Integer Holdings Corp annual report, FY2022

Integer Holdings Corporation: FY2022 Form 10-K Summary

Business Context and Reporting Period

Integer Holdings Corporation is a global medical device outsource manufacturer serving cardiac rhythm management, neuromodulation, vascular, advanced surgical, orthopedic and portable medical markets, with a smaller Non-Medical segment supplying specialized battery solutions for energy, military and environmental applications. The filing covers the fiscal year ended December 31, 2022; it is an annual report rather than a quarterly filing.

Integer operates through Medical and Non-Medical segments. Three Medical customers—Abbott Laboratories, Boston Scientific and Medtronic—collectively represented approximately 46% of 2022 sales. Firm backlog at December 31, 2022 was approximately $886 million, with most orders expected to ship within one year.

Integer acquired Aran Biomedical and Proxy Biomedical (collectively, “Aran”) on April 6, 2022 for total consideration of $141.3 million. The acquisition added medical textile, biomaterial coating and braiding capabilities for implantable devices. Oscor, acquired in December 2021, contributed for a full year in 2022.

Financial Results and Key Metrics

Metric	2022	2021	Change
Sales	$1.376 billion	$1.221 billion	+12.7%
Gross profit	$359.0 million	$337.0 million	+6.5%
Gross margin	26.1%	27.6%	Down 150 basis points
Operating income	$121.3 million	$135.7 million	-10.6%
Income from continuing operations	$65.4 million	$93.0 million	-29.7%
Diluted EPS from continuing operations	$1.96	$2.80	-30.0%
Net income	$66.4 million	$96.8 million	-31.4%
Diluted EPS	$1.99	$2.91	-31.6%
Cash flow from operating activities	$116.4 million	$156.7 million	-25.7%
Capital expenditures	$74.1 million	$53.0 million	+$21.1 million

Medical sales increased 12.4% to $1.330 billion. Cardio & Vascular sales rose 17.9% to $699.5 million, Cardiac Rhythm Management & Neuromodulation increased 6.0% to $532.6 million, and Advanced Surgical, Orthopedics & Portable Medical increased 11.8% to $97.5 million.
Non-Medical sales increased 21.0% to $46.5 million, reflecting growth in energy, military and environmental markets.
Gross profit increased, but labor, freight, supply-chain and manufacturing inefficiencies reduced gross margin.
Operating expenses rose 18% to $237.7 million, including higher labor, research and development, acquisition and integration, and restructuring costs. Restructuring and other charges increased to $16.2 million from $7.9 million.
Interest expense increased 22% to $38.6 million because of higher average debt and higher floating interest rates. Net losses on equity investments increased to $7.6 million from $3.1 million.
The effective tax rate increased to 14.0% from 8.0%, primarily reflecting unfavorable stock-based compensation effects and the nonrecurring favorable impact of 2021 uncertain-tax-position activity.

Liquidity, Debt and Balance Sheet

Cash and cash equivalents were $24.3 million at year-end, compared with $17.9 million in 2021. Working capital was $334.5 million and the current ratio was 2.50.
Total principal debt outstanding was $931.2 million; debt reported net of issuance costs and discounts was $925.3 million. The weighted-average interest rate on outstanding borrowings was 6.40% at year-end.
Available Revolving Credit Facility capacity was $256.2 million after $140.3 million of borrowings and $3.5 million of letters of credit.
Debt maturities included $18.2 million of principal due in 2023, with total 2023 principal and interest obligations estimated at approximately $78 million.
The Company was in compliance with its financial covenants at year-end. Total net leverage was approximately 2.9x and adjusted EBITDA to interest expense was approximately 8.7x.
Integer expects 2023 capital expenditures of approximately $100 million to $120 million, primarily for manufacturing facilities, information technology and productivity-related equipment.
Management stated that operating cash flow, cash on hand and available revolver capacity should be sufficient for working capital, debt service and capital expenditure needs for at least the next twelve months, subject to operating and economic conditions.

Material Changes Versus the Prior Comparable Period

Revenue grew 13%, primarily from the Oscor acquisition, the Aran acquisition and continued recovery in customer demand after pandemic-related disruption.
Profitability declined despite revenue growth because of lower gross margin, increased operating expenses, higher interest expense, greater equity-investment losses and a higher tax rate.
Operating cash flow declined $40.3 million, primarily because of lower earnings and unfavorable working-capital changes, including increased accounts receivable and inventory.
Cash used in investing activities declined to $200.4 million from $271.0 million, principally because acquisition spending decreased, although capital expenditures increased.
Debt increased materially to support acquisitions, particularly the Aran transaction, while the Company remained within its stated covenant limits.
Integer announced a planned exit from certain Advanced Surgical, Orthopedics & Portable Medical markets. The transition is expected to take three to four years because of quality and regulatory requirements.
Product-line sales classifications were recast for prior periods, including reclassification of certain sales into Cardiac Rhythm Management & Neuromodulation.

Guidance, Outlook, Commentary and Risks

Management emphasized opportunities from expanded medical-device capabilities, customer innovation programs, manufacturing excellence initiatives and strategic acquisitions. The filing does not provide a formal revenue or earnings guidance range. It does provide expected 2023 capital expenditures of $100 million to $120 million.

Key operating pressures include inflation, labor shortages, supply-chain disruption, higher raw-material and freight costs, manufacturing inefficiencies, the Russia-Ukraine conflict, foreign-exchange movements and the continuing effects of COVID-19.
Customer concentration is significant, and supply agreements generally do not guarantee minimum purchase volumes. Customer inventory adjustments, insourcing or dual sourcing could materially affect sales.
Integer relies on limited suppliers for certain critical materials, including platinum, stainless steel, titanium, nitinol, lithium and other specialized inputs. Substitution may be difficult or costly.
Medical-device regulation, FDA and international audits, EU Medical Device Regulation implementation, product complaints, recalls, warranty claims and product-liability exposure could affect operations and costs.
Debt is predominantly floating rate. A one-percentage-point increase in LIBOR on approximately $831 million of unhedged variable-rate debt would increase annual interest expense by approximately $8 million, based on the filing’s sensitivity analysis.
Goodwill and other intangible assets totaled approximately $1.8 billion, or 64% of total assets. Management identified no impairment at year-end, but weaker operating performance, customer losses or higher discount rates could result in future impairment charges.
Environmental investigations related to a former New Jersey facility remain unresolved. Management does not currently expect a material effect, but acknowledges that the matter could become material.
Management excluded Aran from its year-end internal-control assessment because the acquisition occurred in 2022. Aran represented approximately 5% of total assets, 9% of net assets and 1% of sales; management and Deloitte nevertheless concluded that the Company’s overall internal control was effective.

Subsequent Events

In February 2023, Integer issued $500 million of 2.125% convertible senior notes due 2028, generating approximately $485.3 million of net proceeds.
Proceeds were used primarily to repay the $336.1 million TLB Facility obligation and reduce Revolving Credit Facility borrowings by approximately $113.9 million, including principal and interest.
The Company amended its credit agreement to increase revolving capacity from $400 million to $500 million, extend certain maturities to February 2028, permit Euro borrowings and replace LIBOR-based pricing with Adjusted Term SOFR.
Integer entered into capped-call transactions intended to reduce potential dilution from conversion of the notes, subject to a cap price initially approximately $108.59 per share.

Most Important Facts for Investors to Verify

Whether revenue growth from Oscor, Aran and underlying customer demand can offset margin pressure from labor, supply-chain and manufacturing costs.
The sustainability of cash generation relative to planned 2023 capital expenditures, debt service and contingent consideration payments.
The effect of the February 2023 convertible-note financing and debt repayment on interest expense, leverage, liquidity and potential share dilution.
Progress and financial impact of the planned exit from selected Advanced Surgical, Orthopedics & Portable Medical markets.
Customer concentration, backlog conversion and any changes in purchasing, inventory or outsourcing decisions by the three largest Medical customers.
Exposure to floating interest rates, raw-material availability and pricing, foreign-exchange movements and regulatory or product-quality events.
Completion of Aran’s integration and inclusion of Aran in future internal-control assessments.