UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 26, 2017
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware | 0-26224 | 51-0317849 |
(State or other jurisdiction of incorporation or organization) | (Commission File Number) | (I.R.S. Employer Identification No.) |
311 Enterprise Drive
Plainsboro, NJ 08536
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 275-0500
Not Applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
ITEM 2.02 RESULTS OF OPERATIONS AND FINANCIAL CONDITION
On October 26, 2017, Integra LifeSciences Holdings Corporation (the “Company”) issued a press release announcing financial results for the quarter ended September 30, 2017 (the “Press Release”). A copy of the Press Release is attached as Exhibit 99.1 to this Current Report on Form 8-K and is incorporated by reference into this Item. In the financial statements portion of the Press Release, the Company has included a reconciliation of GAAP revenues to organic revenues for the quarters and years ended September 30, 2017 and 2016, GAAP net income to adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the quarters and years ended September 30, 2017 and 2016, GAAP net income to adjusted net income for the quarters and years ended September 30, 2017 and 2016, GAAP diluted weighted average shares outstanding to adjusted diluted weighted average shares outstanding for the quarters and years ended September 30, 2017 and 2016, GAAP earnings per diluted share to adjusted earnings per diluted share for the quarters and years ended September 30, 2017 and 2016, and GAAP operating cash flow to free cash flow and adjusted free cash flow conversion used by management for the quarters and years ended September 30, 2017 and 2016 as well as GAAP net income to adjusted net income and GAAP earnings per diluted share to adjusted earnings per diluted share used by management for guidance for the year 2017. In addition, the Company included a supplemental disclosure of revenue by reporting segments in the financial statements portion of the Press Release.
The information contained in Item 2.02 of this Current Report on Form 8-K (including the Press Release and selected historical financial information) is being furnished and shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that Section. The information contained in Item 2.02 of this Current Report on Form 8-K (including the Press Release and selected historical financial information) shall not be incorporated by reference into any registration statement or other document pursuant to the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in any such filing.
Discussion of Adjusted Financial Measures
In addition to our GAAP results, we provide organic revenues, adjusted EBITDA, adjusted net income, adjusted earnings per diluted share, adjusted diluted weighted average shares outstanding, free cash flow, and adjusted free cash flow conversion. Organic revenues consist of total revenues excluding the effects of currency exchange rates, acquired revenues, and product discontinuances. The various measures of adjusted EBITDA consist of GAAP net income, excluding: (i) depreciation and amortization, (ii) other income (expense), (iii) interest income and expense, (iv) income taxes, (v) and those operating expenses also excluded from adjusted net income. The measure of adjusted net income consists of GAAP net income, excluding: (i) global enterprise resource planning (“ERP”) implementation charges; (ii) structural optimization charges; (iii) certain employee severance charges; (iv) acquisition-related charges; (v) convertible debt non-cash interest; (vi) intangible asset amortization expense; (vii) discontinued product lines charges; (viii) income tax impact from adjustments and other items; and (ix) hurricane related expenses. The measure of adjusted diluted weighted average shares outstanding is calculated by adding the economic benefit of the convertible note hedge transactions relating to Integra’s 2016 convertible notes. The adjusted earnings per diluted share measure is calculated by dividing adjusted net income attributable to diluted shares by adjusted diluted weighted average shares outstanding. The measure of free cash flow consists of GAAP net cash provided by operating activities less purchases of property and equipment. The measure of adjusted free cash flow consists of free cash flow adjusted for certain one-time unusual items. The adjusted free cash flow conversion measure is calculated by dividing free cash flow by adjusted net income.
The Company believes that the presentation of organic revenues and the various adjusted EBITDA, adjusted net income, adjusted earnings per diluted share, adjusted diluted weighted average shares outstanding, free cash flow and adjusted free cash flow conversion measures provides important supplemental information to management and investors regarding financial and business trends relating to the Company's financial condition and results of operations. Management uses non-GAAP financial measures in the form of organic revenues, adjusted EBITDA, adjusted net income, adjusted earnings per diluted share, adjusted diluted weighted average shares outstanding, free cash flow and adjusted free cash flow conversion when evaluating operating performance because we believe that the inclusion or exclusion of the items described below, for which the amounts and/or timing may vary significantly depending upon the Company's acquisition, integration, and restructuring activities, for which the amounts are non-cash in nature, or for which the amounts are not expected to recur at the same magnitude, provides a supplemental measure of our operating results that facilitates comparability of our financial condition and operating performance from period to period, against
our business model objectives, and against other companies in our industry. We have chosen to provide this information to investors so they can analyze our operating results in the same way that management does and use this information in their assessment of our core business and the valuation of our Company.
Organic revenues, adjusted EBITDA, adjusted net income, adjusted earnings per diluted share, adjusted diluted weighted average shares outstanding, free cash flow and adjusted free cash flow conversion are significant measures used by management for purposes of:
• | supplementing the financial results and forecasts reported to the Company's board of directors; |
• | evaluating, managing and benchmarking the operating performance of the Company; |
• | establishing internal operating budgets; |
• | determining compensation under bonus or other incentive programs; |
• | enhancing comparability from period to period; |
• | comparing performance with internal forecasts and targeted business models; and |
• | evaluating and valuing potential acquisition candidates. |
The measure of organic revenues that we report reflects the increase in total revenues for the quarter ended September 30, 2017 adjusted for the effects of currency exchange rates, acquired revenues, and product discontinuations on current period revenues. We provide this measure because changes in foreign currency exchange rates can distort our revenue reduction favorably or unfavorably, depending upon the strength of the U.S. dollar in relation to the various foreign currencies in which we generate revenues. We generate significant revenues outside the United States in multiple foreign currencies including euros, British pounds, Swiss francs and Australian and Canadian dollars. We believe this measure provides useful information to determine the success of our international selling organizations in increasing sales of products in their local currencies without regard to fluctuations in currency exchanges rates, for which we do not control. Additionally, significant acquisitions and discontinued product lines can distort our current period revenues when compared to prior periods.
The measure of adjusted net income reflects GAAP net income adjusted for one or more of the following items, as applicable:
• | Global ERP implementation charges. Global ERP implementation charges consist of the non-capitalizable portion of internal labor and outside consulting costs related to the implementation of a global ERP system. We have inherited many diverse business processes and different information systems through our numerous acquisitions. Accordingly, we are undertaking this initiative in order to standardize business processes globally and to better integrate all of our existing and acquired operations using one information system. Although recurring in nature given the expected timeframe to complete the implementation for our existing operations and our expectation to continue to acquire new businesses and operations, management excludes these charges when evaluating the operating performance of the Company because the frequency and amount of such charges vary significantly based on the timing and magnitude of the Company's implementation activities. |
• | Structural optimization charges. These charges, which include employee severance and other costs associated with exit or disposal of facilities, costs related to transferring manufacturing and/or distribution activities to different locations, and rationalization or enhancement of our organization, existing manufacturing, distribution, administrative, functional and commercial infrastructure. Some of these cost-saving and efficiency-driven activities are identified as opportunities in connection with acquisitions that provide the Company with additional capacity or economies of scale. Although recurring in nature given management's ongoing review of the efficiency of our organization and structure, including manufacturing, distribution and administrative facilities and operations, management excludes these items when evaluating the operating performance of the Company because the frequency and amount of such charges vary significantly based on the timing and magnitude of the Company's rationalization activities and are, in some cases, dependent upon opportunities identified in acquisitions, which also vary in frequency and magnitude. |
• | Certain employee severance charges. Certain employee severance and related charges consist of charges related to senior management level terminations and certain significant reductions in force that are not initiated in connection with restructuring. Management excludes these items when evaluating the Company's operating |
performance because these amounts do not affect our core operations and because of the infrequent and/or large scale nature of these activities.
• | Acquisition-related charges. Acquisition-related charges include (i) up-front fees and milestone payments that are expensed as incurred in connection with acquiring licenses or rights to technology for which no product has been approved for sale by regulatory authorities and such approval is not reasonably assured at the time such up-front fees or milestone payments are made, (ii) inventory fair value purchase accounting adjustments, (iii) changes in the fair value of contingent consideration after the acquisition date, (iv) costs related to acquisition integration, including systems, operations, retention and severance and (v) legal, accounting and other outside consultants expenses directly related to acquisitions or divestitures. Inventory fair value purchase accounting adjustments consist of the increase to cost of goods sold that occur as a result of expensing the “step up” in the fair value of inventory that we purchased in connection with acquisitions as that inventory is sold during the financial period. Although recurring given the ongoing character of our development and acquisition programs, these acquisition, divestiture and in-licensing related charges are not factored into the evaluation of our performance by management after completion of development programs or acquisitions because they are of a temporary nature, they are not related to our core operating performance and the frequency and amount of such charges vary significantly based on the timing and magnitude of our development, acquisition and divestiture transactions as well as the level of inventory on hand at the time of acquisition. |
• | Discontinued product lines charges. These charges represent charges taken in connection with product lines that the Company discontinues. Management excludes this item when evaluating the Company’s operating performance because discontinued products do not provide useful information regarding the Company’s prospects for future performance. |
• | Intangible asset amortization expense. Management excludes this item when evaluating the Company's operating performance because it is a non-cash expense. |
• | Convertible debt non-cash interest. The convertible debt accounting requires separate accounting for the liability and equity components of the Company's convertible debt instruments, which may be settled in cash upon conversion, in a manner that reflects an applicable non-convertible debt borrowing rate at the time that we issued such convertible debt instruments. Management excludes this item when evaluating the Company's operating performance because of the non-cash nature of the expense. |
• | Income tax impact from adjustments and other items. Estimated impact on income tax expense related to the following: |
(i) | Adjustments to income tax expense for the amount of additional tax expense that the Company estimates that it would record if it used non-GAAP results instead of GAAP results in the calculation of its tax provision, based on the statutory rate applicable to jurisdictions in which the above non-GAAP adjustments relate. |
(ii) | When we calculate the adjusted tax rate, we include a full year estimate for all discrete items. We then apply that full year rate to the year-to-date results and calculate the current quarter’s rate to arrive at the year-to-date adjusted tax rate. We believe this removes significant variability in our results and creates a more operationally consistent result for our investors to use for comparability purposes. Specifically, the adoption of the FASB Update No. 2016-09 accounting standard has the effect of generating a significant tax expense benefit in each of the first three quarters of 2016. For the adjusted tax rate, we are treating this as a rate item, which is consistent with how other discrete tax expense items are handled in our current adjusted tax expense measure. |
• | Hurricane related expenses. In September 2017, Hurricane Maria caused disruption and minor damage to our facility in Anasco, Puerto Rico. The Company incurred expenses, including idle capacity, to restore the facility to its normal operations. Management excludes this item when evaluating the Company’s performance because of the infrequent nature of this activity. |
Weighted average shares used to calculate GAAP diluted EPS includes the convertible notes and warrant transactions because they are dilutive. The measure of adjusted diluted weighted average shares outstanding used to calculate adjusted diluted EPS includes the effect of the convertible notes hedge transactions, which is anti-dilutive. Integra believes the non-GAAP measure is useful for understanding the economic benefit of the convertible notes hedge transactions.
Organic revenues, adjusted EBITDA, adjusted net income, adjusted earnings per diluted share, adjusted diluted weighted average shares outstanding, free cash flow and adjusted free cash flow conversion are not calculated in accordance with GAAP, and should be considered supplemental to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. Non-GAAP financial measures have limitations in that they do not reflect all of the revenues, costs or benefits associated with the operations of the Company's business as determined in accordance with GAAP. As a result, you should not consider these measures in isolation or as a substitute for analysis of the Company's results as reported under GAAP. The Company expects to continue to acquire businesses and product lines and to incur expenses of a nature similar to many of the non-GAAP adjustments described above, and exclusion of these items from its adjusted financial measures should not be construed as an inference that all of these revenue adjustments or costs are unusual, infrequent or non-recurring. Some of the limitations in relying on the adjusted financial measures are:
• | The Company periodically acquires other companies or businesses, and we expect to continue to incur acquisition-related expenses and charges in the future. These costs can directly impact the amount of the Company's available funds or could include costs for aborted deals which may be significant and reduce GAAP net income. |
• | The Company has initiated a long term effort to implement a global ERP system, and we expect to continue to incur significant systems implementation charges until that effort is completed. These costs can directly impact the amount of the Company's available funds and reduce GAAP net income. |
• | All of the adjustments to GAAP net income have been tax affected at the Company's actual tax rates. Depending on the nature of the adjustments and the tax treatment of the underlying items, the effective tax rate related to adjusted net income could differ significantly from the effective tax rate related to GAAP net income. |
In the financial tables portion of the Press Release, the Company has included a reconciliation of GAAP reported revenues to organic revenues for the quarters ended September 30, 2017 and 2016 and GAAP net income to adjusted EBITDA, GAAP net income to adjusted net income, GAAP diluted weighted average shares outstanding to adjusted diluted weighted average shares outstanding, GAAP earnings per diluted share to adjusted earnings per diluted share, and GAAP operating cash flow to free cash flow and adjusted free cash flow conversion used by management for the quarters ended September 30, 2017 and 2016. Also included are reconciliations for future periods.
Item 9.01 FINANCIAL STATEMENTS AND EXHIBITS
(d) Exhibits
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
INTEGRA LIFESCIENCES HOLDINGS CORPORATION | ||
Date: October 26, 2017 | By: | /s/ Glenn G. Coleman |
Glenn G. Coleman | ||
Title: | Corporate Vice President and Chief Financial Officer | |
EXHIBIT INDEX
News Release
Contact: | |
Investor Relations: | |
Michael Beaulieu | |
(609) 750-2827 | |
michael.beaulieu@integralife.com | |
Media: | |
Laurene Isip | |
(609) 750-7984 | |
laurene.isip@integralife.com | |
Integra LifeSciences Reports Third Quarter 2017 Financial Results
Revenue Increased 11.4% to $279 million; Organic Revenue Increased 1.5%
Reported EPS of $0.04; Adjusted EPS of $0.45
Plainsboro, New Jersey / October 26, 2017 / -- Integra LifeSciences Holdings Corporation (NASDAQ: IART), a leading global medical technology company, today reported financial results for the third quarter ending September 30, 2017.
Highlights
• | Third quarter revenue increased 11.4% to $278.8 million over the same quarter in the prior year, and organic revenue increased 1.5%. The recent storms had a negative impact of approximately $7 million in the third quarter. Derma Sciences contributed $24.1 million of revenue in the quarter; |
• | Third quarter GAAP earnings per share was $0.04, down from prior year quarter largely due to acquisition and integration related expenses. Third quarter adjusted earnings per share was $0.45, compared to $0.46 in the same quarter in the prior year; |
• | Third quarter cash flow from operations was $45.2 million, a slight decrease from $46.8 million in the prior year's quarter due to higher cash outlays for acquisition and integration expenses. Trailing twelve-month free cash flow conversion was 70.8%, compared to 75.6% in the prior-year period; |
• | The company is revising its full-year 2017 revenue guidance to a new range of $1.165 billion to $1.175 billion, primarily reflecting the addition of the Codman Neurosurgery business acquired from Johnson & Johnson. This results in a full-year 2017 reported revenue growth range of 17.4% to 18.4%; |
• | The company is lowering its 2017 full-year organic sales growth to about 4%, from its previous guidance of 6.0% to 7.0%, reflecting the impact from storm-related disruptions and lower base business sales growth; and |
• | The company is revising 2017 full-year GAAP earnings per share to a new range of $0.24 to $0.30 and adjusted earnings per share guidance to a new range of $1.83 to $1.87. |
Total revenues for the third quarter were $278.8 million, reflecting an increase of $28.5 million, or 11.4%, over the third quarter of 2016. Sales in Orthopedics and Tissue Technologies increased by 25.5%, which includes the acquired revenues from Derma Sciences and strength in our regenerative and orthopedic total ankle and shoulder portfolios. Sales in Specialty Surgical Solutions increased 3.4% compared to the third quarter of 2016. The increase resulted from strength in global tissue ablation sales driven by the recent launch of CUSA® Clarity.
Excluding the revenue contribution from acquisitions and the effect of currency exchange rates and discontinued products, total organic revenues increased 1.5% over the third quarter of 2016. Excluding the impact of the recent storms, organic growth was approximately 4.4%.
"Despite the challenges that we encountered during the third quarter, we were able to mitigate much of the impact on adjusted earnings per share with tighter expense controls, resulting in better than expected cash flows," said Peter Arduini, Integra's president and chief executive officer. "We are pleased to have closed the acquisition of Codman Neurosurgery and look forward to the increased scale and profitability that this strategic deal enables."
The company reported GAAP net income of $3.2 million, or $0.04 per diluted share, for the third quarter of 2017, compared to a GAAP net income of $20.1 million, or $0.25 per diluted share, in third quarter of 2016. The decline primarily reflects expenses associated with the Derma Sciences and Codman Neurosurgery transactions.
The adjusted measures discussed below are computed with the adjustments to GAAP reporting set forth in the attached reconciliation.
Adjusted EBITDA for the third quarter of 2017 was $63.0 million, or 22.6% of revenue, compared to $58.6 million, or 23.4% of revenue, in the third quarter of 2016. The decrease in adjusted EBITDA margin on a year-over-year basis primarily results from dilution from Derma Sciences.
Adjusted net income for the third quarter of 2017 was $36.1 million, unchanged from the prior year quarter. Adjusted earnings per share for the third quarter of 2017 were $0.45, a decrease of 2.2% over the prior year quarter.
2017 Full-Year Outlook
The company is adjusting its full-year 2017 revenue guidance to a new range of $1.165 billion to $1.175 billion, from $1.125 billion to $1.140 billion, primarily reflecting the addition of sales from the Codman acquisition in the fourth quarter. The company is reiterating Codman's fourth quarter revenue contribution of $60 million to $65 million, net of divestitures. The company is revising its full-year GAAP earnings per share guidance to a new range of $0.24 to $0.30 from its previous range of $0.49 to $0.55. Adjusted earnings per share guidance is being revised to a new range of $1.83 to $1.87 from its previous range of $1.88 to $1.94, entirely because of storm related disruptions.
Based on third quarter results and the outlook for the remainder of the year, the company is revising its full-year 2017 organic revenue growth to about 4%, down from its previous range of 6.0% to 7.0%, which reflects storm related disruptions of approximately 1.5% and lower growth in the base business of approximately 1%.
"We expect some storm-related disruptions to continue to impact revenues in the fourth quarter as production at our manufacturing facility and local infrastructure in Puerto Rico gradually return to full operating capacity," said
Glenn Coleman, Integra's chief financial officer. "Full-year 2017 organic revenue growth is now expected to be about 4%, which reflects the impact from the storms and slower run rates in our dural repair and SurgiMend® product lines."
In the future, the company may record, or expects to record, certain additional revenues, gains, expenses, or charges as described in the Discussion of Adjusted Financial Measures below, which will be excluded from the calculation of adjusted EBITDA, adjusted earnings per share for historical periods and in adjusted earnings per share guidance.
Conference Call and Presentation Available Online
Integra has scheduled a conference call for 8:30 AM ET today, Thursday, October 26, 2017, to discuss financial results for the third quarter and forward-looking financial guidance. The conference call will be hosted by Integra's senior management team and will be open to all listeners. Additional forward-looking information may be discussed in a question and answer session following the call.
Integra's management team will reference a presentation during the conference call. The presentation can be found on investor.integralife.com.
Access to the live call is available by dialing (323) 794-2551 and using the passcode 6660907. The call can also be accessed via a webcast link provided on investor.integralife.com. A replay of the call will be available through October 30, 2017, by dialing (719) 457-0820 and using the passcode 6660907. The webcast will also be archived on the website.
About Integra
Integra LifeSciences is dedicated to limiting uncertainty for clinicians, so they can concentrate on providing the best patient care. Integra offers innovative solutions, including leading plastic and regenerative technologies, in specialty surgical solutions and orthopedics and tissue technologies. For more information, please visit www.integralife.com.
This news release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties, and reflect the Company's judgment as of the date of this release. Forward-looking statements include, but are not limited to, statements concerning future financial performance, including projections for revenues, GAAP and adjusted net income, GAAP and adjusted (loss)/earnings per diluted share, non-GAAP adjustments such as global enterprise resource planning ("ERP") system implementation charges, acquisition-related charges, goodwill impairment charges, non-cash amortization of imputed interest for convertible debt, intangible asset amortization, and income tax expense (benefit) related to non-GAAP adjustments. In addition, with respect to the Codman Neurosurgery acquisition, forward-looking statements in this document may include without limitation any statements regarding the integration of the Codman Neurosurgery business, and the costs and benefits of the acquisition, including future financial and operating results. It is important to note that the Company’s goals and expectations are not predictions of actual performance. Such forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from predicted or expected results. Such risks and uncertainties include, but are not limited to the following: the Company's ability to execute its operating plan effectively; the Company’s ability to successfully integrate the Codman Neurosurgery business and other acquired businesses; the Company's ability to successfully resume and sustain manufacturing operations at full capacity at our Puerto Rico facility and the restoration of infrastructure and other essential services in Puerto Rico; the Company's ability to manufacture and ship sufficient quantities of its products to meet its customers' demands; the ability of third-party suppliers to supply us with raw materials and finished products; global macroeconomic and political conditions; the Company's ability to manage its direct sales channels effectively; the Company's ability to maintain relationships with customers of acquired entities and businesses; physicians' willingness to adopt and third-party payors' willingness to provide or maintain reimbursement for the Company's recently launched, planned and existing products; initiatives launched by the
Company's competitors; downward pricing pressures from customers; the Company's ability to secure regulatory approval for products in development; the Company's ability to remediate quality systems violations; fluctuations in hospitals spending for capital equipment; the Company's ability to comply with and obtain approvals for products of human origin and comply with regulations regarding products containing materials derived from animal sources; difficulties in controlling expenses, including costs to procure and manufacture our products; the impact of changes in management or staff levels; the impact of goodwill and intangible asset impairment charges if future operating results of acquired businesses are significantly less than the results anticipated at the time of the acquisitions, the Company's ability to leverage its existing selling organizations and administrative infrastructure; the Company's ability to increase product sales and gross margins, and control non-product costs; the Company’s ability to achieve anticipated growth rates, margins and scale and execute its strategy generally; the amount and timing of acquisition and integration-related costs; the geographic distribution of where the Company generates its taxable income; the effect of legislation effecting healthcare reform in the United States and internationally; fluctuations in foreign currency exchange rates; the amount of our convertible notes and bank borrowings outstanding and other factors influencing liquidity; and the economic, competitive, governmental, technological, and other risk factors and uncertainties identified under the heading “Risk Factors” included in Item 1A
of Integra's Annual Report on Form 10-K for the year ended December 31, 2016 and information contained in subsequent filings with the Securities and Exchange Commission.
These forward-looking statements are made only as of the date hereof, and the Company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events, or otherwise.
Discussion of Adjusted Financial Measures
In addition to our GAAP results, we provide organic revenues, adjusted earnings before interest, taxes, depreciation and amortization ("EBITDA"), adjusted net income, adjusted earnings per diluted share, adjusted diluted weighted average shares outstanding, free cash flow and adjusted free cash flow conversion. Organic revenues consist of total revenues excluding the effects of currency exchange rates, acquired revenues and product discontinuances. Adjusted EBITDA consists of GAAP net income from continuing operations, excluding: (i) depreciation and amortization; (ii) other income (expense); (iii) interest income and expense; (iv) income taxes; and (v) those operating expenses also excluded from adjusted net income. The measure of adjusted net income consists of GAAP net income from continuing operations, excluding: (i) global enterprise resource planning ("ERP") implementation charges; (ii) structural optimization charges; (iii) certain employee severance charges; (iv) acquisition-related charges; (v) convertible debt non-cash interest; (vi) intangible asset amortization expense; and (vii) discontinued product lines charges; (viii) income tax impact from adjustments; and (ix) hurricane related expenses and other items. The measure of adjusted diluted weighted average shares outstanding is calculated by adding the economic benefit of the convertible note hedge transactions relating to Integra's 2016 convertible notes. The adjusted earnings per diluted share measure is calculated by dividing adjusted net income attributable to diluted shares by adjusted diluted weighted average shares outstanding. The measure of free cash flow consists of GAAP net cash provided by continuing operating activities from continuing operations less purchases of property and equipment. The adjusted free cash flow conversion measure is calculated by dividing free cash flow by adjusted net income.
Reconciliations of GAAP revenues to adjusted revenues and GAAP Adjusted Net Income from continuing operations to adjusted EBITDA, and adjusted net income, and GAAP earnings per diluted share to adjusted earnings per diluted share all for the Three Months Ended September 30, 2017 and 2016, and the free cash flow and free cash flow conversion for the Three Months Ended September 30, 2017 and 2016 and the twelve months ended June 30, 2017 and 2016, appear in the financial tables in this release.
The Company believes that the presentation of organic revenues and the various adjusted EBITDA, adjusted net income, adjusted earnings per diluted share, adjusted diluted weighted average shares outstanding, free cash flow and free cash flow conversion measures provide important supplemental information to management and investors regarding 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. This Current Report on Form 8-K is available on the SEC's website at www.sec.gov or on our website at www.integralife.com.
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share amounts)
Three Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Total revenues, net | $ | 278,834 | $ | 250,332 | ||||
Costs and expenses: | ||||||||
Cost of goods sold | 101,757 | 89,329 | ||||||
Research and development | 15,034 | 15,124 | ||||||
Selling, general and administrative | 145,945 | 112,317 | ||||||
Intangible asset amortization | 5,456 | 3,467 | ||||||
Total costs and expenses | 268,192 | 220,237 | ||||||
Operating income | 10,642 | 30,095 | ||||||
Interest income | 89 | 2 | ||||||
Interest expense | (6,761 | ) | (6,295 | ) | ||||
Other income (expense), net | (735 | ) | 1,192 | |||||
Income from continuing operations before taxes | 3,235 | 24,994 | ||||||
Income tax expense (benefit) | 76 | 4,850 | ||||||
Net income | $ | 3,159 | $ | 20,144 | ||||
Net income per share: | ||||||||
Diluted net income per share | $ | 0.04 | $ | 0.25 | ||||
Weighted average common shares outstanding for diluted net income per share | 79,455 | 81,032 | ||||||
Segment revenues and growth in total revenues excluding the effects of currency exchange rates, acquisitions, and discontinued products are as follows:
(In thousands)
Three Months Ended September 30, | |||
2017 | 2016 | Change | |
Specialty Surgical Solutions | 164,760 | 159,409 | 3.4% |
Orthopedics and Tissue Technologies | 114,074 | $90,923 | 25.5% |
Total revenues | $278,834 | $250,332 | 11.4% |
Impact of changes in currency exchange rates(1) | $(1,600) | ||
Less contribution of revenues from acquisitions(2) | (24,296) | ||
Less contribution of revenues from discontinued products(3) | (9,637) | (10,559) | |
Total organic revenues | $243,300 | $239,773 | 1.5% |
(1) Excludes $103,000 of foreign currency associated with discontinued products
(2) Acquisitions include Derma Sciences and TGX Medical
(3) Organic Revenue Growth has been restated for PY 2016 to account for discontinued products which includes divestitures related to the Codman acquisition.
Items included in GAAP net income from continuing operations and location where each item is recorded are as follows:
(In thousands)
Three Months Ended September 30, 2017
Item | Total Amount | COGS(a) | SG&A(b) | Amort.(c) | OI&E(d) | Tax(e) |
Global ERP implementation charges | $— | $— | $— | $— | $— | $— |
Structural optimization charges | 1,944 | 1,309 | 635 | — | — | — |
Acquisition-related charges* | 24,904 | 1,572 | 23,332 | — | — | — |
Hurricane related expenses | 1,261 | 1,261 | — | — | — | — |
Intangible asset amortization expense | 15,789 | 10,333 | — | 5,456 | — | — |
Estimated income tax impact from above adjustments and other items | (10,991) | — | — | — | — | (10,991) |
Total adjustments | $32,907 | $14,475 | $23,967 | $5,456 | $— | $(10,991) |
Depreciation expense | 8,470 | — | — | — | — | — |
Stock-based compensation expense | 5,309 | |||||
a) | COGS - Cost of goods sold |
b) | SG&A - Selling, general and administrative |
c) | Amort. - Intangible asset amortization |
d) | OI&E - Interest (income) expense, net and other (income) expense, net |
e) | Tax - Income tax expense |
* Acquisition related charges are primarily associated with the Derma Sciences and Codman Neurosurgery acquisitions and include banking, legal, consulting and other expenses
Three Months Ended September 30, 2016
(In thousands)
Item | Total Amount | COGS (a) | SG&A (b) | Amort. (c) | OI&E (d) | Tax (e) |
Global ERP implementation charges | $3,366 | $— | $3,366 | $— | $— | $— |
Structural optimization charges | 1,993 | 1,133 | 860 | — | — | — |
Acquisition-related charges | 4,935 | 4,570 | 165 | — | — | — |
Certain employee severance charges | 153 | (41) | 194 | — | — | — |
Intangible asset amortization expense | 10,316 | 6,849 | — | 3,467 | — | — |
Convertible debt noncash interest | 2,132 | — | — | — | 2,132 | — |
Estimated income tax impact from above adjustments and other items | (6,938) | — | — | — | — | (6,938) |
Total adjustments | $15,957 | $12,511 | $4,585 | $3,467 | $2,132 | $(6,938) |
Depreciation expense | 7,770 | — | — | — | — | — |
a) | COGS - Cost of goods sold |
b) | SG&A - Selling, general and administrative |
c) | Amort. - Intangible asset amortization |
d) | OI&E - Interest (income) expense, net and other (income) expense, net |
e) | Tax - Income tax expense |
RECONCILIATION OF NON-GAAP ADJUSTMENTS - GAAP NET INCOME FROM CONTINUNG OPERATIONS TO ADJUSTED EBITDA
(UNAUDITED)
(In thousands, except per share amounts)
Three Months Ended September 30, | |||||||
2017 | 2016 | ||||||
GAAP net income from continuing operations | $ | 3,159 | $ | 20,144 | |||
Non-GAAP adjustments: | |||||||
Depreciation and intangible asset amortization expense | 24,259 | 18,086 | |||||
Other (income) expense, net | 735 | (1,192 | ) | ||||
Interest expense, net | 6,672 | 6,293 | |||||
Income tax (benefit) | 76 | 4,850 | |||||
Global ERP implementation charges | — | 3,366 | |||||
Structural optimization charges | 1,944 | 1,993 | |||||
Acquisition-related charges | 24,904 | 4,935 | |||||
Certain employee severance charges | — | 153 | |||||
Hurricane related expenses | 1,261 | — | |||||
Total of non-GAAP adjustments | 59,851 | 38,484 | |||||
Adjusted EBITDA | $ | 63,010 | $ | 58,628 | |||
RECONCILIATION OF NON-GAAP ADJUSTMENTS - GAAP NET INCOME FROM CONTINUING OPERATIONS TO MEASURES OF ADJUSTED NET INCOME AND ADJUSTED EARNINGS PER SHARE
(UNAUDITED)
(In thousands, except per share amounts)
Three Months Ended September 30, | |||||||
2017 | 2016 | ||||||
GAAP net income from continuing operations | 3,159 | 20,144 | |||||
Non-GAAP adjustments: | |||||||
Global ERP implementation charges | — | 3,366 | |||||
Structural optimization charges | 1,944 | 1,993 | |||||
Acquisition-related charges | 24,904 | 4,935 | |||||
Certain employee severance charges | — | 153 | |||||
Intangible asset amortization expense | 15,789 | 10,316 | |||||
Convertible debt noncash interest | — | 2,132 | |||||
Hurricane related expenses | 1,261 | — | |||||
Estimated income tax impact from adjustments and other items | (10,991 | ) | (6,938 | ) | |||
Total of non-GAAP adjustments | 32,907 | 15,957 | |||||
Adjusted net income | $ | 36,066 | $ | 36,101 | |||
Adjusted diluted net income per share | $0.45 | $0.46 | |||||
Weighted average common shares outstanding for diluted net income per share | 79,455 | 81,032 | |||||
Weighted average common shares outstanding adjustment for economic benefit of convertible bond hedge transactions | — | (3,176 | ) | ||||
Weighted average common shares outstanding for adjusted diluted net income per share | 79,455 | 77,856 | |||||
CONDENSED BALANCE SHEET DATA
(UNAUDITED)
(In thousands)
September 30, 2017 | December 31, 2016 | ||||||
Cash and cash equivalents | $ | 481,943 | $ | 102,055 | |||
Accounts receivable, net | 171,126 | 148,186 | |||||
Inventories, net | 232,340 | 217,263 | |||||
Bank line of credit | 1,171,383 | 665,000 | |||||
Stockholders' equity | $ | 913,116 | $ | 839,667 | |||
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In thousands)
Nine Months Ended September 30, | |||||||
September 30, 2017 | September 30, 2016 | ||||||
Net cash provided by operating activities | $ | 102,995 | $ | 109,876 | |||
Net cash used in investing activities | (237,767 | ) | (21,480 | ) | |||
Net cash provided by (used in) financing activities | 504,733 | (28,879 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents | 9,927 | (51 | ) | ||||
Net increase in cash and cash equivalents | $ | 379,888 | $ | 59,466 | |||
RECONCILIATION OF NON-GAAP ADJUSTMENTS - GAAP OPERATING CASH FLOW TO
MEASURES OF FREE CASH FLOW AND FREE CASH FLOW CONVERSION
(UNAUDITED)
(In thousands)
Three Months Ended September 30, | ||||||
2017 | 2016 | |||||
GAAP net cash provided by continuing operating activities | $ | 45,240 | $ | 46,766 | ||
Purchases of property and equipment from continuing operations | (7,796 | ) | (6,974 | ) | ||
Free cash flow | 37,444 | 39,792 | ||||
Adjusted net income * | $ | 36,066 | $ | 36,101 | ||
Adjusted free cash flow conversion | 103.8 | % | 110.2 | % | ||
Twelve Months Ended September 30, | ||||||
2017 | 2016 | |||||
GAAP net cash provided by continuing operating activities** | $ | 109,516 | $ | 135,515 | ||
Accreted interest payment associated with the 2016 convertible note | 42,786 | |||||
Purchases of property and equipment from continuing operations | (50,998 | ) | (39,235 | ) | ||
Adjusted free cash flow | 101,304 | 96,280 | ||||
Adjusted net income * | $ | 143,087 | $ | 127,362 | ||
Adjusted free cash flow conversion | 70.8 | % | 75.6 | % | ||
* Adjusted net income for quarters ended June 30, 2017 and 2016 are reconciled above. Adjusted net income for remaining quarters in the trailing twelve months calculation have been previously reconciled and are publicly available in the Quarterly Earnings Call Presentations and the Historical Financial Results: Continuing Operations presentation on our website at investor.integralife.com under Events & Presentations.
** Operating cash flow excludes $42.8M of accreted interest payment associated with the 2016 Convertible Notes.
The Company calculates adjusted free cash flow conversion by dividing its free cash flow by adjusted net income. The Company believes this measure is useful in evaluating the significance of the cash special charges in its adjusted earnings measures.
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
RECONCILIATION OF NON-GAAP ADJUSTMENTS - GUIDANCE
Recorded Year to Date | Projected Year Ended | ||||||||||
(In thousands, except per share amounts) | September 30, 2017 | December 31, 2017 | |||||||||
Low | High | ||||||||||
GAAP net income | $ | 20,388 | $ | 11,552 | $ | 16,052 | |||||
Non-GAAP adjustments: | |||||||||||
Global ERP implementation charges | 3,261 | 3,261 | 3,261 | ||||||||
Structural optimization charges | 5,336 | 8,609 | 8,609 | ||||||||
Acquisition-related charges | 68,919 | 105,696 | 105,696 | ||||||||
Certain employee severance charges | 125 | 125 | 125 | ||||||||
Hurricane related charges | 1,261 | ||||||||||
Discontinued product lines charges | 1,025 | 1,025 | 1,025 | ||||||||
Intangible asset amortization expense | 39,253 | 59,970 | 59,970 | ||||||||
Estimated income tax impact from adjustments and other items | (37,229 | ) | (41,138 | ) | (41,138 | ) | |||||
Total of non-GAAP adjustments | 81,951 | 137,548 | 137,548 | ||||||||
Adjusted net income | $ | 102,339 | $ | 149,100 | $ | 153,600 | |||||
GAAP diluted net income per share | $0.26 | $0.24 | $0.30 | ||||||||
Non-GAAP adjustments detailed above (per share) | $1.04 | $1.59 | $1.57 | ||||||||
Adjusted diluted net income per share | $1.30 | $1.83 | $1.87 | ||||||||
Weighted average common shares outstanding for diluted net income per share | 78,973 | 79,500 | 79,000 | ||||||||
GUIDANCE - SPECIAL CHARGES
Item | YTD Amount | FY Guidance | COGS | SG&A | R&D | Amort. | Interest (Inc)Exp | Tax | ||||||||||||||||
Global ERP implementation charges | $ | 3,261 | $ | 3,261 | $ | — | $ | 3,261 | $ | — | $ | — | $ | — | $ | — | ||||||||
Structural optimization charges | 5,336 | 8,609 | 4,607 | 4,002 | — | — | ||||||||||||||||||
Acquisition-related charges | 68,919 | 105,696 | 22,711 | 82,985 | — | — | — | |||||||||||||||||
Certain employee severance charges | 125 | 125 | — | 125 | — | — | — | — | ||||||||||||||||
Hurricane related expenses | 1,261 | 1,261 | — | — | — | — | — | |||||||||||||||||
Discontinued product lines charges | 1,025 | 1,025 | 1,025 | — | — | — | — | — | ||||||||||||||||
Intangible asset amortization expense | 39,253 | 59,970 | 39,605 | — | — | 20,365 | — | — | ||||||||||||||||
Convertible debt non-cash interest | — | — | — | — | — | — | — | — | ||||||||||||||||
Estimated income tax impact from adjustments and other items | (37,229 | ) | (41,138 | ) | — | — | — | — | — | (41,138 | ) | |||||||||||||
Total | 81,951 | 138,809 | 67,948 | 90,373 | — | 20,365 | — | (41,138 | ) | |||||||||||||||
Source: Integra LifeSciences Holdings Corporation