Integra LifeSciences Holdings Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2019. The filing was submitted July 25, 2019. Integra operates through Codman Specialty Surgical and Orthopedics and Tissue Technologies, selling neurosurgical, surgical instrument, orthopedic, wound reconstruction, regenerative tissue and private-label products.
Financial performance
| Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 |
|---|---|---|---|---|
| Revenue | $383.6 million | $366.2 million | $743.3 million | $723.3 million |
| Gross margin | 62.6% | 62.4% | 63.3% | 61.0% |
| Operating income | $46.0 million | $27.6 million | $78.3 million | $53.2 million |
| Operating margin | 12.0% | 7.5% | 10.5% | 7.4% |
| Net income | $29.7 million | $11.4 million | $62.5 million | $22.4 million |
| Diluted earnings per share | $0.34 | $0.14 | $0.72 | $0.27 |
| Operating cash flow | Not separately provided | Not separately provided | $78.0 million | $77.7 million |
Second-quarter revenue increased 4.8% year over year; six-month revenue increased 2.8%. Second-quarter net income rose 161%, while six-month net income rose 179%. Management attributed the earnings improvement to higher sales, better margins, lower interest expense and the Switzerland tax benefit.
Revenue and margin drivers
- Codman Specialty Surgical revenue was $249.3 million in the second quarter and $483.8 million for the first six months, up 4.1% and 1.7%, respectively.
- Orthopedics and Tissue Technologies revenue was $134.4 million in the second quarter and $259.5 million for the first six months, up 6.1% and 4.8%, respectively.
- Growth was led by Neuro Monitoring, Programmable Valves, core tissue products and selected private-label products. Foreign exchange reduced second-quarter revenue by approximately $4.0 million and six-month revenue by approximately $9.3 million.
- Gross margin benefited from product mix, manufacturing yields and the absence of certain 2018 Codman acquisition-related costs. Operating expenses as a percentage of revenue declined to 50.6% from 54.8% in the second quarter and to 52.8% from 53.7% for the six-month period.
Cash flow, liquidity and debt
- Cash and cash equivalents were $176.1 million at June 30, 2019, compared with $138.8 million at December 31, 2018. Approximately $155.2 million was held by non-U.S. subsidiaries and intended to remain available outside the United States.
- Six-month operating cash flow was $78.0 million. Capital expenditures were $33.8 million, primarily for the Mansfield and Princeton facilities and commercial expansion.
- Net cash used in financing activities was $7.8 million, reflecting $101.2 million of borrowings and $105.0 million of debt repayments, plus $6.2 million of taxes paid on net equity settlements.
- Debt outstanding included $1.26 billion under the Senior Credit Facility and $102.4 million under the accounts receivable securitization facility. Total borrowings were approximately $1.35 billion, excluding lease liabilities.
- The Senior Credit Facility matures May 3, 2023. The first $22.5 million term-loan installment was due September 30, 2019; $45.0 million was classified as current at June 30, 2019.
- The company was in compliance with the Senior Credit Facility and securitization facility covenants. Management stated that cash and available borrowings were sufficient to fund operations and capital expenditures for the foreseeable future.
- The company had $225.0 million remaining under its share-repurchase authorization, but made no repurchases through June 30, 2019. It has paid no cash dividends since formation.
Material changes and unusual items
- In January 2019, Integra paid $1.7 million for an exclusive worldwide license for a short-stem and stemless shoulder system. A future acquisition option could require payment of up to $80.0 million if specified sales thresholds are achieved.
- Integra recorded a $5.8 million impairment charge in the second quarter for a customer-relationship intangible asset associated with TEI, following an FDA-related market removal involving a private-label customer.
- Special charges totaled $25.1 million in the second quarter and $53.1 million for the first six months, including acquisition and integration costs, structural optimization, impairment, discontinued product lines, litigation matters and European medical-device regulation costs.
- The company adopted the new lease standard on January 1, 2019, recognizing operating lease right-of-use assets and liabilities. At June 30, operating lease liabilities totaled $107.6 million.
- The company recorded a $10.8 million tax benefit from a Swiss federal tax holiday finalized in the first quarter. Management expected a full-year effective tax rate of approximately 10.0%, subject to changes in earnings mix, tax matters and other factors.
Guidance, outlook and risks
- Management did not provide revenue or earnings guidance in the filing. It stated that full-year effective tax rate expectations were approximately 10.0%.
- Strategic priorities include completing Codman integration, developing new products, investing in commercial channels, optimizing the product portfolio and improving customer experience. The company reported 10 product launches during the first half of 2019.
- The FDA issued a Warning Letter concerning quality-system issues at the Boston manufacturing facility. The letter did not restrict manufacturing or shipments and did not require a recall, but foreign-government certificates and certain Class III premarket approvals may be restricted until remediation is satisfactory. Products manufactured at the facility represented approximately 4.0% of six-month consolidated revenue.
- The FDA continues to question whether certain BioD morselized amniotic membrane products qualify for regulation solely as human cells, tissues and cellular or tissue-based products. Those products represented less than 1.0% of six-month consolidated revenue, but further enforcement could adversely affect sales and results.
- A BioD-related legal dispute could potentially result in acceleration of a $26.5 million earnout obligation; the company believes acceleration should not occur if the former executive’s termination was for “Good Reason.”
- Interest-rate and foreign-exchange risks remain material. At June 30, $1.3 billion of interest-rate swaps were outstanding; a 100-basis-point change in rates was estimated to affect annual interest expense on unhedged debt by approximately $4.5 million.
Important facts for investors to verify
- Whether revenue growth and improved gross margins persist after excluding favorable comparisons with 2018 acquisition-related costs and other special items.
- The timing and cost of remediation at the Boston facility and whether the FDA takes additional action.
- The effect of foreign exchange, international demand and discontinued or divested products on future revenue.
- Progress on debt reduction, the September 2019 term-loan payment and compliance with leverage covenants that tighten over time.
- The sustainability of the approximately 10.0% expected full-year tax rate, including the Swiss tax holiday and share-based compensation benefits.
- The outcome of the BioD litigation and any potential $26.5 million earnout acceleration.
- Future impairment risk for the company’s $1.04 billion of intangible assets and $926.7 million of goodwill.