Integra LifeSciences Reports Third Quarter 2006 Financial Results
PLAINSBORO, N.J., Nov. 2, 2006 (PRIMEZONE) -- Integra LifeSciences Holdings Corporation (Nasdaq:IART) today reported its third quarter financial results. Total revenues in the third quarter of 2006 were $116.6 million, reflecting an increase of $47.3 million, or 68%, over the third quarter of 2005. Revenues from products acquired in 2006 totaled $35.7 million for the quarter.
We reported net income of $2.6 million, or $0.09 per diluted share, for the third quarter of 2006, compared to net income of $10.5 million, or $0.33 per diluted share in the third quarter of 2005. Reported earnings for the third quarter of 2006 include $3.8 million of share-based compensation expense related to the implementation of SFAS 123R Share-Based Payment in January 2006. Reported earnings for the third quarter of 2005 do not reflect the impact of share-based compensation expense.
In addition to GAAP results, Integra reports adjusted net income and adjusted diluted earnings per share. A further discussion of these non-GAAP financial measures can be found below, and reconciliations of GAAP net income to adjusted net income and GAAP diluted earnings per share to adjusted diluted earnings per share for the three months ended September 30, 2006 and 2005 appear in the financial statements attached to this release.
Adjusted net income for the third quarter of 2006, computed with the adjustments to GAAP reporting set forth in the attached reconciliation, was $13.7 million, or $0.43 per diluted share. In the third quarter of 2005 adjusted net income was $11.5 million, or $0.36 per diluted share.
"We achieved record revenues in the third quarter," said Stuart M. Essig, Integra's President and Chief Executive Officer. "During the quarter, we acquired Kinetikos Medical (KMI) and launched a direct sales force in Canada through the acquisition of our longstanding Canadian distributor. We have integrated Radionics and Miltex and are now integrating KMI into our Reconstructive Surgery sales channel."
We present our revenues in two categories: a) Neurosurgical and Orthopedic Implants and b) Medical Surgical Equipment.
Our revenues for the period were as follows:
Three Months Ended September 30, % Increase/ 2006 2005 (Decrease) -------- -------- ---------- ($ in thousands) Revenue: Neuro/Ortho Implants $ 43,136 $ 33,516 29% MedSurg Equipment 73,511 35,818 105% -------- -------- ---- Total Revenue $116,647 $ 69,334 68%
In the Neuro/Ortho Implants category, sales of our reconstructive surgery implant products continued to grow strongly. Rapid growth in nerve and dermal repair products and sales of products for the hand, foot and ankle accounted for much of the increase in implant product revenues. INTEGRA™ dermal repair product revenues increased 32% over the third quarter of 2005, nerve repair product revenues increased by 44%, and our hand, foot and ankle products more than doubled. Revenues from bone graft and collagen dental products increased by 57% over the third quarter of 2005. KMI products contributed $1.9 million of sales to the quarter.
In the MedSurg Equipment category, acquired products, surgical instruments, and monitoring products provided most of the year-over-year growth in product revenues for the third quarter. Radionics, Miltex and non-Integra distributed products sold through our former Canadian distributor (all acquired in 2006) contributed $33.8 million of sales to the quarter.
Gross margin on total revenues in the third quarter of 2006 was 59%. In cost of product revenues, we recognized $1.4 million in inventory fair value purchase accounting adjustments from recent acquisitions. These charges reduced our gross margin by approximately 1%.
Research and development expense increased $7.9 million in the third quarter of 2006 to $11.0 million. In the third quarter of 2006, we recorded an in-process research and development charge of $5.6 million related to the KMI acquisition and a $0.5 million charge related to an upfront payment pursuant to a new product development alliance.
Selling, general and administrative expense increased by $20.8 million to $43.4 million in the third quarter of 2006, or 37% of revenue, as compared to 33% in the third quarter of 2005. Included in this increase was $3.5 million of share-based compensation expense attributable to the impact of adopting FAS 123R.
Operating income for the third quarter of 2006 was $11.8 million.
We reported net interest expense of $4.0 million in the third quarter of 2006, which includes $1.4 million of interest expense under our revolving line of credit.
In September 2006, Integra completed an exchange of $115.2 million (out of a total of $120.0 million) of its old contingent convertible notes for the equivalent amount of new notes with a "net share settlement" feature and takeover protection. In connection with the exchange offer, Integra recorded a $1.8 million charge in the third quarter of 2006 related to $0.6 million of fees paid in connection with the exchange and a $1.2 million write-off of the unamortized debt issuance costs associated with the old contingent convertible notes that were exchanged. We reported $1.5 million of this charge in net interest expense.
In October 2006, Integra issued an additional $4.3 million of new notes in exchange for an equal amount of old notes.
We reported $1.8 million of other expense in the third quarter of 2006. In September 2006, Integra terminated its $50.0 million notional amount interest rate swap, which was used to hedge the risk of changes in fair value attributable to interest rate risk with respect to a portion of Integra's old contingent convertible notes. The interest rate swap qualified as a fair value hedge under Statement of Financial Accounting Standard No. 133, as amended, "Accounting for Derivative Instruments and Hedging Activities." In connection with the termination of the interest rate swap, Integra discontinued hedge accounting and recorded a $1.4 million charge to other expense in the third quarter of 2006 to write-off the unamortized mark-to-market fair value adjustment recorded against the contingent convertible notes.
Our effective income tax rate was 57% for the third quarter of 2006, or a 37% effective rate for the year-to-date period. In the first half of 2006, we recorded income tax expense at an expected full year effective rate of 31%. The increase in the expected year-to-date effective rate was primarily driven by the nondeductible nature of the $5.6 million in-process research and development charge recorded in connection with the KMI acquisition in the third quarter of 2006. We expect an effective income tax rate for 2007 of approximately 31%.
We generated $24.2 million in cash flow from operations in the third quarter of 2006. We repurchased 456,750 shares of our common stock in the quarter at an average price of $36.46 per share for an aggregate purchase price of approximately $16.7 million. On October 30, 2006 our Board of Directors authorized us to repurchase up to an additional $75 million of our common stock through December 31, 2007.
At September 30, 2006, our cash totaled $24.2 million and we had outstanding borrowings of $87.0 million under our credit facility.
We are updating our guidance for total revenues for the full years 2006 and 2007. We are also updating our expectations for earnings per share and providing guidance for the fourth quarter of 2006. In accordance with our usual practice, our expectations for 2006 and 2007 financial performance do not include the impact of acquisitions or other strategic corporate transactions that have not yet closed.
For the fourth quarter of 2006, we expect total revenues to be in the range of $116 million to $121 million and earnings per diluted share in the range of $0.37 to $0.43. Accordingly, we expect total revenues in 2006 to be between $410 million and $415 million and earnings per diluted share to be between $1.00 and $1.05. We expect adjusted earnings per diluted share, computed with the adjustments to GAAP reporting set forth in the attached reconciliation, to be in the range of $0.47 and $0.52 for the fourth quarter of 2006 and $1.68 and $1.73 for the full year 2006.
For 2007, we expect total revenues to be between $500 million and $520 million and earnings per diluted share to be between $1.76 and $1.85. We expect adjusted earnings per diluted share, computed with the adjustments to GAAP reporting set forth in the attached reconciliation, to be in the range of $2.08 and $2.17.
Integra has incurred significant costs in 2006 in connection with restructuring and integration activities, including inventory purchase accounting charges, in-process research and development charges, and discontinued research and development projects related to the acquisitions we have closed this year, and charges related to the contingent convertible notes exchange offer and the termination of our interest rate swap. We currently expect these charges to total approximately $16.2 million in 2006, of which $15.6 million have already been incurred through the end of the third quarter.
We have scheduled a conference call for 9:00 am EST today, November 2, 2006, to discuss the financial results for the third quarter of 2006 and forward-looking financial guidance. The call is open to all listeners and will be followed by a question and answer session. Access to the live call is available by dialing (913) 981-5560 or through a listen-only webcast via a link provided on the home page of Integra's website at www.Integra-LS.com. A replay of the conference call will be accessible starting one hour following the live event. Access to the replay is available through November 16, 2006 by dialing (719) 457-0820 (access code 5413428) or through the webcast accessible on our home page.
Integra LifeSciences Holdings Corporation is a diversified medical technology company. We develop, manufacture, and market medical devices for use in a variety of applications. The primary applications for our products are neurosurgery, reconstructive surgery and general surgery. Integra is a leader in applying the principles of biotechnology to medical devices that improve patients' quality of life. Our corporate headquarters are in Plainsboro, New Jersey. We have research, manufacturing and distribution facilities throughout the world. Please visit our website at (http://www.Integra-LS.com).
This news release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, statements concerning future financial performance, including projections for revenues, GAAP and adjusted earnings per diluted share, and costs to be incurred in connection with restructuring and integration activities. Such forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from predicted or expected results. Among other things, our ability to maintain relationships with customers of acquired entities, physicians' willingness to adopt our recently launched and planned products, third-party payors' willingness to provide reimbursement for these products and our ability to secure regulatory approval for products in development may adversely affect our future product revenues; our ability to integrate acquired businesses, increase product sales and gross margins, and control non-product costs may affect our GAAP and adjusted earnings per share; and the ultimate scope of our restructuring and integration activities and our ability to complete these activities may affect the total costs to be incurred in connection with these activities. In addition, the economic, competitive, governmental, technological and other factors identified under the heading "Factors That May Affect Our Future Performance" included in the Business section of Integra's Annual Report on Form 10-K for the year ended December 31, 2005 and information contained in subsequent filings with the Securities and Exchange Commission could affect actual results.
Discussion of Adjusted Financial Measures
Adjusted net income consists of net income excluding equity-based compensation charges, acquisition-related charges, charges incurred in connection with the exchange offer of convertible notes and the termination of the interest rate swap agreement, facility consolidation, manufacturing transfer and system integration charges, and certain employee termination and related costs. Adjusted earnings per diluted share are calculated by dividing adjusted net income for diluted earnings per share by adjusted diluted weighted average shares outstanding. Because all equity-based compensation expense is added back in the calculation of adjusted net income, the calculation of diluted weighted average shares outstanding is adjusted to exclude the benefits of unearned equity-based compensation costs attributable to future services and not yet recognized in the financial statements. These unearned equity-based compensation costs are treated as proceeds assumed to be used to repurchase shares, based on the average trading price of Integra common stock during the period reported, in the calculation of GAAP diluted weighted average shares outstanding.
Integra believes that the presentation of adjusted net income and adjusted earnings per diluted share provides important supplemental information to management and investors regarding non-cash expenses and financial and business trends relating to the Company's financial condition and results of operations. For further information regarding why Integra believes that these non-GAAP financial measures provide useful information to investors, the specific manner in which management uses these measures, and some of the limitations associated with the use of these measures, please refer to the Company's Current Report on Form 8-K regarding this earnings press release filed today with the Securities and Exchange Commission. The section of the Company's report is available on the SEC's website at www.sec.gov or on our website at www.Integra-LS.com
INTEGRA LIFESCIENCES HOLDINGS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share amounts)
Three Months Ended September 30, -------------------- 2006 2005 -------- -------- TOTAL REVENUE $116,647 $ 69,334
COSTS AND EXPENSES Cost of product revenues 47,559 26,394 Research and development 10,991 3,110 Selling, general and administrative 43,431 22,653 Intangible asset amortization 2,852 1,085 -------- -------- Total costs and expenses 104,833 53,242
Operating income 11,814 16,092
Interest income 375 952 Interest expense (4,362) (1,345) Other income (expense), net (1,765) (4) -------- -------- Income before income taxes 6,062 15,695
Income tax expense 3,468 5,213 -------- -------- Net income $ 2,594 $ 10,482
Add back of after tax interest expense -- 800
Net income for diluted earnings per share $ 2,594 $ 11,281
Diluted net income per share $ 0.09 $ 0.33
Weighted average common shares outstanding for diluted net income per share 29,863 34,297
Listed below are the items included in net income that management excludes in computing the adjusted financial measures referred to in the text of this press release and further described under Discussion of Adjusted Financial Measures.
Three Months Ended September 30, ------------------------------- 2006 2005 ------------- ------------ (in thousands) ------------------------------- Equity-based compensation $ 3,809 $ --
Acquisition-related charges 6,999 500
Facility consolidation, manufacturing transfer and system integration charges -- 365
Employee termination and related costs -- 794
Charges associated with convertible debt exchange offer 1,792 --
Charges associated with termination of interest rate swap 1,425 --
Income tax expense (benefit) related to above adjustments (2,969) (623)
INTEGRA LIFESCIENCES HOLDINGS CORPORATION RECONCILIATION OF NON-GAAP ADJUSTMENTS - HISTORICAL (UNAUDITED)
(In thousands, except per share amounts) Three Months Ended September 30, -------------------- 2006 2005 -------- -------- GAAP net income $ 2,594 $ 10,481
Non-GAAP adjustments: Equity-based compensation 3,809 --
Acquisition-related charges 6,999 500
Facility consolidation, manufacturing transfer and system integration charges -- 365
Employee termination and related costs -- 794
Charges associated with convertible debt exchange offer 1,792 --
Charges associated with termination of interest rate swap 1,425 --
Income tax expense (benefit) related to above adjustments (2,969) (623) -------- --------
Total of non-GAAP adjustments 11,056 1,036
Adjusted net income $ 13,650 $ 11,517
Add back of after tax interest expense (a) 755 800 -------- --------
Adjusted net income for diluted earnings per share $ 14,405 $ 12,317
Weighted average common shares outstanding for diluted net income per share 29,863 34,297 Shares issuable upon conversion of convertible notes (a) 3,381 -- Non-GAAP adjustment 106 -- -------- -------- Adjusted weighted average common shares outstanding for adjusted diluted net income per share 33,350 34,297
GAAP diluted net income per share $ 0.09 $ 0.33 Non-GAAP adjustments detailed above (per share) $ 0.34 $ 0.03 -------- -------- Adjusted diluted net income per share $ 0.43 $ 0.36
(a) The "as if converted" method related to the convertible notes is applied in the calculation of adjusted diluted net income per share for the three months ended September 30, 2006 because its effects are more dilutive.
INTEGRA LIFESCIENCES HOLDINGS CORPORATION RECONCILIATION OF NON-GAAP ADJUSTMENTS - GUIDANCE
(In thousands, except per share amounts)
Projected Projected Three Months Ended Year Ended December 31, 2006 December 31, 2006 ----------------- ----------------- Low High Low High
GAAP net income $11,150 $12,800 $30,426 $32,076 Add back of after tax interest expense -- -- 2,252 2,252 ------- ------- ------- ------- GAAP net income for diluted earnings per share 11,150 12,800 32,678 34,328
Non-GAAP adjustments: Equity-based compensation 3,600 3,600 13,882 13,882 Acquisition-related charges 600 600 11,790 11,790 Facility consolidation, manufacturing transfer and system integration charges -- -- 717 717 Employee termination and related costs -- -- 421 421 Charges associated with convertible debt exchange offer -- -- 1,879 1,879 Charges associated with termination of interest rate swap -- -- 1,425 1,425 Income tax expense (benefit) related to above adjustments (1,325) (1,325) (7,814) (7,814) ------- ------- ------- ------- Total of non-GAAP adjustments 2,875 2,875 22,300 22,300 ------- ------- ------- -------
Adjusted net income $14,025 $15,675 $54,978 $56,628
Weighted average common shares outstanding for diluted net income per share 29,875 29,875 32,688 32,688 Non-GAAP adjustment (a) 106 106 126 126 ------- ------- ------- ------- Adjusted weighted average common shares outstanding for adjusted diluted net income per share 29,981 29,981 32,814 32,814
GAAP diluted net income per share $ 0.37 $ 0.43 $ 1.00 $ 1.05 Non-GAAP adjustments detailed above (per share) 0.10 0.09 0.68 0.68 ------- ------- ------- ------- Adjusted diluted net income per share $ 0.47 $ 0.52 $ 1.68 $ 1.73
(a) For ease of computation, the Company has assumed that the same adjustment that applied for the three months ended September 30, 2006 (106 shares) is the applicable adjustment for the projected three months ended December 31, 2006 and the year ended December 31, 2007.
INTEGRA LIFESCIENCES HOLDINGS CORPORATION RECONCILIATION OF NON-GAAP ADJUSTMENTS - GUIDANCE
(In thousands, except per share amounts) Projected Year Ended December 31, 2007 -------------------- Low High
GAAP net income $ 52,000 $ 54,500 Add back of after tax interest expense -- -- -------- -------- GAAP net income for diluted earnings per share 52,000 54,500
Non-GAAP adjustments: Equity-based compensation 14,000 14,000 Income tax expense (benefit) related to above adjustments (4,300) (4,300) -------- -------- Total of non-GAAP adjustments 9,700 9,700 -------- --------
Adjusted net income $ 61,700 64,200
Weighted average common shares outstanding for diluted net income per share 29,500 29,500 Non-GAAP adjustment (a) 106 106 -------- -------- Adjusted weighted average common shares outstanding for adjusted diluted net income per share 29,606 29,606
GAAP diluted net income per share $ 1.76 1.85 Non-GAAP adjustments detailed above (per share) 0.32 0.32 -------- -------- Adjusted diluted net income per share $ 2.08 $ 2.17
(a) For ease of computation, the Company has assumed that the same adjustment that applied for the three months ended September 30, 2006 (106 shares) is the applicable adjustment for the projected three months ended December 31, 2006 and the year ended December 31, 2007.
Condensed Balance Sheet Data: September 30, December 31, 2006 2005 -------- -------- (in thousands) ------------------------------ Cash and marketable securities, including non-current portion $ 24,322 $143,384 Accounts receivable, net 76,715 49,007 Inventory, net 93,773 67,476 Total current assets 219,115 265,952 Total assets 593,667 448,432
Bank line of credit 87,000 -- Demand notes (a) 115,205 -- Total current liabilities 255,456 31,287 Long term debt (a) 4,889 118,378 Total liabilities 288,186 158,614
Stockholders' equity 305,481 289,818
(a) The closing price of Integra's common stock on the issuance date of the new convertible notes was higher than the market price trigger of the new notes. Therefore, the new notes are considered demand debt and are classified as current liabilities on the balance sheet since the holders have the option to call this debt at any time.
CONTACT:
Integra LifeSciences Holdings Corporation
Maureen B. Bellantoni,
Executive Vice President and Chief Financial Officer
(609) 936-6822
maureen.bellantoni@Integra-LS.com
John Bostjancic,
Vice President, Corporate Development and Investor Relations
(609) 936-2239
jbostjancic@Integra-LS.com