Will This “Fix” Orthofix?

On July 29, 2013, Orthofix International N.V. announced it was postponing the release of its financial results for the second quarter.

The announcement stated the Audit Committee of the company’s Board of Directors needed more time to review “matters relating to revenue recognition for prior periods.” The Audit Committee could not predict the length of time or outcome of the review.

“Challenging Circumstances”

The company has experienced significant events over the last couple of years. Company’s President and CEO, (and former CFO) Bob Vaters resigned abruptly on March 13, 2013. At the time of the resignation Vaters said, “I am very pleased with the tremendous progress we have made navigating some challenging circumstances over the last several years.”

One Wall Street analyst told us that it’s never a good thing when a company postpones a quarterly report. It’s one thing to delay because they couldn’t get the numbers done on time, but it’s more concerning to investors when the delay was caused by having to review previous revenue reports. The company’s stock fell around 20% on the news.

Spine Stim Impact

Jefferies senior analyst Raj Denhoy, said his guess is that the matter likely involves sales to wholesalers within the spine stimulation business. Specifically he notes that sales to these third party distributors “may have been inappropriately booked as revenues.” He said those revenues might be in the range of $4 million during periods where management acknowledged that sales to this channel increased (most notably around the second quarter of 2012).

If the issue is confined to stimulation sales, Denhoy says the issue “looks to be manageable.” However, he says this is another overhang for the company “already plagued with company-specific (sales force turbulence in spine stim, senior management changes, etc.) and broader end market challenges (surgery volumes, pricing, etc.) which have manifested themselves in sharp underperformance the past two quarters.”

According to Denhoy, spine stimulation sales represent roughly one-third of company sales. However, given the business’ approximate 40% operating margins make the stabilization of this franchise a key to any turnaround at the company.

Company Reorganization

On June 20, 2013, Brad Mason, the company’s new president and CEO, announced a major reorganization of the company saying that the primary issues that led to disappointing financial results were, “identifiable, within our control, and fixable. We are developing a strategy with specific initiatives that will both improve our internal competencies and drive growth. By managing all bone growth stimulation products under the BioStim business, spinal implant products under the Spine Fixation business, and biologics products under the Biologics business, we believe we can maximize the growth potential of these businesses.”