EX-99.1 2 ofix-ex991_6.htm EX-99.1 ofix-ex991_6.htm

Exhibit 99.1

Orthofix Reports Fourth Quarter and Fiscal Year 2019 Financial Results

 

Fourth Quarter Highlights

 

•

Net sales of $121.5 million, an increase of 0.3% compared to prior year period and 0.9% on a constant currency basis

 

•

Kevin Kenny, an experienced spine executive, joins as Global Spine President

 

•

FDA approval of next generation Bone Growth Therapy patient monitoring app STIM onTrack 2.1

 

Fiscal Year 2019 Highlights

 

•

Net sales of $460.0 million, an increase of 1.5% compared to prior year and 2.6% on a constant currency basis

 

•

M6-C artificial disc achieves $4.1 million in sales in the US

 

•

Successful transition to Jon Serbousek as CEO

LEWISVILLE, Texas — February 24, 2020 — Orthofix Medical Inc. (NASDAQ:OFIX) today reported its financial results for the fourth quarter and fiscal year ended December 31, 2019.  For the fourth quarter of 2019, net sales were $121.5 million, earnings per share (“EPS”) was $0.60 and adjusted EPS was $0.51. For fiscal year 2019, net sales were $460.0 million, EPS was ($1.51) and adjusted EPS was $1.47.

 

“I joined Orthofix because I saw a significant opportunity. The last few months spent with this talented team and our external stakeholders has me even more excited about the future of this Company,” said Jon Serbousek, President and Chief Executive Officer. “We have well defined market and technology leadership positions in bone growth stimulation, cellular based allografts, extremity deformity correction, and artificial disc replacement. This combined with the solid infrastructure we have in place gives us the platform to scale in all of our businesses. We are already executing on our recently developed Strategic Plan, which we believe will accelerate our growth and maximize shareholder value.”  

Serbousek further commented, “During the fourth quarter, revenue from the M6 cervical disc in the U.S. outpaced our expectations, which highlights the significant opportunity we have with this technology. While some of our other product categories experienced some headwinds due to continued distraction, we believe we are putting the pieces in place to reposition Orthofix for accelerating topline growth.”

 

Financial Results Overview

Fourth Quarter

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

 

 

Three Months Ended December 31,

 

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

 

2019

 

 

2018

 

 

Change

 

 

Constant

Currency

Change

 

Bone Growth Therapies

 

$

50,953

 

 

$

52,819

 

 

 

(3.5

%)

 

 

(3.5

%)

Spinal Implants

 

 

25,468

 

 

 

24,969

 

 

 

2.0

%

 

 

2.3

%

Biologics

 

 

16,712

 

 

 

16,045

 

 

 

4.2

%

 

 

4.2

%

Global Spine

 

 

93,133

 

 

 

93,833

 

 

 

(0.7

%)

 

 

(0.7

%)

Global Extremities

 

 

28,361

 

 

 

27,245

 

 

 

4.1

%

 

 

6.4

%

Net sales

 

$

121,494

 

 

$

121,078

 

 

 

0.3

%

 

 

0.9

%

 

Gross profit decreased by $0.1 million to $95.3 million and gross margin decreased slightly to 78.4%, compared to 78.8% in the prior year period.

Net income was $11.7 million, or $0.60 per share, compared to net income of $8.9 million, or $0.46 per share in the prior year period. Adjusted net income was $9.9 million, or $0.51 per share, compared to adjusted net income of $10.7 million, or $0.56 per share in the prior year period.

 

EBITDA was $11.3 million, compared to $16.8 million in the prior year period. Adjusted EBITDA was $22.5 million, or 18.5% of net sales, compared to $24.4 million, or 20.2% of net sales, in the prior year period.

 

Fiscal Year 2019

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

 

 

 

Year Ended December 31,

 

(U.S. Dollars, in thousands)

 

2019

 

 

2018

 

 

Change

 

 

Constant

Currency

Change

 

Bone Growth Therapies

 

$

197,181

 

 

$

195,252

 

 

 

1.0

%

 

 

1.0

%

Spinal Implants

 

 

94,544

 

 

 

91,658

 

 

 

3.1

%

 

 

3.8

%

Biologics

 

 

65,496

 

 

 

59,684

 

 

 

9.7

%

 

 

9.7

%

Global Spine

 

 

357,221

 

 

 

346,594

 

 

 

3.1

%

 

 

3.2

%

Global Extremities

 

 

102,734

 

 

 

106,448

 

 

 

(3.5

%)

 

 

0.3

%

Net sales

 

$

459,955

 

 

$

453,042

 

 

 

1.5

%

 

 

2.6

%

Gross profit increased $2.9 million to $359.3 million, while gross margin decreased to 78.1%, compared to 78.7% in prior year.

Based on the initial success observed in our launch of the M6-C artificial cervical disc in the U.S. market, our long-term forecasts of net sales indicate a greater likelihood of achieving the potential revenue-based milestone payments associated with the Spinal Kinetics acquisition as compared to our original projections in 2018. As such, we recognized expenses during the year of $29.1 million associated with the remeasurement of these potential milestone payment liabilities.

Net loss was ($28.5) million, or ($1.51) per share, compared to net income of $13.8 million, or $0.72 per share, in the prior year. This decrease was primarily driven by the remeasurement of the potential Spinal Kinetics milestone payment liabilities discussed above. Adjusted net income was $28.4 million, or $1.47 per share, compared to adjusted net income of $34.4 million, or $1.81 per share, in the prior year.

EBITDA was ($2.2) million, compared to $42.4 million in the prior year, largely due to the remeasurement of the potential Spinal Kinetics milestone payment liabilities, losses on investment securities, and succession and transition charges. Adjusted EBITDA was $75.7 million, or 16.5% of net sales for the year, compared to $87.6 million, or 19.3% of net sales, in the prior year.

 

Liquidity

As of December 31, 2019, cash, cash equivalents, and restricted cash totaled $70.4 million compared to $72.2 million as of December 31, 2018. Cash flow from operations decreased $17.9 million to $32.0 million when compared to the prior year, while free cash flow decreased $23.2 million to $11.5 million.

As of December 31, 2019, the Company had no outstanding indebtedness and borrowing capacity of $300 million under its credit facility.

 

FitBone

As recently announced, we entered into an asset purchase agreement with Wittenstein SE, a privately-held German-based company, to acquire assets associated with the FITBONE® intramedullary lengthening system for limb lengthening of the femur and tibia bones. The addition of the FITBONE assets will further round out the Company’s limb reconstruction offerings, and will align with our strategy of investing in innovative products to drive growth within our core businesses. We expect the transaction to close at the end of March.

2

 

2020 Outlook

For the year ending December 31, 2020, the Company expects the following results, including the impact of any expected changes in foreign currency exchange rates.

 

 

 

2020 Outlook

(Unaudited, U.S. Dollars, in millions, except per share data)

 

Low

 

 

High

 

 

Full Year 2020

 

 

 

 

 

 

 

 

 

Net sales

 

$

467.0

 

1

$

477.0

 

1

Adjusted EBITDA

 

$

65.0

 

2

$

68.0

 

2

Adjusted EPS

 

$

1.00

 

3

$

1.10

 

3

First Quarter 2020

 

 

 

 

 

 

 

 

 

Net sales

 

$

106.0

 

4

$

109.0

 

4

Adjusted EBITDA

 

$

10.5

 

5

$

11.5

 

5

Adjusted EPS

 

$

0.09

 

6

$

0.12

 

6

 

1 Represents a year-over-year increase of 1.5% to 3.7% on a reported basis and 2.3% to 4.5% on a constant currency basis

2 Represents a year-over-year decrease of 14.2% to 10.2%

3 Represents a year-over-year decrease of 32.0% to 25.2%

4 Represents a year-over-year decrease of 2.9% to 0.1% on a reported basis and a decrease of 1.0% to an increase of 1.7% on a constant currency basis

5 Represents a year-over-year decrease of 33.0% to 26.6%

6 Represents a year-over-year decrease of 66.7% to 55.6%

 

The Company does not provide U.S. GAAP financial measures, other than net sales, on a forward-looking basis because the Company is unable to predict with reasonable certainty the ultimate outcome of legal proceedings, unusual gains and losses, acquisition-related expenses, accounting fair value adjustments, and other such items without unreasonable effort. These items are uncertain, depend on various factors, and could be material to the Company’s results computed in accordance with U.S. GAAP.

 

Conference Call

Orthofix will host a conference call today at 4:30 PM Eastern time to discuss the Company's financial results for the fourth quarter and fiscal year 2019. 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 8228975. 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 8228975. 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 more than 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. Therefore, 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 further update any such statement, or the risk factors described in Part I, Item 1A under the heading Risk Factors in our Form 10-K for the year ended December 31, 2019, to reflect new information, the occurrence of future events or circumstances or otherwise.

Company Contact

 

 

3

 

Orthofix Medical Inc.

 

 

Mark Quick

 

 

P: 214-937-2924

 

 

E: markquick@orthofix.com

 

 

 

4

 

ORTHOFIX MEDICAL INC.

Condensed Consolidated Statements of Operations

 

 

Three Months Ended

 

 

Year Ended

 

 

 

December 31,

 

 

December 31,

 

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

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

Net sales

 

$

121,494

 

 

$

121,078

 

 

$

459,955

 

 

$

453,042

 

Cost of sales

 

 

26,191

 

 

 

25,626

 

 

 

100,607

 

 

 

96,628

 

Gross profit

 

 

95,303

 

 

 

95,452

 

 

 

359,348

 

 

 

356,414

 

Sales and marketing

 

 

58,313

 

 

 

53,832

 

 

 

223,676

 

 

 

205,527

 

General and administrative

 

 

22,110

 

 

 

19,593

 

 

 

85,607

 

 

 

83,251

 

Research and development

 

 

8,446

 

 

 

8,792

 

 

 

34,637

 

 

 

33,218

 

Acquisition-related amortization and remeasurement

 

 

2,339

 

 

 

833

 

 

 

34,212

 

 

 

4,324

 

Operating income (loss)

 

 

4,095

 

 

 

12,402

 

 

 

(18,784

)

 

 

30,094

 

Interest expense, net

 

 

(508

)

 

 

(213

)

 

 

(122

)

 

 

(828

)

Other income (expense), net

 

 

643

 

 

 

(596

)

 

 

(8,143

)

 

 

(6,381

)

Income (loss) before income taxes

 

 

4,230

 

 

 

11,593

 

 

 

(27,049

)

 

 

22,885

 

Income tax benefit (expense)

 

 

7,456

 

 

 

(2,722

)

 

 

(1,413

)

 

 

(9,074

)

Net income (loss)

 

$

11,686

 

 

$

8,871

 

 

$

(28,462

)

 

$

13,811

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.61

 

 

$

0.47

 

 

$

(1.51

)

 

$

0.73

 

Diluted

 

 

0.60

 

 

 

0.46

 

 

 

(1.51

)

 

 

0.72

 

Weighted average number of common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

19,068,067

 

 

 

18,592,385

 

 

 

18,903,289

 

 

 

18,494,002

 

Diluted

 

 

19,315,836

 

 

 

19,052,853

 

 

 

18,903,289

 

 

 

18,911,610

 

5

 

 

Condensed Consolidated Balance Sheets

 

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

 

December 31,

2019

 

 

December 31,

2018

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

69,719

 

 

$

69,623

 

Restricted cash

 

 

684

 

 

 

2,566

 

Trade accounts receivable, net of allowances of $3,987 and $7,463, respectively

 

 

86,805

 

 

 

77,747

 

Inventories

 

 

82,397

 

 

 

76,847

 

Prepaid expenses and other current assets

 

 

20,948

 

 

 

17,856

 

Total current assets

 

 

260,553

 

 

 

244,639

 

Property, plant and equipment, net

 

 

62,727

 

 

 

42,835

 

Intangible assets, net

 

 

54,139

 

 

 

51,897

 

Goodwill

 

 

71,177

 

 

 

72,401

 

Deferred income taxes

 

 

35,117

 

 

 

33,228

 

Other long-term assets

 

 

11,907

 

 

 

21,641

 

Total assets

 

$

495,620

 

 

$

466,641

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Trade accounts payable

 

$

19,886

 

 

$

17,989

 

Current portion of finance lease liability

 

 

323

 

 

 

—

 

Other current liabilities

 

 

64,674

 

 

 

67,919

 

Total current liabilities

 

 

84,883

 

 

 

85,908

 

Long-term portion of finance lease liability

 

 

20,648

 

 

 

—

 

Other long-term liabilities

 

 

62,458

 

 

 

45,336

 

Total liabilities

 

 

167,989

 

 

 

131,244

 

Contingencies

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

 

Common shares $0.10 par value; 50,000,000 shares authorized; 19,022,619 and

   18,579,688 issued and outstanding as of December 31, 2019 and 2018, respectively

 

 

1,902

 

 

 

1,858

 

Additional paid-in capital

 

 

271,019

 

 

 

243,165

 

Retained earnings

 

 

57,749

 

 

 

87,078

 

Accumulated other comprehensive income (loss)

 

 

(3,039

)

 

 

3,296

 

Total shareholders’ equity

 

 

327,631

 

 

 

335,397

 

Total liabilities and shareholders’ equity

 

$

495,620

 

 

$

466,641

 

 

6

 

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 December 31, 2019

 

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

 

Global Spine

 

 

Global Extremities

 

 

Corporate

 

 

Total Orthofix

 

Operating income (loss)

 

$

14,257

 

 

$

1,823

 

 

$

(11,985

)

 

$

4,095

 

Other income (expense), net

 

 

476

 

 

 

270

 

 

 

(104

)

 

 

642

 

Depreciation and amortization

 

 

2,391

 

 

 

1,597

 

 

 

1,192

 

 

 

5,180

 

Amortization of acquired intangibles

 

 

1,339

 

 

 

—

 

 

 

—

 

 

 

1,339

 

EBITDA

 

$

18,463

 

 

$

3,690

 

 

$

(10,897

)

 

$

11,256

 

Share-based compensation

 

 

1,000

 

 

 

591

 

 

 

1,734

 

 

 

3,325

 

Foreign exchange impact

 

 

(438

)

 

 

(311

)

 

 

(4

)

 

 

(753

)

Strategic investments

 

 

17

 

 

 

—

 

 

 

454

 

 

 

471

 

Acquisition-related fair value adjustments

 

 

1,000

 

 

 

—

 

 

 

—

 

 

 

1,000

 

Loss on investment securities

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Legal judgments/settlements

 

 

1,515

 

 

 

468

 

 

 

6

 

 

 

1,989

 

Succession and transition charges

 

 

719

 

 

 

—

 

 

 

4,168

 

 

 

4,887

 

Medical Device Regulation

 

 

445

 

 

 

84

 

 

 

(175

)

 

 

354

 

Adjusted EBITDA

 

$

22,721

 

 

$

4,522

 

 

$

(4,714

)

 

$

22,529

 

 

 

 

 

Year Ended December 31, 2019

 

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

 

Global Spine

 

 

Global Extremities

 

 

Corporate

 

 

Total Orthofix

 

Operating income (loss)

 

$

25,722

 

 

$

2,872

 

 

$

(47,378

)

 

$

(18,784

)

Other expense, net

 

 

(523

)

 

 

(951

)

 

 

(6,670

)

 

 

(8,144

)

Depreciation and amortization

 

 

9,257

 

 

 

5,575

 

 

 

4,795

 

 

 

19,627

 

Amortization of acquired intangibles

 

 

5,072

 

 

 

—

 

 

 

—

 

 

 

5,072

 

EBITDA

 

$

39,528

 

 

$

7,496

 

 

$

(49,253

)

 

$

(2,229

)

Share-based compensation

 

 

5,604

 

 

 

2,290

 

 

 

7,921

 

 

 

15,815

 

Foreign exchange impact

 

 

563

 

 

 

834

 

 

 

37

 

 

 

1,434

 

Strategic investments

 

 

1,420

 

 

 

—

 

 

 

8,065

 

 

 

9,485

 

Acquisition-related fair value adjustments

 

 

29,849

 

 

 

—

 

 

 

—

 

 

 

29,849

 

Loss on investment securities

 

 

—

 

 

 

—

 

 

 

6,534

 

 

 

6,534

 

Legal judgments/settlements

 

 

1,017

 

 

 

1,507

 

 

 

29

 

 

 

2,553

 

Succession and transition charges

 

 

1,608

 

 

 

—

 

 

 

9,719

 

 

 

11,327

 

Medical Device Regulation

 

 

712

 

 

 

234

 

 

 

7

 

 

 

953

 

Adjusted EBITDA

 

$

80,301

 

 

$

12,361

 

 

$

(16,941

)

 

$

75,721

 

 

 

 

7

 

 

 

Three Months Ended December 31, 2018

 

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

 

Global Spine

 

 

Global Extremities

 

 

Corporate

 

 

Total Orthofix

 

Operating income (loss)

 

$

20,605

 

 

$

924

 

 

$

(9,127

)

 

$

12,402

 

Other expense, net

 

 

(164

)

 

 

(107

)

 

 

(325

)

 

 

(596

)

Depreciation and amortization

 

 

2,159

 

 

 

1,463

 

 

 

923

 

 

 

4,545

 

Amortization of acquired intangibles

 

 

453

 

 

 

—

 

 

 

—

 

 

 

453

 

EBITDA

 

$

23,053

 

 

$

2,280

 

 

$

(8,529

)

 

$

16,804

 

Share-based compensation

 

 

1,632

 

 

 

498

 

 

 

2,408

 

 

 

4,538

 

Foreign exchange impact

 

 

130

 

 

 

70

 

 

 

332

 

 

 

532

 

Strategic investments

 

 

348

 

 

 

—

 

 

 

793

 

 

 

1,141

 

Acquisition-related fair value adjustments

 

 

914

 

 

 

—

 

 

 

—

 

 

 

914

 

Loss on investment securities

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Legal judgments/settlements

 

 

266

 

 

 

172

 

 

 

(171

)

 

 

267

 

Succession and transition charges

 

 

214

 

 

 

—

 

 

 

—

 

 

 

214

 

Adjusted EBITDA

 

$

26,557

 

 

$

3,020

 

 

$

(5,167

)

 

$

24,410

 

 

 

 

 

Year Ended December 31, 2018

 

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

 

Global Spine

 

 

Global Extremities

 

 

Corporate

 

 

Total Orthofix

 

Operating income (loss)

 

$

67,956

 

 

$

6,006

 

 

$

(43,868

)

 

$

30,094

 

Other expense, net

 

 

(924

)

 

 

(1,894

)

 

 

(3,563

)

 

 

(6,381

)

Depreciation and amortization

 

 

8,258

 

 

 

5,341

 

 

 

3,805

 

 

 

17,404

 

Amortization of acquired intangibles

 

 

1,255

 

 

 

—

 

 

 

—

 

 

 

1,255

 

EBITDA

 

$

76,545

 

 

$

9,453

 

 

$

(43,626

)

 

$

42,372

 

Share-based compensation

 

 

6,259

 

 

 

2,251

 

 

 

10,420

 

 

 

18,930

 

Foreign exchange impact

 

 

835

 

 

 

1,832

 

 

 

662

 

 

 

3,329

 

Strategic investments

 

 

1,963

 

 

 

—

 

 

 

10,848

 

 

 

12,811

 

Acquisition-related fair value adjustments

 

 

4,508

 

 

 

—

 

 

 

—

 

 

 

4,508

 

Loss on investment securities

 

 

—

 

 

 

—

 

 

 

3,050

 

 

 

3,050

 

Legal judgments/settlements

 

 

686

 

 

 

505

 

 

 

(31

)

 

 

1,160

 

Succession and transition charges

 

 

1,447

 

 

 

—

 

 

 

—

 

 

 

1,447

 

Adjusted EBITDA

 

$

92,243

 

 

$

14,041

 

 

$

(18,677

)

 

$

87,607

 

 

 

Adjusted Net Income

 

  

 

Three Months Ended

December 31,

 

 

Year Ended

December 31,

 

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

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net income (loss)

 

$

11,686

 

 

$

8,871

 

 

$

(28,462

)

 

$

13,811

 

Foreign exchange impact

 

 

(753

)

 

 

532

 

 

 

1,434

 

 

 

3,329

 

Strategic investments

 

 

471

 

 

 

1,141

 

 

 

9,485

 

 

 

12,813

 

Acquisition-related fair value adjustments

 

 

1,000

 

 

 

914

 

 

 

29,849

 

 

 

4,508

 

Amortization of acquired intangibles

 

 

1,339

 

 

 

453

 

 

 

5,072

 

 

 

1,255

 

Interest and loss on investment securities

 

 

—

 

 

 

—

 

 

 

5,328

 

 

 

3,050

 

Legal judgments/settlements

 

 

1,989

 

 

 

267

 

 

 

2,553

 

 

 

1,160

 

Succession and transition charges

 

 

4,887

 

 

 

214

 

 

 

11,327

 

 

 

1,447

 

Medical Device Regulation

 

 

354

 

 

 

—

 

 

 

953

 

 

 

—

 

Long-term income tax rate adjustment

 

 

(11,106

)

 

 

(1,662

)

 

 

(9,104

)

 

 

(6,975

)

Adjusted net income

 

$

9,867

 

 

$

10,730

 

 

$

28,435

 

 

$

34,398

 

 

8

 

 

Adjusted EPS

 

  

 

Three Months Ended

December 31,

 

 

Year Ended

December 31,

 

(Unaudited, per diluted share)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

EPS

 

$

0.60

 

 

$

0.46

 

 

$

(1.51

)

 

$

0.72

 

Foreign exchange impact

 

 

(0.04

)

 

 

0.03

 

 

 

0.07

 

 

 

0.17

 

Strategic investments

 

 

0.02

 

 

 

0.06

 

 

 

0.49

 

 

 

0.67

 

Acquisition-related fair value adjustments

 

 

0.05

 

 

 

0.05

 

 

 

1.58

 

 

 

0.24

 

Amortization of acquired intangibles

 

 

0.07

 

 

 

0.02

 

 

 

0.26

 

 

 

0.07

 

Interest and loss on investment securities

 

 

—

 

 

 

—

 

 

 

0.28

 

 

 

0.16

 

Legal judgments/settlements

 

 

0.10

 

 

 

0.01

 

 

 

0.13

 

 

 

0.06

 

Succession and transition charges

 

 

0.25

 

 

 

0.01

 

 

 

0.59

 

 

 

0.08

 

Medical Device Regulation

 

 

0.02

 

 

 

—

 

 

 

0.05

 

 

 

—

 

Long-term income tax rate adjustment

 

 

(0.56

)

 

 

(0.08

)

 

 

(0.47

)

 

 

(0.36

)

Adjusted EPS

 

$

0.51

 

 

$

0.56

 

 

$

1.47

 

 

$

1.81

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

19,341,552

 

 

 

19,195,653

 

 

 

19,303,457

 

 

 

19,037,978

 

 

 

Free Cash Flow

  

 

Year Ended

December 31,

 

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

 

2019

 

 

2018

 

Net cash from operating activities

 

$

32,033

 

 

$

49,918

 

Capital expenditures

 

 

(20,524

)

 

 

(15,256

)

Free cash flow

 

$

11,509

 

 

$

34,662

 

 

 

 


9

 

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 (loss). 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, performance-based restricted stock awards, market-based restricted stock awards and our stock purchase plan; see the share-based compensation footnote in our Form 10-K for the year ended December 31, 2019 for a detail of these costs by consolidated statement of operations line item; however, certain share-based compensation costs have been included within succession charges for 2019

 

•

Foreign exchange impact – gains and losses related to foreign currency transactions, which are recorded as other income (expense), net; guidance presented does not include the impact of any future foreign exchange fluctuations

 

•

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 Curaçao to the State of Delaware during 2018, which are primarily recorded as general and administrative expenses.

Amounts previously reported as “Domestication to Delaware” have been reclassified to this line item to conform to current period presentation, resulting in an increase in strategic investments of $0.5 million and $4.2 million for the three months and year ended December 31, 2018

 

•

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.

Also included in this line are adjustments totaling $0.03 per share in the presentation of Adjusted EPS to account for the difference in the weighted average number of shares outstanding for GAAP and Non-GAAP reporting purposes due to our reported net loss position under GAAP and net income position under Non-GAAP for the year ended December 31, 2019, as these charges were the primary driver of our net loss position

 

•

Amortization of acquired intangibles – amortization of intangible assets acquired in business combinations or asset acquisitions, including items such as developed technologies, in process research and development, trade names, and other intangible assets, which are recorded as operating expenses

 

•

Interest and loss on investment securities – net losses recognized within other expense, net, or amortization of historical unrealized gains previously recorded within accumulated other comprehensive income to interest income relating to our investments in eNeura Inc. and Bone Biologics, Inc.

 

•

Legal judgments/settlements – adverse or favorable legal judgments or negotiated legal settlements, including legal and other professional fees associated with the SEC Investigation, Securities Class Action Complaints and Brazil subsidiary compliance review, which are recorded as general and administrative expenses

 

•

Succession and transition charges – costs related to the transition of the Company’s 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 recorded as general and administrative expenses

 

•

Medical Device Regulation – incremental costs incurred to establish 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 regulation provides a transition period until May 2020 for

10

 

 

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

 

•

Long-term income tax rate adjustment – reflects management’s expectation of a long-term normalized effective tax rate of 35% for the first and second quarters of 2018, 29% for the third and fourth quarters of 2018, and 27% for our 2019 and 2020 results and outlook, which is based on current tax law and current expected 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.

 

Source

Orthofix Medical Inc.

 

11