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Business, basis of presentation, COVID-19 update, and CARES Act | 6 Months Ended
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Jun. 30, 2020
Organization Consolidation And Presentation Of Financial Statements And Unusual Or Infrequent Items Disclosure [Abstract] |
Business, basis of presentation, COVID-19 update, and CARES Act | 1. Business, basis of presentation, COVID-19 update, and CARES Act Description of the Business Orthofix Medical Inc., together with its subsidiaries (the “Company” or “Orthofix”) is a global medical device company focused on musculoskeletal products and therapies. The Company’s mission is to improve patients' lives by providing superior reconstruction and regenerative musculoskeletal solutions to physicians worldwide. Headquartered in Lewisville, Texas, Orthofix’s spine and orthopedic extremities products are distributed in more than 70 countries via the Company's sales representatives and distributors. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Pursuant to these rules and regulations, certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair statement have been included. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Form 10-K for the year ended December 31, 2019. Operating results for the three and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for other interim periods or the year ending December 31, 2020. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition; contractual allowances; allowance for expected credit losses; inventories; valuation of intangible assets; goodwill; fair value measurements, including contingent consideration; litigation and contingent liabilities; tax matters; and share-based compensation. Actual results could differ from these estimates. COVID-19 Update The global Coronavirus Disease 2019 ("COVID-19") pandemic is significantly affecting the Company’s patients, communities, employees and business operations. The pandemic has led to the temporary closure of businesses, restrictions on travel and the implementation of physical distancing measures around the world. Since March 2020, hospitals, ambulatory surgery centers and other medical facilities in the Company’s sales markets have cancelled or deferred elective surgery procedures and diverted resources to patients being treated for COVID-19. The pandemic has caused surgeons and patients to defer procedures in which the Company’s products otherwise would be used, and many facilities that specialize in such procedures have temporarily closed or reduced operating hours. In addition, broad economic factors resulting from the pandemic, including increased unemployment rates and reduced consumer spending, are affecting the Company’s patients and partners. These circumstances have negatively affected the Company’s net sales, particularly during the period from March 2020 through May 2020, when surgery center closures were most pronounced, though these effects remain ongoing. The Company remains focused on protecting the health and wellbeing of its employees, partners, patients, and the communities in which it operates while assuring the continuity of its business operations. The Company's condensed consolidated financial statements reflect estimates and assumptions made by management that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and reported amounts of revenue and expenses during the reporting periods presented. At this time, the future trajectory of the COVID-19 pandemic remains very uncertain, both in the U.S. and in other markets. Within the U.S., for example, new infection counts have significantly decreased in some regions, while other regions have seen increases in recent weeks. The exact reasons for varying case trajectories remains unclear, including the level of infection rates in different states and geographic areas. As a result, it is not yet clear whether the future trajectory of the pandemic is likely to include one or more future waves of cases, or whether case counts may slowly decline from this point forward. In addition, progress continues to be made on therapeutic treatments and vaccine candidates, though the efficacy and timing of various treatments and vaccines is uncertain. Given these various uncertainties, it is unclear the extent to which lingering slowdowns in elective procedures will affect the Company’s business during the second half of 2020 and beyond. The expected effects of COVID-19 on the Company’s business will depend on various factors including (i) the comfort level of patients in returning to clinics and hospitals, (ii) the extent to which localized elective surgery shutdowns occur, (iii) the unemployment rate’s effect on potential patients lacking medical insurance coverage, and (iv) general hospital capacity constraints occurring because of the need to treat high volumes of COVID-19 patients. During the second quarter of 2020, the Company focused on making its facilities safe given updated COVID-19 public health guidelines, and management believes the employee workforce has adapted to the new environment. In particular, the Company has been able to continue its manufacturing activities to keep pace with customer orders. However, given the potential for further shelter in place orders in the Company’s largest manufacturing and operational centers (particularly, Lewisville, Texas and Verona, Italy), there remains a risk that a significant localized surge in the virus could cause disruption to manufacturing, distribution, administrative and other business operations (including downtime at manufacturing facilities and the interruption of the production of the Company’s products). In addition, while the Company has not seen such effects to date, risk remains that COVID-19 could have material negative effects on contractual counterparties, leading to supply chain disruptions or counterparty payment defaults and bankruptcies (including bankruptcies to hospital systems that significantly rely on revenue from elective surgeries). The Company’s results of operations and liquidity have been materially impacted by the decrease in elective surgical procedures and could be further impacted by delays in payments from customers, supply chain interruptions, the potential of extended "shelter in place" and social distancing orders or advisories, facility closures, or other reasons related to the pandemic. The Company’s results of operations and liquidity may also be affected by the rate at which and timing of when elective procedures resume at hospitals and other facilities, which may occur at a faster or slower pace than current expectations. As of the date of issuance of these condensed consolidated financial statements, the full extent to which COVID-19 could materially affect the Company’s financial condition, liquidity, or results of operations is uncertain. These matters are also described in Part II, Item 1A of this Form 10-Q under heading Risk Factors. As precautionary measures to increase the Company’s cash position and preserve financial flexibility in view of the current uncertainty resulting from the COVID-19 pandemic, the Company (i) completed a borrowing of $100.0 million under its secured revolving credit facility on April 16, 2020 (of this amount, $50.0 million was subsequently repaid in July 2020; see Note 7 for further discussion), (ii) executed temporary salary reductions for U.S. employees and the Board of Directors, which were in effect for two months during the second quarter of 2020, (iii) suspended the Company’s 401(k) match program through the remainder of fiscal year 2020, and (iv) initiated travel restrictions and a significant slow-down in hiring. Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) On March 27, 2020, the President of the United States signed the CARES Act into federal law, which is aimed at providing emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic and generally supporting the U.S. economy. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act had no impact to the Company’s income tax benefit reported within the condensed consolidated statements of operations for the six months ended June 30, 2020. In addition, the CARES Act has provided financial relief to the Company through other various programs, which are each described in further detail below. In April 2020, the Company received $13.9 million in funds from the Centers for Medicare & Medicaid Services (“CMS”) Accelerated and Advance Payment Program. For discussion of the Company’s accounting for these funds, see Note 11. The Company also automatically received, without request, $4.7 million in funds from the U.S. Department of Health and Human Services in April 2020 as part of the Provider Relief Fund. Upon review of the qualifying criteria required to retain the funding, which primarily relate to lost revenues or the incurrence of expenses attributable to COVID-19, it was determined that the Company met the criteria to permanently retain all of the proceeds received. During the quarter ended June 30, 2020, the Company recognized other income of $4.7 million related to this in-substance grant. In addition, as part of the CARES Act, the Company is permitted to defer all employer social security payroll tax payments for the remainder of the 2020 calendar year, such that 50% of the taxes is deferred until December 31, 2021, with the remaining 50% deferred until December 31, 2022. As of June 30, 2020, the Company has deferred $1.3 million associated with this program, all of which is classified within other long-term liabilities.

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