Integra LifeSciences Holdings Corporation — Form 10-Q Summary
Business context and reporting period
Integra is a global medical technology company focused on neurosurgery, regenerative technologies, wound care, tissue repair, and extremities orthopedics. Its reportable segments are Specialty Surgical Solutions and Orthopedics and Tissue Technologies. This unaudited Form 10-Q covers the three and six months ended June 30, 2017, compared with the corresponding 2016 periods.
Financial performance and liquidity
| Metric | Three months ended June 30, 2017 | Three months ended June 30, 2016 | Six months ended June 30, 2017 | Six months ended June 30, 2016 |
|---|---|---|---|---|
| Revenue | $282.2 million | $249.3 million | $540.8 million | $486.1 million |
| Gross profit | $183.2 million | $159.7 million | $355.2 million | $311.7 million |
| Gross margin | 64.9% | 64.1% | 65.7% | 64.1% |
| Operating income | $17.0 million | $22.4 million | $26.9 million | $44.5 million |
| Net income | $10.8 million | $12.8 million | $17.2 million | $26.2 million |
| Diluted EPS | $0.14 | $0.16 | $0.22 | $0.34 |
- Revenue increased 13.2% in the second quarter and 11.3% year to date. Orthopedics and Tissue Technologies grew 34.2% in the quarter and 27.1% year to date, while Specialty Surgical Solutions grew 1.1% and 2.2%, respectively.
- Operating margin declined to approximately 6.0% in the quarter from 9.0% in the prior-year quarter, and to approximately 5.0% year to date from 9.1%, primarily because of acquisition and integration costs and higher selling, general and administrative expense.
- Six-month operating cash flow was $57.8 million, compared with $63.1 million in 2016. Capital expenditures were $22.0 million, and cash used for acquisitions was $225.7 million.
- Cash and cash equivalents were $154.6 million at June 30, 2017, including approximately $111.7 million held by non-U.S. subsidiaries.
- Total borrowings under the Senior Credit Facility were approximately $880.0 million, consisting of $500.0 million under Term Loan A and $380.0 million under the revolving facility. Approximately $1.3 billion remained available, including the $700.0 million delayed-draw Term Loan A-1.
- The Company was in compliance with its debt covenants. The first scheduled Term Loan A installment is $25.0 million due March 31, 2018; the facility matures December 7, 2021.
Material changes versus the prior comparable period
- Derma Sciences was acquired in February 2017 for approximately $210.8 million and contributed $23.8 million of second-quarter revenue and $34.3 million of six-month revenue. TGX Medical was acquired in April 2017 for approximately $5.3 million.
- Acquisition-related charges were $23.7 million in the quarter and $44.0 million year to date, compared with $6.0 million and $12.1 million, respectively, in 2016. Total identified special charges were $26.3 million in the quarter and $51.8 million year to date.
- Selling, general and administrative expense increased 21.7% in the quarter and 24.3% year to date, reflecting acquired Derma Sciences costs, commercial investments, and acquisition and integration spending.
- Intangible asset amortization increased to $5.4 million in the quarter and $9.5 million year to date, compared with $3.5 million and $6.9 million in the prior periods.
- The effective tax rate was a benefit of 35.4% in the quarter and 35.2% year to date, versus expense rates of 14.6% and 12.6% in the comparable periods. The change primarily reflected acquisition-related U.S. costs, geographic income mix, and excess tax benefits from stock compensation.
- The Company amended its credit facility in March 2017, increasing total commitments from $1.5 billion to $2.2 billion to support the planned Codman transaction.
Guidance, outlook, commentary, and risks
- Management expects 2017 gross margin of approximately 65.0% to 66.0%, research and development expense of approximately 6.0% of revenue, and selling, general and administrative expense of approximately 51.0% to 52.0% of revenue.
- Management expects a full-year effective tax rate of approximately 8.3%, subject to revision.
- 2017 capital expenditures are expected to be approximately $50 million to $55 million. The Company expects to fund the approximately $1.045 billion Codman Neurosurgery acquisition with the delayed-draw term loan and revolving credit facility.
- The Codman transaction had not closed by June 30, 2017. Antitrust clearances had been obtained in India, the United Kingdom, and Spain, but U.S. HSR clearance and other customary closing conditions remained outstanding. Management expected completion in the fourth quarter of 2017.
- FDA discussions continue regarding BioD morselized amniotic membrane products. The FDA has maintained that certain products may require a biologics license; possible outcomes include marketing restrictions, additional compliance costs, or product recall. Related revenue was less than 1.0% of consolidated revenue.
- TEI remains involved in approximately 50 product-liability cases. Litigation is managed by Boston Scientific under an indemnification arrangement, with insurance and contractual protections subject to stated limits and conditions.
- BioD filed litigation concerning the status of a former executive’s resignation and a potential $26.5 million earnout acceleration. Integra believes the likelihood of loss is remote if the resignation is determined to have been for “Good Reason.”
- Key operating risks include healthcare reimbursement and cost-containment initiatives, regulatory changes, foreign exchange exposure, interest-rate volatility, acquisition integration, competitive pressure on dural sealants, and execution of the Codman transaction.
Most important facts for investors to verify
- Whether and when the Codman Neurosurgery acquisition closed, the final purchase price, financing drawn, and resulting leverage.
- The extent to which reported revenue growth reflects acquisitions versus organic growth, particularly in Orthopedics and Tissue Technologies.
- Progress in reducing acquisition and integration charges and restoring operating margins.
- Cash conversion, working-capital requirements, capital expenditures, and funding capacity after the planned Codman transaction.
- Resolution of FDA matters involving BioD and TEI, including any required licenses, labeling changes, recalls, remediation costs, or litigation payments.
- Changes to the projected 2017 tax rate, gross margin, SG&A ratio, and other guidance assumptions.
- Future goodwill and intangible-asset impairment exposure following the Derma Sciences and other acquisitions.