Integer Holdings Corporation — Q1 2020 Form 10-Q Summary
Business context and reporting period
Integer is a medical device outsource manufacturer serving cardiac, neuromodulation, vascular, orthopedic, advanced surgical and portable medical markets, with a smaller Non-Medical segment serving energy, military and environmental applications. The quarter ended April 3, 2020 and included 94 days, compared with 91 days in the quarter ended March 29, 2019. Results exclude the Advanced Surgical and Orthopedic product line, which was sold in 2018 and reported as discontinued operations.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Sales | $328.4 million | $314.7 million | 4.4% |
| Gross profit | $96.7 million | $88.6 million | 9.1% |
| Gross margin | 29.4% | 28.2% | +1.2 percentage points |
| Operating income | $44.1 million | $39.2 million | 12.5% |
| Operating margin | 13.4% | 12.4% | +1.0 percentage point |
| Income from continuing operations | $31.1 million | $21.4 million | 45.6% |
| Diluted EPS from continuing operations | $0.94 | $0.65 | 44.6% |
| Net cash provided by operating activities | $32.4 million | $11.2 million | +$21.2 million |
| Capital expenditures and other investing uses | $23.6 million | $7.5 million | +$16.1 million use |
Medical sales increased 5.7% to $318.3 million, led by Cardio & Vascular growth of 17.5% to $179.2 million. Cardiac & Neuromodulation declined 7.8% to $107.8 million, while Advanced Surgical, Orthopedics & Portable Medical declined 1.1% to $31.2 million. Non-Medical sales fell 25.3% to $10.2 million.
SG&A was $36.5 million, RD&E was $13.2 million and other operating expenses were $2.9 million. The effective tax rate was 15.1%, compared with 15.0% in the prior-year quarter. Net income was $31.1 million, versus $21.7 million, including $0.3 million of discontinued-operation income in 2019.
Cash and equivalents were $37.3 million at April 3, 2020, up from $13.5 million at December 31, 2019. Working capital was $274.7 million and the current ratio was 2.48. The company sold $15.5 million of accounts receivable through a non-recourse supplier-financing arrangement during the quarter.
Total debt was $831.3 million at April 3, 2020, including $25.0 million drawn under the revolving facility. The company had $168.3 million of revolver capacity available at quarter-end, after outstanding borrowings and letters of credit. On April 10, 2020, it drew an additional $160 million, leaving approximately $8.3 million of available capacity for normal-course letters of credit. The credit facilities mature October 27, 2022.
Material changes versus the prior comparable period
- Sales growth and manufacturing efficiencies increased gross margin by 1.2 percentage points, partially offset by customer price reductions, product mix and $0.8 million of charges related to the Nuvectra bankruptcy.
- Interest expense declined 25.1% to $10.4 million, primarily because of lower interest rates and lower average debt balances.
- The company recorded a $1.9 million net gain on equity investments, compared with a negligible loss in Q1 2019, and $1.0 million of other income versus $0.2 million of other expense.
- Operating cash flow improved substantially, aided by sales of receivables under the supplier-financing program and stronger earnings, although inventory and other working-capital uses increased.
- Investing cash uses increased due to $14.9 million of property, plant and equipment purchases, a $3.5 million intangible-asset purchase and $5.3 million paid for the InoMec acquisition.
- Integer acquired InoMec on February 19, 2020 for $7.0 million of estimated consideration, including $1.7 million of contingent consideration. InoMec and USB contributed $1.4 million of Q1 sales; their earnings were not material.
Guidance, outlook, risks and unusual items
The filing does not provide formal numerical revenue or earnings guidance. Management expects cash on hand, operating cash flow and revolver availability to fund working capital, debt service and capital expenditures for the next twelve months, but notes that additional financing could be required if needs increase.
COVID-19 had a negligible impact on most Medical product lines during Q1, but materially affected Non-Medical demand through the collapse in oil-related activity. Management expects potential future delayed or reduced orders, particularly because some supported medical procedures are elective. Risks include customer concentration, pricing pressure, supply-chain disruption, manufacturing interruptions, international currency and interest-rate exposure, regulatory and product-liability matters, and covenant compliance.
The company’s facilities remained open as essential operations, with enhanced safety procedures. Furloughs and temporary shutdowns were used or considered to align labor with demand. The company believes the Non-Medical reporting unit’s fair value exceeded carrying value as of April 3, 2020, despite pandemic-related pressure.
The 2020 restructuring plan is expected to generate aggregate pre-tax charges of approximately $2 million to $3 million, with $1.0 million incurred through April 3, 2020 and substantial completion expected by year-end. The company also has an ongoing patent dispute with AVX; a $22.2 million jury award remains subject to appeal, and no gain has been recorded.
Important facts for investors to verify
- Assess the impact of the April 10, 2020 $160 million revolver draw on leverage, interest expense, liquidity and covenant headroom.
- Monitor whether COVID-19 causes delayed elective-procedure demand, customer inventory reductions or supply-chain and facility disruptions in subsequent quarters.
- Verify the sustainability of the 29.4% gross margin improvement, given customer pricing pressure and the contribution of production efficiencies and volume.
- Evaluate Non-Medical exposure to oil and energy markets and the potential for continued revenue and goodwill pressure.
- Review the treatment and sustainability of the $1.9 million equity-investment gain and $1.0 million foreign-currency-related other income, which management identifies as unpredictable.
- Track debt maturities, the October 2022 facility maturity, required principal payments and compliance with the 4.00-to-4.25 maximum net leverage and 3.00 minimum interest-coverage covenants.
- Confirm the timing and final consideration for InoMec and other acquisition-related contingent payments, as well as restructuring and acquisition costs.