Integra LifeSciences(IART) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Presents unaudited condensed consolidated financial statements for Q3 and nine months ended September 30, 2023, with notes on accounting policies and financial details Condensed Consolidated Statements of Operations Highlights | Indicator | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Total revenue, net | $382,421 | $385,191 | $1,144,534 | $1,159,644 | | Operating income | $26,593 | $65,049 | $75,479 | $171,080 | | Net income | $19,497 | $49,915 | $47,907 | $127,604 | | Diluted EPS | $0.24 | $0.60 | $0.59 | $1.53 | Condensed Consolidated Balance Sheets Highlights (in thousands) | Account | September 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $273,732 | $456,661 | | Total current assets | $1,027,229 | $1,161,498 | | Total assets | $3,739,371 | $3,889,758 | | Total current liabilities | $355,712 | $320,906 | | Total liabilities | $2,160,150 | $2,085,355 | | Total stockholders' equity | $1,579,221 | $1,804,403 | Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $81,205 | $179,135 | | Net cash used in investing activities | ($36,949) | ($3,760) | | Net cash used in financing activities | ($223,035) | ($154,254) | | Net decrease in cash and cash equivalents | ($182,929) | ($1,511) | Note 2. Acquisitions and Divestitures Details the acquisition of SIA for $51.5 million plus contingent consideration and the sale of the non-core TWC business for $28.8 million - Completed the acquisition of Surgical Innovation Associates, Inc. (SIA) for $51.5 million plus up to $90.0 million in contingent consideration based on revenue and FDA approval milestones[25] - In August 2022, the company sold its non-core traditional wound care (TWC) business for $28.8 million, resulting in a gain of $0.6 million[35][36] Note 3. Revenues from Contracts with Customers Explains revenue recognition policies, highlighting the significant impact of the Boston facility product recall on net revenue due to return provisions - Due to the voluntary recall of products manufactured at the Boston facility, the company recorded a provision for product returns of $6.8 million in Q3 2023 and $19.7 million for the nine months ended September 30, 2023, as a reduction of net revenue[43] Disaggregated Revenue by Segment (in thousands) | Segment/Franchise | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2023 | | :--- | :--- | :--- | | Codman Specialty Surgical | $268,205 | $787,371 | | Neurosurgery | $209,229 | $607,902 | | Instruments | $58,976 | $179,469 | | Tissue Technologies | $114,216 | $357,163 | | Wound Reconstruction and Care | $88,071 | $280,129 | | Private Label | $26,145 | $77,034 | | Total revenue | $382,421 | $1,144,534 | Note 5. Goodwill and Other Intangible Assets Details annual goodwill impairment tests, confirming no impairment for 2023, even after an interim test on the Tissue Technologies unit due to the Boston recall - Total goodwill stood at $1.036 billion as of September 30, 2023, down slightly from $1.039 billion at year-end 2022[57] - A quantitative goodwill impairment test was performed for the TT reporting unit in Q2 2023 due to the Boston recall and stock price drop; the fair value was determined to be more than 20% above the carrying amount[58] Note 6. Debt Details the March 2023 amendment of the Senior Credit Facility, extending maturity to 2028 and transitioning to SOFR, alongside other outstanding debt instruments - On March 24, 2023, the company amended its Senior Credit Facility, extending maturity to March 2028 and replacing LIBOR-based rates with SOFR-indexed rates[65] - As of September 30, 2023, outstanding debt included $775.0 million under the term loan, $90.0 million under the revolver, $575.0 million in convertible notes, and $75.7 million under the securitization facility[70][74][82] Note 11. Treasury Stock Details two accelerated share repurchase agreements in 2023 totaling $275 million and a new $225 million share repurchase program authorized in July - Entered into a $150 million accelerated share repurchase (ASR) in January 2023 and a $125 million ASR in August 2023[128][130] - A new $225 million share repurchase program was authorized by the Board of Directors on July 18, 2023, replacing the previous program[132] Note 12. Income Taxes The company's effective tax rate significantly decreased in Q3 and the first nine months of 2023 due to lower book income in higher-taxed jurisdictions Effective Tax Rate Comparison | Period | 2023 | 2022 | | :--- | :--- | :--- | | Three Months Ended Sep 30 | (4.8)% | 15.1% | | Nine Months Ended Sep 30 | 8.2% | 14.8% | Note 15. Segment and Geographic Information Provides a breakdown of net sales and profit by Codman Specialty Surgical and Tissue Technologies segments, along with disaggregated revenue by major geographic area Segment Net Sales (in thousands) | Segment | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2023 | | :--- | :--- | :--- | | Codman Specialty Surgical | $268,205 | $787,371 | | Tissue Technologies | $114,216 | $357,163 | | Total revenues | $382,421 | $1,144,534 | Revenue by Geography (in thousands) | Region | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2023 | | :--- | :--- | :--- | | United States | $269,838 | $817,622 | | Europe | $41,524 | $120,040 | | Asia Pacific | $48,777 | $146,956 | | Rest of World | $22,282 | $59,916 | | Total Revenues | $382,421 | $1,144,534 | Note 16. Commitments and Contingencies Details legal actions, including a securities class action complaint filed September 12, 2023, regarding quality system issues at the Boston facility, and contingent consideration liabilities - A securities class action complaint was filed against the company on September 12, 2023, alleging violations of securities laws related to quality system issues at the Boston manufacturing facility[149] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, strategic developments, and regulatory matters, analyzing results of operations, liquidity, and the significant impact of the Boston facility recall FDA Matters Details two key regulatory issues: the global voluntary removal of CereLink monitors and the ongoing quality system issues and recall at the Boston manufacturing facility - In May 2023, the company initiated a voluntary recall of products manufactured in its Boston facility and temporarily halted manufacturing; resumption is expected late in Q4 2023[186] - The Boston recall resulted in a $19.7 million provision for product returns and a $24.6 million inventory write-off in the first nine months of 2023[187] - A voluntary global product removal of all CereLink intracranial pressure monitors was initiated in August 2022; a 510(k) application with design changes was submitted to the FDA in September 2023[184][185] Results of Operations Analyzes decreased net income and revenues for Q3 and nine months ended September 30, 2023, primarily due to the Boston recall, impacting gross margin and segment performance Special Charges (in thousands) | Charge Type | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2023 | | :--- | :--- | :--- | | Acquisition, divestiture and integration-related | $5,832 | $18,056 | | Structural optimization | $5,893 | $15,022 | | EU medical device regulation | $13,490 | $34,172 | | Boston recall expenses | $5,636 | $33,687 | | Total | $30,851 | $100,937 | - Q3 2023 total revenues decreased by $2.8 million YoY, driven by the Boston recall which included a $6.8 million return reserve and a $20.5 million revenue decline[194] - Gross margin as a percentage of revenue fell to 57.1% in Q3 2023 from 61.5% in Q3 2022, primarily due to the Boston recall's impact, including a $6.8 million provision for returns and $5.1 million in idle capacity charges[197] Liquidity and Capital Resources Discusses decreased working capital and cash, with net cash from operating activities significantly lower due to reduced net income and working capital changes, alongside cash utilization for repurchases and debt - Working capital decreased from $840.6 million at Dec 31, 2022, to $671.5 million at Sep 30, 2023[231] - Net cash provided by operating activities for the nine months ended Sep 30, 2023, was $81.2 million, a decrease of $97.9 million from the same period in 2022[233][234] - Financing activities for the first nine months of 2023 included $275.0 million for share repurchases and $85.9 million in debt repayments[240] Item 3. Quantitative and Qualitative Disclosures About Market Risk Discusses exposure to market risks from foreign currency and interest rates, managed through derivative instruments like forward contracts and interest rate swaps - The company is primarily exposed to foreign currency risk from transactions in Euros, British pounds, Swiss francs, Canadian dollars, and Japanese yen, among others[258] - Interest rate risk is managed through interest rate swaps on its SOFR-indexed borrowings; a 100 basis point change in interest rates would impact annual interest expense on unhedged debt by approximately $1.7 million[263] Item 4. Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal control over financial reporting - Based on an evaluation as of September 30, 2023, the principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective[265] - There were no changes in internal control over financial reporting during the quarter ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, internal controls[266] PART II. OTHER INFORMATION Item 1. Legal Proceedings Refers to Note 16 for details on legal proceedings, including a securities class action lawsuit related to the Boston manufacturing facility - Refers to Note 16, Commitments and Contingencies, for details on current legal proceedings, which includes a securities class action lawsuit related to the Boston facility[149][268] Item 1A. Risk Factors States no material changes to risk factors from those disclosed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2022 - There have been no material changes in risk factors from those disclosed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2022[269] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Details the company's share repurchase activities during Q3 2023, highlighting the $125 million accelerated share repurchase agreement in August Issuer Purchases of Equity Securities (Q3 2023) | Period | Total Shares Purchased | Average Price Paid | Approx. Value Remaining for Purchase | | :--- | :--- | :--- | :--- | | July 2023 | — | — | — | | August 2023 | 2,296,739 | $54.42 | $25,000,000 | | September 2023 | — | — | $25,000,000 | - On August 15, 2023, the company entered into a $125 million accelerated share repurchase (ASR) and received an initial 2.3 million shares[272]