Integra LifeSciences Holdings Corp. (IART) reported adjusted earnings per share (EPS) of 60 cents in the second quarter of 2013, down 18.9% from the year-ago quarter. However, it remained 9.1% ahead of the Zacks Consensus Estimate of 55 cents.
Including some one-time items, the company reported net income of $3.4 million or 12 cents per share, lower than net income of $8.5 million or 30 cents a share recorded in the second quarter of 2012. Decline in the earnings is attributable to product recall andrelated product supply shortages.
Revenue Details
Total revenue during the reported quarter declined 2.2% year over year (flat at constant exchange rates or CER) to $205.5 million. Revenues were lower than the Zacks Consensus Estimate of $207 million.
Revenues remained sluggish mainly due to the product recall related to supply shortage. Sales of DuraGen and some selected products in the company’s Private Label business were adversely affected due to this recall.The company expects the same to continue for the rest of the year. Owing to this recall, the company is estimated to have lost the opportunity to generate sales of $7 million to $10 million in 2013.
Segment Revenues
Revenues from U.S. Neurosurgery declined 1.0% year over year to $41.8 million. Within this segment, growth in NeuroCritical Care, Cranial Stabilization and Stereotaxy were offset by the product recall, which affected the dural repair sales. Sales of tissue ablation were also disappointing due to strong year-over-year comparison. Revenues from neuro capital products were flat year over year.
U.S. Instruments revenues decreased 3% year over year to $39.9 million. Low sales in Xenon lighting products combined with discontinuation of low-margin productsled to the decline in revenues. An increase in LED surgical headlamps sales to hospitals partially offset the lower sales.
International segment revenues were up 3% year over year to $47.3 million. Product recalls and shortages during the quarter were offset by growth in Spine and Neurosurgery franchises outside the U.S.
Despite strong year-over-year comparison, revenues in the U.S. Extremities segment increased 5% year over year to $33.5 million as the product recall did not affect this segment. Robust demand in regenerative medicine, and foot and ankle business drove the segment’s revenues.
Revenues from U.S. Spine & Other decreased 12% year over year to $42.9 million. Within this segment, Orthobiologics sales were flat, while sales in the Private Label business decreased due to the product recall.
Margins
Integra witnessed a 7.1% year-over-year decrease in gross profit to $205.5 million. Accordingly, gross margin during the quarter dipped 317 basis points (bps) to 59.8%. Increased spending on quality systems in the plants, unfavorable product mix led by supply shortages of high-margin products and the Medical Device Excise Tax were the primary causes for the contraction in gross margin.
During the quarter, research and development expenses declined 10.1% to $11.8 million, while selling, general and administrative expenses increased 3.7% year over year to $99.6 million. For the quarter, the company incurred a 51.2% decline in operating profit to $11.1 million leading to a contraction of 541 bps in operating margin.
Balance Sheet
Integra exited the second quarter of 2013 with $98.6 million in cash and cash equivalents compared with $96.9 million at the end of 2012. The company generated $3.0 million in cash flow from operations and incurred $14 million of capital expenditure in the quarter.
Outlook
Integra reiterated its fiscal 2013 guidance. The company expects to generate revenues between $840 million and $852 million. Adjusted EPS were guided in the range of $2.40–$2.70. The current Zacks Consensus Estimate for revenues and EPS of $842 million and $2.54, respectively, are in line with the company’s guided range.
Our Take
The product recall and related product shortages during the quarter adversely affected all segments. However, we believe that the company’s initiatives in the future will likely be successful and accelerate sales going forward.
In the reported quarter, the company received the 510(k) clearance for its Titan Reverse Shoulder System and expects the limited market release in the U.S. in another few days. The company expects the global commercial launch of this product in the first quarter of 2014. Moreover, in extremities, Integra made a major development with the publication of its pilot study on the use of Integra Skin in diabetic foot ulcers in the journal of the American Podiatric Medical Association. According to Integra, this should help strengthen its foothold in the growing diabetic foot ulcer market. The company noted that the completion of enrollment of its pivotal DFU clinical trial is expected within the first quarter of 2014.
However, tighter capital spending and pricing pressure continue to challenge the market. Moreover, the company believes that the medical device excise tax and new depreciation on its ERP system will temper its 2013 margin growth. Currently, Integra retains a Zacks Rank #3 (Hold).
While we prefer to remain on the sidelines on Integra, other medical device stocks worth a look are Affymetrix Inc. (AFFX), Hanger, Inc. (HGR) and Align Technology Inc. (ALGN). All these stocks carry a Zacks Rank #1 (Strong Buy).
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