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8-K - FORM 8-K - RTI SURGICAL, INC.d649066d8k.htm

Exhibit 99.1

RTI Surgical® Announces Third Quarter 2018 Results

Strong Growth in Spine and OEM Franchises Drives Performance

Third Quarter 2018 Highlights:

 

   

Revenue increased 4% to $69.1 million

 

   

Net income of $2.9 million, inclusive of $0.9 million of net non-recurring income

 

   

Adjusted EBITDA of $9.1 million, or 13% of revenue

 

   

Company narrows fiscal 2018 outlook ranges

ALACHUA, Fla., November 1, 2018 – RTI Surgical, Inc. (Nasdaq: RTIX), a global surgical implant company, reported operating results for the third quarter of 2018.

“The strength of our third quarter results underscores the substantial ongoing progress we are making across our strategic transformation and the growing momentum throughout the company,” stated Camille Farhat, President and CEO. “Our spine franchise produced excellent results aided by growth in recently introduced products, and our OEM franchise continued its strong performance. Our operational excellence initiatives are taking hold throughout the organization, helping to further reduce costs and instill a culture of continuous improvement. Overall, with our seventh consecutive quarter of meeting or exceeding our commitments, our team is executing effectively on many fronts and we have increased our focus on accelerating growth with investments in both organic and inorganic activities.”

Third Quarter 2018

RTI’s worldwide revenues for the third quarter of 2018 were $69.1 million, compared with $66.7 million during the same period in the prior year. Excluding a $1.3 million reduction from the sale of substantially all the assets of the Cardiothoracic Closure business completed in August 2017, total revenues increased $3.7 million, or 5.7%, driven by strong performance in both the spine and OEM franchises. Gross profit for the third quarter of 2018 was $37.7 million, or 54.5% of revenues, a significant increase compared to $33.5 million, or 50.3% of revenues, in the third quarter of 2017.

During the third quarter of 2018, RTI incurred non-recurring pre-tax charges to support the ongoing strategic transformation of the business. The company incurred $1.9 million of acquisition and integration costs related to investment in our objective of accelerating growth through the ongoing pursuit of M&A activity. The company incurred $0.8 million of severance and restructuring charges to complete the rationalization of the international infrastructure and transition distribution to a third-party logistics partner. Finally, the company recognized a $3.0 million gain from a cash contingency consideration related to the release of escrow funds held at the close of the Cardiothoracic Closure sale. During the third quarter of 2017, the company incurred $2.8 million of non-recurring charges primarily to support executive leadership transitions.

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


Net income applicable to common shares was $2.9 million, or $0.04 per fully diluted common share in the third quarter of 2018, compared to net income applicable to common shares of $16.5 million, or $0.23 per fully diluted common share in the third quarter of 2017. As outlined in the reconciliation tables that follow, excluding the impact of the various non-recurring charges, Adjusted Net Income applicable to common shares was $2.0 million, or $0.03 per fully diluted common share in the third quarter of 2018.

Adjusted earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA), for the third quarter of 2018 was $9.1 million, or 13% of revenues, compared with $8.1 million, or 12% of revenues for the third quarter of 2017. The increase in Adjusted EBITDA is driven by gross margin expansion associated with the efforts to reduce complexity and increase operational excellence initiated during 2017, partially offset by increased operating expenses focused on accelerating growth, such as planned increases to research and development spending.

Fiscal 2018 Outlook

Farhat concluded, “We firmly believe our strategic transformation is well underway. Our teams are aligned with common purpose and intense focus on achieving our considerable potential. Given the ongoing success of our efforts to reduce complexity and drive operational excellence, we are focused on accelerating growth by further developing our R&D capabilities, pursuing M&A activities, and ensuring we continue to deliver on our commitments.”

Based on our recent financial results and current business outlook, the Company is narrowing its financial guidance for fiscal 2018, originally issued on January 5, 2018:

 

   

The Company now expects full year revenues in the range of approximately $280 million.

 

   

The Company now expects full year Adjusted EBITDA to be in the range of $32 million to $35 million.

The Company noted the following assumptions are included in its guidance:

 

   

Relatively stable market conditions and regulatory environment;

 

   

Continued positive revenue contribution from the acquisition of Zyga Technology – announced January 4, 2018;

 

   

Ongoing positive impact of efforts to reduce complexity and implement operational excellence; and

 

   

The successful ongoing transition of map3 to ViBone, or an alternative RTI orthobiologic product, during November and December 2018.

Conference Call

RTI will host a conference call and audio webcast at 9:00 a.m. ET today. The conference call can be accessed by dialing (877) 383-7419 (U.S.) or (760) 666-3754 (International). The webcast can be accessed through the investor section of RTI’s website at www.rtix.com/investors. A replay of the conference call will be available on RTI’s website for one month 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, plastic surgery, spine, orthopedic and trauma procedures and are distributed in more than 40 countries. RTI 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. Connect with us on LinkedIn and Twitter.


Forward-Looking Statements

This communication contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including the statements made in this communication about our positive operational and financial performance, the continued contribution of the OEM franchise to RTI’s growth, the impact of operational priorities on costs and their impact on RTI’s financial performance, RTI’s ability to meet its commitments, the implementation of RTI’s strategic initiatives, the reduction in complexity of RTI’s operations, RTI’s ability to maintain partnerships in the organ procurement community, RTI’s ability to expand the number of patients it is able to serve, the integration of Zyga’s operations, anticipated financial results, growth rates, new product introductions, and future operational improvements. 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. The forward-looking statements are not guarantees of future performance and are based on certain assumptions including RTI’s ability to reduce inventory, manage expenses and accomplish its goals and strategies, the quality of the new product offerings from RTI, general economic conditions, as well as those within RTI’s industry, RTI’s ability to integrate acquisitions into existing operations, and numerous other factors and risks identified in the Company’s Form 10-K for the fiscal year ended December 31, 2017 and other filings with the 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.

MEDIA CONTACT:

Molly Poarch

mpoarch@rtix.com

+1 224 287 2661

INVESTOR CONTACT:

Nathan Elwell

nelwell@lincolnchurchilladvisors.com

+1 847 530 0249


RTI SURGICAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

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

 

     Three months ended     Nine months ended  
     September 30,     September 30,  
     2018     2017     2018     2017  

Revenues

   $ 69,064     $ 66,688     $ 209,639     $ 208,747  

Costs of processing and distribution

     31,409       33,177       108,262       102,494  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     37,655       33,511       101,377       106,253  
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Marketing, general and administrative

     29,671       27,678       87,326       86,845  

Research and development

     3,606       2,801       10,297       10,229  

Severance and restructuring costs

     824       2,820       1,708       10,623  

Asset impairment and abandonments

     104       —         4,748       —    

Acquisition and integration expenses

     1,941       —         2,741       —    

Cardiothoracic closure business divestiture contingency consideration

     (3,000     —         (3,000     —    

Gain on cardiothoracic closure business divestiture

     —         (34,090     —         (34,090
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     33,146       (791     103,820       73,607  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     4,509       34,302       (2,443     32,646  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense - net

     (598     (681     (2,524     (2,470
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax (provision) benefit

     3,911       33,621       (4,967     30,176  

Income tax (provision) benefit

     (807     (16,135     1,646       (16,251
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     3,104       17,486       (3,321     13,925  
  

 

 

   

 

 

   

 

 

   

 

 

 

Convertible preferred dividend

     (173     (938     (2,120     (2,772
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) applicable to common shares

   $ 2,931     $ 16,548     $ (5,441   $ 11,153  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per common share - basic

   $ 0.05     $ 0.28     $ (0.09   $ 0.19  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per common share - diluted

   $ 0.04     $ 0.23     $ (0.09   $ 0.19  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding - basic

     63,495,952       59,704,533       63,517,958       59,045,372  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding - diluted

     79,284,315       75,188,161       63,517,958       59,954,964  
  

 

 

   

 

 

   

 

 

   

 

 

 


RTI SURGICAL, INC. AND SUBSIDIARIES

Reconciliation of Net Loss Applicable to Commons Shares to Adjusted EBITDA

(Unaudited, in thousands)

 

     Three Months     Nine Months  
     Ended September 30,     Ended September 30,  
     2018     2017     2018     2017  

Net income (loss) applicable to common shares

   $ 2,931     $ 16,548     $ (5,441   $ 11,153  

Interest expense, net

     597       741       2,192       2,475  

Provision (benefit) for income taxes

     807       16,135       (1,646     16,251  

Depreciation

     2,577       2,623       7,824       7,947  

Amortization of intangible assets

     1,149       952       2,970       2,757  
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     8,061       36,999       5,899       40,583  

Reconciling items impacting EBITDA

        

Preferred dividend

     173       938       2,120       2,772  

Non-cash stock based compensation

     1,080       2,305       3,650       4,113  

Foreign exchange loss (gain)

     1       (60     23       (5

Other reconciling items *

        

Inventory write-off

     —         —         7,582       —    

Inventory purchase price adjustment

     —         —         456       —    

Severance and restructuring costs

     824       2,000       1,708       9,470  

Loss on extinguishment of debt

     —         —         309       —    

Asset impairment and abandonments

     —         —         4,515       —    

Acquisition and integration expenses

     1,941       —         2,741       —    

Cardiothoracic closure business divestiture contingency consideration

     (3,000     —         (3,000     —    

Gain on cardiothoracic closure business divestiture

     —         (34,090     —         (34,090
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 9,080     $ 8,092     $ 26,003     $ 22,843  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA as a percent of revenues

     13     12     12     11
  

 

 

   

 

 

   

 

 

   

 

 

 

 

*

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

(Unaudited, in thousands except per share data)

 

     Three Months Ended  
     September 30, 2018     September 30, 2017  
     Net           Net        
     Income (Loss)     Amount     Income (Loss)     Amount  
     Applicable to     Per Diluted     Applicable to     Per Diluted  
     Common Shares     Share     Common Shares     Share  

As reported

   $ 2,931     $ 0.04     $ 16,548     $ 0.23  

Severance and restructuring costs

     824       0.01       2,820       0.04  

Acquisition and integration expenses

     1,941       0.02       —         —    

Cardiothoracic closure business divestiture contingency consideration

     (3,000     (0.04     —         —    

Gain on cardiothoracic closure business divestiture

     —         —         (34,090     (0.45

Tax effect on new tax legislation

     (650     (0.01     —         —    

Tax effect on adjustments

     —         —         15,159       0.20  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted *

   $ 2,046     $ 0.03     $ 437     $ 0.01  
  

 

 

   

 

 

   

 

 

   

 

 

 
     Nine Months Ended  
     September 30, 2018     September 30, 2017  
     Net           Net        
     Income (Loss)     Amount     Income (Loss)     Amount  
     Applicable to     Per Diluted     Applicable to     Per Diluted  
     Common Shares     Share     Common Shares     Share  

As reported

   $ (5,441   $ (0.09   $ 11,153     $ 0.19  

Severance and restructuring costs

     1,708       0.03       10,623       0.18  

Asset impairment and abandonments

     4,515       0.07       —         —    

Inventory purchase price adjustment

     456       0.01       —         —    

Loss on extinguishment of debt

     309       0.00       —         —    

Inventory write-off

     7,582       0.12       —         —    

Acquisition and integration expenses

     2,741       0.04       —         —    

Cardiothoracic closure business divestiture contingency consideration

     (3,000     (0.05     —         —    

Gain on cardiothoracic closure business divestiture

     —         —         (34,090     (0.57

Tax effect on new tax legislation

     (650     (0.01     —         —    

Tax effect on adjustments

     (3,654     (0.06     13,855       0.23  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted *

   $ 4,566     $ 0.07     $ 1,541     $ 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.    


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, Adjusted Net Income per Common Share – Diluted and Adjusted Gross Profit. The calculation of the tax effect on the adjustments between GAAP net income (loss) 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 income (loss) 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 months ended September 30, 2018 and 2017 as well as the reason for excluding the individual items:

Severance and restructuring costs – These costs relate to the reduction of our organizational structure, primarily driven by simplification of our international operating infrastructure, specifically our distribution model. Management removes the amount of these costs from our operating results to supplement a comparison to our past operating performance.

Asset impairment and abandonments – These costs represent an asset impairment and abandonments related to lower distributions of our map3® implant. Management removes the amount of these costs from our operating results to supplement a comparison to our past operating performance.

Acquisition and integration expenses – These costs relate to acquisition and integration expenses due to the purchase of Zyga and certain other business development activities. Management removes the amount of these costs from our operating results to supplement a comparison to our past operating performance.

Inventory write-off – These costs relate to an inventory write-off due to the rationalization of our international distribution infrastructure and an inventory write-off related to lower distributions of our map3® implant. Management removes the amount of these costs from our operating results to supplement a comparison to our past operating performance.

Inventory purchase price adjustment – These costs relate to the purchase price effects of acquired Zyga inventory that was sold during the nine months ended September 30, 2018. Management removes the amount of these costs from our operating results to supplement a comparison to our past operating performance.

Loss on extinguishment of debt – These costs relate to refinancing our debt. 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 of the assets of our CT Business to A&E. Management removes the amount of these costs from our operating results to supplement a comparison to our past operating performance.

Cardiothoracic closure business divestiture contingency consideration – This adjustment represents the remaining cash contingency consideration received from the sale of substantially all of the assets of our CT Business to A&E. Management removes the amount of these costs from our operating results to supplement a comparison to our past operating performance.

Tax effect on new tax legislation – This adjustment represents charges relating to the Tax Cuts and Jobs Act tax legislation which was enacted on December 22, 2017. Management removes the amount of these costs 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, Adjusted Net Income per Common Share – Diluted, and Adjusted Gross Profit 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, Adjusted Net Income per Common Share – Diluted and Adjusted Gross Profit 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
September 30,
     For the Nine Months Ended
September 30,
 
     2018      2017      2018      2017  
     (In thousands)  

Revenues:

        

Spine

   $ 20,741      $ 18,131      $ 58,938      $ 57,888  

Sports

     12,271        12,723        39,896        41,852  

OEM

     30,092        28,779        91,382        81,904  

International

     5,960        5,715        19,423        18,939  

Cardiothoracic

     —          1,340        —          8,164  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 69,064      $ 66,688      $ 209,639      $ 208,747  
  

 

 

    

 

 

    

 

 

    

 

 

 


RTI SURGICAL, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited, in thousands)

 

     September 30,
2018
    December 31,
2017
 
Assets     

Cash

   $ 10,022     $ 22,381  

Accounts receivable - net

     44,141       35,081  

Inventories - net

     103,891       111,927  

Prepaid and other assets

     8,613       16,285  
  

 

 

   

 

 

 

Total current assets

     166,667       185,674  

Property, plant and equipment - net

     77,344       79,564  

Goodwill

     62,864       46,242  

Other assets - net

     43,222       34,426  
  

 

 

   

 

 

 

Total assets

   $ 350,097     $ 345,906  
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity     

Accounts payable

   $ 19,282     $ 18,252  

Accrued expenses and other current liabilities

     27,111       30,478  

Current portion of long-term obligations

     —         4,268  
  

 

 

   

 

 

 

Total current liabilities

     46,393       52,998  

Deferred revenue

     1,968       3,741  

Long-term liabilities

     54,780       43,507  
  

 

 

   

 

 

 

Total liabilities

     103,141       100,246  

Preferred stock

     66,180       63,923  

Stockholders’ equity:

    

Common stock and additional paid-in capital

     427,271       425,132  

Accumulated other comprehensive loss

     (6,980     (6,329

Accumulated deficit

     (239,515     (237,066
  

 

 

   

 

 

 

Total stockholders’ equity

     180,776       181,737  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 350,097     $ 345,906  
  

 

 

   

 

 

 


RTI SURGICAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited, in thousands)

 

    Three Months
Ended September 30,
    Nine Months
Ended September 30,
 
    2018     2017     2018     2017  

Cash flows from operating activities:

       

Net income (loss)

  $ 3,104     $ 17,486     $ (3,321   $ 13,925  

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

       

Depreciation and amortization expense

    3,726       3,575       10,794       10,704  

Stock-based compensation

    1,080       2,203       3,650       4,011  

Amortization of deferred revenue

    (1,217     (1,141     (3,652     (3,601

Other items to reconcile to net cash (used in) provided by operating activities

    (5,064     (35,594     3,536       (27,897
 

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

    1,629       (13,471     11,007       (2,858
 

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

       

Purchases of property, plant and equipment

    (3,250     (3,198     (7,106     (10,358

Patent and acquired intangible asset costs

    (2,070     (279     (2,798     (2,124

Acquisition of Zyga Technology

    —         —         (21,000     —    

Cardiothoracic closure business divestiture

    3,000       51,000       3,000       51,000  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by investing activities

    (2,320     47,523       (27,904     38,518  
 

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

       

Proceeds from long-term obligations

    —         2,000       74,425       6,000  

Payments on long-term obligations

    (4,421     (32,000     (71,171     (39,375

Other financing activities

    896       (18     1,299       1,415  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

    (3,525     (30,018     4,553       (31,960
 

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

    (8     35       (15     195  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

    (4,224     4,069       (12,359     3,895  

Cash and cash equivalents, beginning of period

    14,246       13,675       22,381       13,849  
 

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

  $ 10,022     $ 17,744     $ 10,022     $ 17,744