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Integra LifeSciences Holdings Corp. (IART - Analyst Report) reported adjusted earnings per share (EPS) of 39 cents in the first quarter of 2013, declining 45.1% from the year-ago quarter, as well as below the Zacks Consensus Estimate of 48 cents by 18.9%.

However, including some one-time items, the company reported net loss of $4.1 million or 15 cents per share came in narrower than net income of $6.7 million or 23 cents a share reported in first quarter of 2013. Decline in the earnings is attributable to product recall, from all the segments except Extremities, and related product shortages.

Revenue Details

Total revenue during the reported quarter increased marginally by 0.2% year over year (flat at constant exchange rates or CER) to $196.7 million. The revenue came in below the Zacks Consensus Estimate of $200 million.

The revenue remained sluggish mainly due to the product recall which hurt the topline by $2.9 million. Owing to this recall, the company is estimated to have lost the opportunity to tap sales in the range of $6 million and $7 million. Sales of DuraGen and few selected products in the company’s Private Label business were adversely affected due to this recall.

Segment Revenues

Revenues from U.S. Neurosurgery declined 3.0% year over year to $39 million. Within this segment, the product recall affected the dural repair sales. Sales of tissue ablation, critical care and cranial stabilization increased in mid-single digits.

U.S. Instruments revenue decreased 2.8% year over year to $36.9 million. Low sales in Xenon lighting and alternate site products led to the decline in revenues. Increase in LED lighting, instruments and retractors sales to hospitals partially offset the lower sales.

International segment revenue declined 1.7% year over year to $45.8 million. Product recalls and product shortages drove the decline within this segment.

Revenue in the U.S. Extremities segment surged 18% year over year as the product recall did not affect this segment. Robust demand in regenerative medicine, and foot and ankle business drove the segment’s revenue. Revenue of all the products increased at about double-digits.

Revenue from U.S. Spine & Other decreased 2.8% year over year to $43.5 million. Decline in the segment’s revenue is attributable to low sale of spinal hardware products. Sale of spinal hardware products decreased mainly due to pricing pressure and a challenging market. Within this segment Orthobiologics sales increased while sales in the Private Label business decreased due to the product recall.

Margins

Integra witnessed a 4.2% year over year decrease in gross profit to $116.4 million. Gross margin during the quarter was down 270 basis points (bps) to 59.2%. During the quarter, research and development expenses increased 6.7% to $12.7 million while selling, general and administrative expenses increased 14.6% year over year to $100.2 million. For the quarter, the company incurred an operating loss of $44 million compared to operating profit of $17.5 million.

Balance Sheet

Integra exited the first quarter of 2013 with $89.7 million in cash and cash equivalents compared with $96.9 million at the end of 2012. The company used $7.8 million in cash flow from operations and invested $10.9 million in capital expenditures in the quarter.

Outlook Lowered

Integra lowered its fiscal 2013 guidance. The company expects to generate revenues between $840 million and $852 million down from the previously guided range of $865 million and $880 million. Adjusted EPS were guided in the range of $2.40-$2.70 from the previously guided $3.08−$3.27. The current Zacks Consensus Estimate for revenues and EPS of $844 million and $2.49, respectively, are in line with the company’s guided range.

Our Take

This quarter the financials of the company were adversely affected owing to the product recalls. The product recall and related product shortages hurt all its segments except extremities.

On the other hand, future company initiatives such as planned product launches and acquisitions are expected to accelerate sales growth for the next several quarters.

However, tighter capital spending and pricing pressure continue to challenge the market. Moreover, the company believes that the medical device excise tax and new depreciation on its ERP system will temper its 2013 margin growth.

Currently, the company retains a Zacks Rank #5 (Strong Sell).

While we prefer to remain on the sidelines on Life Technologies, other medical device stocks worth a look are Athersys, Inc. (ATHX - Snapshot Report), Anika Therapeutics Inc. and Aeterna Zentaris Inc. . All these stocks carry a Zacks Rank #1 (Strong Buy).

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