Shares of Orthofix International N.V. (OFIX - Free Report) have lost 13% over the past two weeks since the company’s first-quarter 2018 earnings release on Apr 30, 2018.
Despite better-than-expected bottom line numbers, shares dropped due to lowered earnings outlook for the company in 2018. Over this period, the company has also significantly underperformed the industry it belongs to. The stock has lost 12.5% against the industry’s 3.7% gain.
Let us delve deeper into the earnings details of Orthofix:
The company reported first-quarter 2018 adjusted earnings per share (EPS) of 39 cents from continuing operations. The figure was ahead of the Zacks Consensus Estimate by 8.3%. The bottom line surged 44.4% year over year primarily on strong sales growth at the company’s BioStim, Extremity Fixation and Spine Fixation strategic business units (SBU).
Excluding one-time items, net income from continuing operations in the first quarter came in at 27 cents per share versus the net loss from continuing operations of 13 cents, thereby showing a remarkable year-over-year improvement.
Orthofix’s first-quarter sales improved 5.8% (up 3.3% at constant exchange rate or CER) to $108.7 million, almost in line with the Zacks Consensus Estimate of $109 million. As a result of the company’s adoption of the revenue recognition accounting change at the beginning of 2018, Orthofix noted that if it converts the consolidated revenues of first-quarter 2017 into the new standard, growth would have been 2.4% at CER in the reported quarter. Sales were primarily driven by a strong performance by the company’s three SBUs, namely BioStim, Extremity Fixation and Spine Fixation, partly offset by a year-over-year decline in Biologics business.
For the first quarter, the company posted BioStim sales of $46.2 million, reflecting 3.6% (same at CER) growth from the prior-year period.
Extremity Fixation sales were $27.5 million in the quarter under review with 14.9% improvement (up 4.3% at CER) from first-quarter 2017. The company realized a continued uptake of new products and a commendable performance in most of the company’s global markets including the United States.
Orthofix reported Spine Fixation SBU sales of $20.7 million, reflecting 7.5% (up 7.2% at CER) growth over the year-earlier quarter. This uptick can be attributed to product launches and the adopted strategic initiatives.
Biologics SBU sales totaled $14.3 million, down 4.4% (same at CER) from the year-ago quarter. This decline resulted from the contractual reduction in the marketing service fee percentage that Orthofix receives from MTF Biologics.
In the first quarter, gross margin contracted 23 basis points (bps) to 77.8%. Unfavorable sales mix impacted the quarterly gross margin.
Sales and marketing expenses rose 3.6% year over year to $50.2 million. General and Administrative expenses were up 6.6% to $19.5 million. The company witnessed a 6.6% decrease in research and development expenses to $6.9 million. Overall, adjusted operating margin expanded 148 bps to 7.2% owing to increased operating expenses.
Orthofix exited the first quarter of 2018 with cash and cash equivalents of $77.1 million compared with $81.2 million at the end of 2017. For the first quarter, net cash used in operating activities was $3.6 million compared with $10.8 million a year ago.
Orthofix has lowered its 2018 earnings view as it expects Biologic sales to be flat or less by low single digits for the full year due to contractual decrease in the marketing service fee the company is going to receive from MTF Biologics. Adjusted EPS from continuing operations are expected in the range of $1.58-$1.78, falling below the earlier-projected band of $1.76-$1.84. The Zacks Consensus Estimate for full-year adjusted EPS stands at $1.67, within the company’s projected range.
Full-year net sales projection has been increased to the band of $458-$464 million (earlier prediction was $450-$455 million). The Zacks Consensus Estimate for full-year revenues is pegged at $462.7 million, lying within but near the upper end of the guided range.
Orthofix exited the first quarter of 2018 on a mixed note. While earnings exceeded the Zacks Consensus Estimate, sales almost matched the consensus mark. Investors are upset about poor Biologics prospects, which will continue to be a drag on the overall performance throughout the remainder of the year. Accordingly, the company has to reduce its full-year earnings expectation.
This apart, currency fluctuations, a competitive landscape and macroeconomic headwinds continue to pose challenges to the company. Moreover, higher costs and operating expenses are a matter of grave concern for Orthofix. Also, heavy dependence on a third party for final distribution of products exposes the company to heightened risks.
On a positive note, the top line was substantially driven by strength in Extremity Fixation as well as Spine Fixation businesses, which are expected to continue in the near term on the back of sales force enhancements, expanded distributorship network and introduction of products.
Zacks Rank & Key Picks
Orthofix carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the broader medical space, having posted solid results this earnings season are, Intuitive Surgical (ISRG - Free Report) , Chemed Corp. (CHE - Free Report) and Baxter International Inc. (BAX - Free Report) . While Intuitive Surgical sports a Zacks Rank #1 (Strong Buy), Chemed and Baxter carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Intuitive Surgical reported first-quarter 2018 adjusted EPS of $2.44, beating the Zacks Consensus Estimate by 22.6%. Revenues totaled $848 million, also surpassing the consensus estimate by 10.6%.
Chemed posted first-quarter 2018 adjusted EPS of $2.72, outshining the Zacks Consensus Estimate of $2.37. Revenues came in at $439.2 million, outpacing the Zacks Consensus Estimate of $420 million.
Baxter posted first-quarter 2018 adjusted bottom line of 70 cents, which exceeded the Zacks Consensus Estimate by 12.9%. The top line came in at $2.68 billion, edging past the Zacks Consensus Estimate of $2.62 billion.
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