Integra LifeSciences Holdings Corporation — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; filed July 29, 2021. The unaudited results should be read with the 2020 Form 10-K and are not necessarily indicative of full-year results. Integra operates through Codman Specialty Surgical and Tissue Technologies.
Financial performance and liquidity
| Metric | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 |
|---|---|---|---|---|
| Revenue | $390.0 million | $258.7 million | $750.1 million | $613.0 million |
| Gross margin | 61.2% | 59.2% | 60.4% | 61.0% |
| Operating income | $51.9 million | $14.1 million | $82.6 million | $41.2 million |
| Net income | $35.1 million | $(0.4) million | $80.5 million | $8.8 million |
| Diluted EPS | $0.41 | $0.00 | $0.94 | $0.10 |
| Operating cash flow | Not separately provided | Not separately provided | $160.4 million | $53.9 million |
- Second-quarter revenue increased 50.8% year over year; six-month revenue increased 22.4%. Management attributed the improvement primarily to recovery in surgical procedure volumes from COVID-19-affected 2020 levels.
- Second-quarter operating margin was approximately 13.3%, compared with 5.4% in the prior-year quarter. Six-month operating margin was approximately 11.0%, compared with 6.7%.
- Codman Specialty Surgical revenue was $256.8 million in the quarter and $498.1 million year to date. Tissue Technologies revenue was $133.2 million in the quarter and $252.0 million year to date.
- Six-month operating cash flow was $160.4 million. Investing cash flow used $125.5 million, including $303.9 million for the ACell acquisition, partly offset by $191.7 million of proceeds from the Extremity Orthopedics divestiture. Financing cash flow used $100.5 million, primarily for debt repayments.
- Cash and cash equivalents were $397.4 million at June 30, 2021, compared with $470.2 million at December 31, 2020. Working capital was $713.6 million, versus $836.2 million at year-end.
- Total borrowings were approximately $1.54 billion, consisting primarily of $866.3 million under the senior credit facility, $112.5 million under the securitization facility and $575.0 million principal amount of convertible notes. The company was in compliance with debt covenants at quarter-end.
Material changes versus the prior comparable period
- Revenue and profitability rebounded substantially as procedure volumes recovered from the pandemic-related disruption in 2020. International and domestic revenue both increased.
- The January 2021 acquisition of ACell contributed to Tissue Technologies and added preliminary intangible assets of $245.0 million and goodwill of $94.3 million. The transaction included potential contingent consideration of up to $100 million; its estimated fair value was $23.5 million at June 30, 2021.
- Integra completed the sale of its Extremity Orthopedics business on January 4, 2021 for an aggregate purchase price of $240.0 million, subject to working-capital adjustments. The company recognized a $42.2 million gain and received net proceeds of $191.7 million after related payments.
- Gross margin improved in the second quarter because of revenue recovery, favorable U.S. product mix and improved manufacturing utilization. Six-month gross margin declined modestly because of increased amortization and ACell inventory step-up amortization.
- Interest expense declined by $7.4 million for the six months, primarily because adoption of ASU 2020-06 eliminated non-cash convertible-debt discount amortization.
- Effective tax rate was 21.8% for the quarter and 28.2% for the six months, compared with 122.4% and 32.7%, respectively, in the prior-year periods.
Guidance, outlook, risks and unusual items
- Management expected a full-year effective tax rate of approximately 24.8%, subject to changes in geographic and business mix, tax planning and tax settlements.
- Management stated that cash, operating results and available borrowings were expected to be sufficient for operations and capital expenditures for the foreseeable future and forecast sufficient sales and earnings to remain compliant with financial covenants over the next twelve months.
- Management continued to monitor COVID-19 resurgences and variants. Further hospital resource reallocations, procedure cancellations, supply-chain disruption, reduced capital spending or economic recession could adversely affect demand, operations, liquidity and cash flow. Recovery remained uneven across markets, with capital equipment and some international indirect markets earlier in recovery.
- Special items included acquisition, divestiture and integration costs, structural optimization, European medical-device regulation costs and discontinued-product charges. Aggregate special charges were $18.9 million in the quarter and $1.6 million for the six months, after the $42.2 million divestiture gain.
- Integra discontinued manufacturing and distribution of certain BioD morselized amniotic membrane products before the FDA’s May 31, 2021 enforcement-discretion deadline. These products represented less than 1% of six-month consolidated revenue, and no further FDA enforcement notice had been received as of June 30.
- A TEI Biosciences facility remains subject to an FDA Warning Letter concerning quality-system matters. The facility represented approximately 4.5% of six-month revenue. FDA action could restrict manufacturing, marketing or sales, although management reported substantial remediation progress and no current restriction on manufacturing or shipping.
- Remaining contingencies include up to $100 million of ACell milestone payments, approximately $38.5 million of estimated contingent consideration for acquisitions, ordinary-course litigation and product-liability matters, and $0.8 million of uncertain tax benefits excluded from contractual obligations.
Important facts for investors to verify
- Whether surgical procedure volumes and revenue growth remain sustainable as COVID-19 resurgences and variants affect healthcare systems.
- The contribution, integration progress, margins and milestone performance of ACell, including potential contingent consideration payments.
- Final working-capital adjustments and transition-services obligations related to the Extremity Orthopedics divestiture.
- Progress toward resolution of the TEI FDA Warning Letter and the effect of discontinued BioD products on Tissue Technologies revenue.
- Debt maturities and refinancing needs, including the $866.3 million term loan, $112.5 million securitization borrowing and $575.0 million convertible notes due in 2025.
- Execution of manufacturing, restructuring and integration initiatives, as well as the effect of amortization and acquisition-related charges on recurring margins.
- Foreign-exchange, interest-rate and derivative exposures, including approximately $1.8 billion of interest-rate-swap notional amounts and $1.54 billion of borrowings.