Integra EPS in Line, Guides Lower

Integra LifeSciences (IART - Snapshot Report) reported EPS of 39 cents in the third quarter of fiscal 2011 down 29% from 55 cents in the year-ago quarter. However, adjusted EPS increased 5.5% year over year to 77 cents, in line with the Zacks Consensus Estimate.

Total revenue during the quarter increased 8% year over year to $202.2 million and was at par with the Zacks Consensus Estimate. However, excluding the impact of currency exchange rates, revenues jumped 7% from the year-ago quarter. Barring Instruments, which dipped 1% year over year to $43.3 million, Integra registered sales growth in both Orthopedics (18% to $86.4 million) and Neurosurgery (4% to $72.4 million).

Integra witnessed a 6.9% year-over-year increase in gross profit to $125.5 million. However, gross margin contracted 84 basis points to 62.1% due to higher cost of products (up 13.7%). During the quarter, selling, general and administrative expenses rose 15.6% to $87.5 million and research and development expenses increased 12.5% to $13.2 million. This in turn resulted in a 556 bps drag in operating margin to 9.04%.

Integra exited the quarter with $110.9 million in cash and cash equivalents compared with $128.7 million at the end of 2010. The company generated $23.8 million in cash flow from operations and incurred capital expenditures of $12.2 million in the quarter.

During the quarter, Integra acquired Ascension Orthopedics, Inc, for approximately $66.5 million. Texas-based Ascension primarily manufactures innovative foot, hand and shoulder implants. Additionally, the company borrowed $50.0 million under its credit facility and repurchased approximately 300 thousand shares for $12.0 million.

Outlook

Integra lowered its fiscal 2011 EPS guidance. The company lowered its adjusted EPS outlook to expects $2.88–$2.96 (previous guidance: $2.92–$3.02) while revenue guidance of $785–$800 million remained unchanged. The current Zacks Consensus Estimate for revenue and EPS are $797 million and $2.94, respectively.

Integra is a global leader in regenerative medicine. The company’s products are used primarily in neurosurgery, extremity reconstruction, orthopedics, and general surgery to treat millions of patients in the US, Europe and the Asia-Pacific every year.

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 - Analyst Report) and Stryker Corp. (SYK - Analyst Report). Currently the company retains a short-term Zacks #4 Rank (Sell).  However, considering the company’s business model and fundamentals, we have a long-term ‘Neutral’ recommendation on the stock.

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