Orthofix Releases Third Quarter Results

Lewisville, Texas-based reconstructive and regenerative orthopedic and spine solutions company Orthofix International NV has reported its financial results for the third quarter ended Sept. 30, including net sales of $101.2 million, diluted loss per share from continuing operations of ($0.04) and adjusted diluted earnings per share from continuing operations of $0.30.

“The third quarter was a very good quarter for Orthofix in many respects, led by the financial results, which are at the high end of our expectations. Our third quarter net sales continue to confirm that the plan we are executing will deliver consistent top line growth. With this growth we also anticipate ongoing improvement in our operating leverage,” said President and CEO Brad Mason. “I am also pleased to report that our board of directors has approved a $75 million share repurchase plan. I believe our improving financial performance and significant cash flow generation ability affords us this opportunity to return capital to shareholders while driving profitable growth.”

Third Quarter Financial Results

Net sales of $101.2 million were relatively flat when compared to the same prior year period; however, net sales increased by approximately 4.1 percent on a constant currency basis. Net sales increased in Orthofix’s biostim and biologics strategic business units (SBUs) due primarily to continued expansion of sales channels and improving execution of commercial strategies. Net sales in the extremity fixation SBU decreased 10.6 percent (an increase of 3.4 percent on a constant currency basis) compared to the same prior year period. The increase in constant currency terms was primarily driven by growth in the United States and increased cash collections, partially offset by weakness in Brazil. Net sales in the spine fixation SBU decreased 3.9 percent in constant currency year-over-year; however, third quarter sales grew 4.5 percent sequentially over the second quarter, marking three consecutive quarters of sales growth in this segment and highlighting the success of the team and strategies that were put in place late last year.

Gross profit increased $1.6 million to $77.3 million, compared to $75.7 million in the same prior year period. Gross margin was 76.4 percent compared to 75.0 percent for the same prior year period, primarily due to the increased sales mix of the biostim and biologics regenerative solutions relative to the company’s other products.

Total net margin (gross profit less sales and marketing expenses) was $31.2 million, or 30.8 percent of net sales, a decrease of $3.5 million or 10.3 percent from $34.7 million, or 34.4 percent of net sales, in the third quarter of 2014. The decrease in net margin was driven by an increase in sales and marketing expenses of $5.1 million, partially due to an increase in bad debt expense of $3 million, $2 million of which resulted from an increase in accounts receivable reserves in response to the recent fiscal and economic difficulties experienced by the Puerto Rico Commonwealth, including receiving downgrades in credit ratings. Also contributing to this increase was the planned increase in sales management and field-based education and training personnel as well as overachievement of sales commission quotas in certain territories. These increases in sales and marketing expenses were partially offset by the increase in gross profit.
Operating expenses increased by $3.9 million to $73.1 million, compared to $69.2 million in the prior year period. The increase in operating expenses was primarily a result of the increase in sales and marketing expense, partially offset by a decrease of $1.2 million in restatements and related costs from lower professional fees.

Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization), which excludes share-based compensation, foreign exchange impact, strategic investments, restatements and related costs, infrastructure investments, legal judgment, gain on sale of assets, and the Puerto Rico adjustment, decreased to $15.9 million or 15.7 percent of net sales for the quarter, compared to $17.6 million or 17.4 percent of net sales in the same prior year period due primarily to increased operating expenses as described above.

Net loss from continuing operations for the quarter was ($0.8) million, or ($0.04) per diluted share, compared to net income of $28 thousand, or $0.00 per diluted share, in the same prior year period.

Adjusted net income from continuing operations for the quarter was $5.7 million, or $0.30 per diluted share, compared to adjusted net income from continuing operations of $3.3 million, or $0.17 per diluted share, in the same prior year period.

As of September 30, 2015, cash and cash equivalents were $63.7 million compared to $71.2 million, which includes restricted cash, as of December 31, 2014. On August 31, 2015, the Company entered into a new credit agreement that provides for a five year, $125 million secured revolving credit facility, and replaces the Company’s prior 2010 credit facility. As of Sept. 30, 2015, the company had no outstanding indebtedness and borrowing capacity of $125 million.

Share Repurchase Plan

Orthofix’s board of directors has authorized a share repurchase plan, authorizing the purchase of up to $75 million of the company’s common stock through the end of September 2017. The timing of purchases and the number of shares to be purchased will depend on market conditions and other factors. Repurchases are expected to consist primarily of open market transactions at prevailing market prices in accordance with the guidelines specified under the Securities Exchange Act.

Fiscal 2015 Outlook

Based on the Company’s year-to-date results and updated forecast for the fourth quarter of this year, the company is narrowing its range of net sales and adjusted EBITDA guidance. Previously, expected net sales were in the range of $390-395 million for 2015; now, they are $392-395 million. Adjusted EBITDA was $57-60 million; now it is $58-60 million.