Orthofix(OFIX) - 2019 Q1 - Quarterly Report

PART I FINANCIAL INFORMATION Financial Statements 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 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) 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] Condensed Consolidated Statements of Cash Flows 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] Notes to the Unaudited Condensed Consolidated Financial Statements 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][69] - 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][39] - On January 31, 2019, the company acquired certain assets of medical device distributor Options Medical, LLC for $6.4 million[36] - 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][57] - 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][82] Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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] - 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][97] - 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][100] Liquidity and Capital Resources 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] | 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] Quantitative and Qualitative Disclosures About Market Risk 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] Controls and Procedures 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] - No material changes to internal control over financial reporting occurred during the first quarter of 2019[128] PART II OTHER INFORMATION Legal Proceedings 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] - 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][82] Risk Factors 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] Other Items (Items 2, 3, 4, 5, 6) 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]