Integra LifeSciences Holdings Corporation — Fiscal 2021 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2021; filed February 24, 2022. The filing is an annual report, not a standalone fourth-quarter report. Integra is a global medical technology company operating through Codman Specialty Surgical (CSS) and Tissue Technologies (TT), with products sold in more than 130 countries.
Business Context
- CSS represents approximately two-thirds of revenue and includes neurosurgery, neurocritical care, instrumentation and surgical technologies.
- TT represents approximately one-third of revenue and includes complex wound management, surgical reconstruction and peripheral nerve repair.
- Integra acquired ACell in January 2021 and sold its Extremity Orthopedics business to Smith & Nephew in January 2021.
Key Financial Metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Revenue | $1,542.4 million | $1,371.9 million | +12.4% |
| Gross profit | $944.6 million | $851.0 million | +11.0% |
| Gross margin | 61.2% | 62.0% | -80 basis points |
| Operating income | $197.2 million | $151.4 million | +30.3% |
| Net income | $169.1 million | $133.9 million | +26.3% |
| Diluted EPS | $1.98 | $1.57 | +26.1% |
| Operating cash flow | $312.4 million | $203.8 million | +53.3% |
- CSS revenue was $1,025.2 million, up 14.6%; TT revenue was $517.2 million, up 8.4%.
- U.S. revenue was $1,089.5 million, or 70.6% of total revenue. International revenue was $452.9 million, up 13.3%.
- Total operating expenses were $747.4 million, or 48.4% of revenue, compared with 50.9% in 2020. Research and development was 6.0% of revenue and selling, general and administrative expense was 41.3%.
- Income before taxes was $214.7 million. The effective tax rate was 21.2%, compared with a 43.2% tax benefit in 2020, which included a $59.2 million deferred tax benefit from an intra-entity intellectual-property transfer.
Liquidity, Debt and Capital Resources
- Cash and cash equivalents were $513.4 million at December 31, 2021, compared with $470.2 million at year-end 2020. Working capital was $813.7 million.
- Net cash used in investing activities was $161.4 million, including $303.9 million paid for ACell, $190.5 million of net proceeds from the Extremity Orthopedics sale and $48.0 million of capital expenditures.
- Net cash used in financing activities was $98.2 million, principally reflecting $125.5 million of debt repayments.
- Total consolidated external debt was approximately $1.6 billion. The balance sheet included $843.8 million of borrowings under the term loan, $31.3 million under the revolving credit facility, $112.5 million under the securitization facility and $575.0 million principal amount of convertible notes.
- The Senior Credit Facility matures in February 2025, the securitization facility was extended to May 2024, and the convertible notes mature in August 2025.
- Management stated that expected sales and earnings should be sufficient to maintain compliance with financial covenants. The company was in compliance with its debt covenants at December 31, 2021.
- No common-stock repurchases were made under the authorization during 2021. In January 2022, Integra entered into a $125.0 million accelerated share repurchase and received 1.5 million shares at inception.
- Integra has not paid cash dividends since formation and had no material off-balance-sheet financing arrangements.
Material Changes Versus the Prior Comparable Period
- Revenue and operating results improved primarily because surgical procedure volumes recovered from 2020 COVID-19 disruption.
- CSS benefited from recovery across neurosurgery and instruments and from the CereLink intracranial-pressure monitoring launch in the U.S. and Europe.
- TT results included the ACell acquisition and the absence of Extremity Orthopedics revenue following the divestiture. Excluding those transactions, wound reconstruction and private-label sales grew at low double-digit rates.
- Gross margin declined because of higher amortization of technology-based intangible assets and inventory step-up amortization associated with ACell.
- Interest expense declined by $21.2 million, primarily because adoption of ASU 2020-06 eliminated non-cash convertible-debt discount amortization and prior-period refinancing costs.
- Operating results included a $41.8 million gain on the Extremity Orthopedics sale. Total disclosed special charges were $33.4 million in 2021 versus $89.0 million in 2020.
- Adoption of ASU 2020-06 resulted in the convertible notes being presented entirely as a liability and reduced opening additional paid-in capital by $63.3 million.
Guidance, Outlook, Commentary and Unusual Items
- Management expects the underlying markets to remain attractive and is focused on long-term growth through product development, clinical evidence, geographic expansion, commercial-channel investment and strategic acquisitions.
- The company estimated a 2022 worldwide effective tax rate of approximately 18.4%.
- Expected annual amortization expense is approximately $79.1 million in 2022, declining gradually through 2026, with $585.8 million expected thereafter.
- ACell included up to $100 million of contingent consideration based on revenue milestones in 2022, 2023 and 2025; the estimated fair value was $21.8 million at December 31, 2021.
- Integra discontinued manufacturing of certain morselized amniotic membrane products before May 31, 2021 following FDA guidance. Related 2021 revenue was less than 1% of consolidated revenue.
- The TEI Boston facility remained subject to remediation of a 2019 FDA Warning Letter and a November 2021 Form 483. The matters did not restrict manufacturing or shipment at year-end, but additional regulatory action could materially affect the business. Products made at the facility represented approximately 4.7% of 2021 consolidated revenue.
- The company filed a PMA for a SurgiMend indication in post-mastectomy breast reconstruction and hoped to obtain FDA approval in 2023.
- Key risks include continuing COVID-19 effects on procedures and hospital spending, supply-chain and labor disruptions, regulatory and quality-system compliance, reimbursement and pricing pressure, competition, integration of acquisitions, product liability, cybersecurity, foreign-exchange and interest-rate exposure, and leverage.
- Approximately 43.3% of 2021 revenue came from products containing bovine-derived material, creating additional sourcing and regulatory exposure.
Most Important Facts for Investors to Verify
- Whether procedure volumes and hospital staffing normalize sufficiently to sustain revenue recovery.
- The operating contribution, integration progress and milestone exposure associated with ACell.
- Progress and final resolution of the TEI Boston FDA Warning Letter and 2021 Form 483.
- Debt maturities, covenant headroom and the company’s ability to refinance or repay obligations due in 2024 and 2025.
- The effect of gross-margin pressure from ACell-related amortization, inflation, supply constraints and product mix.
- Achievement of regulatory and commercial milestones for CereLink, Aurora Surgiscope, SurgiMend and other pipeline products.
- Potential impairment of goodwill and intangible assets, particularly given the significant acquisition-related balances and sensitivity to projected cash flows and discount rates.
- The final share count and settlement terms of the January 2022 accelerated share repurchase.