Integra Beats on EPS, Misses Rev

Zacks

Integra LifeSciences Holdings Corporation (IART) reported earnings per share (‘EPS’) of 46 cents in the third quarter of fiscal 2012, significantly up from 39 cents in the year-ago quarter. Adjusted EPS increased 10.3% year over year to 85 cents and comfortably beat the Zacks Consensus Estimate of 76 cents.

Total revenue during the quarter increased 4% year over year (5% at constant exchange rates or CER) to $210.1 million. However, it missed the Zacks Consensus Estimate of $211 million. The growth was primarily on the back of improved sales across most of the segments of Integra.

Segment wise, barring International revenues (down 3.4% year over year to $43.2 million) and U.S. Instruments (down 0.2% year over year to $41.5 million), all the other segments of Integra recorded growth – U.S. Spine & Other (up 1.9% to $49.2 million), U.S. Neurosurgery (up 1.1% to $43.3 million), and U.S. Extremities (up 32.8% to $32.9 million) at CER.

Product category wise, worldwide Orthopedics sales increased 9.9% year over year to $94.2 million (up 12.5% in the U.S., offset by a 4.9% dip outside the U.S.) in the quarter. The company also registered a 0.1% year-over-year drag in worldwide Neurosurgery sales to $69.7 million as a 0.8% rise in US Neurosurgery revenues were more than offset by a 1.6% dip in the non-U.S. revenues during the quarter. Worldwide Instruments revenues were $46.2 million, down 1.0% year over year with a 0.1% decline in U.S. sales and 7.3% dip in non-U.S. sales.

Integra witnessed a 5.7% year-over-year increase in gross profit to $130.6 million. Gross margin during the quarter was up 108 basis points (bps) to 62.16%. During the quarter, research and development expenses dropped 0.6% to $13.1 million but selling, general and administrative expenses increased 6.4% year over year to $93.1 million. Operating margin expanded 35 bps to 9.4%.

Integra exited the quarter with $125.7 million in cash, cash equivalents compared with $100.8 million at the end of 2011. The company generated $27.9 million in cash flow from operations and incurred capital expenditures of $19.7 million in the quarter.

Outlook

Integra reiterated its 2012 revenue guidance of $828–$838 million. However, the company increased its 2012 adjusted EPS guidance to $3.04–$3.09 (earlier guidance being $2.97–$3.06). The current Zacks Consensus Estimate for revenues and EPS of $834 million and $3.05, respectively, are in line with the company’s guided range.

Recommendation

We are encouraged by the company’s balanced performance in the reported quarter amidst a challenging macroeconomic environment. The company’s focus on strategic initiatives to drive growth and profitability in the orthopedic market is quite encouraging. Several initiatives on the company’s part like planned product launches and acquisitions are expected to accelerate sales growth for the next several quarters.

However, tighter capital spending continues to challenge the surgical instruments market. Moreover, Integra faces direct competition in the medical instruments & supplies industry from major players like Medtronic (MDT) and Stryker Corp. (SYK). Currently, the company retains a short-term Zacks #3 Rank (Hold rating).

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