Item 2.02. Results of Operations and Financial Condition.
On March 6, 2023, Orthofix Medical Inc. (the “Company”) issued a news release
announcing, among other things, its financial results for the fourth quarter and
year ended December 31, 2022. As the merger with SeaSpione Holdings Corporation
(“SeaSpine”) was completed on January 5, 2023, the news release also includes
the stand-alone financial results of SeaSpine for the fourth quarter and year
ended December 31, 2022. A copy of the press release is furnished herewith as
Exhibit 99.1 and attached hereto.
The information furnished in this Item 2.02, including the exhibit furnished
herewith as Exhibit 99.1, will not be treated as “filed” for the purposes of
Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), or otherwise subject to the liabilities of that section. This information
will not be deemed incorporated by reference into any filing under the
Securities Act of 1933, as amended (the “Securities Act”), or into another
filing under the Exchange Act, unless that filing expressly incorporates by
reference this Item 2.02 of this report.
Discussion of Non-GAAP Financial Measures
Constant Currency
Constant currency is a non-GAAP measure, which the Company calculates 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.
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 the
Company’s normal business operations, including capital expenditures. Management
uses free cash flow to measure progress on its capital efficiency and cash flow
initiatives.
EBITDA
EBITDA is a non-GAAP financial measure, which the Company calculate by adding
interest income (expense), net; income tax expense (benefit); and depreciation
and amortization to net income. EBITDA provides management with additional
insight to its results of operations. EBITDA is the primary metric used by the
Company’s Chief Operating Decision Maker in managing the business.
Adjusted EBITDA, Adjusted Net Income (Loss) and Adjusted EPS for Stand-Alone
Orthofix Financial Results
These non-GAAP financial measures utilized in the Orthofix stand-alone financial
results provide management with additional insight to its results of operations
and reflect the exclusion of the following items:
•
Share-based compensation expense – Costs related to the Company’s share-based
compensation plans, which include stock options, restricted stock,
performance-based or market-based restricted stock, and a stock purchase plan;
see the share-based compensation footnote in the Company’s Form 10-K for the
year ended December 31, 2022 for an allocation of these costs by consolidated
statement of operations line item. It should be noted that certain share-based
compensation costs are instead included within medical device regulation for
2021 and 2022. Management excludes this item when evaluating the Company’s
operating performance as it represents a non-cash expense.
•
Foreign exchange impact – Gains and losses related to foreign currency
transactions, which are recorded as other income (expense), net. Management
excludes this item when evaluating the Company’s operating results as at is
primarily a non-cash expense or benefit and is non-operating in nature.
•
Strategic investments – Costs related to the Company’s strategic investments,
such as due diligence and integration costs, which are primarily recorded as
general and administrative expenses. These acquisition and integration-related
charges are not factored into the evaluation of the Company’s performance by
management because they are of a temporary nature, not related to the Company’s
core operating performance, and as the frequency and amount of such charges vary
significantly based on the timing and magnitude of the Company’s acquisition
transactions.
•
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) recognized costs related to acquired
in-process research and development (“IPR&D”) assets, which were expensed
immediately. Management excludes this item when evaluating the Company’s
operating results as the remasurement of contingent consideration is primarily
non-cash in nature and as the frequency and amount of IPR&D charges can vary
significantly based on the timing and magnitude of the Company’s acquisition
transactions.
•
Amortization of acquired intangibles – Amortization of intangible assets
acquired in business combinations or asset acquisitions, including items such as
developed technologies, customer relationships, trade names, manufacturing
agreements, and other intangible assets, and any impairment of acquired
goodwill, which are recorded in cost of sales or
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operating expenses. Management excludes this item when evaluating the Company’s
operating performance as it represents a non-cash expense.
•
(Gain) Loss on investment securities – Net gains or losses recognized (realized
or unrealized) within other income (expense), net relating to certain of our
investments. Management excludes this item when evaluating the Company’s
operating performance as it typically represents a non-cash gain or loss and is
not related to the Company’s core operating performance.
•
Legal judgments/settlements – Adverse or favorable legal judgments or negotiated
legal settlements, which are recorded as general and administrative expenses.
Management excludes this item when evaluating the Company’s operating results as
these costs and/or benefits can vary significantly based on the timing and
magnitude of litigation matters.
•
Succession and transition charges – Costs related to the transition of certain
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 primarily recorded as
general and administrative expenses. Management excludes this item when
evaluating the Company’s operating results as these costs associated with events
that are not expected to recur at a similar frequency and magnitude in the
future.
•
Medical device regulation – Incremental costs incurred (i) 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, which are recorded primarily as research and
development expenses, and (ii) related to rationalization of certain product
lines that we do not expect to continue to market subsequent to the effective
date of these regulations, which are recorded primarily as costs of sales.
Management excludes this item when evaluating the Company’s operating results as
these costs associated with events that are not expected to recur at a similar
frequency and magnitude in the future.
•
Business interruption – COVID-19 – Gains and losses related to the realized
effects the COVID-19 pandemic has had on our business operations, which consist
primarily of (i) certain legislative relief received as a result of the COVID-19
pandemic, (ii) costs associated with the redesign of certain products in
response to supply chain disruption, and (iii) incremental costs incurred to
enhance the safety and sanitation of our facilities. Management excludes this
item when evaluating the Company’s operating results as these costs associated
with events that are not expected to recur at a similar frequency and magnitude
in the future.
•
Long-term income tax rate adjustment – Reflects management’s expectation of a
long-term normalized effective tax rate of 27% for 2021 and 28% for the fiscal
year 2022 results and outlook, which is based on current tax law and current
expected adjusted 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 and Adjusted EPS.
Adjusted EBITDA and Adjusted Gross Margin for SeaSpine Stand-Alone Financial
Results
Adjusted EBITDA and Adjusted Gross Margin are measures used by management for
purposes of:
•
supplementing the financial results and forecasts reported to the Company’s
board of directors;
•
evaluating, managing and benchmarking the operating performance of the Company;
•
establishing internal operating budgets;
•
enhancing comparability from period to period; and
•
comparing performance with internal forecasts and targeted business models.
Adjusted EBITDA consists of GAAP net loss before interest, taxes, depreciation
and amortization and excludes the impact of the following items:
•
Fixed NanoMetalene supplier processing charge – This charge relates to the
future fixed payments that SeaSpine is obligated to make to a supplier in
connection with securing and maintaining long-term backup processing capacity
for its NanoMetalene franchise. Because SeaSpine no longer anticipates utilizing
. . .
Item 7.01 Regulation FD Disclosure.
The news release furnished in Exhibit 99.1 also provides an update on the
Company’s business outlook, that is intended to be within the safe harbor
provided by the Private Securities Litigation Reform Act of 1995 (the “Act”) as
comprising forward looking statements within the meaning of the Act.
The information furnished in this Item 7.01, including the exhibit furnished
herewith as Exhibit 99.1, will not be treated as “filed” for the purposes of
Section 18 of the Exchange Act, or otherwise subject to the liabilities of that
section. This information will not be deemed incorporated by reference into any
filing under the Securities Act, or into another filing under the Exchange Act,
unless that filing expressly incorporates by reference this Item 7.01 of this
report.
Item 9.01. Financial Statements and Exhibits.
(d) Exhibits
99.1 News release, dated March 6, 2023 104 Cover Page Interactive Data File (embedded within the Inline XBRL document).
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Orthofix Medical Inc.
By: /s/ Patrick Keran
Patrick Keran
Chief Legal Officer
Date: March 6, 2023
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