Business Context and Reporting Period
This Form 10-K is for Greatbatch, Inc. and its subsidiaries, for the 52-week fiscal year ended January 1, 2016. The filing is associated with the company now known as Integer Holdings Corporation, but the legal name change was subject to shareholder approval in May 2016. The company designs and manufactures medical devices, components, assemblies and outsourced manufacturing solutions for global OEMs.
Reportable segments at year-end were Greatbatch Medical, QiG and Lake Region Medical. Greatbatch acquired Lake Region Medical on October 27, 2015, creating a significantly larger medical-device outsourcing platform. The company also planned to spin off a portion of QiG as Nuvectra in March 2016.
Key Financial Metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Sales | $800.4 million | $687.8 million | +16% |
| Gross profit | $235.1 million | $231.4 million | +2% |
| Gross margin | 29.4% | 33.6% | Down 4.2 points |
| Operating income | $13.1 million | $75.7 million | Down 83% |
| Operating margin | 1.6% | 11.0% | Down 9.4 points |
| Net income (loss) | $(7.6) million | $55.5 million | Decline of $63.1 million |
| Diluted EPS | $(0.29) | $2.14 | Down $2.43 |
| Adjusted diluted EPS | $2.90 | $2.86 | +1% |
| Adjusted EBITDA | $165.9 million | $147.8 million | +12% |
| Adjusted EBITDA margin | 20.7% | 21.5% | Down 0.8 points |
- Operating cash flow was $12.5 million, compared with $81.3 million in 2014.
- Capital expenditures were $44.6 million; net cash used in investing activities was $473.6 million, primarily due to the Lake Region acquisition.
- Cash and cash equivalents were $82.5 million at year-end, including $31.0 million held by foreign subsidiaries and considered permanently reinvested.
- Working capital was $360.8 million, compared with $242.0 million in 2014.
- Total debt was $1.714 billion, compared with $186.6 million at the prior year-end. Long-term obligations were $1.918 billion.
- Available borrowing capacity under the revolving credit facility was $186.6 million, after outstanding letters of credit.
- Estimated 2016 debt-service obligations were approximately $130 million.
Material Changes Versus the Prior Comparable Period
- Lake Region Medical contributed approximately $138.6 million of 2015 revenue from the acquisition date and increased the consolidated net loss by approximately $17.4 million.
- The acquisition added approximately $1.8 billion of debt, including a $1.025 billion term loan B, a $375 million term loan A and $360 million of 9.125% senior notes due 2023.
- Gross margin declined primarily because Lake Region Medical historically had lower margins and the acquisition generated $23.0 million of inventory step-up amortization.
- Other operating expenses increased to $66.5 million from $15.3 million, including $33.4 million of acquisition and integration costs and $23.0 million related to capacity, consolidation and optimization initiatives.
- Interest expense increased to $33.5 million from $4.3 million, reflecting the acquisition financing and $9.5 million of one-time debt-related transaction costs.
- Organic constant-currency sales declined 2%, despite reported sales growth, primarily because of lower Electrochem sales and foreign-exchange pressure. Foreign currency movements reduced 2015 sales by approximately $14.5 million.
- Electrochem sales declined 27% because of weakness in oil and gas drilling and exploration markets. Cardio and vascular sales increased 144% and included substantial Lake Region revenue; advanced surgical, orthopaedics and portable medical sales increased 13%.
- Four customers collectively represented approximately 52% of sales, compared with 54% in 2014.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management expected approximately $25 million of annual Lake Region acquisition synergies in 2016 and at least $60 million annually by 2018. The company estimated $69 million of investment over three years to achieve these synergies, including $22 million of capital expenditures and $47 million of operating expenses.
- Management expected 2016 other operating expenses of approximately $60 million to $70 million, reflecting continuing integration and consolidation activity.
- Expected 2016 capital expenditures were $60 million to $70 million, approximately half discretionary. Management stated that cash, operating cash flow and revolver availability should fund these requirements.
- Management expected to reduce leverage to approximately 3.5x to 3.0x over two to three years, dependent on execution and synergy realization.
- Algovita received FDA PMA approval in the fourth quarter of 2015, with a U.S. commercial launch anticipated in the first half of 2016. The related QiG assets were expected to be transferred to Nuvectra in the planned spin-off.
- The Nuvectra spin-off was expected to distribute one Nuvectra share for every three Greatbatch shares. Completion, timing and anticipated benefits remained subject to execution and other risks.
- Significant risks include customer concentration, customer pricing pressure and vertical integration, dependence on limited raw-material suppliers, regulatory approval and product-liability exposure, recalls, intellectual-property disputes, foreign-exchange movements, acquisition integration, leverage and covenant compliance.
- The company had a 6.5:1 maximum total net leverage covenant and a 3.0:1 minimum adjusted EBITDA-to-interest covenant. Reported covenant ratios were approximately 5.2:1 and 4.8:1, respectively, at year-end; the company stated it was in compliance.
- A jury awarded Greatbatch $37.5 million in damages in January 2016 in patent litigation against AVX. The award was subject to post-trial proceedings and possible appeal, and no gain had been recorded because no cash had been received.
- The acquired Collegeville, Pennsylvania facility remained subject to EPA consent orders requiring groundwater treatment and monitoring. The company recorded $1.1 million for ongoing remediation and awaited an EPA decision on its post-remediation care plan.
- Management excluded Lake Region Medical from its year-end internal-control assessment because it was acquired in 2015. Lake Region represented approximately 66% of total assets, 17% of revenue and 229% of consolidated net loss; the company expected to assess its controls in 2016.
Facts Investors Should Verify
- Whether the legal name change to Integer Holdings Corporation and the Nuvectra spin-off were completed on the expected terms and timeline.
- Lake Region Medical’s full-year revenue, profitability, integration costs and realized synergies after inclusion for only two months in 2015.
- Debt reduction, interest expense, variable-rate exposure and compliance with leverage and interest-coverage covenants.
- Whether the company’s $60 million to $70 million 2016 operating-expense outlook and $60 million to $70 million capital-spending outlook were achieved.
- The commercial launch, sales trajectory and remaining obligations associated with Algovita and Nuvectra.
- The final outcome and collectability of the $37.5 million AVX patent award, as well as the status and cost of environmental proceedings.
- The sustainability of reported sales growth after separating acquisition effects, foreign-exchange effects and customer inventory movements.