Integra LifeSciences Holdings Corporation — Q3 2021 Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2021; filed November 2, 2021. Integra operates through Codman Specialty Surgical and Tissue Technologies, serving neurosurgery, surgical instruments, wound reconstruction, regenerative medicine and related markets.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Revenue | $386.9 million | $370.2 million | $1,136.9 million | $983.2 million |
| Operating income | $56.4 million | $57.5 million | $139.0 million | $98.7 million |
| Net income | $43.2 million | $32.3 million | $123.7 million | $41.1 million |
| Diluted EPS | $0.51 | $0.38 | $1.45 | $0.48 |
| Gross margin | 62.7% | 63.6% | 61.2% | 62.0% |
- Q3 revenue increased 4.5%; nine-month revenue increased 15.6%. Codman Specialty Surgical revenue rose 7.2% in Q3 and 17.8% for nine months. Tissue Technologies revenue declined 0.4% in Q3 but increased 11.6% for nine months, partly reflecting the ACell acquisition and the divestiture of Extremity Orthopedics.
- Q3 operating margin was approximately 14.6%, versus 15.5% in the prior-year quarter. Nine-month operating margin was approximately 12.2%, versus 10.0%.
- Net margin was approximately 11.2% in Q3 and 10.9% for nine months, compared with 8.7% and 4.2%, respectively, in the comparable periods.
- Cash provided by operating activities was $243.2 million for the nine months, versus $123.6 million in 2020. Capital expenditures were $20.6 million.
- Cash and cash equivalents were $470.2 million at September 30, 2021, essentially unchanged from December 31, 2020. Working capital was $770.9 million, down from $836.2 million.
- Reported borrowings were approximately $1.54 billion, consisting primarily of $868.7 million under the Senior Credit Facility, $111.7 million under the securitization facility and $563.7 million of convertible securities. The company also had $108.4 million of operating lease liabilities.
- The company was in compliance with its debt covenants at September 30, 2021. The Senior Credit Facility matures in February 2025, the securitization facility was extended to May 2024, and the $575.0 million convertible notes mature in August 2025.
Material changes versus the prior comparable period
- Revenue growth reflected recovering surgical procedure volumes after COVID-19 disruptions, although recovery remained uneven.
- Interest expense declined by $8.6 million in Q3 and $16.0 million for nine months, primarily because adoption of ASU 2020-06 eliminated non-cash convertible debt discount amortization and prior-period refinancing costs.
- Nine-month results included a $42.0 million gain on the sale of the Extremity Orthopedics business. The company received approximately $240.0 million of consideration, paid $41.5 million to terminate a related licensing arrangement and received approximately $190.5 million of net cash proceeds.
- On January 20, 2021, Integra acquired ACell for approximately $306.9 million, plus contingent consideration of up to $100.0 million. The acquisition added approximately $245.0 million of identifiable intangible assets and $94.3 million of goodwill; estimated ACell contingent consideration was $23.0 million at September 30, 2021.
- Gross margin declined because of higher amortization associated with technology-based intangible assets and inventory step-up amortization related to ACell. Nine-month operating expense as a percentage of revenue improved to 48.9% from 52.0%.
- Special charges totaled $16.4 million in Q3 and $18.1 million for nine months, including structural optimization, European Union medical-device regulation, acquisition and integration, and discontinued-product charges.
Outlook, commentary and risks
- Management expected sales and earnings for the following twelve months to be sufficient to maintain compliance with financial covenants and stated that cash, available borrowings and operating cash flow were sufficient to fund operations and capital expenditures for the foreseeable future.
- Management forecast a full-year effective tax rate of approximately 24.1%.
- COVID-19 resurgences, the Delta variant, hospital staffing shortages and delayed or canceled procedures continued to affect demand. Further outbreaks, reduced hospital capital spending, supply-chain disruption, labor constraints, freight costs and material inflation could adversely affect revenue, margins, liquidity and cash flow.
- Integra discontinued manufacturing and distribution of certain BioD morselized amniotic membrane products before May 31, 2021 following FDA regulatory guidance. These products represented less than 1.0% of nine-month consolidated revenue.
- A 2019 FDA Warning Letter concerning quality-system matters at the TEI Boston facility remained unresolved. Products manufactured there represented approximately 4.6% of nine-month consolidated revenue. Additional regulatory action could restrict manufacturing, marketing or sales.
- The company had approximately $37.8 million of acquisition-related contingent consideration at fair value, excluded from the contractual-obligations table because timing and amount are uncertain. It also faces ordinary-course litigation, product-liability claims, tax contingencies and regulatory risks.
- Expected remaining amortization was approximately $20.2 million for the remainder of 2021 and $78.8 million in 2022. No quantitative goodwill or indefinite-lived intangible impairment test was required after the third-quarter qualitative assessment.
Investor verification items
- Verify the sustainability of procedure-volume recovery and the effect of COVID-19-related hospital staffing and supply-chain constraints.
- Separate recurring operating performance from the $42.0 million divestiture gain, acquisition accounting effects and other special charges.
- Assess ACell integration, revenue milestones and potential contingent consideration payments of up to $100.0 million.
- Review debt maturities, leverage-covenant headroom, variable-rate exposure and the August 2025 convertible-note maturity.
- Monitor the unresolved TEI FDA Warning Letter and the commercial impact of discontinued BioD products.
- Reconcile reported revenue growth for Tissue Technologies after considering the ACell acquisition and Extremity Orthopedics divestiture.