Orthofix(OFIX) - 2021 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION Financial Statements This section presents Orthofix Medical Inc.'s unaudited condensed consolidated financial statements, including balance sheets, statements of operations, and cash flows, for the periods ended June 30, 2021 Condensed Consolidated Balance Sheets Total assets decreased to $502.0 million as of June 30, 2021, primarily due to lower cash, while shareholders' equity slightly increased Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $79,968 | $96,291 | | Total current assets | $258,452 | $270,379 | | Total assets | $502,010 | $525,861 | | Total current liabilities | $81,646 | $103,899 | | Total liabilities | $139,726 | $168,997 | | Total shareholders' equity | $362,284 | $356,864 | Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) Q2 2021 net sales increased 66.0% to $121.4 million, resulting in $2.4 million net income, a significant turnaround from the prior year Statement of Operations Highlights (in thousands, except per share data) | Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $121,394 | $73,135 | $226,987 | $177,958 | | Gross profit | $93,955 | $49,969 | $173,634 | $131,383 | | Operating income (loss) | $4,267 | $(21,000) | $1,351 | $(14,146) | | Net income (loss) | $2,420 | $(18,424) | $(3,396) | $7,241 | | Diluted EPS | $0.12 | $(0.96) | $(0.17) | $0.37 | Condensed Consolidated Statements of Cash Flows Net cash from operating activities significantly decreased to $0.3 million for the six months ended June 30, 2021, leading to a $16.3 million total cash decrease Cash Flow Summary for Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash from operating activities | $264 | $30,094 | | Net cash from investing activities | $(9,792) | $(28,572) | | Net cash from financing activities | $(6,528) | $101,918 | | Net change in cash, cash equivalents, and restricted cash | $(16,299) | $102,988 | Notes to the Unaudited Condensed Consolidated Financial Statements Notes detail accounting policies, including the CARES Act impact, asset acquisitions, and a $20.7 million contingent consideration liability for Spinal Kinetics - In April 2020, the Company received $13.9 million from the CMS Accelerated and Advance Payment Program as part of the CARES Act. As of June 30, 2021, the remaining liability is $11.0 million, with recoupment having started in April 2021[25][56][58] - On February 2, 2021, the Company acquired intellectual property rights in an asset acquisition for consideration of up to $10.0 million, consisting of $1.0 million upfront and $9.0 million in contingent milestones[30] - The estimated fair value of the remaining contingent consideration for the Spinal Kinetics acquisition was $20.7 million as of June 30, 2021. A $15.0 million milestone payment was made in Q2 2021[43][44] Net Sales by Segment (Six Months Ended June 30, in thousands) | Segment | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Global Spine | $176,990 | $140,416 | 26.0% | | Global Orthopedics | $49,997 | $37,542 | 33.2% | | Total Net Sales | $226,987 | $177,958 | 27.6% | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the 66% year-over-year increase in Q2 2021 net sales, improved gross margin, increased operating expenses, and decreased operating cash flow - Q2 2021 net sales increased 66% year-over-year to $121.4 million, driven by the recovery of elective procedures from the COVID-19 pandemic's impact in the prior year[72][75] Net Sales Growth by Segment (Q2 2021 vs Q2 2020) | Segment | Q2 2021 Sales (in thousands) | Reported Growth | Constant Currency Growth | | :--- | :--- | :--- | :--- | | Global Spine | $94,650 | 62.9% | 62.5% | | Global Orthopedics | $26,744 | 77.9% | 66.0% | | Total | $121,394 | 66.0% | 63.2% | - Gross margin for Q2 2021 improved to 77.4% from 68.3% in Q2 2020, primarily due to higher sales volume, increased fixed cost absorption, and the absence of significant inventory-related charges that occurred in 2020[79][82][83] - Operating expenses (Sales & Marketing, G&A, R&D) increased compared to Q2 2020, largely because cost-saving initiatives implemented during the pandemic in 2020 (e.g., salary reductions, 401(k) match suspension) were no longer in place in 2021[84][87][88] - Net cash from operating activities decreased by $29.8 million for the first six months of 2021 compared to 2020, primarily due to a decrease in net income, changes in fair value of contingent consideration, and changes in working capital, including the CMS advance payment[97][98][99] - A contingent consideration milestone payment of $15.0 million related to the Spinal Kinetics acquisition was made in the second quarter of 2021[106] Quantitative and Qualitative Disclosures About Market Risk No material changes to the company's market risks have occurred since the 2020 Form 10-K disclosure - There have been no material changes to the company's market risks as disclosed in the 2020 Form 10-K[122] Controls and Procedures Disclosure controls and procedures were effective, with no material changes in internal control over financial reporting during the quarter - The President and CEO and the CFO concluded that the company's disclosure controls and procedures were effective as of June 30, 2021[124] - No change in internal control over financial reporting occurred during the quarter that has materially affected, or is reasonably likely to materially affect, the company's internal controls[125] PART II OTHER INFORMATION Legal Proceedings Ongoing legal matters include a $7.3 million accrual for the Italian Medical Device Payback and a $1.7 million dispute with a former Brazilian distributor - The company has accrued $7.3 million related to the Italian Medical Device Payback (IMDP) measure, though the final amount is uncertain[49] - An accrual of $1.7 million has been made for a legal dispute with a former Brazilian distributor, and approximately $0.6 million of the company's cash in Brazil remains frozen[50][112] Risk Factors Ongoing risks include the COVID-19 pandemic's impact on operations and supply chain, particularly the global shortage of semiconductor chips - The company highlights the continuing material risk from the COVID-19 pandemic on its global operations and supply chain[128] - A specific supply chain risk identified is the global shortage of semiconductor chips, which could affect the company's ability to manufacture certain products or require costly redesigns[128] Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase any common stock during the second quarter of 2021 - The company made no repurchases of its common stock in the second quarter of 2021[129] Defaults Upon Senior Securities This item is reported as not applicable - Not applicable[130] Mine Safety Disclosures This item is reported as not applicable - Not applicable[131] Other Information No matters are reported under this item - There are no matters to be reported under this item[132] Exhibits This section lists all exhibits filed, including amendments to incentive plans and required CEO/CFO certifications - Filed exhibits include amendments to the 2012 Long-Term Incentive Plan and the Stock Purchase Plan[133] - Required certifications from the Chief Executive Officer and Chief Financial Officer under Rule 13a-14(a)/15d-14(a) and Section 1350 are included as exhibits[133]