Orthofix Warns Investors Over Past Financial Reports

On August 6, 2013, the new management at Orthofix International N.V. announced that previously issued financial statements for certain periods of time should no longer be relied upon.

When the company announced on July 29, 2013 that it was postponing release of second quarter financial results because it’s Board’s Audit Committee needed more time to review certain “revenue recognition, ” sharks began to circle as law firms began trolling for shareholders who could be litigants in lawsuits against the company for potential SEC violations.

Apparently, no good transparency deed goes unpunished.

Assessing Controls and Restatement

The August 6 update stated that although the review remains at a preliminary stage, the Audit Committee has concluded, “After consultation with management and the company’s independent registered public accounting firm, that certain revenues recognized during 2011 and 2012, upon further evaluation, should not have been recognized or should not have been recognized during the periods in which they were recognized. As a result of the foregoing, on August 5, 2013, the Audit Committee concluded, after consultation with management and the outside auditors, that the Company’s previously issued consolidated financial statements as of and for the fiscal years ended December 31, 2011 and December 31, 2012 (as well as the interim quarterly periods within such years), as well as for the interim quarterly period ended March 31, 2013, should no longer be relied upon.” On August 6, 2013, the Board ratified the foregoing conclusion by the Audit Committee.

As the Audit Committee continues its review, management said it cannot predict the aggregate amount of revenue that will ultimately be restated, whether additional periods beyond those referenced above will be affected, the final outcome or timing of the Audit Committee’s continuing review of these matters, or the timing of the Company’s filing of restated financial statements for the affected annual and quarterly periods.

The company also said it was continuing to assess its disclosure controls and procedures and internal control over financial reporting for current and prior periods.

Wall Street: “Looks Manageable”

While management has not identified specific “revenue recognition” under review, Jefferies senior analyst Raj Denhoy said his guess is that it 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).

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.

If the issue is confined to stimulation sales, Denhoy says the issue “looks to be manageable.”