RTI Surgical’s Sales Down 3 Percent Last Year

It’s time for a reset at RTI Surgical Inc.

As it prepares to welcome its new CEO Camille Farhat, the company released disappointing fourth-quarter and full-year 2016 financial results. Although RTI delivered a strong performance in its direct business, with double-digit growth reported in its spine, surgical specialties, cardiothoracic and international divisions, its commercial/other business declined during 2016, primarily due to extraordinarily high commercial orders in 2015. However, the company’s finances did show signs of stabilization during the year.

“We are focused on execution and, in parallel with the pending arrival of Camille, we are executing an initial restructuring plan to reduce operating costs and streamline and improve our platform for growth,” RTI Interim CEO Robert Jordheim said. “As a result of this initial cost rationalization, we expect to incur a pre-tax charge of approximately $4 million for severance-related expenses, a majority of which will be recorded in the first quarter of 2017. This initial plan is expected to save the company approximately $8 million of annualized expenses beginning in the first quarter of 2017 and is a first step toward optimizing our expense structure to establish an efficient and more flexible platform upon which to grow profitably.”

Fourth Quarter 2016
RTI reported a net loss of $12 million in 2016’s fourth quarter, or 21 cents per fully diluted common share, mainly due to pre-tax charges totaling $16 million related to excess hernia and sports medicine inventory and asset impairment of the company’s German subsidiary. Excluding these charges, adjusted net income per fully diluted common share was 1 cents and adjusted earnings before interest, taxes, depreciation and amortization (adjusted EBITDA) was $6.1 million for the fourth quarter of 2016 (ended Dec. 31).
 
Worldwide revenues were $71.3 million for the fourth quarter of 2016, a decrease of 6 percent, domestic revenues were $64.6 million, a decrease of 9 percent, and international revenues were $6.8 million, an increase of 24 percent from 2015’s fourth quarter. The decrease in domestic revenue was primarily due to lower orders in the commercial/other business in 2016 coming off a very strong 2015; partially offset by strong growth in the domestic direct businesses. The increase in international revenues was mainly driven by growth in Asia, primarily in Spine.

Direct revenues were $44.5 million for the fourth quarter of 2016, an increase of 22 percent compared to the fourth quarter of 2015, with particular strength in Spine. RTI’s spine business continues to be one of the fastest-growing spine businesses in the United States, primarily due to increases in surgeon users and distributor relationships. Commercial/other revenues were $26.8 million for the fourth quarter of 2016. Spinal sales surged 37 percent in the fourth quarter to $21.4 million. Sports medicine and orthopedic product revenue climbed 1 percent to $13.2 million.
 
The company has begun implementing restructuring actions targeted at rightsizing investments toward those businesses and market areas with the greatest potential for long-term growth. This effort is ongoing and is expected to result in both cost savings and additional revenue opportunities over the near- and long-term.
 
Full Year 2016
Worldwide revenues were $272.9 million for the full year 2016, a decrease of 3 percent compared to revenues for the full year 2015, mainly due to the same factors impacting fourth quarter 2016 worldwide revenues. Domestic revenues were $247.8 million for the full year 2016, a decrease of 5 percent compared to domestic revenues for the full year 2015. International revenues were $25.1 million for the full year 2016, an increase of 15 percent compared to international revenues for the full year 2015. On a constant currency basis, international revenues for the full year 2016 increased 15 percent compared to international revenue for the full year 2015.
 
Direct revenues were $160.8 million for the full year 2016, an increase of 16 percent compared to direct revenues for the full year 2015. The company experienced double digit growth in the spine, surgical specialties, cardiothoracic, and international businesses. Commercial/other revenues were $112 million for the full year 2016, a decrease of 22 percent compared to commercial/other revenues for the full year 2015. The decline in commercial/other business is primarily related to significantly high orders in 2015 with lower orders in 2016, however the commercial business showed signs of stabilization during the year. In addition, RTI is taking actions to reinvigorate this business by strengthening relationships and investing in innovation.

The company’s spinal proceeds jumped 27.4 percent last year to $73.9 million; conversely, sports medicine and orthopedic product sales fell 1.1 percent to $50.1 million.
 
During the year, the company recorded pre-tax charges totaling $25.6 million as follows: $9.6 million related to hernia and sports medicine inventory, $5.6 million related to asset impairment of the company’s German subsidiary, $1.2 million related to strategic review costs, $4.4 million related to CEO transition and retirement costs, $2.7 million related to contested proxy costs, $1.1 million related to restructuring, and $1 million related to severance. In addition, the company also recorded a foreign net operating loss valuation reserve of $1.2 million.
 
Net loss applicable to common shares was $18.1 million for the full year 2016, compared to net income applicable to common shares of $11.6 million for the full year 2015. Net loss per common share was 31 cents for the full year 2016, based on 58.2 million common shares outstanding, compared to net income per fully diluted common share of 20 cents for the full year 2015, based on 58.6 million fully diluted common shares outstanding.
 
Adjusted net income applicable to common shares was $2.1 million for the full year 2016, compared to adjusted net income applicable to common shares of $13.4 million for the full year 2015.

Adjusted net income per fully diluted common share was 4 cents for the full year 2016, based on 58.5 million fully diluted common shares outstanding, compared to adjusted net income per fully diluted common share of 23 cents for the full year 2015, based on 58.6 million fully diluted common shares outstanding.
 
Adjusted EBITDA was $29.8 million for the full year 2016 (11 percent of 2016 revenues) compared to $46.3 million for the full year 2015 (16 percent of 2015 revenues).
 
Fiscal 2017 Outlook
RTI will remain focused in 2017 on execution, continued innovation and profitable growth across each of its business lines and geographies. The company has developed its guidance based on a conservative view of its current restructuring and operational improvement program, its current business profile and existing market conditions.
 
Within this context, RTI expects full year revenues for 2017 to be between $274 million and $285 million. Compared to the full year 2016, direct revenue is expected to grow mid-to-high single digits on a percentage basis, while commercial/other revenue is expected to account for a relatively flat to low single-digit decline on a percentage basis.
 
Excluding the approximately $4 million pre-tax charge for severance-related expenses in 2017, adjusted full year net income per fully diluted common share is expected to be in the range of 5 cents to 10 cents, based on 59.5 million fully diluted common shares outstanding.