Integra LifeSciences Tops Q2 Earnings, Revenues, Shares Up

New Jersey-based medical device manufacturer Integra LifeSciences Holdings Corporation (IART) reported adjusted earnings per share (EPS) of 68 cents in the second quarter of 2014, registering a 28.3% improvement year over year. Adjusted results also beat the Zacks Consensus Estimate of 63 cents by 8%. The year-over year increase in earnings came on the back of solid revenue growth and operational improvement.

However, including some one-time items, the company reported net income of $4.8 million or 15 cents per share, a huge improvement from the year-ago net income of $1.5 million or 5 cents per share.

Following the earnings release, the company's share price rose 1% to eventually close at $48.60 yesterday.

Revenue Details

Total revenue during the reported quarter increased 12.6% year over year to $231.4 million, beating the Zacks Consensus Estimate by 1%. Overall revenue growth was in line with the company's expectations, primarily driven by solid sales of DuraSeal and strong performance of Integra Lifesciences' global neurosurgery business. Worldwide neurosurgery business improved 10% on an organic basis. Overall organic revenue improved 4% year over year.

On the basis of product categories, revenues from the company's U.S. neurosurgery business jumped 45% to $60.6 million due to strong performance from DuraSeal and DuraGen. Revenues from the U.S. Extremities business increased 7.5% to $34.4 million, on account of higher sales of skin and wound products and the addition of a few specialized wraps.

Integra LifeSciences' U.S. Spine & Other business achieved revenues of $45.1 million, up 3.8% year over year, whereas the overall U.S. Spine business was relatively flat with a rise in biologics that offset a small decline in spine hardware. Revenues from the international segment rose 9.5% to $51.8 million, with DuraSeal being the largest growth contributor. However, revenues from the U.S. Instruments segment dropped 3.8% from the prior-year quarter to $39.5 million, owing to lower sales in acute care and discontinued products.

Margin Trends

Gross margin improved 220 basis points (bps) to 62.4% in the second quarter, primarily driven by a higher concentration of sales from the company's high margin products such as Skin and Dura repair, improved manufacturing capacity, higher utilization for regenerative products, and lower remediation and recall-related costs compared to the prior year.

While selling, general and administrative expenses increased 11.6% to $115.3 million in the reported quarter, research and development expenses rose 16.4% to $13.7 million. Adjusted operating margin (excluding amortization of intangible asset) improved 240 bps to 6.6%.

Financial Position

Integra Lifesciences exited the second quarter with cash and cash equivalents of $137.2 million, up from $120.6 million as of Dec 31, 2013. In the quarter, net cash flow from operating activities was $16.4 million, a significant improvement from the year-ago figure of $2.9 million.

Free cash flow in the quarter was $7.0 million, compared to year-over-year free cash outflow of $10.7 million.

Outlook

Integra Lifesciences has reaffirmed its full-year expectations for both revenues and adjusted EPS. The company continues to expect full year 2014 revenues in the range of $920–$940 million (representing sales growth of 10–12%) and adjusted EPS in the range of $2.88–$3.06.

However, the company has made some minor modifications in its business segments' growth outlook for full year 2014. The company now expects 35–40% year over year increase in the U.S. Neurosurgery business, up from the previous guidance of 30–35% increase. In the U.S. Extremities, the company now expects sales to increase in the high-to-low single digits, against earlier expectations of low-to-high teen growth. In U.S. instrument segment, Integra Lifesciences now estimates sales to decrease in the low single digits against prior guidance of relatively flat sales.

The company continues to expect full year sales in the U.S. Spine and Other segment to decrease in low-to-mid single digits and increase in low double digits to mid-teens in the international segment. Also, for the full year, the company continues to project reported gross margins in the range of 61–62% and adjusted gross margin in the band of 65–66%.

Our Take

We are impressed with Integra Lifesciences' second-quarter 2014 financial results which fairly beat the Zacks Consensus Estimate on both top and bottom-line fronts. Year-over-year growth on both fronts is also indicative of the company's growth via organic and inorganic means across all its segments, except U.S. Extremities.

Management has particularly expressed its optimism about the pipeline of opportunities present in the company's skin and wound products and expects consistent growth in this significant product franchise.

However, management remains concerned about declining sales in lower extremities hardware, weak orthopedic sales and late tenders in a few large markets that the company has faced lately. We believe the company will be successful in overcoming these difficulties soon, buoyed by its new product launches and an efficient management team.

Zacks Rank

Currently, Integra Lifesciences carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the Med-Biomed/Generic industry include Actelion Ltd. (ALIOF), Curis, Inc. (CRIS) and Cytokinetics, Incorporated (CYTK). All these stocks sport a Zacks Rank #1 (Strong Buy).