Integra LifeSciences(IART) - 2020 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides comprehensive financial data, including statements, notes, and management's analysis, for the period ended September 30, 2020 Financial Statements This section presents the unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2020, and 2019, along with detailed notes Condensed Consolidated Statements of Operations The company reported a net income of $32.3 million for Q3 2020, a significant turnaround from a net loss of $27.6 million in Q3 2019, largely due to the absence of a $59.9 million IPR&D expense Consolidated Statement of Operations Highlights (In thousands, except per share amounts) | Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Total revenue, net | $370,232 | $379,095 | $983,221 | $1,122,430 | | Operating income (loss) | $57,542 | $(20,587) | $98,725 | $57,680 | | Net income (loss) | $32,337 | $(27,610) | $41,148 | $34,882 | | Diluted EPS | $0.38 | $(0.32) | $0.48 | $0.40 | Condensed Consolidated Balance Sheets As of September 30, 2020, total assets were $3.45 billion, up from $3.30 billion at year-end 2019, driven by increased cash and the classification of assets held for sale Consolidated Balance Sheet Highlights (In thousands) | Metric | September 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $396,279 | $198,911 | | Assets held for sale | $159,977 | $— | | Total assets | $3,453,521 | $3,303,240 | | Liabilities & Equity | | | | Long-term convertible securities | $469,898 | $— | | Total liabilities | $2,055,534 | $1,886,504 | | Total stockholders' equity | $1,397,987 | $1,416,736 | Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2020, net cash from operating activities decreased to $123.6 million, while financing activities provided $100.4 million, driven by convertible note issuance Consolidated Statement of Cash Flows Highlights (In thousands) | Metric | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $123,570 | $142,249 | | Net cash used in investing activities | $(32,152) | $(142,059) | | Net cash provided by financing activities | $100,403 | $73,226 | | Net increase in cash and cash equivalents | $197,368 | $69,143 | Notes to Unaudited Condensed Consolidated Financial Statements The notes provide detailed explanations of the financial statements, covering COVID-19 impact, the planned divestiture of Extremity Orthopedics, debt, and derivative activities - The company is subject to risks from the COVID-19 pandemic, which caused customers to defer or cancel elective procedures, though volumes began to approach normalized levels through Q3 2020, ongoing uncertainty persists[24] - On September 29, 2020, the company agreed to sell its Extremity Orthopedics business to Smith & Nephew for approximately $240 million in cash, with assets and liabilities now classified as held for sale[35] - On February 4, 2020, the company issued $575.0 million of 0.5% Convertible Senior Notes due 2025, entering into call and warrant transactions to effectively increase the conversion price[93][96] Disaggregated Revenue (In thousands) | Revenue Source | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Codman Specialty Surgical | $239,323 | $640,541 | | Orthopedics and Tissue Technologies | $130,909 | $342,680 | | Total revenue | $370,232 | $983,221 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses financial performance, highlighting the COVID-19 impact, strategic priorities, and segment results, along with liquidity and capital resources - The company's strategic priorities include strategic acquisitions, portfolio optimization, new product introductions, and commercial channel investments[178][179][180] - The sale of the Extremity Orthopedics business is expected to make Integra a faster-growing, more profitable, and more focused company, allowing for increased investment in core Neurosurgery and Tissue Technology businesses[181] - In response to COVID-19, the company implemented cost-saving measures in April 2020, including reduced compensation and discretionary spending, which were restored in Q3 as revenues recovered[189] Results of Operations For Q3 2020, total revenues decreased 2.3% YoY to $370.2 million, a significant improvement from Q2, with net income of $32.3 million due to the absence of a prior-year IPR&D expense Revenue by Segment (In thousands) | Segment | Q3 2020 Revenue | Q3 2019 Revenue | % Change | | :--- | :--- | :--- | :--- | | Codman Specialty Surgical | $239,323 | $252,984 | -5.4% | | Orthopedics & Tissue Technologies | $130,909 | $126,111 | +3.8% | | Total Revenue | $370,232 | $379,095 | -2.3% | - Q3 2020 gross margin increased to 63.6% from 62.4% in Q3 2019, attributed to favorable revenue mix and cost-saving measures[217] - Q3 2020 operating expenses decreased by $79.2 million YoY, primarily due to a $59.9 million IPR&D expense in Q3 2019 and a $23.0 million reduction in SG&A costs from cost-saving measures and lower sales commissions[218][219][220] Liquidity and Capital Resources Cash and cash equivalents increased to $396.3 million at September 30, 2020, primarily driven by financing activities, including the issuance of $575.0 million in convertible senior notes - Cash and cash equivalents increased to $396.3 million at Sept 30, 2020 from $198.9 million at Dec 31, 2019[248] - Net cash from operating activities was $123.6 million for the first nine months of 2020, a decrease from $142.2 million in the prior year period, mainly due to an increase in inventory[249][250] - During the first nine months of 2020, the company repurchased 2.1 million shares for $100.0 million, with $125.0 million remaining under the share repurchase authorization as of September 30, 2020[260][261] Contractual Obligations as of September 30, 2020 (In millions) | Obligation | Total | Payments Due 2021-2022 | Payments Due Thereafter | | :--- | :--- | :--- | :--- | | Revolving Credit Facility | $97.5 | $— | $97.5 | | Term Loan | $877.5 | $78.8 | $798.7 | | Securitization Facility | $92.3 | $92.3 | $— | | Convertible Debt | $575.0 | $— | $575.0 | | Operating Leases | $140.4 | $27.0 | $109.6 | Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from foreign currency exchange rates and interest rates on its variable-rate debt, mitigated by derivative instruments - The company is primarily exposed to foreign currency exchange rate risk with respect to transactions in EUR, GBP, CHF, and other currencies[277] - To manage interest rate risk on its LIBOR-indexed borrowings, the company uses interest rate swaps, with a total notional amount of $975.0 million in effect as of September 30, 2020[282][283] - A hypothetical 100 basis point change in interest rates would have impacted annual interest expense on the unhedged portion of the debt by $0.9 million[283] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2020, with no material changes to internal control over financial reporting during the quarter - The Principal Executive Officer and Principal Financial Officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2020[286] - There were no changes in internal control over financial reporting during the quarter ended September 30, 2020, that have materially affected, or are reasonably likely to materially affect, internal controls[287] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, equity security sales, and other required disclosures Legal Proceedings This section refers to Note 17, "Commitment and Contingencies," for information on legal proceedings, which are not expected to have a material adverse effect on financial condition - Information on legal proceedings is located in Note 17, which states that such claims are not expected to have a material adverse effect on the company's financial condition[165][289] Risk Factors This section adds new risk factors related to the pending sale of the Extremity Orthopedics business, including completion risk, business disruption, and impact on relationships - The sale of the Extremity Orthopedics business is subject to customary closing conditions, including an employee consultation process in France, and may not be completed on a timely basis or at all[291] - The pending sale may disrupt business, adversely affect relationships with employees and business partners, and divert management's attention[292] Unregistered Sales of Equity Securities and Use of Proceeds This section refers to Note 12, "Treasury Stock," for information regarding the company's share repurchase program - Refers to Note 12 for information on the common stock repurchase program[294] Mine Safety Disclosures The company states that this item is not applicable - Not applicable[295] Other Information The company states that this item is not applicable - Not applicable[296] Exhibits This section lists the exhibits filed with the 10-Q report, including the Put Option Agreement for the sale of the Extremity Orthopedics business, CEO/CFO certifications, and XBRL data files - Lists filed exhibits, including the Put Option Agreement with Smith & Nephew, Sarbanes-Oxley certifications, and XBRL data files[303]