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Orthofix International Reports First Quarter 2014 Results

Companies mentioned in this article: Orthofix International N.V.

LEWISVILLE, Texas -- (BUSINESS WIRE) -- Orthofix International N.V. (NASDAQ:OFIX) today reported results for the first quarter ended March 31, 2014. Net sales were $101.3 million for the first quarter of 2014, decreasing 2.0% from net sales of $103.4 million in the first quarter of 2013. Net margin, which the Company calculates as gross profit less sales and marketing expenses, increased 6.5% during the period to $34.8 million, or 34.4% of sales, over $32.7 million, or 31.6% of sales in the first quarter 2013.

President and Chief Executive Officer Brad Mason commented on the Company’s financial results, “The first quarter results were better than expected and give us further confidence that our initiatives to improve and grow our business are appropriate and effective. Additionally, during the quarter we announced a number of Board and executive leadership changes that bring added experience and talent to help us drive improved results.”

First Quarter 2014 Sales Results

BioStim

Net sales in the Company’s BioStim strategic business unit, or SBU, increased 0.5% to $38.4 million in the first quarter of 2014 compared to $38.2 million for the same period in the prior year, an increase of $0.2 million. The BioStim revenue was driven by a stable performance in Spine Stimulation and a lower, yet improving performance in Physio-Stim, as the Company continued to transition the Physio-Stim sales force.

Biologics

Net sales in the Company’s Biologics SBU decreased $0.4 million, or 2.7%, to $13.0 in the first quarter of 2014 compared to $13.4 million for the same period in the prior year. This was due to a decrease in the Company’s marketing service fee rate with the Musculoskeletal Transplant Foundation (“MTF”) to 65% from 70% April 1, 2013, for Trinity Evolution and Trinity Elite sales. Assuming no marketing fee rate decrease, sales in Biologics grew 4.0% year-over-year in the first quarter.

Extremity Fixation

Net sales in the Company’s Extremity Fixation SBU increased $0.9 million, or 3.3%, to $27.1 million in the first quarter of 2014 compared to $26.2 million for the same period last year. The sales improvement was driven primarily due to increased sales in the U.K. and France and offset somewhat by lower performance in the U.S. and Brazil due to ongoing restructuring activities.

Spine Fixation

Net sales in the Company’s Spine Fixation SBU decreased $2.7 million, or 10.6%, to $22.8 million in the first quarter of 2014 compared to $25.5 million for the same period last year. This decrease was primarily due to lower international sales.

First Quarter 2014 Net Margin and Earnings Results

First quarter 2014 consolidated net margin increased 6.5% to $34.8 million over $32.7 million in the first quarter of the prior year. As a percentage of sales, net margin improved to 34.4% in the first quarter 2014 from 31.6% in the first quarter 2013. This increase was primarily driven by Spine Fixation and Extremity Fixation, which was offset by a decrease in BioStim net margin. Spine Fixation net margin benefitted from cost reductions and lower commissions due to a higher international sales mix, while BioStim net margin was negatively impacted primarily by an increase in commission expense.

First quarter 2014 net income (loss) from continuing operations was ($0.2) million, or ($0.01) per diluted share, compared to net income of $7.6 million, or $0.39 per diluted share for the same period last year. First quarter 2014 and 2013 net income also included the specified items detailed below. When excluding these items, adjusted net income from continuing operations for the first quarter 2014 was $5.2 million, or $0.29 per diluted share, compared to $7.2 million, or $0.37 per diluted share, in the first quarter 2013.

Conference Call

Orthofix will host a conference call to discuss first quarter results today, Wednesday, May 7, 2014 at 4:30 p.m. EDT (3:30 p.m. CDT). Interested parties may access the conference call by dialing (888) 267-2845 in the U.S. and (973) 413-6102 outside the U.S., and entering the conference ID 38220. A replay of the call will be available for two weeks by dialing (800) 332-6854 in the U.S. and (973) 528-0005 outside the U.S., and entering the conference ID 38220. 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 International N.V. is a diversified, global medical device company focused on improving patients’ lives by providing superior reconstructive and regenerative orthopedic and spine solutions to physicians worldwide. Headquartered in Lewisville, TX, the Company has four strategic business units that include BioStim, Biologics, Extremity Fixation and Spine Fixation. Orthofix products are widely distributed via the Company’s sales representatives, distributors and its subsidiaries. In addition, Orthofix is collaborating on research and development activities with leading clinical organizations such as the Musculoskeletal Transplant Foundation, the Orthopedic Research and Education Foundation and the Texas Scottish Rite Hospital for Children. For more information, please visit www.orthofix.com.

Forward-Looking Statements

This communication contains certain forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements, which may include, but are not limited to, statements concerning the projections, financial condition, results of operations and businesses of Orthofix and its subsidiaries and are based on management’s current expectations and estimates and involve risks and uncertainties that could cause actual results or outcomes to differ materially from those contemplated by the forward-looking statements.

The forward-looking statements in this release do not constitute guarantees or promises of future performance. Factors that could cause or contribute to such differences may include, but are not limited to: risks relating to our recent Audit and Finance Committee review and the recently filed restatement of our financial statements for certain prior periods and related legal proceedings (including potential action by the Division of Enforcement of the SEC and pending securities class action litigation); the Company’s review of allegations of improper payments involving the Company’s Brazil-based subsidiary; the expected sales of the Company’s products, including recently launched products; unanticipated expenditures; changing relationships with customers, suppliers, strategic partners and lenders; changes to and the interpretation of governmental regulations; the resolution of pending litigation matters (including the Company’s indemnification obligations with respect to certain product liability claims against, and the government investigation of, the Company’s former sports medicine global business unit); the Company’s ongoing compliance obligations under a corporate integrity agreement with the Office of Inspector General of the Department of Health and Human Services (and related terms of probation), a deferred prosecution agreement with the U.S. Department of Justice and a Consent Decree with the SEC; risks relating to the protection of intellectual property; changes to the reimbursement policies of third parties; the impact of competitive products; changes to the competitive environment, the acceptance of new products in the market, conditions of the orthopedic industry, credit markets and the economy; corporate development and market development activities, including acquisitions or divestitures, unexpected costs or operating unit performance related to recent acquisitions; and other risks described in Item 1A under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as well as in other subsequent periodic reports filed by the Company with the SEC. Existing and prospective investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to update or revise the information contained in this press release.

The following table is a summary of sales reconciled to constant currency sales growth for the quarters ended March 31, 2014, and 2013. Amounts shown are in millions and reflect unaudited figures. Some calculations may be impacted by rounding.

         
External net sales by strategic business unit
Three Months Ended March 31,
Constant
Reported Currency
(U.S. Dollars in millions) 2014 2013 Growth Growth
 
BioStim 38.4 38.2 1 % 1 %
Biologics 13.0 13.4 -3 % -3 %
Extremity Fixation 27.1 26.2 3 % 4 %
Spine Fixation   22.8   25.5 -11 % -11 %
 
Total net sales $ 101.3 $ 103.4 -2 % -2 %
 

The following tables are summaries of first quarter 2014 and 2013 net margin calculations by strategic business unit. Amounts shown are in millions and reflect unaudited figures. Some calculations may be impacted by rounding.

     
ORTHOFIX INTERNATIONAL N.V.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
Three Months Ended March 31,
(U.S. Dollars in millions)
2014 2013
Net margin by Strategic Business Unit:
BioStim $ 14.2 $ 16.9
Biologics 6.7 6.0
Extremity Fixation 9.3 8.0
Spine Fixation 5.1 2.2
Corporate   (0.4 )   (0.4 )
Subtotal 34.8 32.7
 
Consolidated Expenses:
General and administrative expense (17.5 ) (18.3 )
Research and development expense (5.9 ) (5.7 )
Amortization of intangible assets (0.6 ) (0.5 )
Costs related to accounting review and restatement   (8.3 )   -  
 
Consolidated Operating income   2.5     8.1  
 

The following table reconciles reported operating income from continuing operations to adjusted operating income from continuing operations for the quarters ended March 31, 2014, and 2013. Some calculations may be impacted by rounding. Please refer to the Non-GAAP performance measures section at the end of this press release for more information about the specified items below.

         
First Quarter Adjusted Operating Income from Continuing Operations Q1 2014 Q1 2013
($000's)     % of Sales ($000's)     % of Sales
   
Reported GAAP operating income $ 2,465 2.4 % $ 8,087 7.8 %
 

Specified Items:

 
Costs related to accounting review and restatement 8,306 -
Succession and restructuring charges   -   3,537
Adjusted operating income $ 10,771 10.6 % $ 11,624 11.2 %
 

The following table reconciles reported net income from continuing operations and net income from continuing operations per diluted share to adjusted net income from continuing operations and adjusted net income from continuing operations per diluted share for the quarters ended March 31, 2014, and 2013. Some calculations may be impacted by rounding. Please refer to the Non-GAAP performance measures section at the end of this press release for more information about the specified items below.

                   
First Quarter Adjusted Net Income from Continuing Operations Q1 2014 Q1 2013 % Change
($000's)     EPS ($000's)     EPS Earnings     EPS
   
Reported GAAP net (loss) income and net (loss) income per diluted share $ (222 ) $ (0.01 ) $ 7,610 $ 0.39 -103 % -103 %

Specified Items:

 
Costs related to accounting review and restatement 5,482 -
Succession and restructuring charges - 2,756
Foreign exchange gain (53 ) (393 )

Gain related to demutualization of a mutual insurance company

  -     (2,776 )
Adjusted net income and net income per diluted share $ 5,207   $ 0.29 $ 7,197   $ 0.37 -28 %   -22 %
     
 
ORTHOFIX INTERNATIONAL N.V.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, U.S. Dollars, in thousands, except per share and share data)
 
 
Three Months Ended March 31,
2014 2013
 
Net sales $ 101,342 $ 103,373
Cost of sales   22,632     25,617  
Gross profit   78,710     77,756  
 
Operating expenses
Sales and marketing 43,871 45,054
General and administrative 17,545 18,330
Research and development 5,939 5,741
Amortization of intangible assets 584 544
Costs related to the accounting review and restatement   8,306     -  
  76,245     69,669  
 
Operating income 2,465 8,087
 
Other income and expense
Interest expense, net (486 ) (560 )
Other income (expense)   (261 )   4,764  
Income before income taxes 1,718 12,291
Income tax expense   (1,940 )   (4,681 )
Net income (loss) from continuing operations   (222 )   7,610  
 
Discontinued operations
Loss from discontinued operations (794 ) (4,434 )
Income tax (expense) benefit   234     1,324  
Net income (loss) from discontinued operations   (560 )   (3,110 )
Net income (loss) $ (782 ) $ 4,500  
 
 
Net income (loss) per common share - basic
Net income (loss) from continuing operations $ (0.01 ) $ 0.39
Net loss from discontinued operations $ (0.03 ) $ (0.16 )
Net income (loss) per common share - basic $ (0.04 ) $ 0.23  
 
Net income (loss) per common share - diluted
Net income (loss) from continuing operations $ (0.01 ) $ 0.39
Net loss from discontinued operations $ (0.03 ) $ (0.16 )
Net income (loss) per common share - diluted $ (0.04 ) $ 0.23  
 

Weighted average number of common shares outstanding - basic

18,197,363 19,431,093
 

Weighted average number of common shares outstanding - diluted

18,197,363 19,691,141
     
 
ORTHOFIX INTERNATIONAL N.V.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, U.S. Dollars, in thousands)
 
 
March 31, March 31,
2014 2013
 
Assets
Current assets:
Cash and cash equivalents $ 26,747 $ 30,486
Restricted cash 19,270 23,761
Trade accounts receivable, net 76,917 75,567
Inventories, net 92,753 90,577
Deferred income taxes 33,956 33,947
Prepaid expenses and other current assets   28,781   25,906
Total current assets 278,424 280,244
 
Property, plant and equipment, net 52,532 54,606
Patents and other intangible assets, net 8,518 9,046
Goodwill 53,565 53,565
Deferred income taxes 18,758 18,336
Other long-term assets   6,743   7,385
Total assets $ 418,540 $ 423,182
 
 
Liabilities and shareholders' equity
Current liabilities:
Trade accounts payable 14,022 20,674
Other current liabilities   41,467   46,146
Total current liabilities 55,489 66,820
 
Long-term debt 20,000 20,000
Deferred income taxes 13,307 13,132
Other long-term liabilities   12,487   12,736
Total liabilities   101,283   112,688
 
Shareholders' equity:
Common shares 1,836 1,810
Additional paid-in capital 223,630 216,653
Retained earnings 88,550 89,332
Accumulated other comprehensive income   3,241   2,699
Total shareholders' equity   317,257   310,494
 
Total liabilities and shareholders' equity $ 418,540 $ 423,182
     
 
ORTHOFIX INTERNATIONAL N.V.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, U.S. Dollars, in thousands)
 
Three Months Ended March 31,
   
2014 2013
 
Cash flows from operating activities:
Net income (loss) $ (782 ) $ 4,500

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

-
Depreciation and amortization $ 6,004 $ 5,029
Other non-cash adjustments $ 4,523 $ 4,367
Change in operating assets and liabilities:
Changes in working capital $ (19,923 ) $ 1,164  
Net cash (used in) provided by operating activities $ (10,178 ) $ 15,060
 
Cash flows from investing activities:

Capital expenditures

  (3,737 )   (6,073 )
Net cash used in investing activities (3,737 ) (6,073 )
 
Cash flows from financing activities:
Net proceeds from issuance of common shares 5,542 2,143
Repayment of bank borrowings, net - (15 )
Change in restricted cash 4,502 (8,141 )
Excess income tax benefit on employee stock-based awards   29     78  
Net cash provided by (used in) financing activities 10,073 (5,935 )
 
Effect of exchange rate changes on cash   103     (431 )
 
Net (decrease) increase in cash and cash equivalents (3,739 ) 2,620
Cash and cash equivalents at the beginning of period   30,486     31,055  
Cash and cash equivalents at the end of period   26,747     33,675  
 
 

Non-GAAP Performance Measures

The tables in this press release present reconciliations of operating income, net income and net income per diluted share, operating income and net cash provided by operating activities calculated in accordance with generally accepted accounting principles (GAAP) to non-GAAP performance measures, referred to as "adjusted operating income from continuing operations," "adjusted net income from continuing operations and adjusted net income from continuing operations per diluted share," that exclude the items specified in the tables. 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 Orthofix's business operations in order to facilitate comparisons to its historical operating results and internally evaluate the effectiveness of the Company's operating strategies. A more detailed explanation of the items in the tables above that are excluded from GAAP net sales and GAAP net income and net income per diluted share, as well as why management believes the non-GAAP measures are useful to them, is included in the Regulation G Supplemental Information below.

Reconciliations of Non-GAAP Performance Measures

Adjusted Operating Income From Continuing Operations Reconciling Items

  • Costs related to accounting review and restatement - legal, accounting, and other professional costs related to the Company's accounting review and restatement.
  • Succession and restructuring charges - In 2013 these costs relate to the cessation of employment of certain of the Company's former executive officers.

Adjusted Net Income From Continuing Operations and Adjusted Net Income from Continuing Operations Per Diluted Share Reconciling Items

Note: The reconciling items were tax affected in the current period at the prevailing rate within the respective jurisdictions.

  • Costs related to accounting review and restatement - legal, accounting, and other professional costs related to the Company's accounting review and restatement.
  • Succession and restructuring charges - In 2013 these costs relate to the cessation of employment of certain of the Company's former executive officers.
  • Foreign exchange loss (gain) - due to translation adjustments resulting from the weakening or strengthening of the U.S. Dollar against various foreign currencies. A number of Orthofix's foreign subsidiaries have intercompany and third party trade accounts receivables and payables that are held in currencies, most notably the U.S. Dollar, other than their local currency, and movements in the relative values of those currencies result in foreign exchange gains and losses.
  • Gain related to demutualization of a mutual insurance company - the Company received cash related to the demutualization of a mutual insurance company, in which the Company was an eligible member to share in such proceeds.

Management use of, and economic substance behind, Non-GAAP Performance Measures

Management uses non-GAAP measures to evaluate performance period over period, to analyze the underlying trends in the Company's business, to assess its performance relative to its 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 the Company's business units. The items excluded from Orthofix's non-GAAP measures are also excluded from the profit or loss reported by the Company's business units for the purpose of analyzing their performance.

Material Limitations Associated with the Use of Non-GAAP 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 performance measures. Some of the limitations associated with the use of these non-GAAP performance measures are that they exclude items that reflect an economic cost to the Company and can have a material effect on cash flows. Similarly, equity compensation expense does not directly impact cash flows, but is part of total compensation costs accounted for under GAAP.

Compensation for Limitations Associated with Use of Non-GAAP Measures

Orthofix compensates for the limitations of its non-GAAP performance measures by relying upon its GAAP results to gain a complete picture of the Company's performance. The GAAP results provide the ability to understand the Company's performance based on a defined set of criteria. The non-GAAP measures reflect the underlying operating results of the Company's businesses, excluding non-cash items, which management believes is an important measure of the Company's overall performance. The Company provides a detailed reconciliation of the non-GAAP performance measures to their most directly comparable GAAP measures, and encourages investors to review this reconciliation.

Usefulness of Non-GAAP Measures to Investors

Orthofix believes that providing non-GAAP measures that exclude certain items provides investors with greater transparency to the information used by the Company's senior management in its financial and operational decision-making. Management believes that providing this information enables investors to better understand the performance of the Company's ongoing operations and to understand the methodology used by management to evaluate and measure such performance. Disclosure of these non-GAAP performance measures also facilitates comparisons of Orthofix's underlying operating performance with other companies in its industry that also supplement their GAAP results with non-GAAP performance measures.


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Contact:

Orthofix International N.V.
Mark Quick, 214-937-2924
Investor Relations
markquick@orthofix.com