Business Context and Reporting Period
Company: Greatbatch, Inc. (Note: Input metadata referenced "Integer Holdings Corp," but the filing text identifies the registrant as Greatbatch, Inc.)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended October 2, 2009.
Business Overview: Greatbatch operates two segments: Greatbatch Medical (components for cardiac rhythm management, neuromodulation, vascular access, and orthopaedics) and Electrochem (electrochemical cells and wireless sensors). The company utilizes a 52/53-week fiscal year.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Oct 2, 2009 | 9 Months Ended Oct 2, 2009 | 3 Months Ended Sept 26, 2008 | 9 Months Ended Sept 26, 2008 |
|---|---|---|---|---|
| Sales | $121,470 | $396,013 | $136,242 | $400,044 |
| Gross Profit | $39,137 | $124,773 | $41,753 | $109,047 |
| Gross Margin % | 32.2% | 31.5% | 30.6% | 27.3% |
| Operating Income (Loss) | $(23,933) | $3,335 | $15,714 | $22,926 |
| Net Income (Loss) | $(20,693) | $(7,467) | $6,516 | $6,784 |
| Diluted EPS | $(0.90) | $(0.33) | $0.28 | $0.30 |
| Cash and Equivalents | $29,545 | $29,545 | $22,063 | $22,063 |
| Operating Cash Flow (9mo) | $50,243 | |||
| Total Debt (Long-term + Current) | $296,106 | $296,106 | $314,384 | $314,384 |
Material Changes vs. Prior Period
- Revenue Decline: Sales decreased 11% in the quarter and 1% year-to-date compared to 2008. The decline was driven by a 39% drop in Orthopaedic sales (due to reduced elective procedures and foreign currency impacts) and a 16% drop in Electrochem sales (due to energy market slowdowns). These were partially offset by an 11% increase in CRM/Neuromodulation sales.
- Significant Litigation Charge: Operating results were heavily impacted by a $34.5 million litigation charge recorded in the third quarter related to the "Electrochem Litigation" (Input/Output Marine Systems). This charge turned a projected operating profit into a significant operating loss for the quarter.
- Margin Expansion: Despite revenue declines, gross margin percentage improved to 32.2% (Q3) and 31.5% (9mo) from 30.6% and 27.3% in the prior year, driven by manufacturing efficiencies and favorable foreign currency impacts on the Mexican Peso.
- Accounting Change: The company adopted ASC 470-20 regarding convertible debt, requiring retrospective restatement of 2008 figures. This adjustment increased interest expense and reduced prior period net income.
Guidance, Outlook, and Risks
- 2009 Sales Outlook: Management lowered full-year 2009 revenue guidance to $520 million - $535 million, down from the original estimate of $550 million - $600 million, citing continued weakness in the Orthopaedic market.
- Litigation Contingency: The company accrued $35 million for the Electrochem judgment. If the post-trial motion fails, the company intends to appeal. Interest will accrue on the award during the appeal. The company plans to bond the judgment using its credit facility.
- Liquidity: As of October 2, 2009, the company had $29.5 million in cash and $128 million available under its revolving credit facility. Management believes this is sufficient to meet operating needs, debt service, and potential litigation settlements.
- Investment Plans: In November 2009, the company announced a plan to invest approximately $21 million in its Orthopaedic business, including a new Rapid Prototyping Center, with construction starting in early 2010.
- Risks: Key risks include the outcome of the Electrochem litigation, dependence on a limited number of customers (top 4 customers accounted for 63% of sales), foreign currency fluctuations, and the impact of healthcare reform on elective procedures.
Investor Verification Checklist
- Litigation Status: Verify the outcome of the post-trial motion scheduled for November 18, 2009, and the potential for additional interest accruals on the $35 million judgment.
- Orthopaedic Segment Recovery: Monitor Orthopaedic sales trends to see if the 39% quarterly decline stabilizes, given the company's significant new investment in this segment.
- Debt Covenants: Confirm continued compliance with credit facility covenants (leverage ratio and interest coverage), noting that the litigation charge is excluded from adjusted EBITDA calculations.
- Convertible Notes: Review the terms of the $30.5 million convertible notes due in 2013, which are classified as current liabilities due to a put option exercisable in June 2010.
- Customer Concentration: Assess the risk associated with the top four customers representing 63% of total sales.