PART I FINANCIAL INFORMATION [Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited condensed consolidated financial statements for the quarter ended March 31, 2019, showing relatively flat net sales but a significant decrease in net income due to increased operating expenses and acquisition-related costs [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) The balance sheet highlights show cash and cash equivalents decreased to $46.7 million, while total assets increased to $479.3 million, and total shareholders' equity rose to $343.7 million as of March 31, 2019 | Balance Sheet Highlights (in thousands) | March 31, 2019 (Unaudited) | December 31, 2018 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $46,668 | $69,623 | | Total current assets | $224,338 | $244,639 | | Total assets | $479,316 | $466,641 | | **Liabilities & Equity** | | | | Total current liabilities | $63,654 | $85,908 | | Total liabilities | $135,634 | $131,244 | | Total shareholders' equity | $343,682 | $335,397 | [Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Income%20(Loss)) Net sales remained flat at $109.1 million, but net income significantly decreased to $0.9 million from $5.2 million, primarily due to a substantial increase in acquisition-related amortization and remeasurement expenses | Income Statement (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net sales | $109,112 | $108,709 | | Gross profit | $85,404 | $84,562 | | Operating income (loss) | $(4,448) | $7,870 | | Net income | $897 | $5,226 | | Diluted EPS | $0.05 | $0.27 | - The company experienced a significant drop in operating income, moving from a **$7.9 million profit** in Q1 2018 to a **$4.4 million loss** in Q1 2019, primarily driven by a large increase in 'Acquisition-related amortization and remeasurement' expenses, which rose from $63 thousand to **$6.5 million**[16](index=16&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Net cash used in operating activities improved slightly, but significant cash outflows from investing and financing activities led to a $23.0 million net decrease in cash, primarily due to acquisition-related payments | Cash Flow Summary (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net cash from operating activities | $(1,039) | $(3,560) | | Net cash from investing activities | $(11,316) | $(4,655) | | Net cash from financing activities | $(10,396) | $3,697 | | Net change in cash | $(22,981) | $(4,101) | - The significant use of cash in financing activities in Q1 2019 was primarily due to a **$13.7 million payment** for contingent consideration related to an acquisition[18](index=18&type=chunk) [Notes to the Unaudited Condensed Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20the%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) This section details changes in reporting segments, adoption of new lease accounting standards, the Options Medical acquisition, and significant milestone payments and remeasurement expenses related to the Spinal Kinetics acquisition - Effective Q1 2019, the company changed its reportable business segments to Global Spine and Global Extremities to align with changes in how the business is managed and performance is reviewed[23](index=23&type=chunk)[69](index=69&type=chunk) - The company adopted the new lease accounting standard ASU 2016-02 on January 1, 2019, resulting in the recognition of **$20.2 million in lease assets** and **$20.5 million in lease liabilities**[24](index=24&type=chunk)[39](index=39&type=chunk) - On January 31, 2019, the company acquired certain assets of medical device distributor Options Medical, LLC for **$6.4 million**[36](index=36&type=chunk) - Following FDA approval for the M6-C artificial cervical disc on February 6, 2019, the company paid a **$15.0 million milestone obligation** related to the Spinal Kinetics acquisition, and the fair value of remaining contingent consideration was remeasured, resulting in a **$5.4 million expense**[55](index=55&type=chunk)[57](index=57&type=chunk) - In Brazil, approximately **$2.5 million of the company's cash** was frozen as part of an investigation but was subsequently ordered to be unfrozen in April 2019[62](index=62&type=chunk)[82](index=82&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=22&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Q1 2019 results, noting a slight increase in net sales, segment performance variations, and a significant drop in net income due to increased operating expenses and acquisition-related costs [Results of Operations](index=22&type=section&id=Results%20of%20Operations) Net sales increased slightly to $109.1 million, driven by Global Spine growth, while Global Extremities declined, and operating expenses surged, leading to an operating loss | Net Sales by Segment (in thousands) | Q1 2019 | Q1 2018 | % Change (Reported) | | :--- | :--- | :--- | :--- | | Global Spine | $85,918 | $81,205 | 5.8% | | Global Extremities | $23,194 | $27,504 | -15.7% | | **Total Net Sales** | **$109,112** | **$108,709** | **0.4%** | - The increase in General and Administrative expense was primarily driven by **$2.7 million in transition and succession charges** related to the announced retirement of the President and CEO[94](index=94&type=chunk) - Acquisition-related expenses surged by **$6.4 million**, mainly due to a **$5.4 million charge** for the remeasurement of contingent consideration for the Spinal Kinetics acquisition[74](index=74&type=chunk)[97](index=97&type=chunk) - The company's primary performance metric for segments has changed to EBITDA, with total EBITDA decreasing from **$15.2 million** in Q1 2018 to **$0.9 million** in Q1 2019[72](index=72&type=chunk)[100](index=100&type=chunk) [Liquidity and Capital Resources](index=26&type=section&id=Liquidity%20and%20Capital%20Resources) Cash and equivalents decreased by $23.0 million due to acquisition-related payments, while net cash used in operating activities improved, and free cash flow remained negative - The decrease in cash was largely a result of **$15.0 million paid** for the Spinal Kinetics FDA Milestone and **$6.4 million** for the acquisition of assets from Options Medical[101](index=101&type=chunk) | Free Cash Flow (Non-GAAP, in thousands) | Q1 2019 | Q1 2018 | | :--- | :--- | :--- | | Net cash from operating activities | $(1,039) | $(3,560) | | Capital expenditures | $(4,916) | $(3,438) | | **Free cash flow** | **$(5,955)** | **$(6,998)** | - The company had no borrowings under its **$125 million secured revolving credit facility** as of March 31, 2019[46](index=46&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=29&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) No material changes to the company's market risks were reported since the prior year-end disclosure - There have been no material changes to the company's market risks since the year-end 2018 disclosure[125](index=125&type=chunk) [Controls and Procedures](index=29&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the quarter - Management concluded that disclosure controls and procedures were effective as of March 31, 2019[127](index=127&type=chunk) - No material changes to internal control over financial reporting occurred during the first quarter of 2019[128](index=128&type=chunk) PART II OTHER INFORMATION [Legal Proceedings](index=31&type=section&id=Item%201.%20Legal%20Proceedings) This section details contingencies including a $3.9 million accrual for the Italian Medical Device Payback and the unfreezing of $2.5 million in cash in Brazil - The company has accrued **$3.9 million** related to the Italian Medical Device Payback (IMDP) law, though the final liability could differ[61](index=61&type=chunk) - In Brazil, approximately **$2.5 million of the company's cash** was frozen in July 2018 as part of an industry-wide investigation, with a court ordering its unfreezing and return in April 2019[62](index=62&type=chunk)[82](index=82&type=chunk) [Risk Factors](index=31&type=section&id=Item%201A.%20Risk%20Factors) No material changes to the company's risk factors were reported for the quarter compared to the prior annual report - No material changes to risk factors were reported for the quarter[131](index=131&type=chunk) [Other Items (Items 2, 3, 4, 5, 6)](index=31&type=section&id=Other%20Items) The company reported no unregistered sales of equity securities, stock repurchases, or defaults on senior securities during the first quarter - The company did not repurchase any of its common stock during the first quarter of 2019[132](index=132&type=chunk)

Part I [Business](index=4&type=section&id=Item%201.%20Business) Orthofix is a global medical device company specializing in musculoskeletal products and therapies across four reporting segments - Orthofix is a global medical device company focused on musculoskeletal products and therapies, with products distributed in over seventy countries[15](index=15&type=chunk) - In July 2018, the company changed its jurisdiction of organization from Curaçao to Delaware and changed its name to Orthofix Medical Inc[17](index=17&type=chunk) 2018 Net Sales by Business Segment | Business Segment | 2018 Net Sales % | | :--- | :--- | | Bone Growth Therapies | 43% | | Spinal Implants | 20% | | Biologics | 13% | | Orthofix Extremities | 24% | [Business Segments](index=4&type=section&id=Business%20Segments) The company's operations are divided into Bone Growth Therapies, Spinal Implants, Biologics, and Orthofix Extremities segments - The Bone Growth Therapies segment's strategy is to expand patient access to its noninvasive devices, leveraging its **STIM onTrack mobile app** to monitor patient adherence[24](index=24&type=chunk)[25](index=25&type=chunk) - The Spinal Implants segment was strengthened by the April 2018 acquisition of Spinal Kinetics, which added the **M6-C and M6-L artificial discs** to its portfolio; the M6-C disc received FDA approval in February 2019[40](index=40&type=chunk) - The Biologics segment exclusively markets **Trinity Evolution and Trinity ELITE** tissue forms through a partnership with MTF Biologics, which processes and supplies the tissues[42](index=42&type=chunk)[49](index=49&type=chunk) - The Orthofix Extremities segment focuses on pediatrics and deformity correction worldwide, leveraging its **TL-HEX system** and JuniOrtho pediatric brand[53](index=53&type=chunk)[64](index=64&type=chunk) [Product Development, IP, and Compliance](index=14&type=section&id=Product%20Development%2C%20IP%2C%20and%20Compliance) The company invested $33.2 million in R&D in 2018 and protects its technology through patents, trade secrets, and licenses Research and Development Expense (2016-2018) | Year | R&D Expense (in millions) | | :--- | :--- | | 2018 | $33.2 | | 2017 | $29.7 | | 2016 | $28.8 | - The company relies on a combination of patents, trade secrets, assignment and license agreements, and non-disclosure agreements to protect its proprietary intellectual property[70](index=70&type=chunk) [Government Regulation and Sales](index=15&type=section&id=Government%20Regulation%20and%20Sales) The company's products and sales practices are subject to extensive regulation by the FDA and other global authorities - Bone Growth Therapies products and the M6-C artificial cervical disc are classified as **class III** by the FDA, requiring the most stringent Premarket Approval (PMA) process[75](index=75&type=chunk) - The Biologics segment's allograft products (Trinity Evolution, Trinity ELITE) are regulated under the FDA's **Human Cell, Tissues and Cellular and Tissue-Based Products (HCT/P) framework**, not as medical devices[78](index=78&type=chunk) - Sales and marketing practices are subject to U.S. laws including the federal **Anti-Kickback Statute**, the Stark Law, the Civil False Claims Act, and HIPAA[85](index=85&type=chunk) [Competition, Manufacturing, and Employees](index=19&type=section&id=Competition%2C%20Manufacturing%2C%20and%20Employees) Orthofix competes with major medical device firms, relies on subcontracting, and employed 954 people worldwide as of year-end 2018 - Key competitors include **Zimmer Biomet, DJO Global, Medtronic, DePuy Synthes** (a division of Johnson & Johnson), and **Stryker Corp**[99](index=99&type=chunk) - The company subcontracts a substantial portion of component part manufacturing and relies on **MTF as the sole supplier** for its Trinity Evolution and Trinity ELITE HCT/Ps[101](index=101&type=chunk)[102](index=102&type=chunk) - As of December 31, 2018, the company had **954 employees worldwide**, with 686 in the U.S. and 268 in other locations[104](index=104&type=chunk) [Risk Factors](index=19&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks from its legal environment, industry competition, third-party reliance, and financial exposures - The company has previously settled violations of the **Foreign Corrupt Practices Act (FCPA)** related to its Brazilian and Mexican subsidiaries and retained an independent compliance consultant which concluded its review in March 2018[109](index=109&type=chunk) - The business is subject to extensive government regulation by the FDA and other authorities, and a potential **FDA down-classification of Class III bone growth stimulators could increase competition**[119](index=119&type=chunk) - The company is dependent on third-party manufacturers, including a **sole-supplier relationship with MTF** for its Trinity Evolution and Trinity ELITE allografts[139](index=139&type=chunk) - A **$15 million loan to eNeura, Inc** matures on March 4, 2019, and the company does not expect to collect the full principal and interest on the maturity date[157](index=157&type=chunk)[159](index=159&type=chunk) [Properties](index=30&type=section&id=Item%202.%20Properties) Orthofix's principal facilities include a leased corporate headquarters in Texas and an owned manufacturing facility in Italy Principal Facilities | Location | Approx. Square Feet | Ownership | | :--- | :--- | :--- | | Lewisville, TX | 140,000 | Leased | | Sunnyvale, CA | 25,000 | Leased | | Verona, Italy | 38,000 | Owned | | Verona, Italy | 18,000 | Leased | | Verona, Italy | 9,000 | Leased | [Legal Proceedings](index=31&type=section&id=Item%203.%20Legal%20Proceedings) Material pending legal proceedings are detailed in Note 13 of the Notes to the Consolidated Financial Statements - A description of material pending legal proceedings is provided in **Note 13** of the Notes to the Consolidated Financial Statements[169](index=169&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=32&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock trades on Nasdaq under the symbol "OFIX," and the company does not intend to pay dividends - The company's common stock is traded on the Nasdaq Global Select Market under the symbol **"OFIX"**[173](index=173&type=chunk) - The company has **not paid dividends in the past** and has no present intention to pay dividends in the foreseeable future[175](index=175&type=chunk) 2018 Quarterly Stock Price Range | Quarter | High | Low | | :--- | :--- | :--- | | First | $61.00 | $51.01 | | Second | $61.86 | $51.38 | | Third | $61.98 | $50.41 | | Fourth | $63.57 | $48.00 | [Selected Financial Data](index=33&type=section&id=Item%206.%20Selected%20Financial%20Data) This section presents a five-year summary of key financial data, showing net sales of $453.0 million for 2018 Selected Financial Data (2016-2018) | (U.S. Dollars, in thousands) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | **Net sales** | $453,042 | $433,823 | $409,788 | | **Gross profit** | $356,414 | $340,786 | $321,935 | | **Operating income** | $30,094 | $40,811 | $21,067 | | **Net income (loss)** | $13,811 | $6,223 | $3,056 | | **Diluted EPS** | $0.72 | $0.34 | $0.17 | | **Total assets (at year-end)** | $466,641 | $405,354 | $372,103 | | **Shareholders' equity (at year-end)** | $335,397 | $296,608 | $263,477 | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=35&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Net sales grew 4.4% in 2018, though operating income decreased due to acquisition costs and higher G&A expenses [Results of Operations](index=35&type=section&id=Results%20of%20Operations) Net sales growth in 2018 was driven by the Bone Growth Therapies and Spinal Implants segments, while the effective tax rate decreased significantly Net Sales by Reporting Segment (2017 vs. 2018) | (U.S. Dollars, in thousands) | 2018 | 2017 | % Change (Reported) | | :--- | :--- | :--- | :--- | | Bone Growth Therapies | $195,252 | $185,900 | 5.0% | | Spinal Implants | $91,658 | $81,957 | 11.8% | | Biologics | $59,684 | $62,724 | -4.8% | | Orthofix Extremities | $106,448 | $103,242 | 3.1% | | **Total Net Sales** | **$453,042** | **$433,823** | **4.4%** | - General and administrative expenses **increased by $12.6 million (17.5%)** in 2018, primarily due to $6.3 million in costs associated with the Spinal Kinetics acquisition and domestication, and a $5.5 million increase in share-based compensation[199](index=199&type=chunk)[200](index=200&type=chunk) - The effective tax rate **decreased from 80.0% in 2017 to 39.7% in 2018**, as the 2017 rate was significantly impacted by a one-time charge of $8.3 million related to the U.S. Tax Cuts and Jobs Act[212](index=212&type=chunk)[213](index=213&type=chunk) [Liquidity and Capital Resources](index=41&type=section&id=Liquidity%20and%20Capital%20Resources) Cash from operations increased, but overall cash decreased due to the Spinal Kinetics acquisition, while a $125 million credit facility remains undrawn Summary of Cash Flows (2018 vs. 2017) | (U.S. Dollars, in thousands) | 2018 | 2017 | | :--- | :--- | :--- | | Net cash from operating activities | $49,918 | $38,972 | | Net cash from investing activities | $(60,998) | $(16,474) | | Net cash from financing activities | $2,993 | $3,538 | | **Net change in cash** | **$(8,968)** | **$27,216** | - The acquisition of Spinal Kinetics involved a closing payment of **$45.0 million in cash**, with potential future milestone payments up to $60.0 million; the FDA approval of the M6-C disc in February 2019 triggered a **$15.0 million payment**[229](index=229&type=chunk)[230](index=230&type=chunk) - The company has a **$125 million secured revolving credit facility** that was undrawn as of December 31, 2018[226](index=226&type=chunk) [Critical Accounting Estimates](index=44&type=section&id=Critical%20Accounting%20Estimates) Management identifies critical accounting estimates in revenue recognition, intangible asset valuation, and fair value measurements - For stocking distributors, revenue is recognized upon shipment, and the transaction price is estimated based on historical collection experience, a change resulting from the adoption of **Topic 606** in 2018[245](index=245&type=chunk) - The valuation of intangible assets and goodwill from the Spinal Kinetics acquisition required significant judgment, including forecasting future operating results and estimating probabilities of success for **IPR&D projects**[249](index=249&type=chunk)[250](index=250&type=chunk)[251](index=251&type=chunk) - Fair value measurements for the eNeura debt security and the Spinal Kinetics contingent consideration are classified as **Level 3**, as they are based on significant unobservable inputs and internal assumptions[254](index=254&type=chunk)[255](index=255&type=chunk)[258](index=258&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=50&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risks are interest rate changes and foreign currency fluctuations, particularly against the Euro, Real, and Pound - The company's primary market risk exposures are changes in interest rates and foreign currency fluctuations, particularly the **U.S. Dollar against the Euro, Brazilian Real, or British Pound**[281](index=281&type=chunk)[284](index=284&type=chunk) - For the year ended December 31, 2018, the company recorded a **foreign currency loss of $3.3 million**[284](index=284&type=chunk) - A sensitivity analysis indicates that a 10% change in the value of the U.S. Dollar relative to foreign currencies would result in an **$8.6 million change in net sales** and a **$0.4 million change in operating income**[285](index=285&type=chunk) [Financial Statements and Supplementary Data](index=50&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section contains the company's audited consolidated financial statements and related notes for the fiscal year ended December 31, 2018 [Consolidated Balance Sheets](index=63&type=section&id=Consolidated%20Balance%20Sheets) Total assets grew to $466.6 million in 2018, driven by goodwill and intangible assets from the Spinal Kinetics acquisition Consolidated Balance Sheet Highlights (as of Dec 31) | (U.S. Dollars, in thousands) | 2018 | 2017 | | :--- | :--- | :--- | | Total Current Assets | $244,639 | $251,801 | | Goodwill | $72,401 | $53,565 | | Total Assets | $466,641 | $405,354 | | Total Current Liabilities | $85,908 | $79,406 | | Total Liabilities | $131,244 | $108,746 | | Total Shareholders' Equity | $335,397 | $296,608 | [Consolidated Statements of Income and Comprehensive Income](index=64&type=section&id=Consolidated%20Statements%20of%20Income%20and%20Comprehensive%20Income) The company reported net income of $13.8 million and diluted EPS of $0.72 for the year ended December 31, 2018 Consolidated Income Statement Highlights (Year Ended Dec 31) | (U.S. Dollars, in thousands) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net Sales | $453,042 | $433,823 | $409,788 | | Gross Profit | $356,414 | $340,786 | $321,935 | | Operating Income | $30,094 | $40,811 | $21,067 | | Net Income from Continuing Operations | $13,811 | $7,291 | $3,497 | | Net Income | $13,811 | $6,223 | $3,056 | | Diluted EPS | $0.72 | $0.34 | $0.17 | [Consolidated Statements of Cash Flows](index=66&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Net cash from operations was $49.9 million, while investing activities used $61.0 million, primarily for an acquisition Consolidated Cash Flow Highlights (Year Ended Dec 31, 2018) | (U.S. Dollars, in thousands) | 2018 | | :--- | :--- | | Net cash from operating activities | $49,918 | | Net cash from investing activities | $(60,998) | | Net cash from financing activities | $2,993 | | Effect of exchange rate changes | $(881) | | **Net change in cash** | **$(8,968)** | | **Cash at end of year** | **$72,189** | [Controls and Procedures](index=50&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that disclosure controls and internal controls over financial reporting were effective as of December 31, 2018 - Management concluded that as of December 31, 2018, the company's disclosure controls and procedures were **effective**[288](index=288&type=chunk) - Management concluded that the company's internal control over financial reporting was **effective** as of December 31, 2018; the assessment excluded Spinal Kinetics, which was acquired during the year[291](index=291&type=chunk) - The independent registered public accounting firm, Ernst & Young LLP, issued an **unqualified audit report** on the effectiveness of the company's internal control over financial reporting as of December 31, 2018[292](index=292&type=chunk)[296](index=296&type=chunk) Part III Information required by Part III is omitted from this Form 10-K and will be filed in the company's definitive proxy statement [Directors, Executive Compensation, and Corporate Governance](index=54&type=section&id=Items%2010-14) Information for Items 10 through 14 is incorporated by reference from the company's definitive proxy statement to be filed later - Information required by Items 10, 11, 12, 13 and 14 of Form 10-K is **omitted from this Annual Report** and will be filed in a definitive proxy statement or by an amendment to this Annual Report not later than 120 days after the end of the fiscal year[307](index=307&type=chunk) Part IV [Exhibits, Financial Statement Schedules](index=55&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists the financial statements and exhibits filed as part of the Form 10-K report - This section contains the index to consolidated financial statements and a list of all exhibits filed with the Form 10-K[314](index=314&type=chunk)