gain a complete picture of our performance. The GAAP results provide the ability to understand our performance based on a defined set of criteria. The non-GAAP measures reflect the underlying operating results of our businesses, which we believe is an important measure of our overall performance. We provide a detailed reconciliation of the non-GAAP financial measures to our most directly comparable GAAP measures, and encourage investors to review this reconciliation.

Usefulness of Non-GAAP Financial Measures to Investors

We believe that providing non-GAAP financial measures that exclude certain items provides investors with greater transparency to the information used by 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 our business operations in order to facilitate comparisons to its historical operating results and internally evaluate the effectiveness of our operating strategies. Disclosure of these non-GAAP financial measures also facilitates comparisons of our underlying operating performance with other companies in the industry that also supplement their GAAP results with non-GAAP financial measures.

Orthofix Medical Inc.
Mark Quick
P: 214-937-2924
E: markquick@orthofix.com

Source: Orthofix Medical Inc.

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