RTI Surgical Announces Second Quarter 2018 Results

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

“Our team is sustaining the momentum generated over the past 18 months, as evidenced by our positive operational and financial performance this quarter,” said Camille Farhat, chief executive officer. “As anticipated in our previously issued guidance, our OEM franchise continues to contribute attractive growth, which we believe demonstrates the importance of the changes we implemented in 2017 and the value of our diverse portfolio. Our current operational excellence priorities, focused primarily on the cost of tissue processing, began to positively impact our cost of sales this quarter, providing significant margin and adjusted EBITDA improvements. Our efforts to date are encouraging and we believe that we remain well positioned to deliver on our commitments in 2018 and beyond.”

Farhat added, “As we enter the second half of the year, we continue to make significant strides in our strategic transformation. Following the recent owned agency transition announcement, we have further reduced the complexity of our operations through the reduction of vertical integration and increased focus on our strength in tissue processing. We believe we maintain strong partnerships with the organ procurement community that, in our opinion, ensure that we can continue to expand the number of patients served with our differentiated allograft products. With the implementation of our operational excellence initiatives well underway, we are starting to see the positive outcomes in our financial results, and I am proud of the ongoing efforts of many people across the Company. Also, we are encouraged by the progress demonstrated by the team managing the Zyga acquisition and integration, which exemplify our endeavors to accelerate growth. In light of this progress, I am focused on reinvigorating the R&D pipeline and pursuing attractive deals at logical valuations.”

Second Quarter 2018

RTI’s worldwide revenues for the second quarter of 2018 were $70.7 million, down slightly compared with $72.1 million during the same period for the prior year. Excluding a $3.7 million reduction from the sale of substantially all the assets of the cardiothoracic closure business completed in August 2017, our total revenues increased $2.2 million, or 3.3%. Gross profit for the second quarter of 2018 was $30.0 million, inclusive of a $6.8 million charge for the write-off of excess inventory related to decreased distributions of our map3® implant and the purchase accounting step-up of Zyga inventory. To partially offset the impact of the decreased distribution of map3® implant we signed a distribution agreement with Aziyo Biologics, Inc., to supplement our biologics portfolio with an alternative allograft stem cell product. Excluding the excess inventory charge and purchase accounting impact, our Adjusted Gross Profit for the second quarter of 2018 was $36.8 million or 52.1% of revenues, compared to $37.0 million, or 51.3% of revenues, in the second quarter of 2017.

During the second quarter of 2018, RTI incurred non-recurring pre-tax charges to support the ongoing strategic transformation of the business. The company incurred $4.5 million in asset impairment and abandonment charges related to decreased distribution of our map3® implant During the second quarter of 2017, the company incurred $3.4 million of non-recurring pre-tax charges.

Net loss applicable to common shares was $6.4 million, or $0.10 per fully diluted common share in the second quarter of 2018, compared to a net loss applicable to common shares of $2.6 million, or $0.04 per fully diluted common share in the second 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 second quarter of 2018.

Adjusted earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA), for the second quarter of 2018 was $9.1 million, or 13% of revenues compared with $8.3 million, inclusive of $1.2 million of EBITDA related to the cardiovascular closure business, or 11% of revenues for the second quarter of 2017. The increase in Adjusted EBITDA is primarily driven by the reduction in operating expenses associated with efforts to reduce complexity and increase operational excellence implemented during 2017.

Fiscal 2018 Outlook

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

• The Company expects full year revenues in the range of $280 million and $290 million.
• The Company expects full year Adjusted EBITDA to be in the range of $32 million to $38 million.

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

• Relatively stable market conditions and regulatory environment;
• 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
• Continued demand of map3® cellular allogeneic bone graft or alternative allograft stem cell product.

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. 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, general 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.

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.

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 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 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 six months ended June 30, 2018 and 2017 as well as the reason for excluding the individual items:

Severance and restructuring costs – This adjustment represents costs relating to the reduction of our organizational structure. Management removes the amount of these costs from our operating results to supplement a comparison to our past operating performance.

Asset impairment and abandonments – This adjustment represents an asset impairment and abandonments related to decreased 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 – This adjustment represents charges relating to acquisition and integration expenses due to the purchase of Zyga. Management removes the amount of these costs from our operating results to supplement a comparison to our past operating performance.

Inventory obsolescence and reserve charge – This adjustment represents charges relating to inventory obsolescence due to the rationalization of our international distribution infrastructure and an inventory reserve charge related to decreased 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 – This adjustment represents the purchase price effects of acquired Zyga inventory that was sold during the six months ended June 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 – This adjustment represents costs relating to refinancing our debt. 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.