Integra LifeSciences Holdings Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; filed April 29, 2021. Results are unaudited and are not necessarily indicative of full-year performance. Integra operates through Codman Specialty Surgical and Tissue Technologies.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $360.1 million | $354.3 million | +1.6% |
| Gross margin | 59.5% | 62.3% | -280 bps |
| Operating income | $30.7 million | $27.1 million | +13.3% |
| Operating margin | 8.5% | 7.6% | +80 bps |
| Net income | $45.4 million | $9.2 million | +394% |
| Diluted EPS | $0.53 | $0.11 | +$0.42 |
| Operating cash flow | $69.1 million | $20.8 million | +$48.3 million |
Revenue mix: Codman Specialty Surgical revenue increased 4.2% to $241.2 million. Tissue Technologies revenue declined 3.3% to $118.8 million, primarily reflecting the sale of Extremity Orthopedics, partially offset by the ACell acquisition and growth in wound reconstruction products. International revenue increased 4.5%, aided by a $5.9 million favorable foreign-exchange impact.
Profitability: Gross margin declined because of increased amortization and inventory step-up amortization related to ACell, product and geographic mix, and higher manufacturing costs associated with COVID-19-related idle capacity. Operating expenses declined 5.3% to $183.5 million, driven by lower selling, general and administrative spending, cost controls, and transaction-related synergies.
Non-operating items: Net income benefited substantially from a $42.9 million gain on the sale of Extremity Orthopedics and $4.9 million of other income, net. Interest expense declined to $12.9 million from $17.8 million, partly because adoption of ASU 2020-06 eliminated non-cash amortization of the convertible-note discount.
Liquidity and balance sheet: Cash and cash equivalents were $409.0 million at March 31, 2021, compared with $470.2 million at December 31, 2020. Working capital was $626.8 million, down from $836.2 million, principally because assets held for sale were converted and cash was used for the ACell acquisition. Total assets were $3.74 billion and stockholders’ equity was $1.53 billion.
Debt: Debt included $1.02 billion under the Senior Credit Facility, $110.9 million under the securitization facility, and $575.0 million principal amount of 0.5% convertible senior notes due 2025. The Company was in compliance with applicable debt covenants. Total contractual obligations were $1.87 billion, including debt, interest, leases, purchase obligations, and other commitments.
Cash flow and capital allocation
- Operating cash flow was $69.1 million.
- Investing cash flow was a use of $117.6 million, including $302.6 million paid for ACell and $191.7 million of net proceeds from the Extremity Orthopedics sale.
- Capital expenditures were $6.7 million, compared with $16.5 million in Q1 2020.
- Financing cash flow was a use of $3.0 million, compared with a source of $162.0 million in Q1 2020, when the Company issued convertible notes and completed other financing transactions.
- The Company had $225.0 million remaining under its share repurchase authorization; no material Q1 repurchases were reported.
Material changes versus the prior comparable period
- Revenue increased modestly, with stronger Codman Specialty Surgical performance and foreign-exchange benefits offsetting the Extremity Orthopedics divestiture.
- Net income increased sharply, primarily because of the $42.9 million divestiture gain and lower interest and operating expenses. The improvement is not fully representative of recurring earnings.
- Gross margin contracted 280 basis points despite higher revenue.
- Operating cash flow improved by $48.3 million, while cash declined because acquisition spending exceeded divestiture proceeds and operating cash generation.
- The Company acquired ACell Inc. on January 20, 2021 for $305.4 million, plus contingent consideration of up to $100 million. The preliminary fair value of contingent consideration was $23.9 million.
- The Company completed the sale of its Extremity Orthopedics business on January 4, 2021 for $240.0 million, subject to working-capital adjustments, and paid $41.5 million to terminate a related licensing agreement.
- Adoption of ASU 2020-06 increased the carrying value of the convertible notes to $575.0 million and reduced additional paid-in capital by $63.3 million through a cumulative-effect adjustment.
Outlook, risks, contingencies, and unusual items
Management stated that surgical volumes continued to recover during Q1 2021 but remained affected by COVID-19 resurgences and lower procedure volumes. Further outbreaks, delayed or canceled procedures, reduced hospital capital spending, supply-chain disruption, facility closures, and economic recession could adversely affect revenue, liquidity, and covenant compliance. Management forecast that sales and earnings would be sufficient to maintain compliance with debt covenants over the following twelve months.
Management expects continued integration, restructuring, manufacturing-transfer, and cost-saving activities. Future results may include additional acquisition, divestiture, integration, restructuring, product-discontinuation, impairment, or accelerated-amortization charges.
- FDA regulatory uncertainty remains regarding morselized amniotic membrane products. FDA enforcement discretion was scheduled to extend through May 31, 2021; Q1 revenue from these products was less than 1% of consolidated revenue.
- A TEI Biosciences manufacturing facility remains subject to an FDA Warning Letter concerning quality-system issues. Products manufactured there represented approximately 4.5% of Q1 consolidated revenue.
- ACell contingent consideration of up to $100 million depends on future revenue-based milestones in 2022, 2023, and 2025. Total contingent consideration liabilities had an estimated fair value of $39.6 million at March 31, 2021.
- LIBOR transition could affect the Company’s variable-rate debt and interest-rate swaps. Remaining U.S. dollar LIBOR settings were scheduled to cease by June 30, 2023.
- Operating results remain exposed to foreign-currency movements, interest rates, healthcare reimbursement, regulatory actions, product liability claims, and legal contingencies.
Investor verification points
- Separate recurring operating performance from the $42.9 million divestiture gain and other favorable non-operating effects.
- Assess whether gross-margin pressure from ACell purchase accounting, product mix, international sales, and manufacturing underutilization persists.
- Review ACell integration progress, preliminary purchase-price accounting, intangible-asset assumptions, and potential milestone payments.
- Monitor COVID-19 effects on surgical volumes, hospital spending, supply chains, and the Company’s debt-covenant headroom.
- Track FDA developments involving the amniotic membrane products and the TEI Boston facility.
- Verify refinancing, LIBOR-transition, interest-rate, foreign-exchange, and scheduled debt-repayment risks, including the $575.0 million convertible notes due in 2025.