RTI Surgical® Announces 2017 First Quarter Results

RTI Surgical® Announces 2017 First Quarter Results

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April 27, 2017

ALACHUA, Fla.–(BUSINESS WIRE)–RTI Surgical Inc. (RTI) (Nasdaq: RTIX), a global surgical implant company, reported operating results for the first quarter of 2017. In addition, the company outlined progress against the initial stages of its transformation toward long-term profitable growth.

RTI’s first quarter 2017 financial results, as described in greater detail below, reflect that the company’s initial actions are beginning to yield positive results. RTI has delivered double-digit revenue growth across its direct business, including its spine, surgical specialties and cardiothoracic segments. The company reported continued strong performance in its International business, with revenue growth in Europe and Asia-Pacific. The Commercial/other business continues to see signs of stabilization despite a decline in revenues.

Under the leadership of Camille Farhat, who assumed the CEO position on March 15, 2017, RTI’s management is implementing a series of actions to return the company to sustainable profitable growth. These initiatives include improving execution, reducing costs and directing resources to those businesses, products and markets with the greatest growth potential. The initial phase of the company’s restructuring program remains on target to yield annualized savings of approximately $8 million, starting in the second quarter.

“I am pleased that our initial strategic initiatives are taking hold, as evidenced by two consecutive quarters of improving performance. While these results are a positive sign, we still have significant work ahead of us,” said Camille Farhat, chief executive officer, RTI. “We are in the early stages of what will be a long-term transformation of the company. Our current focus is on cost reduction, disciplined execution and targeted innovation to better position RTI’s operating platform for growth and profitability.”

He added, “Longer-term, we are completing a thorough evaluation of RTI, its businesses, markets and products. Although we are in the initial phases of this evaluation, there are three central themes that standout: 1) continue investment in our spine business and build scale, 2) increase investment in our commercial business to drive innovation and create new growth opportunities, and, 3) improve margins of our tissue-based implants. We have a talented team, outstanding products and a fierce dedication to meeting our customers’ needs. I am confident that we are on the right path toward setting up RTI for long-term profitable growth and improved cash flow generation.”

First Quarter 2017

RTI reported a net loss applicable to common shares of $2.8 million in the first quarter of 2017, or $0.05 per fully diluted common share, primarily due to a previously disclosed pre-tax charge for severance-related expenses totaling $4.4 million. As outlined in the reconciliation tables that follow, excluding these charges, adjusted net income applicable to common shares was $139,000. Adjusted earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) were $6.5 million.

Worldwide revenues were $69.9 million for the first quarter of 2017, an increase of 4 percent, domestic revenues were $63.3 million, an increase of 3 percent, and International revenues were $6.6 million, an increase of 8 percent when compared to the first quarter of 2016. The increase in domestic revenues was primarily due to strong performance in the domestic direct business. The increase in International revenues was mainly driven by growth in Asia, primarily in Spine, and in Europe, primarily in Biologics.

Direct revenues were $43.8 million for the first quarter of 2017, an increase of 13 percent compared to the first quarter of 2016, with double-digit growth reported in RTI’s spine, surgical specialties and cardiothoracic direct business segments. Commercial/other revenues were $26.1 million for the first quarter of 2017, a decline of 9 percent compared to the first quarter of 2016, partly due to lower orders in RTI’s OEM trauma business. Commercial/other revenues continue to stabilize on a sequential basis.

Fiscal 2017 Outlook

RTI’s focus for 2017 will remain squarely on disciplined execution, targeted innovation, and ongoing implementation of strategic actions to achieve profitable growth across each of its business lines and geographies. The company has developed its guidance based on its ongoing restructuring and operational improvement program, its current business profile and existing market conditions.

Within this context, based on first quarter results, RTI expects full year revenues for 2017 to be between $274 million and $285 million, in line with prior communication, with direct revenues anticipated to grow mid-to-high single digits on a percentage basis compared to 2016, while commercial/other revenues are expected to be relatively flat to low single-digit decline on a percentage basis.

As detailed in the reconciliation provided later in this release, excluding the $4.4 million pre-tax charge for severance-related expenses in 2017 as noted above, RTI expects adjusted full year net income per fully diluted common share to be between $0.05 and $0.10, in line with prior communication, based on 59.5 million fully diluted shares outstanding.

RTI will continue to evaluate its operating platform throughout the year and will update its top and bottom line guidance as its actions might warrant.

Conference Call

RTI will host a conference call and simultaneous audio webcast to discuss its first 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
March 31,
2017 2016
Revenues $ 69,939 $ 67,351
Costs of processing and distribution 34,160 31,326
Gross profit 35,779 36,025
Expenses:
Marketing, general and administrative 29,671 27,552
Research and development 3,688 4,161
Severance charges 4,403
Contested proxy expenses 308
Total operating expenses 37,762 32,021
Operating (loss) income (1,983 ) 4,004
Total other expense – net (799 ) (314 )
(Loss) income before income tax provision (2,782 ) 3,690
Income tax benefit (provision) 910 (1,289 )
Net (loss) income (1,872 ) 2,401
Convertible preferred dividend (910 ) (858 )
Net (loss) income applicable to common shares $ (2,782 ) $ 1,543
Net (loss) income per common share – basic $ (0.05 ) $ 0.03
Net (loss) income per common share – diluted $ (0.05 ) $ 0.03
Weighted average shares outstanding – basic 58,495,796 57,914,893
Weighted average shares outstanding – diluted 58,495,796 58,211,644
RTI SURGICAL, INC. AND SUBSIDIARIES
Reconciliation of Net (Loss) Income Applicable to Commons Shares to Adjusted EBITDA
(Unaudited, in thousands)
For the Three Months
Ended March 31,
2017 2016
Net (loss) income $ (2,782 ) $ 1,543
Interest expense, net 819 360
Provision for income taxes (910 ) 1,289
Depreciation 2,672 3,382
Amortization of intangible assets 896 928
EBITDA 695 7,502
Reconciling items for Adjusted EBITDA
Preferred dividend 910 858
Non-cash stock based compensation 834 500
Foreign exchange gain (20 ) (46 )
Other reconciling items(1)
Severance charges excluding stock based compensation 4,070

Contested proxy expenses 308
Adjusted EBITDA $ 6,489 $ 9,122
Adjusted EBITDA as a percent of revenues 9 % 14 %

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

RTI SURGICAL, INC. AND SUBSIDIARIES
Reconciliation of Net (Loss) Income Applicable to Common Shares and Net (Loss) Income 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
March 31, 2017 March 31, 2016
Net Net
Income Amount Income Amount
Applicable to per Diluted Applicable to per Diluted
Common Shares Share Common Shares Share
As reported $ (2,782 ) $ (0.05 ) $ 1,543 $ 0.03
Severance charges (1) 4,403 $ 0.07
Contested proxy expenses (2) $ 308 0.01
Tax effect on adjustments (1,482 ) $ (0.03 ) (125 ) (0.00 )
Adjusted * $ 139 $ 0.00 $ 1,726 $ 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 $0.01 to $0.06, based on 59.5 million fully diluted shares outstanding. Excluding severance charges taken in 2017, full year net income per fully diluted common share is expected to be in the range of $0.05 to $0.10.

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 $ 0.01 – 0.06
Severance charges, net of tax effect 0.04
Adjusted Non-GAAP Guidance Net Income Per Common Share – Diluted $ 0.05 – 0.10

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 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 month period ended March 31, 2017 and 2016 as well as the reason for excluding the individual items:

(1) 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.

(2) Contested proxy expenses – This adjustment represent 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.

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

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 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
March 31,
2017 2016
Revenues:
Spine $ 20,338 $ 17,094
Sports medicine and orthopedics 12,896 12,520
Surgical specialties 1,780 1,015
Cardiothoracic 3,151 2,534
International 5,657 5,517
Subtotal direct 43,822 38,680
Global commercial 23,581 25,330
Other revenues 2,536 3,341
Total revenues $ 69,939 $ 67,351
Domestic revenues 63,307 61,184
International revenues 6,632 6,167
Total revenues $ 69,939 $ 67,351
RTI SURGICAL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited, in thousands)
March 31, December 31,
2017 2016
Assets
Cash and cash equivalents $ 17,598 $ 13,849
Accounts receivable – net 36,294 41,488
Inventories – net 117,392 119,743
Prepaid and other current assets 5,888 5,213
Total current assets 177,172 180,293
Property, plant and equipment – net 85,118 83,298
Goodwill 54,887 54,887
Other assets – net 51,472 49,553
Total assets $ 368,649 $ 368,031

Liabilities and Stockholders Equity

Accounts payable $ 28,360 $ 26,112
Accrued expenses and other current liabilities 27,345 26,772
Current portion of long-term obligations 5,301 6,080
Total current liabilities 61,006 58,964
Deferred revenue 7,394 6,612
Long-term liabilities 76,068 77,523
Total liabilities 144,468 143,099
Preferred stock, including accrued dividends 60,972 60,016

Stockholders’ equity:

Common stock and additional paid-in capital 416,415 416,570
Accumulated other comprehensive loss (7,996 ) (8,316 )
Accumulated deficit (245,210 ) (243,338 )

Total stockholders’ equity

163,209 164,916

Total liabilities and stockholders’ equity

$ 368,649 $ 368,031
RTI SURGICAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
For the Three Months
Ended March 31,
2017 2016
Cash flows from operating activities:
Net (loss) income $ (1,872 ) $ 2,401

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

Depreciation and amortization expense 3,568 4,310
Stock-based compensation 834 500
Amortization of deferred revenue (1,274 ) (1,217 )

Other items to reconcile to net cash provided by operating activities

8,321 429
Net cash provided by operating activities 9,577 6,423
Cash flows from investing activities:
Purchases of property, plant and equipment (3,283 ) (4,637 )
Patent and acquired intangible asset costs (319 ) (1,196 )
Net cash used in investing activities (3,602 ) (5,833 )
Cash flows from financing activities:
Proceeds from long-term obligations 2,000 3,000
Net payments from short-term obligations (249 )
Payments on long-term obligations (4,250 ) (4,133 )
Other financing activities (34 ) (108 )
Net cash used in financing activities (2,284 ) (1,490 )
Effect of exchange rate changes on cash and cash equivalents 58 14
Net increase (decrease) in cash and cash equivalents 3,749 (886 )
Cash and cash equivalents, beginning of period 13,849 12,614
Cash and cash equivalents, end of period $ 17,598 $ 11,728

Contacts

RTI Surgical Inc.
Robert Jordheim
Chief Financial Officer
rjordheim@rtix.com
or
Roxane Wergin
Director, Corporate Communications
rwergin@rtix.com
386-418-8888

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