Integer Holdings Corporation — Q1 2021 Form 10-Q Summary
Business context and reporting period
Integer Holdings is a medical device outsourcing manufacturer serving cardiac, neuromodulation, vascular, orthopedic, advanced surgical and portable medical markets, with a smaller Non-Medical battery business. The quarter ended April 2, 2021 and comprised 92 days, compared with 94 days in the quarter ended April 3, 2020. Results were materially affected by the continuing COVID-19 pandemic, including customer order delays, supply-chain disruption and manufacturing and shipment constraints.
Financial performance and key metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Sales | $290.5 million | $328.4 million | Down 11.6% |
| Gross profit | $84.5 million | $96.7 million | Down 12.6% |
| Gross margin | 29.1% | 29.4% | Down 0.3 percentage points |
| Operating income | $34.6 million | $44.1 million | Down 21.5% |
| Operating margin | 11.9% | 13.4% | Down 1.5 percentage points |
| Net income | $21.5 million | $31.1 million | Down 30.8% |
| Net margin | 7.4% | 9.5% | Down 2.1 percentage points |
| Diluted EPS | $0.65 | $0.94 | Down $0.29 |
| Cash flow from operations | $36.4 million | $32.4 million | Up $4.0 million |
| Capital expenditures | $7.7 million | $14.9 million | Down $7.3 million |
Medical sales were $283.0 million, down 11.1%. Cardio & Vascular sales declined 16.8%, Advanced Surgical, Orthopedics & Portable Medical declined 18.7%, and Cardiac & Neuromodulation increased 0.5%. Non-Medical sales declined 26.2% to $7.5 million, reflecting weakness in the energy market and pandemic-related demand impacts.
Gross profit declined primarily because of lower volume and customer price reductions. SG&A decreased 2.6% to $35.5 million, while research, development and engineering expense increased 1.7% to $13.5 million. Other operating expenses declined 68.8% to $0.9 million as prior-period strategic reorganization, manufacturing alignment and acquisition-related costs largely ended.
Interest expense decreased 17.7% to $8.5 million due to lower debt and interest rates. The company recorded a $1.3 million loss on equity investments, compared with a $1.9 million gain in the prior-year quarter. The effective tax rate was 13.8%, compared with 15.1%.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $28.4 million at April 2, 2021, down from $49.2 million at December 31, 2020.
- Working capital was $247.7 million and the current ratio was 2.53.
- Total debt, net of discounts and issuance costs, was $687.1 million, including $220.3 million under Term Loan A and $472.3 million under Term Loan B.
- The company prepaid $36.0 million of Term Loan B during the quarter and recorded a $0.3 million loss on debt extinguishment.
- The $200 million revolving credit facility had $193.3 million of available capacity after outstanding letters of credit.
- Senior secured credit facilities mature October 27, 2022. The company was in compliance with its covenants, including a maximum total net leverage ratio of 4.75:1.00 and a minimum interest coverage ratio of 3.00:1.00.
- Reported total net leverage was approximately 3.2:1.0 and adjusted EBITDA to interest expense was approximately 6.8:1.0. Management stated that adjusted EBITDA could decline approximately $70 million, or 33%, before covenant noncompliance.
Material changes versus the prior comparable period
- Sales fell $38.0 million, primarily because of continuing COVID-19 effects, including reduced or delayed customer demand. The prior-year period also benefited from a discrete customer contract signing.
- Gross margin declined 0.3 percentage points, principally due to price reductions, partly offset by product mix and lower customer-bankruptcy-related costs.
- Operating income and net income declined more rapidly than sales because of lower gross profit and a swing from a prior-year equity investment gain to a current-period loss.
- Cash from operations increased despite lower earnings, while investing cash use declined because Q1 2020 included higher capital expenditures, an intangible asset purchase and acquisition spending.
- Financing cash flow changed from $15.2 million of inflow in Q1 2020 to $49.6 million of outflow in Q1 2021, primarily due to debt repayments.
- Accumulated other comprehensive income declined to $35.6 million from $52.7 million, primarily due to a $16.4 million foreign-currency translation loss.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide formal revenue or earnings guidance. Management stated that it believes available cash, operating cash flow and revolver capacity are sufficient for working capital, debt service and capital expenditures over the next twelve months. Estimated debt service obligations for the remainder of 2021 were approximately $45 million.
Management continues to emphasize sales-force, innovation, manufacturing, business-process, leadership and performance excellence initiatives. The 2021 realignment plan is expected to generate approximately $1 million to $2 million of pretax charges, mostly cash, and is expected to be substantially completed by year-end.
- COVID-19 remains a significant uncertainty, with potential effects on customers, suppliers, employees, manufacturing, shipments and cash flows.
- The company depends on a limited number of large OEM customers; four customers represented significant portions of Medical or Non-Medical segment revenue.
- Other key risks include supply-chain interruptions, pricing pressure, product quality and regulatory matters, cybersecurity, competition, international operations and foreign exchange, acquisition execution, intellectual property and product liability.
- Approximately $5.5 million of unrecognized tax benefits remained at quarter-end; up to $3.4 million could be reduced within the next twelve months through potential audit settlements.
- The company had $9.7 million of deferred payroll taxes under the CARES Act, with repayments scheduled in 2022 and 2023.
- Net contingent consideration liabilities were $2.3 million, with a maximum undiscounted payout of $6.8 million.
- Net losses of approximately $3.2 million related to cash-flow hedges are expected to be reclassified into earnings during the next twelve months.
Important facts for investors to verify
- Whether medical-device demand and customer orders recover as pandemic-related healthcare disruptions ease.
- Whether the company can reduce leverage before the October 2022 debt maturities and comply with tightening leverage covenants.
- The impact of customer pricing concessions and mix changes on future gross margins.
- Progress and cash costs of the 2021 restructuring and operational-excellence initiatives.
- Concentration among major OEM customers and exposure to supply-chain, manufacturing and regulatory disruptions.
- The sustainability of operating cash flow and the availability of revolver capacity relative to debt service and capital spending needs.