UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
(Mark one)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number: 0-19961
(Exact name of registrant as specified in its charter)
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Delaware |
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98-1340767 |
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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3451 Plano Parkway, Lewisville, Texas |
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75056 |
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(Address of principal executive offices) |
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(Zip Code) |
(214) 937-2000
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large Accelerated filer |
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Accelerated filer |
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Non-Accelerated filer |
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Smaller Reporting Company |
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Emerging Growth Company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
As of October 26, 2018,
Table of Contents
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PART I |
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Item 1. |
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4 |
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Condensed Consolidated Balance Sheets as of September 30, 2018, and December 31, 2017 |
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Notes to the Unaudited Condensed Consolidated Financial Statements |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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33 |
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Item 4. |
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33 |
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PART II |
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Item 1. |
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34 |
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Item 1A. |
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34 |
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Item 2. |
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34 |
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Item 3. |
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34 |
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Item 4. |
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34 |
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Item 5. |
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34 |
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Item 6. |
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35 |
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36 |
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2
Forward-Looking Statements
This report 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, including the risks described Part I, Item 1A under the heading Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2017 (the “2017 Form 10-K”) and other Securities and Exchange Commission (“SEC”) filings. 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 the 2017 Form 10-K and other SEC filings, to reflect new information, the occurrence of future events or circumstances or otherwise.
Trademarks
Solely for convenience, our trademarks and trade names in this report are referred to without the ® and ™ symbols, but such references should not be construed as any indicator that we will not assert, to the fullest extent under applicable law, our rights thereto.
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ORTHOFIX MEDICAL INC.
Condensed Consolidated Balance Sheets
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(U.S. Dollars, in thousands, except share data) |
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September 30, 2018 |
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December 31, 2017 |
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(Unaudited) |
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Assets |
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Current assets |
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Cash and cash equivalents |
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$ |
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$ |
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Restricted cash |
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— |
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Accounts receivable, net of allowances of $ |
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Inventories |
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Prepaid expenses and other current assets |
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Total current assets |
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Property, plant and equipment, net |
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Intangible assets, net |
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Goodwill |
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Deferred income taxes |
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Other long-term assets |
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Total assets |
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$ |
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$ |
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Liabilities and shareholders’ equity |
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Current liabilities |
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Accounts payable |
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$ |
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$ |
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Other current liabilities |
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Total current liabilities |
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Other long-term liabilities |
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Total liabilities |
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Contingencies (Note 6) |
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Shareholders’ equity |
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Common shares $ 2018 and December 31, 2017, respectively |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive income |
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Total shareholders’ equity |
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Total liabilities and shareholders’ equity |
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$ |
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$ |
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The accompanying notes form an integral part of these condensed consolidated financial statements
4
ORTHOFIX MEDICAL INC.
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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(Unaudited, U.S. Dollars, in thousands, except share and per share data) |
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2018 |
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2017 |
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2018 |
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2017 |
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Net sales |
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$ |
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$ |
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$ |
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$ |
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Cost of sales |
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Gross profit |
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Sales and marketing |
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General and administrative |
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Research and development |
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Changes in fair value of contingent consideration |
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— |
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— |
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Operating income |
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Interest income (expense), net |
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Other income (expense), net |
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Income (loss) before income taxes |
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Income tax benefit (expense) |
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Net income (loss) from continuing operations |
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Discontinued operations (Note 6) |
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Income (loss) from discontinued operations |
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— |
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Income tax benefit (expense) |
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Net income (loss) from discontinued operations |
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( |
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Net income (loss) |
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$ |
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$ |
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$ |
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$ |
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Net income (loss) per common share—basic |
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Net income (loss) from continuing operations |
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$ |
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$ |
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$ |
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$ |
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Net income (loss) from discontinued operations |
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— |
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— |
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( |
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Net income (loss) per common share—basic |
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$ |
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$ |
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$ |
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$ |
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Net income (loss) per common share—diluted |
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Net income (loss) from continuing operations |
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$ |
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$ |
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$ |
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$ |
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Net income (loss) from discontinued operations |
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— |
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— |
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( |
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Net income (loss) per common share—diluted |
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$ |
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$ |
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$ |
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$ |
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Weighted average number of common shares: |
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Basic |
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Diluted |
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Other comprehensive income, before tax |
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Unrealized gain (loss) on debt securities |
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— |
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$ |
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Reclassification adjustment for loss on debt securities in net income |
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— |
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— |
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— |
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Currency translation adjustment |
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( |
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Other comprehensive income before tax |
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Income tax related to items of other comprehensive income |
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— |
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( |
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Other comprehensive income, net of tax |
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Comprehensive income (loss) |
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$ |
( |
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$ |
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$ |
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$ |
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The accompanying notes form an integral part of these condensed consolidated financial statements
5
ORTHOFIX MEDICAL INC.
Condensed Consolidated Statements of Cash Flows
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Nine Months Ended September 30, |
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(Unaudited, U.S. Dollars, in thousands) |
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2018 |
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2017 |
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Cash flows from operating activities |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net income to net cash from operating activities |
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Depreciation and amortization |
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Amortization of debt costs and other assets |
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Provision for doubtful accounts |
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( |
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Deferred income taxes |
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Share-based compensation |
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Other-than-temporary impairment on debt securities |
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— |
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Loss on valuation of equity securities |
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— |
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Change in fair value of contingent consideration |
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— |
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Other |
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Changes in operating assets and liabilities, net of effects of acquisition |
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Accounts receivable |
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( |
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( |
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Inventories |
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( |
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Prepaid expenses and other current assets |
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Accounts payable |
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( |
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Other current liabilities |
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( |
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Other long-term assets and liabilities |
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Net cash from operating activities |
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Cash flows from investing activities |
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Acquisition of business, net of cash acquired |
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( |
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— |
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Capital expenditures for property, plant and equipment |
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Capital expenditures for intangible assets |
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( |
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Asset acquisitions and other investments |
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— |
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Other investing activities |
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— |
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Net cash from investing activities |
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Cash flows from financing activities |
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Proceeds from issuance of common shares |
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Payments related to withholdings for share-based compensation |
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( |
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Payment of debt issuance costs and other financing activities |
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— |
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Net cash from financing activities |
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Effect of exchange rate changes on cash |
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Net change in cash, cash equivalents, and restricted cash |
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Cash, cash equivalents, and restricted cash at the beginning of period |
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Cash, cash equivalents, and restricted cash at the end of period |
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$ |
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$ |
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Components of cash, cash equivalents and restricted cash at the end of period |
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Cash and cash equivalents |
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$ |
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$ |
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Restricted cash |
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— |
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Cash, cash equivalents, and restricted cash at the end of period |
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$ |
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$ |
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Supplemental Disclosure of Cash Flow Information: |
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Noncash investing activities: |
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Purchase of intangible assets |
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$ |
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$ |
— |
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Contingent consideration recognized at acquisition date |
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— |
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The accompanying notes form an integral part of these condensed consolidated financial statements
6
ORTHOFIX MEDICAL INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
Business and basis of presentation
Orthofix Medical Inc. (previously Orthofix International N.V.), together with its subsidiaries (the “Company” or “Orthofix”) is a global medical device company focused on musculoskeletal products and therapies. Headquartered in Lewisville, Texas, the Company has
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Pursuant to these rules and regulations, certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair statement have been included. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Form 10-K for the year ended December 31, 2017. Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for other interim periods or the year ending December 31, 2018.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, the Company evaluates its estimates including those related to revenue recognition, contractual allowances, doubtful accounts, inventories, goodwill and intangible asset impairment, fair value measurements, litigation and contingent liabilities, contingent consideration, income taxes, and share-based compensation. Actual results could differ from these estimates.
On
1. Recently adopted accounting standards and recently issued accounting pronouncements
Adoption of Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606)
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09. Topic 606 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted Accounting Standards Codification (“ASC”) 606 as of January 1, 2018 using the modified retrospective transition method. Results for prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting under the previous revenue recognition standard, Topic 605. See Note 8 for further details.
Adoption of ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10), and ASU 2018-03, Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10)
In January 2016, the FASB issued ASU 2016-01, which was then further clarified in ASU 2018-03, in February 2018. This guidance requires entities to generally measure equity investments at fair value and recognize any changes in fair value in net income. However, for certain equity investments that do not have readily determinable fair values, the new guidance allows entities to choose to measure these investments using a new measurement alternative, which values the investments at cost, less any impairments, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. The Company prospectively adopted both ASU 2016-01 and ASU 2018-03 during the first quarter of
7
2018 and elected to use the new measurement alternative for the Company’s equity investments in Bone Biologics, Inc. (“Bone Biologics”), which have historically been held at cost. This resulted in an increase in the previously recorded value of the Company’s equity investments in Bone Biologics, which were recorded within other current assets or long-term assets and other income (expense), of $
Adoption of ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
In October 2016, the FASB issued ASU 2016-16, which reduces diversity in practice of accounting for intra-entity transfers of assets, particularly for intra-entity transfers of intellectual property. The new standard states an entity should recognize the income tax consequences of an intra-entity transfer when the transfer occurs, as opposed to historical U.S. GAAP guidance which prohibited the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset had been sold to an outside party. During the third and fourth quarters of 2017, the Company executed
Adoption of ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash
In November 2016, the FASB issued ASU 2016-18, which reduces diversity in classification and presentation of restricted cash, including transfers between cash and restricted cash, on the statement of cash flows. The Company adopted this standard as of January 1, 2018 using a retrospective transition approach. Adoption of this ASU resulted in an increase in net cash from operating activities of $
Adoption of ASU 2017-01, Business Combinations (Topic 805)
In January 2017, the FASB issued ASU 2017-01, which clarifies the definition of a business. This amendment states that when substantially all of the fair value of gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, that the set of assets acquired is not a business, which will likely result in more acquisitions being accounted for as asset acquisitions rather than business combinations. Based upon this guidance, which the Company adopted as of January 1, 2018, the Company accounted for certain transactions during the first and third quarters of 2018 for approximately $
8
Recently issued accounting pronouncements
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Topic |
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Description of Guidance |
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Effective Date |
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Status of Company's Evaluation |
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Leases (ASU 2016-02 and other related updates) |
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Requires a lessee to recognize lease assets and lease liabilities for leases classified as operating leases. Applied using a modified retrospective approach. An entity can choose to apply the provisions at the beginning of the earliest comparative period presented in the financial statements or at the beginning of the period of adoption. The Company expects to apply the provisions at the beginning of the period of adoption, beginning on January 1, 2019. |
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January 1, 2019 |
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The Company has established a cross-functional implementation team to analyze the impact of the standard on the Company's population of leases and to evaluate the Company's current accounting policies relating to leases. The Company is currently evaluating the impact this ASU may have on its consolidated financial statements; however, the Company expects this guidance will materially impact the Company's consolidated balance sheet, resulting in current operating lease obligations being reflected on the consolidated balance sheet. The Company is continuing to evaluate the potential impact to the Company's balance sheet, but expects to recognize lease assets and lease liabilities as of January 1, 2019, in excess of $ |
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Goodwill (ASU 2017-04) |
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Eliminates Step 2 of the current goodwill impairment test, which requires a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment loss will instead be measured at the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the recorded amount of goodwill. Applied on a prospective basis, with early adoption permitted. |
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January 1, 2020 |
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The Company is currently evaluating the impact this ASU may have on its consolidated financial statements. However, the Company does not expect this ASU to have a significant impact on its financial statements or disclosures. |
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Comprehensive income (ASU 2018-02) |
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Allows entities to reclassify from accumulated other comprehensive income to retained earnings stranded tax effects resulting from the Tax Cuts and Jobs Act (the "Tax Act"). Applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized. |
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January 1, 2019 |
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The Company is currently evaluating the impact this ASU may have on its consolidated financial statements. |
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Topic |
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Description of Guidance |
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Effective Date |
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Status of Company's Evaluation |
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Fair value measurement (ASU 2018-13) |
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Eliminates such disclosures as the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and adds new disclosure requirements for Level 3 measurements. Certain of the provisions are to be applied retrospectively with other provisions applied prospectively. |
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January 1, 2020 |
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The Company is currently evaluating the impact this ASU may have on its consolidated financial statements. |
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Implementation costs in a cloud computing arrangement that is a service contract (ASU 2018-15) |
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Aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. Applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. |
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January 1, 2020 |
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The Company is currently evaluating the impact this ASU may have on its consolidated financial statements. |
Other recently issued accounting guidance
In August 2018, the Securities and Exchange Commission (the “SEC” or the “Commission”) issued SEC Final Rule Release No. 33-10532, Disclosure Update and Simplification, which amends certain of the Commission’s disclosure requirements that have become redundant, duplicative, overlapping, outdated, or superseded, in light of other Commission disclosure requirements, U.S. GAAP, or changes in the information environment. However, in certain instances, the amendments expanded disclosure requirements, including those related to interim disclosures about changes in shareholders’ equity. As amended in the final rule, registrants must now analyze changes in shareholders’ equity, in the form of a reconciliation for the current year-to-date interim periods, with subtotals for each interim period. The final rule is effective for all filings submitted on or after November 5, 2018. As a result, the Company anticipates that it will present a Condensed Consolidated Statement of Changes in Shareholders’ Equity within its interim financial statements beginning in its Form 10-Q for the quarter ending March 31, 2019.
2. Acquisition of Spinal Kinetics, Inc.
On March 15, 2018, the Company entered into a definitive merger agreement (the “Merger Agreement”) to acquire
The acquisition date fair value of the consideration transferred was $
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(U.S. Dollars, in thousands) |
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Fair value of consideration transferred |
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Cash paid |
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$ |
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Contingent consideration |
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Total fair value of consideration transferred |
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$ |
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The contingent consideration consists of potential future milestone payments of up to $
The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the acquisition date. A final determination of the allocation of the purchase price to assets acquired and liabilities assumed has not been made and the following should be considered preliminary. The final determination is subject to completion of the Company’s valuation of the assets acquired and liabilities assumed, which it expects to complete within one year of the acquisition date.
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(U.S. Dollars, in thousands) |
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As of April 30, 2018 |
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Assigned Useful Life |
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Assets acquired |
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Cash and cash equivalents |
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$ |
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Restricted cash |
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Accounts receivable |
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Inventories |
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Prepaid expenses and other current assets |
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Property, plant and equipment |
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Other long-term assets |
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Developed technology |
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In-process research and development ("IPR&D") |
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Tradename |
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Deferred income taxes |
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Total identifiable assets acquired |
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$ |
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Liabilities assumed |
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Accounts payable |
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$ |
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Other current liabilities |
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Other long-term liabilities |
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Total liabilities assumed |
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Goodwill |
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Total fair value of consideration transferred |
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$ |
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The purchase price exceeded the fair value of the net tangible and identifiable intangible assets acquired from Spinal Kinetics. As a result, the Company recorded goodwill in connection with the acquisition. Specifically, the goodwill includes the assembled workforce and synergies associated with the combined entity and is not expected to be deductible for tax purposes. The $
The IPR&D intangible asset is considered an indefinite-lived asset until the completion or abandonment of the associated research and development efforts. Accordingly, during the development period after the acquisition, this asset is not amortized but, instead, is subject to impairment review and testing provisions. Upon completion of the IPR&D project, which the Company currently expects to occur mid-2019, the Company will determine the useful life of the asset and begin amortization.
The Company recognized $
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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(U.S. Dollars, in thousands) |
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2018 |
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2017 |
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2018 |
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2017 |
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(unaudited) |
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(unaudited) |
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(unaudited) |
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(unaudited) |
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Net sales |
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$ |
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$ |
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$ |
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$ |
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Net income from continuing operations |
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3. Inventories
Inventories were as follows:
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(U.S. Dollars, in thousands) |
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September 30, 2018 |
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December 31, 2017 |
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Raw materials |
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$ |
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$ |
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Work-in-process |
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Finished products |
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Deferred cost of sales |
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— |
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Inventories |
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$ |
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$ |
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Prior to the adoption of ASU 2014-09, or for all periods presented prior to January 1, 2018, deferred cost of sales resulted from certain transactions where the Company had shipped product or performed services for which all revenue recognition criteria had not yet been met. Once all revenue recognition criteria had been met, the revenue and associated cost of sales were recognized. Subsequent to the adoption of ASU 2014-09, the Company no longer has transactions which result in the recognition of deferred cost of sales. See Note 8 for further discussion of the Company’s adoption of ASU 2014-09.
4. Long-term debt
On July 31, 2018, the Company amended and restated its previous Credit Agreement with JPMorgan Chase Bank, N.A. (“JPMorgan”), the Administrative Agent, and the lenders party thereto pursuant to a First Amended and Restated Credit Agreement (“Amended Credit Agreement”). The Amended Credit Agreement is substantially the same as the previous Credit Agreement, except for certain amendments to, among other things, (i) effectuate the domestication of the Company from a Curaçao company to a Delaware corporation, (ii) limit the pledge by the Company and each domestic subsidiary of the Company of equity interests in their respective first tier foreign subsidiaries to
As of September 30, 2018, the Company had
12
5. Fair value measurements
The fair value of the Company’s financial assets and liabilities measured on a recurring basis were as follows:
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September 30, 2018 |
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December 31, 2017 |
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(U.S. Dollars, in thousands) |
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Level 1 |
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Level 2 |
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Level 3 |
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Total |
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Total |
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Assets |
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Collective trust funds |
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$ |
— |
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$ |
— |
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