Integra LifeSciences(IART) - 2024 Q3 - Quarterly Results

Executive Summary & Highlights Integra LifeSciences reported a Q3 2024 revenue decline and decreased EPS, while making progress on shipping holds and announcing a new CEO, with ongoing efforts to enhance quality and supply chain reliability Third Quarter 2024 Highlights Integra LifeSciences reported a slight decrease in Q3 2024 revenues on a reported basis, with a more significant organic decline. GAAP and adjusted EPS also saw a notable decrease compared to the prior year. The company announced progress on resolving shipping holds and updated its full-year 2024 guidance, alongside a new CEO appointment | Metric | Q3 2024 | Q3 2023 | Change (YoY) | | :----- | :------ | :------ | :----------- | | Revenues (reported) | $380.8 million | $382.4 million | -0.4% | | Revenues (organic) | - | - | -8.6% | | Revenues (organic, excl. Boston) | - | - | -10.3% | | GAAP EPS (diluted) | $(0.14) | $0.24 | - | | Adjusted EPS (diluted) | $0.41 | $0.76 | - | - Shipping holds communicated during the second quarter earnings call are releasing in line with expectations, and Integra Skin production is on pace to meet historical revenue run rates for the fourth quarter[3] | Guidance Metric | Range | | :-------------- | :---- | | Full-year 2024 Revenue | $1.609 billion to $1.619 billion | | Full-year 2024 Adjusted EPS | $2.41 to $2.49 per share | - Mojdeh Poul has been announced as Integra's next president and chief executive officer[3] CEO Statement Integra's President and CEO, Jan De Witte, highlighted the early progress in identifying and remediating gaps in the quality management system and the ongoing implementation of a compliance master plan to enhance manufacturing and supply chain reliability - The company is making early progress in identifying and remediating gaps in its quality management system[4] - Implementation of the compliance master plan across manufacturing and supply chain operations is progressing to meet market demand and improve delivery consistency[4] Third Quarter 2024 Financial Performance Integra LifeSciences experienced a slight revenue decline, a GAAP net loss, and reduced adjusted profitability in Q3 2024, with varied performance across its Codman Specialty Surgical and Tissue Technologies segments Consolidated Performance Integra LifeSciences reported a slight revenue decline in Q3 2024, with significant organic decreases. The company experienced a GAAP net loss and a reduction in adjusted net income and EBITDA compared to the prior year, alongside a decrease in both GAAP and adjusted gross margins | Metric | Q3 2024 | Q3 2023 | Change (YoY) | | :----- | :------ | :------ | :----------- | | Total Reported Revenues | $380.8 million | $382.4 million | -0.4% | | Organic Revenues | - | - | -8.6% | | Organic Revenues (excl. Boston) | - | - | -10.3% | | GAAP Gross Margin | 52.6% | 57.1% | -4.5 percentage points | | Adjusted Gross Margin | 63.0% | 64.6% | -1.6 percentage points | | Adjusted EBITDA | $61.8 million (16.2% of revenue) | $88.1 million (23.0% of revenue) | -29.9% (absolute) | | GAAP Net Loss | $(10.7) million | $19.5 million (Net Income) | - | | Adjusted Net Income | $31.7 million | $60.5 million | -47.6% | Segment Performance In Q3 2024, Codman Specialty Surgical (CSS) saw reported growth but an organic decline, primarily due to Neurosurgery's organic decrease offset by Instruments and ENT growth. Tissue Technologies (TT) experienced reported and organic declines, with Integra Skin facing production challenges, while other products like DuraSorb® and private label showed growth | Segment | Q3 2024 Revenues | Reported Growth (YoY) | Organic Growth (YoY) | | :---------------------- | :--------------- | :-------------------- | :------------------- | | Codman Specialty Surgical | $270.8 million | 1.0% | -10.7% | | Tissue Technologies | $110.1 million | -3.6% | -3.7% | Codman Specialty Surgical The Codman Specialty Surgical segment experienced an organic decline in Q3 2024, primarily due to Neurosurgery's temporary shipping holds and supply challenges, partially offset by growth in Advanced Energy, Instruments, and ENT - Neurosurgery sales declined 16.0% on an organic basis, primarily due to temporary shipping holds in CSF management and Neuro monitoring (largely resolved) and supply challenges in Dural access and repair[9] - Advanced energy grew mid-single digits, driven by CUSA® capital and CUSA disposables[9] - Instruments sales grew 8.7% on an organic basis[9] - ENT reported substantial revenue growth due to the Acclarent acquisition[9] Tissue Technologies The Tissue Technologies segment saw a decline in Q3 2024, driven by production challenges for Integra Skin, though DuraSorb®, MicroMatrix®, Cytal®, and private label sales demonstrated growth - Tissue Technologies sales were down 9.4% excluding sales of products manufactured in Boston[10] - Integra Skin experienced a low double-digit decline due to production challenges[10] - DuraSorb®, MicroMatrix®, and Cytal® showed low double-digit growth[10] - Private label sales grew 13.3% on an organic basis[10] Strategic Updates & Leadership Transition Integra LifeSciences announced Mojdeh Poul as its new CEO, effective January 2025, while continuing to advance its compliance master plan, improve supply reliability, and integrate recent acquisitions CEO Transition Update Integra LifeSciences announced Mojdeh Poul as the successor to Jan De Witte as President and CEO, effective January 6, 2025, at which time she will also join the board of directors - Mojdeh Poul will succeed Jan De Witte as Integra's President and CEO, joining the company and its board on January 6, 2025[11] Advancing our Strategy The company continues to experience strong demand for its brands and is advancing its compliance master plan and investments in supply reliability. Key operational improvements include clearing Neurosurgery shipping holds, improving Integra Skin production, and successful integration of Acclarent ENT products - Continued strong demand for Integra's diverse portfolio of leading brands[12] - Advancing the compliance master plan and investments in supply reliability, with Neurosurgery shipping holds clearing and Integra Skin production on pace for Q4[12] - Began installing equipment in the Braintree facility and continued successful integration with Acclarent ENT products[12] - Growth in DuraSorb® and UBM portfolio remains strong[12] Financial Position & Outlook Integra LifeSciences generated positive cash flow from operations in Q3 2024, with increased net debt, and provided updated Q4 and full-year 2024 guidance reflecting expected revenue growth and adjusted EPS Balance Sheet, Cash Flow and Capital Allocation Integra generated $22.5 million in cash flow from operations during Q3 2024. The company's total balance sheet debt stood at $1.81 billion, with net debt at $1.54 billion, resulting in a consolidated total leverage ratio of 4.0x. Total liquidity was approximately $1.18 billion | Metric | Q3 2024 | | :-------------------------- | :------------ | | Cash Flow from Operations | $22.5 million | | Total Balance Sheet Debt | $1.81 billion | | Net Debt | $1.54 billion | | Consolidated Total Leverage Ratio | 4.0x | | Total Liquidity | ~$1.18 billion | 2024 Outlook Integra provided updated guidance for both Q4 and the full year 2024. Q4 revenue is expected to grow significantly on a reported basis, with positive organic growth, and adjusted EPS is projected to be between $0.81 and $0.89. The full-year revenue guidance was updated to a range of $1.609 billion to $1.619 billion, representing reported growth of 4.4% to 5.0%, but an organic decline of -1.7% to -1.0%, with adjusted EPS guidance of $2.41 to $2.49 | Metric | Q4 2024 Guidance | | :-------------------- | :--------------- | | Reported Revenues | $441 million to $451 million | | Reported Growth (YoY) | 11.1% to 13.6% | | Organic Growth (YoY) | 2.0% to 4.5% | | Adjusted EPS | $0.81 to $0.89 | - Q4 guidance reflects the integration of Acclarent, stepped-up revenue from clearing third-quarter shipping holds, and improved production for Integra Skin, partially offset by additional quality holds[15] | Metric | Full-Year 2024 Guidance (Updated) | | :-------------------- | :-------------------------------- | | Revenue | $1.609 billion to $1.619 billion | | Reported Growth (YoY) | 4.4% to 5.0% | | Organic Growth (YoY) | -1.7% to -1.0% | | Adjusted EPS | $2.41 to $2.49 | Additional Information This section provides details on the Q3 2024 conference call, an overview of Integra LifeSciences, and important disclosures regarding forward-looking statements and the use of non-GAAP financial measures Conference Call and Presentation Available Online Integra LifeSciences scheduled a conference call for November 4, 2024, to discuss Q3 2024 results and guidance, with a live webcast and replay available on its investor relations website - A conference call was scheduled for November 4, 2024, at 8:30 a.m. ET to discuss Q3 2024 financial results and forward-looking guidance[17] - A live webcast and replay of the conference call, along with a presentation, are available on the Investors section of the company's website[17][18] About Integra Integra LifeSciences is a global medical technology company focused on restoring patients' lives by innovating treatment pathways and offering a comprehensive portfolio of leadership brands in surgical, neurologic, and regenerative care - Integra LifeSciences is a global medical technology company dedicated to restoring patients' lives through innovative treatment pathways[19] - The company advances patient outcomes and sets new standards in surgical, neurologic, and regenerative care with a comprehensive portfolio of high-quality, leadership brands[19] Forward-Looking Statements This section contains standard forward-looking statements regarding future financial performance, operational plans, and strategic initiatives, emphasizing that actual results may differ materially due to various risks and uncertainties, including macroeconomic conditions, operational execution, regulatory approvals, and supply chain disruptions - The news release contains forward-looking statements concerning future financial performance, including projections for revenues, growth, and earnings, as well as expectations for business and operational performance and strategic initiatives[20] - Such statements involve risks and uncertainties that could cause actual results to differ materially from predicted or expected outcomes, including global challenges, operational execution, integration of acquisitions, supply chain issues, and regulatory compliance[21] - The company undertakes no obligation to update or revise these forward-looking statements, except as required by law[22] Discussion of Adjusted Financial Measures Integra provides various non-GAAP financial measures, such as organic revenues, adjusted EBITDA, adjusted net income, and adjusted gross margin, to offer supplemental information on financial and business trends. These measures exclude specific items like currency effects, acquisition/divestiture impacts, structural optimization charges, and recall-related costs, with detailed reconciliations provided in the financial tables - The company uses non-GAAP measures like organic revenues, adjusted EBITDA, adjusted net income, and adjusted gross margin to provide supplemental information on financial and business trends[22][24] - These non-GAAP measures exclude items such as currency exchange rates, acquisition/divestiture impacts, structural optimization charges, EU Medical Device Regulation charges, Boston recall/Braintree transition costs, and intangible asset amortization[22] - Reconciliations of GAAP to non-GAAP measures are included in the financial tables of the release and further discussed in the company's Current Report on Form 8-K[23][24] Financial Tables This section presents detailed financial tables, including consolidated statements of operations, revenue breakdowns by segment, non-GAAP adjustments, and reconciliations for EBITDA, net income, EPS, cash flow, net debt, and gross profit Condensed Consolidated Statements of Operations The condensed consolidated statements of operations show a decline in total revenues and a shift from net income to a net loss for Q3 2024 compared to Q3 2023, primarily driven by increased costs and expenses | Metric (in thousands) | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | | :-------------------- | :------------------------------ | :------------------------------ | | Total revenues, net | $380,834 | $382,421 | | Cost of goods sold | $180,596 | $164,076 | | Operating income (loss) | $(8,150) | $26,593 | | Net income (loss) | $(10,695) | $19,497 | | Diluted net income (loss) per share | $(0.14) | $0.24 | Revenues by Major Sources Revenue disaggregation highlights varied performance across segments in Q3 2024. Codman Specialty Surgical saw overall reported growth, despite a significant organic decline in Neurosurgery, while Tissue Technologies experienced a reported and organic decline. ENT revenue grew substantially due to an acquisition | Segment (in thousands) | 2024 | 2023 | Change (YoY) | | :--------------------- | :--- | :--- | :----------- | | Neurosurgery | $175,956 | $209,229 | (15.9)% | | Instruments | $54,238 | $49,920 | 8.6% | | ENT | $40,588 | $9,056 | 348.2% | | Total Codman Specialty Surgical | $270,782 | $268,205 | 1.0% | | Wound Reconstruction and Care | $80,461 | $88,071 | (8.6)% | | Private Label | $29,592 | $26,145 | 13.2% | | Total Tissue Technologies | $110,053 | $114,216 | (3.6)% | | Total reported revenues | $380,835 | $382,421 | (0.4)% | | Total organic revenues | $349,642 | $382,408 | (8.6)% | | Total organic revenues excl. Boston | $348,863 | $388,797 | (10.3)% | Non-GAAP Adjustments to Net Income This section details the specific items excluded from GAAP net income to arrive at non-GAAP measures for Q3 2024 and Q3 2023. Significant adjustments include intangible asset amortization, EU Medical Device Regulation charges, and costs related to the Boston Recall/Braintree Transition | Item (in thousands) | Q3 2024 Total Amount | Q3 2023 Total Amount | | :------------------------------------------ | :------------------- | :------------------- | | Acquisition, divestiture and integration-related charges | $7,810 | $5,832 | | Structural Optimization charges | $5,739 | $3,729 | | EU Medical Device Regulation charges | $10,578 | $13,490 | | Boston Recall/Braintree Transition | $9,933 | $7,800 | | Intangible asset amortization expense | $25,615 | $20,869 | | Estimated income tax impact from adjustments | $(17,244) | $(10,677) | | Depreciation expense | $10,216 | $9,670 | Reconciliation of GAAP Net Income to Adjusted EBITDA The reconciliation shows that despite a GAAP net loss in Q3 2024, adjusted EBITDA remained positive, though it decreased significantly compared to Q3 2023, reflecting the impact of various non-GAAP adjustments | Metric (in thousands) | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | | :-------------------- | :------------------------------ | :------------------------------ | | GAAP net income (loss) | $(10,695) | $19,497 | | Total of non-GAAP adjustments | $72,453 | $68,608 | | Adjusted EBITDA | $61,758 | $88,105 | Reconciliation of GAAP Net Income to Adjusted Net Income and Adjusted EPS This reconciliation demonstrates the impact of non-GAAP adjustments, converting a GAAP net loss into a positive adjusted net income for Q3 2024, albeit at a significantly lower level than the prior year's adjusted net income and EPS | Metric (in thousands, except per share) | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | | :-------------------------------------- | :------------------------------ | :------------------------------ | | GAAP net income (loss) | $(10,695) | $19,497 | | Total of non-GAAP adjustments | $42,431 | $41,042 | | Adjusted net income | $31,736 | $60,539 | | Adjusted diluted net income per share | $0.41 | $0.76 | Condensed Balance Sheet Data The balance sheet data as of September 30, 2024, shows an increase in short-term investments and inventories compared to December 31, 2023, alongside a significant rise in borrowings under the senior credit facility and a decrease in stockholders' equity | Metric (in thousands) | Sep 30, 2024 | Dec 31, 2023 | | :------------------------------------------ | :----------- | :----------- | | Short term investments | $62,441 | $32,694 | | Cash and cash equivalents | $215,157 | $276,402 | | Inventories, net | $436,930 | $389,608 | | Current and long-term borrowing under senior credit facility | $1,161,355 | $840,094 | | Stockholders' equity | $1,521,587 | $1,587,884 | Condensed Statement of Cash Flows For the nine months ended September 30, 2024, net cash provided by operating activities slightly decreased, while net cash used in investing activities significantly increased. Net cash provided by financing activities turned positive, contrasting with a net use in the prior year | Metric (in thousands) | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :------------------------------------------ | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $78,642 | $81,205 | | Net cash used in investing activities | $(386,559) | $(36,949) | | Net cash provided by (used by) financing activities | $245,013 | $(223,035) | | Net decrease in cash and cash equivalents | $(61,245) | $(182,929) | Reconciliation of GAAP Operating Cash Flow to Free Cash Flow and Adjusted Free Cash Flow Conversion For Q3 2024, free cash flow turned negative, and adjusted free cash flow conversion also became negative, a significant shift from the positive figures in Q3 2023. The trailing twelve months also show a decrease in free cash flow and adjusted free cash flow conversion | Metric (in thousands) | Q3 2024 | Q3 2023 | | :------------------------------------------ | :------ | :------ | | Net cash provided by operating activities | $22,480 | $26,770 | | Purchases of property and equipment | $(29,646) | $(13,062) | | Free cash flow | $(7,166) | $13,708 | | Adjusted net income | $31,736 | $60,539 | | Adjusted free cash flow conversion | (22.6)% | 22.6% | | Metric (in thousands) | Twelve Months Ended Sep 30, 2024 | Twelve Months Ended Sep 30, 2023 | | :------------------------------------------ | :------------------------------- | :------------------------------- | | Net cash provided by operating activities | $137,385 | $166,538 | | Purchases of property and equipment | $(99,381) | $(56,868) | | Free cash flow | $38,004 | $109,670 | | Adjusted net income | $192,791 | $257,514 | | Adjusted free cash flow conversion | 19.7% | 42.6% | Reconciliation of Net Debt Net debt increased significantly to $1.54 billion as of September 30, 2024, compared to $1.20 billion at December 31, 2023, driven by higher borrowings under the senior credit facility | Metric (in thousands) | Sep 30, 2024 | Dec 31, 2023 | | :------------------------------------------ | :----------- | :----------- | | Short-term borrowings under senior credit facility | $29,063 | $14,531 | | Long-term borrowings under senior credit facility | $1,132,292 | $825,563 | | Borrowings under securitization facility | $72,800 | $89,200 | | Convertible securities | $572,442 | $570,255 | | Cash & Cash Equivalents | $(215,157) | $(276,402) | | Net Debt | $1,535,515 | $1,200,104 | Reconciliation of GAAP Gross Profit to Adjusted Gross Profit and Adjusted Gross Margin Both reported and adjusted gross profit decreased in Q3 2024 compared to Q3 2023, with adjusted gross margin also declining, indicating pressure on profitability despite non-GAAP adjustments | Metric (in thousands, except percentages) | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | | :------------------------------------------ | :------------------------------ | :------------------------------ | | Total revenues, net | $380,834 | $382,421 | | Reported Gross Profit | $200,238 | $218,345 | | Adjusted Gross Profit | $239,895 | $247,229 | | Adjusted Gross Margin | 63.0% | 64.6% |