Orthofix’s CEO of 1-3/4 years has left the building. Robert S. Vaters tendered his resignation last week and made official what had been quietly rumored over the past few weeks and, in the inimitable language of corporate America, left to “pursue other interests.”
Former California surfer dude Brad Mason, who’d arrived at Orthofix in 2003 as part of the $150 million purchase of Breg Corporation and had been promoted twice—first to head of Spine and then to assume the duties of Group President of the Americas—but then “retired” at the comparatively young age of 58, has returned to take the top job. And, we think, this time to stay.
The probability that Orthofix’s board of directors would consider a new CEO materialized when Vaters announced results for the final quarter of 2012. Orthopedic 4Q12 sales of $36.4 million were down 18% from prior year levels. Spine sales of $75.7 million were down 4%. The main offset was profit margins, which rose at the gross income level to 83.5% of sales, an all-time high.
Wall Street reacted swiftly to the ugly sales report and extracted $50 million or 7% from Orthofix’s value.
At the company, Vater’s reputation for ruffling feathers did not leave him with sufficient goodwill to ride out the bad quarter.
Average Orthofix CEO Tenure
Orthofix’s market value on Vater’s last day was about $700 million. Sales this year are expected to be $471 million. Nineteen months ago, when Vaters assumed the CEO position, Wall Street was also pegging OFIX’s value at about $700 million and sales were coming in at a $570 million annual run rate. During Vater’s time in the top spot there was no real change in Wall Street’s valuation and sales had fallen by about 18% primarily because Vater divested certain operations including Breg—which was originally founded by Brad Mason.
In fact, shareholder’s perception of Orthofix’s value has not changed much since the time when long time CEO Federico retired in 2006. Orthofix’s stock price was $44 when Charles Federico left the CEO chair. Today it is at $37.
Since Federico left, the average tenure of an Orthofix CEO has been 3.5 years. Alan Milinazzo, who succeeded Federico, was on the job 5 years. Vaters less than 2 years.
Federico held Orthofix’s top spot from 1995 to 2006 and during his watch grew Orthofix from essentially a European manufacturer of a grab bag of Italian made medical products like external fixators, back braces and so forth to a thousand employee company operating in 180 countries.
In Federico’s first year, Orthofix’s sales were $52 million. By the time he retired, in 2006, sales had grown more than 504% to over $300 million and earnings were pushing $40 million. Shareholder’s equity when Federico left was $710 million—a far cry from the $59 million he inherited in 1996.
Federico and his team created the modern Orthofix. By the time he retired in 2006, Orthofix was well on its way to becoming one of the largest integrated orthopedic companies in the world having bought Blackstone Medical for $330 million and creating a particularly impressive biologics and new implant platform which took the company increasingly into the OR.
But the stock market wasn’t valuing Orthofix in a way that was commensurate with other orthopedic companies. In 2006, the average orthopedic company was trading at about 21x price to earnings (P/E). Orthofix was at 19 P/E.
Federico’s time as CEO was about 30% longer than the average American public company CEO who is not a founder. And that stability at the top helped Orthofix establish an enduring reputation for quality, innovation and consistency with its customers and employees.
But, perhaps, CEO turnover is a rising trend in all of American business.
According to the 2012 edition of the CEO Succession Practices (the most recent version) the average tenure of an American CEO is 8.4 years and has been declining for a decade.
“The stronger independence and accountability of directors registered during the past decade and increased scrutiny from shareholders and activists might motivate corporate boards to be more inclined to dismiss a CEO who is performing below expectations, ” says Matteo Tonello, Managing Director of Corporate Leadership at the Conference Board. “In addition, the pressure of serving as the CEO of a large company in an increasingly competitive global marketplace could contribute to voluntarily shorter tenures, suggesting that CEOs are leaving on their own terms after fewer years in the position.”
CEO Succession Rate
In 2011, 55 CEOs in the S&P 500 left their post. The rate of CEO succession was 10.8%, consistent with the average number of annual succession announcements from 2000 through 2010.
The probability that a CEO will resign or be replaced jumps significantly following poor performance. In the 2000–2010 period, the succession rate of CEOs of poorly performing companies averaged 14.0% (ranging from a high of 21.2% to a low of 10.0%). The succession rate of CEOs of better performing companies was 10.3% over the same period.
The probability of CEO succession is also higher for CEOs who are at least 64 years of age. The succession rate of younger CEOs ranged from 8.3% to 13.4% (on average, 10.1% over the period).
The rate of CEO dismissals for the 2000–2005 period at 28.6% is similar to the rate for the 2006–2011 period, at 27.9%.
The Conference Board also noted that 81% of the successions were mangers groomed inside the company. Only 19.2% of successions in 2011 involved an outsider CEO appointment.
Brad Mason
While Mason was technically an “outsider” when he was tapped to take over the CEO position, in a more practical sense, he was an insider having spent seven years at Orthofix managing first Breg, then Spine and finally all of Orthofix Americas. He knows this company well.
Mason came to Orthofix the first time as part of the 2003 Breg purchase. He’d founded Breg in 1989 along with five other principal shareholders and through aggressive product innovation (Mason personally holds more than 38 patents) and salesmanship, built Breg into one of the leading bracing companies in the world—behind the #1 bracing company, DJ Orthopedics.
Ironically enough, Mason was also a co-founder of DJ Orthopedics. The story, as we’ve heard it, is that Mason was a California surfer who started cutting up neoprene wet suits to make knee braces. He then hooked up with former Philadelphia Eagles offensive line captain Mark Nordquist and lawyer Ken Reed to start a bracing company in a small town just north of San Diego, Carlsbad. The company, called DonJoy, was named after the founder’s wives—Donna and Joy.
Mason was DonJoy’s first head of Manufacturing Operations and Product Design where his efforts resulted in hundreds of new and innovative products.
In 1987 London-based Smith & Nephew bought DonJoy. Mason, who was DonJoy’s executive vice president left shortly thereafter to start a new bracing company—Breg.
All told, Brad Mason has about 35 years of experience in the medical device industry. And at 59 years of age, he still has a precious few good years left.
Of course, given Orthofix’s average CEO tenure, he’d only be 63 if the board were to decide to replace him.
We don’t think that will happen. Mason appears to have all the hallmarks of a long termer at Orthofix. His management style is very well regarded among Orthofix’s rank and file. One person who worked with Mason wrote this assessment: “Brad has always had an uncanny ability to place right team members in the right place, support them and then let them do their jobs. He hires people whose jobs will grow into their abilities rather than people whose jobs will outgrow them.”
Orthofix Under Mason
The California surfer is now in charge of a company founded in 1980 in Verona, Italy.
At this stage, Orthofix may well be in need of some laid back surfer culture.
In Mason, Orthofix knows what it is getting. Yes, a highly appealing and people friendly style, but also 35 years of exceptional experience building companies and organizations. Mason knows how to build.
He will, we expect, boost morale at Orthofix. The outgoing CEO, Vater, leaves Mason with a stellar balance sheet, an income statement in need of attention and an organization in need of re-investment and support.
Mason will bring all of that, for sure. We only hope he also brings the surfboard.
