LEWISVILLE, Texas–(BUSINESS WIRE)–Orthofix International N.V. (NASDAQ:OFIX) today reported its financial results for the fourth quarter and fiscal year ended December 31, 2017. For the fourth quarter of 2017, net sales were $116.9 million, earnings per share from continuing operations was $0.08 and adjusted earnings per share from continuing operations was $0.52. For fiscal year 2017, net sales were $433.8 million, earnings per share from continuing operations was $0.39 and adjusted earnings per share from continuing operations was $1.62.“Adjusted earnings per share from continuing operations”
“2017 was a very strong year for Orthofix. We exceeded our topline expectations and finished the year with a solid margin improvement trajectory. We also made significant progress in the transformation of our Spine Fixation business and completed our worldwide restructuring initiatives,” said Brad Mason, President and Chief Executive Officer.
“With 2017 in the rear-view mirror, we are now focused fully on executing our 2018 global and business unit strategies. Globally, we expect to drive shareholder value through three pillars, topline organic growth better than market growth rates, margin expansion through operational improvements, and strategic deployment of our capital in ways that we believe will accelerate topline growth in our core businesses. We are well positioned and expect to execute in each of these areas in 2018.”
Financial Results Overview
Fourth Quarter
The following table provides net sales by strategic business unit (“SBU”):
Three Months Ended December 31, | ||||||||||||||||
(Unaudited, U.S. Dollars, in thousands) | 2017 | 2016 | Change |
Constant |
||||||||||||
BioStim | $ | 49,760 | $ | 47,803 | 4.1 | % | 4.1 | % | ||||||||
Extremity Fixation | 29,103 | 26,843 | 8.4 | % | 2.2 | % | ||||||||||
Spine Fixation | 21,175 | 18,664 | 13.5 | % | 13.2 | % | ||||||||||
Biologics | 16,858 | 15,227 | 10.7 | % | 10.7 | % | ||||||||||
Net sales | $ | 116,896 | $ | 108,537 | 7.7 | % | 6.1 | % | ||||||||
Gross profit increased $8.1 million to $93.3 million. Gross margin increased to 79.8% compared to 78.5% in the prior year period, primarily due to increased revenue from international Extremity Fixation stocking distributors, as well as our domestic and international restructuring initiatives during 2017. Non-GAAP net margin (gross profit less sales and marketing expenses) was $41.5 million, an increase of 13.6% compared to $36.5 million in the prior year period. The increase in non-GAAP net margin was primarily due to the increase in gross margin and a slight decrease in sales and marketing expenses as a percent of sales.
Net income from continuing operations was $1.5 million, or $0.08 per share, compared to net loss of $5.1 million, or ($0.29) per share in the prior year period. Adjusted net income from continuing operations was $9.7 million, or $0.52 per share, compared to adjusted net income of $7.7 million, or $0.42 per share in the prior year period.
EBITDA was $21.8 million, compared to $8.6 million in the prior year period. Adjusted EBITDA was $24.3 million or 20.8% of net sales for the fourth quarter, compared to $21.1 million or 19.4% of net sales in the prior year period.
Fiscal Year 2017
The following table provides net sales by SBU:
Year Ended December 31, | ||||||||||||||||
(U.S. Dollars, in thousands) | 2017 | 2016 | Change |
Constant |
||||||||||||
BioStim | $ | 185,900 | $ | 176,561 | 5.3 | % | 5.3 | % | ||||||||
Extremity Fixation | 103,242 | 102,683 | 0.5 | % | (0.9 | %) | ||||||||||
Spine Fixation | 81,957 | 72,632 | 12.8 | % | 12.7 | % | ||||||||||
Biologics | 62,724 | 57,912 | 8.3 | % | 8.3 | % | ||||||||||
Net sales | $ | 433,823 | $ | 409,788 | 5.9 | % | 5.5 | % | ||||||||
Driven by the increase in net sales, gross profit increased $18.9 million to $340.8 million, while gross margin was flat at 78.6% compared to the prior year period. Non-GAAP net margin was $142.4 million, an increase of 1.3% compared to $140.6 million in the prior year period. The increase in Non-GAAP net margin was due to the increase in net sales, partially offset by higher commission expenses from geographic mix in Extremity Fixation and higher commission rates from Biologics and Spine Fixation distributors.
Net income from continuing operations was $7.3 million, or $0.39 per share, compared to net income of $3.5 million, or $0.19 per share in the prior year. Adjusted net income from continuing operations was $30.1 million, or $1.62 per share, compared to adjusted net income of $27.0 million, or $1.46 per share in the prior year.
EBITDA was $56.9 million in 2017, compared to $39.1 million in the prior year. Adjusted EBITDA was $81.6 million or 18.8% of net sales for the year, compared to $79.3 million or 19.4% of net sales in the prior year.
Adoption of Revenue Recognition Standard ASU 2014-09
On January 1, 2018, the Company adopted the new revenue recognition standard, ASU 2014-09, as amended, using a cumulative effect adjustment, which resulted in a significant increase in accounts receivable, a decrease in inventories, and a related change to deferred income taxes. These changes were offset by an adjustment to the Company’s opening retained earnings of approximately $5 million. One of the primary impacts of this new standard is the timing of revenue recognition for our sales to international Extremity Fixation and Spine Fixation stocking distributors that were historically accounted for using the sell-through method. This revenue will now be recorded on invoiced sales instead of deferring recognition until cash is received. If the Company were to have adopted the new standard as of January 1, 2017, pro-forma net sales for the year ended December 31, 2017 would have been approximately $431 million. Refer to the table under the subheading “2017 Pro-forma Net Sales Under the New Revenue Recognition Standard” for the detail of pro-forma 2017 net sales by quarter as would have been reported under the new revenue recognition standard.
Liquidity
As of December 31, 2017, cash and cash equivalents were $81.2 million compared to $39.6 million as of December 31, 2016. As of December 31, 2017, we had no outstanding indebtedness and borrowing capacity of $125 million. Cash flow from operations increased $8.6 million to $53.3 million, while free cash flow increased $10.0 million to $36.4 million.
Redomicile
The Company is in the final stages of evaluating the impact of moving its parent company’s domicile from Curacao to the United States. Based on the analysis to date, including the assessment of the recent U.S. tax reform, the Company believes that executing this change could provide a number of benefits to Orthofix, including organizational simplification, more efficient cash deployment, a lower tax rate and increased cash flow. Subject to the outcome of final diligence, the Company currently anticipates requesting shareholder approval for this move in conjunction with its annual shareholder meeting later this year. The Company also expects to incur costs this year to complete all of the underlying steps required for this transition. These estimated costs are included in our 2018 guidance.
2018 Outlook
For the year ending December 31, 2018, the Company expects the following results, assuming exchange rates are the same as those currently prevailing. This guidance reflects the new revenue recognition standard that is required as of January 1, 2018 and discussed above, for which net sales will be recorded on invoiced sales instead of deferring recognition until cash is received.
2018 Outlook | ||||||||||||
(Unaudited, U.S. Dollars, in millions, except per share data) | Low | High | ||||||||||
Net sales | $ | 450.0 | 1 | $ | 455.0 | 1 | ||||||
Net income from continuing operations | $ | 28.3 | 2 | $ | 30.6 | 2 | ||||||
Adjusted EBITDA | $ | 89.0 | 3 | $ | 91.0 | 3 | ||||||
EPS from continuing operations | $ | 1.50 | 4 | $ | 1.62 | 4 | ||||||
Adjusted EPS from continuing operations | $ | 1.76 | 5 | $ | 1.84 | 5 | ||||||
1 | Represents a year-over-year increase of 3.7% to 4.9% on a reported basis | |
2 | Represents a year-over-year increase of 288.1% to 319.7% | |
3 | Represents a year-over-year decrease of 9.1% to 11.6% | |
4 | Represents a year-over-year increase of 284.6% to 315.4% | |
5 | Represents a year-over-year increase of 8.6% to 13.6% | |
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 2017. 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 7995595. 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 7995595. 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 global medical device company focused on musculoskeletal healing products and value-added services. The Company’s mission is to improve patients’ lives by providing superior reconstruction and regenerative musculoskeletal solutions to physicians worldwide. Headquartered in Lewisville, Texas, the Company has four strategic business units: BioStim, Extremity Fixation, Spine Fixation, and Biologics. Orthofix products are widely distributed 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, 2017, to reflect new information, the occurrence of future events or circumstances or otherwise.