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8-K - FORM 8-K - RTI SURGICAL, INC.d459984d8k.htm

Exhibit 99.1

For more information, contact:

Jonathon Singer

Chief Financial & Administrative Officer

jsinger@rtix.com

Roxane Wergin

Director, Corporate Communications

rwergin@rtix.com

Phone (386) 418-8888

RTI Surgical® Announces 2017 Third Quarter Results

Company achieves financial commitments and confirms full year expectations

ALACHUA, Fla. (November 2, 2017) – RTI Surgical Inc. (RTI) (Nasdaq: RTIX), a global surgical implant company, reported operating results for the third quarter, ended September 30, 2017.

RTI generated $66.7 million in revenue, driven by growth in the company’s spine, commercial and international businesses. Earnings for the third quarter totaled $16.5 million, which includes a $34.1 million gain from the sale of RTI’s Cardiothoracic closure business, which was announced on August 3, 2017.

“We believe our focus to reduce complexity, drive operational excellence and accelerate growth continued to support solid financial and operational progress during the most recent quarter,” said Camille Farhat, chief executive officer, RTI. “We delivered on our financial commitments while mobilizing across our organization to mitigate the impact of the recent hurricanes, which disrupted end-user demand across many of our markets and necessitated the closure of our Florida operations for several days.”

RTI estimates a permanent loss in excess of $1.2 million of product revenue during the quarter, due to the cancellation of procedures in regions impacted by the storms. The lost revenue in conjunction with facility closure cost impacted net income by approximately $0.5 million during the quarter. “RTI’s operating team’s response was outstanding,” Farhat said. “Stellar planning and collaboration across the organization minimized the disruption and ensured we could quickly resume operations and support our customers.”


During the quarter, three highly experienced executives were added to the leadership team: Jonathon Singer as chief financial & administrative officer, Olivier Visa as head of OEM, Donor Services and Sports franchises, and Julius Aviza as leader of the quality assurance function.

“Each has a long resume of success and, we believe, will play a key role in driving the execution of our strategic objectives. Our entire leadership team has quickly aligned around accelerating initiatives to reduce complexity and drive operational excellence toward those areas that we believe will have the greatest impact on earnings growth and cash generation over the next 12-18 months,” Farhat commented. “With my confidence that our leadership team is driving these initiatives, we will expand our effort to find new and better ways to serve our customers by enhancing our product portfolio and evaluating and pursuing strategic growth opportunities intended to capitalize on our strengths and enable us to take market leadership positions.”

Third Quarter 2017

RTI’s revenues for the third quarter of 2017 were $66.7 million, a slight increase from the prior year quarter revenues of $66.5 million. Third quarter revenues were driven by growth in spine, commercial and international, partially offset by a $1.6 million reduction from the sale of substantially all the assets of the Cardiothoracic closure business. In addition, RTI estimates that the impact of domestic hurricanes during the quarter reduced revenue by approximately $1.2 million due to cancellation of procedures. Gross profit for the third quarter of 2017 was $33.5 million, or 50.3% of revenue, compared to $34.3 million, or 51.5% of revenue in the third quarter of 2016. Gross margin was impacted adversely by approximately $0.9 million in the third quarter of 2017 due to the loss of revenue and the closure of RTI’s Florida facilities due to hurricanes during the period, and by $1.3 million due to the sale of the Cardiothoracic closure business.

During the third quarter of 2017, RTI completed the sale of substantially all the assets related to its Cardiothoracic closure business for total consideration of $54 million, plus an additional $6 million in contingent cash consideration. In conjunction with the sale of the Cardiothoracic closure business, the company recognized a gain of $34.1 million, or $18.2 million after-tax.

During the third quarter of 2017, RTI incurred $2.8 million in severance charges predominantly to support executive leadership transition and our efforts to enhance our strategic focus to reduce complexity and drive operational excellence.

Net income applicable to common shares was $16.5 million, or $0.23 per fully diluted common share in the third quarter of 2017, compared to a net loss applicable to common shares of $4.5 million, or $0.08 per fully diluted common share in the third quarter of 2016. As outlined in the reconciliation tables that


follow, excluding the impact of the Cardiothoracic closure sale gain and severance charges in the third quarter of 2017, adjusted net income applicable to common shares was $0.4 million, or $0.01 per fully diluted common share in the third quarter of 2017.

Adjusted earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) of $8.1 million was comparable to the third quarter of 2016.

Fiscal 2017 Outlook

RTI has developed its guidance based on the company’s ongoing restructuring and operational improvement program, its current business profile and existing market conditions.

Within this context, based on third quarter 2017 results and the transition of the Cardiothoracic closure business from a direct business to a commercial business due to the sale, RTI continues to expect full year revenues for 2017 to be between $274 million and $280 million. Due primarily to the third quarter impact of the hurricanes, RTI has narrowed the guidance range for adjusted full year net income per fully diluted common share to be between $0.05 and $0.07 based on 61 million fully diluted shares outstanding when adjusted for non-recurring activity as detailed in the reconciliation provided below.

Conference Call

RTI will host a conference call and simultaneous audio webcast to discuss its third quarter 2017 results at 8:30 a.m. ET today. The conference call can be accessed by dialing (877) 383-7419. The webcast can be accessed through the investor section of RTI’s website at www.rtix.com. A replay of the conference call will be available on the RTI website following the call.

About RTI Surgical Inc.

RTI Surgical is a leading global surgical implant company providing surgeons with safe biologic, metal and synthetic implants. Committed to delivering a higher standard, RTI’s implants are used in sports medicine, general surgery, spine, orthopedic, trauma and cardiothoracic procedures and are distributed in nearly 50 countries. RTI is headquartered in Alachua, Fla., and has four manufacturing facilities throughout the U.S. and Europe. RTI is accredited in the U.S. by the American Association of Tissue Banks and is a member of AdvaMed. For more information, please visit www.rtix.com.


Forward Looking Statement

This communication contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management’s current expectations, estimates and projections about our industry, our management’s beliefs and certain assumptions made by our management. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, except for historical information, any statements made in this communication about anticipated financial results, growth rates, new product introductions, future operational improvements and results or regulatory actions or approvals or changes to agreements with distributors also are forward-looking statements. These statements are not guarantees of future performance and are subject to risks and uncertainties, including the risks described in public filings with the U.S. Securities and Exchange Commission (SEC). Our actual results may differ materially from the anticipated results reflected in these forward-looking statements. Copies of the company’s SEC filings may be obtained by contacting the company or the SEC or by visiting RTI’s website at www.rtix.com or the SEC’s website at www.sec.gov.


RTI SURGICAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited, in thousands, except share and per share data)

 

     For the Three Months Ended     For the Nine Months Ended  
     September 30,     September 30,  
     2017     2016     2017     2016  

Revenues

   $ 66,688     $ 66,547     $ 208,747     $ 201,518  

Costs of processing and distribution

     33,177       32,273       102,494       97,270  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     33,511       34,274       106,253       104,248  
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Marketing, general and administrative

     27,678       28,724       86,845       84,678  

Research and development

     2,801       3,789       10,229       12,034  

Severance charges

     2,820       328       10,623       1,039  

Restructuring charges

     —         —         —         1,107  

Strategic review costs

     —         650       —         650  

CEO Retirement and transition costs

     —         4,107       —         4,107  

Contested proxy expenses

     —         —         —         2,680  

Gain on cardiothoracic closure business divestiture

     (34,090     —         (34,090     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     (791     37,598       73,607       106,295  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     34,302       (3,324     32,646       (2,047
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense - net

     (681     (374     (2,470     (1,112
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax (provision) benefit

     33,621       (3,698     30,176       (3,159

Income tax (provision) benefit

     (16,135     92       (16,251     (338
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (loss)

     17,486       (3,606     13,925       (3,497
  

 

 

   

 

 

   

 

 

   

 

 

 

Convertible preferred dividend

     (938     (883     (2,772     (2,611
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) applicable to common shares

   $ 16,548     $ (4,489   $ 11,153     $ (6,108
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per common share - basic

   $ 0.28     $ (0.08   $ 0.19     $ (0.10
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per common share - diluted

   $ 0.23     $ (0.08   $ 0.19     $ (0.10
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding - basic

     59,704,533       58,353,110       59,045,372       58,173,580  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding - diluted

     75,188,161       58,353,110       59,954,964       58,173,580  
  

 

 

   

 

 

   

 

 

   

 

 

 


RTI SURGICAL, INC. AND SUBSIDIARIES

Reconciliation of Net Income (Loss) Applicable to Commons Shares to Adjusted EBITDA

(Unaudited, in thousands)

 

     For the Three Months     For the Nine Months  
     Ended September 30,     Ended September 30,  
     2017     2016     2017     2016  

Net income (loss)

   $ 16,548     $ (4,489   $ 11,153     $ (6,108

Interest expense, net

     741       307       2,475       1,053  

Provision (benefit) for income taxes

     16,135       (92     16,251       338  

Depreciation

     2,623       3,459       7,947       10,295  

Amortization of intangible assets

     952       934       2,757       2,792  
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     36,999       119       40,583       8,370  

Reconciling items for Adjusted EBITDA

        

Preferred dividend

     938       883       2,772       2,611  

Non-cash stock based compensation

     2,305       1,975       4,113       3,075  

Foreign exchange (gain) loss

     (60     67       (5     59  

Other reconciling items(1)

        

Severance charges excluding stock based compensation

     2,000       328       9,470       1,039  

Restructuring charges

     —         —         —         1,107  

Strategic review costs

     —         650       —         650  

CEO Retirement and transition costs

     —         4,107       —         4,107  

Contested proxy expenses

     —         —         —         2,680  

Gain on cardiothoracic closure business divestiture

     (34,090     —         (34,090     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 8,092     $ 8,129     $ 22,843     $ 23,698  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA as a percent of revenues

     12     12     11     12
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) See explanations in Use of Non-GAAP Financial Measures section later in this release.


RTI SURGICAL, INC. AND SUBSIDIARIES

Reconciliation of Net Income (Loss) Applicable to Common Shares and Net Income (Loss) Per Diluted Share to

Adjusted Net Income Applicable to Common Shares and Adjusted Net Income Per Diluted Share

(Unaudited, in thousands, except per share data)

 

     For the Three Months Ended  
     September 30, 2017     September 30, 2016  
     Net           Net        
     Income     Amount     Income     Amount  
     Applicable to     per Diluted     Applicable to     per Diluted  
     Common Shares     Share     Common Shares     Share  

As reported

   $ 16,548     $ 0.23     $ (4,489   $ (0.08

Severance charges

     2,820       0.04       328       0.01  

Strategic review costs

     —         —         650       0.01  

CEO Retirement and transition costs

     —         —         4,107       0.07  

European net operating loss valuation reserve

     —         —         1,224       0.02  

Gain on cardiothoracic closure business divestiture

     (34,090     (0.45     —         —    

Tax effect on adjustments

     15,159       0.20       (1,773     (0.03
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted *

   $ 437     $ 0.01     $ 47     $ 0.00  
  

 

 

   

 

 

   

 

 

   

 

 

 
     For the Nine Months Ended  
     September 30, 2017     September 30, 2016  
     Net           Net        
     Income     Amount     Income     Amount  
     Applicable to     per Diluted     Applicable to     per Diluted  
     Common Shares     Share     Common Shares     Share  

As reported

   $ 11,153     $ 0.19     $ (6,108   $ (0.10

Severance charges

     10,623       0.18       1,039       0.02  

Restructuring charges

     —         —         1,107       0.02  

Strategic review costs

     —         —         650       0.01  

CEO Retirement and transition costs

     —         —         4,107       0.07  

Contested proxy expenses

     —         —         2,680       0.05  

European net operating loss valuation reserve

     —         —         1,224       0.02  

Gain on cardiothoracic closure business divestiture

     (34,090     (0.57     —         —    

Tax effect on adjustments

     13,855       0.23       (3,128     (0.05
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted *

   $ 1,541     $ 0.03     $ 1,571     $ 0.03  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

* See explanations in Use of Non-GAAP Financial Measures section later in this release.

 

  Amount Per Diluted Share may not foot due to rounding.


Fiscal 2017 Outlook

Full year net income per fully diluted common share is expected to be in the range of $0.21 to $0.23, based on 61 million fully diluted shares outstanding. Excluding severance charges and the gain from the sale of the Company’s Cardiothoracic closure business taken in 2017, full year net income per fully diluted common share is expected to be in the range of $0.05 to $0.07.

RTI SURGICAL, INC. AND SUBSIDIARIES

Reconciliation of GAAP Guidance Net Income Per Common Share - Diluted to

Adjusted Non-GAAP Guidance Net Income Per Common Share - Diluted

(Unaudited)

 

     Twelve Months Ended  
     December 31, 2017  
     $ Amount  
     Per Common  
     Share - Diluted  

GAAP Guidance Net Income Per Common Share - Diluted

   $ 0.21 - 0.23  

Severance charges, net of tax effect

     0.14  

Gain on Cardiothoracic closure business divestiture, net of tax effect

     (0.30
  

 

 

 

Adjusted Non-GAAP Guidance Net Income Per Common Share - Diluted

   $ 0.05 - 0.07  
  

 

 

 


Use of Non-GAAP Financial Measures

To supplement the Company’s unaudited condensed consolidated financial statements presented on a GAAP basis, the Company discloses certain non-GAAP financial measures that exclude certain amounts, including EBITDA, Adjusted EBITDA, Adjusted Net Income Applicable to Common Shares and Adjusted Net Income per Common Share - Diluted. The calculation of the tax effect on the adjustments between GAAP net (loss) income applicable to common shares and non-GAAP net income applicable to common shares is based upon our estimated annual GAAP tax rate, adjusted to account for items excluded from GAAP net (loss) income applicable to common shares in calculating Adjusted Net Income Applicable to Common Shares-Diluted. A reconciliation of the non-GAAP financial measures to the corresponding GAAP measures is included in the tables listed above.

The following is an explanation of the adjustments that management excluded as part of adjusted measures for the three and nine month periods ended September 30, 2017 and 2016 as well as the reason for excluding the individual items:

Severance charges – This adjustment represents charges relating to the termination of former employees. Management removes the amount of these costs from our operating results to supplement a comparison to our past operating performance.

Restructuring charges – This adjustment represents the closure of our French distribution and tissue procurement office. Management removes the amount of these costs from our operating results to supplement a comparison to our past operating performance.

Strategic review costs – This adjustment represents charges relating to a comprehensive strategic review of the Company’s business lines and operations intended to leverage the Company’s expertise, technology and products and identify opportunities to increase stockholder value. Management removes the amount of these expenses from our operating results to supplement a comparison to our past operating performance.

CEO Retirement and transition costs – This adjustment represents charges relating to the retirement of our former Chief Executive Officer, and the resulting financial impact of such resignation under the Executive Transition Agreement dated August 29, 2012 and Executive Separation Agreement dated August 15, 2016. Management removes the amount of these expenses from our operating results to supplement a comparison to our past operating performance.

Contested proxy expenses – This adjustment represents charges relating to contested proxy expenses. Management removes the amount of these costs from our operating results to supplement a comparison to our past operating performance.

Gain on Cardiothoracic closure business divestiture – This adjustment represents the gain relating to the sale of substantially all the assets of our Cardiothoracic closure business to A&E. Management removes the amount of this gain from our operating results to supplement a comparison to our past operating performance.

Material Limitations Associated with the Use of Non-GAAP Financial Measures

EBITDA, Adjusted EBITDA, Adjusted Net Income Applicable to Common Shares and Adjusted Net Income per Common Share - Diluted should not be considered in isolation, or as a replacement for GAAP measures.

Usefulness of Non-GAAP Financial Measures to Investors

The Company believes that presenting EBITDA, Adjusted EBITDA, Adjusted Net Income Applicable to Common Shares and Adjusted Net Income per Common Share - Diluted in addition to the related GAAP measures provide investors greater transparency to the information used by management in its financial decision-making. The Company further believes that providing this information better enables the Company’s investors to understand the Company’s overall core performance and to evaluate the methodology used by management to assess and measure such performance.


RTI SURGICAL, INC. AND SUBSIDIARIES

Condensed Consolidated Revenues

(Unaudited, in thousands)

 

     For the Three Months Ended      For the Nine Months Ended  
     September 30,      September 30,  
     2017      2016      2017      2016  

Revenues:

           

Spine

   $ 18,131      $ 17,775      $ 57,888      $ 52,514  

Sports medicine and orthopedics

     11,286        11,874        37,179        36,956  

Surgical specialties

     1,437        1,168        4,673        2,985  

Cardiothoracic

     1,340        2,893        8,164        8,332  

International

     5,077        4,352        16,739        15,532  
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal direct

     37,271        38,062        124,643        116,319  

Global commercial

     26,807        25,297        76,225        75,396  

Other revenues

     2,610        3,188        7,879        9,803  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 66,688      $ 66,547      $ 208,747      $ 201,518  
  

 

 

    

 

 

    

 

 

    

 

 

 


RTI SURGICAL, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited, in thousands)

 

     September 30,     December 31,  
     2017     2016  
Assets     

Cash and cash equivalents

   $ 17,744     $ 13,849  

Accounts receivable - net

     36,188       41,488  

Inventories - net

     114,568       119,743  

Prepaid and other current assets

     9,806       5,213  

Assets held for sale

     1,750       —    
  

 

 

   

 

 

 

Total current assets

     180,056       180,293  

Property, plant and equipment - net

     82,794       83,298  

Goodwill

     46,242       54,887  

Other assets - net

     44,190       49,553  
  

 

 

   

 

 

 

Total assets

   $ 353,282     $ 368,031  
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity     

Accounts payable

   $ 24,445     $ 26,112  

Accrued expenses and other current liabilities

     25,275       26,772  

Current portion of long-term obligations

     4,268       6,080  
  

 

 

   

 

 

 

Total current liabilities

     53,988       58,964  

Deferred revenue

     4,959       6,612  

Long-term liabilities

     47,787       77,523  
  

 

 

   

 

 

 

Total liabilities

     106,734       143,099  

Preferred stock, including accrued dividends

     62,925       60,016  

Stockholders’ equity:

    

Common stock and additional paid-in capital

     419,505       416,570  

Accumulated other comprehensive loss

     (6,469     (8,316

Accumulated deficit

     (229,413     (243,338
  

 

 

   

 

 

 

Total stockholders’ equity

     183,623       164,916  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 353,282     $ 368,031  
  

 

 

   

 

 

 


RTI SURGICAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited, in thousands)

 

     For the Three Months     For the Nine Months  
     Ended September 30,     Ended September 30,  
     2017     2016     2017     2016  

Cash flows from operating activities:

        

Net income (loss)

   $ 17,486     $ (3,606   $ 13,925     $ (3,497

Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:

        

Depreciation and amortization expense

     3,575       4,393       10,704       13,087  

Stock-based compensation

     2,203       1,975       4,011       3,075  

Amortization of deferred revenue

     (1,141     (1,216     (3,601     (3,650

Gain on cardiothoracic closure business divestiture

     (34,090     —         (34,090     —    

Other items to reconcile to net cash provided by operating activities

     (1,504     (4,721     6,193       1,019  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (13,471     (3,175     (2,858     10,034  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

        

Purchases of property, plant and equipment

     (3,198     (3,371     (10,358     (12,774

Patent and acquired intangible asset costs

     (279     (804     (2,124     (2,195

Cardiothoracic closure business divestiture

     51,000       —         51,000       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     47,523       (4,175     38,518       (14,969
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

        

Proceeds from long-term obligations

     2,000       8,000       6,000       15,000  

Net payments from short-term obligations

     —         (662     —         (1,511

Payments on long-term obligations

     (32,000     (1,125     (39,375     (9,424

Other financing activities

     (18     —         1,415       (94
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (30,018     6,213       (31,960     3,971  
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     35       7       195       (26
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     4,069       (1,130     3,895       (990

Cash and cash equivalents, beginning of period

     13,675       12,754       13,849       12,614  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 17,744     $ 11,624     $ 17,744     $ 11,624