Market Overview

RTI Surgical Announces Second Quarter 2018 Results

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Performance Powered by Ongoing Strength of OEM Business and
Operational Excellence Initiatives

Highlights:

  • Second Quarter 2018 revenue of $70.7 million
  • Second Quarter 2018 Net loss of $6.4 million, inclusive of $8.5
    million of non-recurring charges
  • Second Quarter 2018 Adjusted EBITDA of $9.1 million, or 13% of revenue
  • Completed new $100 million credit agreement increasing borrowing
    capacity at reduced cost of borrowing

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.

 

RTI SURGICAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations
(Unaudited, in thousands, except share and per share data)
               
 
Three months ended Six months ended
June 30, June 30,
2018 2017 2018 2017
Revenues $ 70,685 $ 72,120 $ 140,575 $ 142,059
Costs of processing and distribution   40,645     35,157     76,853     69,317  
Gross profit   30,040     36,963     63,722     72,742  
 
Expenses:
Marketing, general and administrative 29,266 29,496 57,655 59,167
Research and development 3,270 3,740 6,691 7,428
Severance and restructuring costs - 3,400 884 7,803
Asset impairment and abandonments 4,515 - 4,644 -
Acquisition and integration expenses   -     -     800     -  
Total operating expenses   37,051     36,636     70,674     74,398  
Operating (loss) income   (7,011 )   327     (6,952 )   (1,656 )
Total other expense - net   (1,151 )   (990 )   (1,926 )   (1,789 )
Loss before income tax provision (8,162 ) (663 ) (8,878 ) (3,445 )
Income tax benefit (provision)   2,702     (1,026 )   2,453     (116 )
Net loss   (5,460 )   (1,689 )   (6,425 )   (3,561 )
Convertible preferred dividend   (981 )   (924 )   (1,947 )   (1,834 )
Net loss applicable to common shares $ (6,441 ) $ (2,613 ) $ (8,372 ) $ (5,395 )
 
Net loss per common share - basic $ (0.10 ) $ (0.04 ) $ (0.13 ) $ (0.09 )
Net loss per common share - diluted $ (0.10 ) $ (0.04 ) $ (0.13 ) $ (0.09 )
Weighted average shares outstanding - basic   63,405,708     58,935,786     63,400,737     58,715,791  
Weighted average shares outstanding - diluted   63,405,708     58,935,786     63,400,737     58,715,791  
 
 
RTI SURGICAL, INC. AND SUBSIDIARIES
Reconciliation of Net Loss Applicable to Commons Shares to
Adjusted EBITDA
(Unaudited, in thousands)
                 
 
Three Months Six Months
Ended June 30, Ended June 30,
2018 2017 2018 2017
Net loss applicable to common shares $ (6,441 ) $ (2,613 ) $ (8,372 ) $ (5,395 )
Interest expense, net 771 915 1,595 1,734
(Benefit) provision for income taxes (2,702 ) 1,026 (2,453 ) 116
Depreciation 2,524 2,652 5,147 5,324
Amortization of intangible assets   960     909     1,921     1,805  
EBITDA (4,888 ) 2,889 (2,162 ) 3,584
Reconciling items impacting EBITDA
Preferred dividend 981 924 1,947 1,834
Non-cash stock based compensation 1,290 974 2,570 1,808
Foreign exchange gain 71 75 22 55
Other reconciling items *
Inventory write-off 6,559 - 7,582 -
Inventory purchase price adjustment 250 - 456 -
Severance and restructuring costs - 3,400 884 7,470
Loss on extinguishment of debt 309 - 309 -
Asset impairment and abandonments 4,515 - 4,515 -
Acquisition and integration expenses   -     -     800     -  
Adjusted EBITDA $ 9,087   $ 8,262   $ 16,923   $ 14,751  
Adjusted EBITDA as a percent of revenues   13 %   11 %   12 %   10 %
 
* See explanations in Use of Non-GAAP Financial Measures section later
in this release.
 
               
RTI SURGICAL, INC. AND SUBSIDIARIES
Reconciliation of Net Loss Applicable to Common Shares and Net
Loss 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)
 
Three Months Ended
June 30, 2018 June 30, 2017
Net Net
(Loss) Income Amount (Loss) Income Amount
Applicable to Per Diluted Applicable to Per Diluted
Common Shares Share Common Shares Share
As reported $ (6,441 ) $ (0.10 ) $ (2,613 ) $ (0.04 )
Severance and restructuring costs - - 3,400 0.06
Asset impairment and abandonments 4,515 0.07 - -
Inventory purchase price adjustment 250 0.00 - -
Loss on extinguishment of debt 309 0.00 - -

Inventory obsolescence and reserve charge

6,559 0.10 - -
Tax effect on adjustments   (3,161 )   (0.05 )   178     0.00  
Adjusted * $ 2,031   $ 0.03   $ 965   $ 0.02  
 
 
Six Months Ended
June 30, 2018 June 30, 2017
Net Net
(Loss) Income Amount (Loss) Income Amount
Applicable to Per Diluted Applicable to Per Diluted
Common Shares Share Common Shares Share
As reported $ (8,372 ) $ (0.13 ) $ (5,395 ) $ (0.09 )
Severance and restructuring costs 884 0.01 7,803 0.13
Asset impairment and abandonments 4,515 0.07 - -
Inventory purchase price adjustment 456 0.01 - -
Loss on extinguishment of debt 309 0.00 - -

Inventory obsolescence and reserve charge

7,582 0.12 - -
Acquisition and integration expenses 800 0.01 - -
Tax effect on adjustments   (3,654 )   (0.06 )   (1,304 )   (0.02 )
Adjusted * $ 2,520   $ 0.04   $ 1,104   $ 0.02  
 
 
 
* 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 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.

           
RTI SURGICAL, INC. AND SUBSIDIARIES
Condensed Consolidated Revenues
(Unaudited, in thousands)
   
 
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2018 2017 2018 2017
Revenues: (In thousands)
Spine $ 18,934 $ 19,419 $ 38,197 $ 39,757
Sports 14,190 14,453 27,625 29,129
OEM 31,170 27,983 61,290 53,125
International 6,391 6,592 13,463 13,224
Cardiothoracic   -   3,673   -   6,824
Total revenues $ 70,685 $ 72,120 $ 140,575 $ 142,059
 
       
RTI SURGICAL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited, in thousands)
 
June 30, December 31,
2018 2017
Assets
Cash $ 14,246 $ 22,381
Accounts receivable - net 45,576 35,081
Inventories - net 101,022 111,927
Prepaid and other assets   8,038     16,285  
Total current assets 168,882 185,674
 
Property, plant and equipment - net 76,838 79,564
Goodwill 64,863 46,242
Other assets - net   36,910     34,426  
Total assets $ 347,493   $ 345,906  
 
Liabilities and Stockholders' Equity
Accounts payable $ 14,797 $ 18,252
Accrued expenses and other current liabilities 28,934 30,478
Current portion of long-term obligations   -     4,268  
Total current liabilities 43,731 52,998
 
Deferred revenue 3,155 3,741
Long-term liabilities   58,571     43,507  
Total liabilities 105,457 100,246
 
Preferred stock 65,961 63,923
 
Stockholders' equity:
Common stock and additional paid-in capital 425,544 425,132
Accumulated other comprehensive loss (6,850 ) (6,329 )
Accumulated deficit   (242,619 )   (237,066 )
Total stockholders' equity   176,075     181,737  
Total liabilities and stockholders' equity $ 347,493   $ 345,906  
 
               
RTI SURGICAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
 
 
Three Months Six Months
Ended June 30, Ended June 30,
2018 2017 2018 2017
Cash flows from operating activities:
Net loss $ (5,460 ) $ (1,689 ) $ (6,425 ) $ (3,561 )
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization expense 3,484 3,561 7,068 7,129
Stock-based compensation 1,290 974 2,570 1,808
Amortization of deferred revenue (1,218 ) (1,186 ) (2,435 ) (2,460 )
Other items to reconcile to net cash
(used in) provided by operating activities   12,731     (624 )   8,600     7,697  
Net cash provided by operating activities   10,827     1,036     9,378     10,613  
Cash flows from investing activities:
Purchases of property, plant and equipment (1,738 ) (3,877 ) (3,856 ) (7,160 )
Patent and acquired intangible asset costs (398 ) (1,526 ) (728 ) (1,845 )
Acquisition of Zyga Technology   -     -     (21,000 )   -  
Net cash used in investing activities   (2,136 )   (5,403 )   (25,584 )   (9,005 )
Cash flows from financing activities:
Proceeds from long-term obligations 54,425 2,000 74,425 4,000
Payments on long-term obligations (61,625 ) (3,125 ) (66,750 ) (7,375 )
Other financing activities   (991 )   1,467     403     1,433  
Net cash (used in) provided by financing activities   (8,191 )   342     8,078     (1,942 )
Effect of exchange rate changes on cash and cash equivalents   (66 )   102     (7 )   160  
Net increase (decrease) in cash and cash equivalents 434 (3,923 ) (8,135 ) (174 )
Cash and cash equivalents, beginning of period   13,812     17,598     22,381     13,849  
Cash and cash equivalents, end of period $ 14,246   $ 13,675   $ 14,246   $ 13,675  
 

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