Medical device manufacturer Integra LifeSciences Holdings Corporation (IART) reported adjusted earnings per share (EPS) of 76 cents in the third quarter of 2014, registering a 15.2% improvement year over year. Adjusted results also beat the Zacks Consensus Estimate of 74 cents by 2.7%. Favorable revenue mix, led by Integra’s U.S. Neurosurgery and U.S. Extremities segments, aided the company’s better-than-expected bottom-line results in the reported quarter.
However, including some one-time items, the company reported net income of $9.8 million or 30 cents per share, a massive improvement from the year-ago net loss of $30.3 million or $1.09 loss per share.
During its third quarter earnings release, Integra LifeSciences announced its plan to spin off its spine and orthobiologics business to operate as a standalone public company to be named SeaSpine. Once the spin-off is complete, Integra will operate as two global business areas providing specialty surgical solutions and orthopedics and tissue technologies to surgeons.
Revenue Details
Total revenue during the reported quarter increased 7.7% year over year to $229.7 million, but missed the Zacks Consensus Estimate by 1.4%. Overall revenue growth was in line with the company's expectations, excluding unfavorable foreign currency translation owing to the weakening of the euro versus the dollar. The year-over-year improvement in third quarter sales growth was primarily driven by strong growth in the company’s global neurosurgery business. Double-digit growth in Integra’s global skin and wound franchise also benefited the top line in the quarter. Worldwide neurosurgery business improved 27%, or 2% excluding DuraSeal.
On the basis of product categories, revenues from the company's U.S. neurosurgery business climbed 38.1% to $62.3 million and rose 7% on an organic basis owing to strong demand for tissue ablation and neurocritical care capital equipment, each of which increased in double digits on a year-over-year basis. Revenues from the U.S. Extremities business increased 15.4% to $36.7 million, driven by higher sales in each major product category. Consistent growth in skin and wound product sales primarily contributed to this business’ sales growth.
Integra LifeSciences' U.S. Spine & Other business’ revenues declined 11.4% year over year to $42 million, largely driven by a decrease of 26% in private label, which was consistent with management’s expectations as the prior year included a strong recovery from the recall. Overall, U.S Spine business declined 3% year over year, with mid-single digit decrease in Spine hardware which neutralized a low single-digit increase in orthobiologics. Also, revenues from the U.S. Instruments segment dropped 7.3% from the prior-year quarter to $39.9 million, owing to lower sales in acute care and alternate sight channels.
Revenues from the international segment rose 6.3% to $48.8 million, with a strong upside in demand for DuraSeal which served as the largest contributor to growth.
Margin Trends
Adjusted gross margin improved 270 basis points (bps) to 67% in the third quarter. This improvement was primarily driven by a shift in product mix, specifically a higher concentration of sales coming from high margin products such as skin and Dural repair.
While selling, general and administrative expenses increased 10.1% to $115.3 million in the quarter, research and development expenses inched up 0.6% to $13.1 million. Adjusted operating margin (excluding amortization of intangible asset and goodwill impairment charge) improved 30 bps to 9%.
Financial Position
Integra Lifesciences exited the third quarter with cash and cash equivalents of $140.2 million, up from $120.6 million as of Dec 31, 2013. In the quarter, net cash flow from operating activities was $31.1 million, an improvement from the year-ago figure of $30.8 million.
Free cash flow in the quarter was $22.3 million compared to the year-ago equivalent of $17.6 million.
Outlook
Integra Lifesciences has revised its full-year expectation for both revenues and adjusted EPS. The company now expects full year 2014 revenues to come in at the lower end of its previously announced range of $920–$940 million (representing sales growth of 10–12%). The Zacks Consensus Estimate for revenues in 2014 is pegged at $929 million.
The company also expects its 2014 adjusted EPS to lie at the lower end of the earlier guided band of $2.88–$3.06. The Zacks Consensus Estimate for adjusted EPS is pegged at $2.96.
The company has also made some minor modifications in the growth outlook for its business segments for full year 2014. The company now expects the U.S. Neurosurgery business to grow at the higher end of its previously announced range of 35–40% .In the U.S. Extremities, the company continues to expect sales to increase in high-single digits to low-double digits. In the U.S. instrument segment, Integra Lifesciences now estimates sales to decrease in low-to-mid single digits, slightly lesser than the prior guidance.
The company continues to expect full year sales in the U.S. Spine and Other segment to decrease in mid single digits, which is at the lower end of the prior guidance range. In the international segment, the company now expects sales to increase in high single digits to low double digits, a decline from the previous guidance of low double digits to mid-teens. Also, for the full year, the company now expects gross margin at around 62% and adjusted gross margin at round 66%.
Our Take
Integra Lifesciences reported mixed third-quarter 2014 financial results which beat the Zacks Consensus Estimate on the earnings front but failed to do the same with respect to the top line. While elaborating on individual business’ performance, management has particularly mentioned the notable show in the U.S. Extremities business. The expansion of sales force and the addition of new skin specialists, coupled with the launch of Integra’s new thin skin product line aided the double-digit growth in this segment. Further, management expects to make incremental investments in sales capabilities in this area in 2015.
However, management remains concerned about declining sales in the U.S instrument segment. Since hospital spending on new instrument is still cautious, management believes the market will remain soft through the remainder of 2014. We believe the company will be successful in overcoming these difficulties soon, buoyed by 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 are Affymetrix Inc. (AFFX), Agenus Inc. (AGEN) and AMAG Pharmaceuticals, Inc. (AMAG). All these stocks sport a Zacks Rank #1 (Strong Buy).
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