Integer Holdings Corporation — Q1 2023 Form 10-Q Summary
Business Context and Reporting Period
Integer Holdings is a medical device outsource manufacturer serving cardiac rhythm management, neuromodulation, cardiovascular, orthopedic, advanced surgical and portable medical markets. It also develops batteries for specialized energy, military and environmental applications. The company reports Medical and Non-Medical segments. The reported quarter ended March 31, 2023 and comprised 90 days, compared with 91 days ended April 1, 2022.
Key Financial Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Sales | $378.8 million | $310.9 million | 21.8% increase |
| Gross profit | $96.7 million | $81.5 million | 18.7% increase |
| Gross margin | 25.5% | 26.2% | Down 70 basis points |
| Operating income | $34.2 million | $22.5 million | 51.9% increase |
| Operating margin | 9.0% | 7.2% | Improved |
| Net income | $13.1 million | $11.4 million | 14.9% increase |
| Diluted EPS | $0.39 | $0.34 | Increase of $0.05 |
| Cash flow from operations | $6.2 million | $18.2 million | Decrease of $12.0 million |
| Capital expenditures | $24.7 million | $10.9 million | Increase of $13.8 million |
Medical sales increased 20.6% to $364.3 million, led by Cardio & Vascular sales growth of 20.2%, Cardiac Rhythm Management & Neuromodulation growth of 17.7%, and Advanced Surgical, Orthopedics & Portable Medical growth of 42.0%. Non-Medical sales increased 63.4% to $14.5 million.
Operating expenses were $62.5 million, or 16.5% of sales, compared with 19.0% in the prior-year quarter. SG&A increased 5.9% and research, development and engineering expense increased 18.7%. The effective tax rate was 18.3%, compared with 18.5%.
At March 31, 2023, cash and cash equivalents were $40.6 million, working capital was $403.5 million and the current ratio was 2.79. Total debt, net of discounts and issuance costs, was approximately $1.002 billion, compared with $925.3 million at December 31, 2022. Revolver availability was $377.5 million after borrowings and standby letters of credit.
Material Changes Versus the Prior Comparable Period
- Sales benefited from continued recovery in product demand, strong demand across medical markets, new product ramps, and contributions from the Oscor and Aran acquisitions.
- Gross profit increased, but gross margin declined because of incremental labor and supply-chain costs and manufacturing efficiency headwinds.
- Operating income improved materially as higher volume and operating leverage more than offset higher SG&A and research and development spending.
- Interest expense increased $11.3 million to $17.3 million, reflecting higher interest rates, higher average debt and $4.4 million of debt extinguishment losses.
- Losses on equity investments declined to $0.2 million from $2.4 million.
- Operating cash flow declined because of higher accounts receivable and contract assets, while capital expenditures increased substantially.
Debt, Liquidity and Financing Activity
In February 2023, Integer issued $500 million aggregate principal amount of 2.125% convertible senior notes due February 15, 2028, generating approximately $485 million of net proceeds. The proceeds were used primarily to repay the Term Loan B facility, reduce revolving borrowings, pay related fees and fund $35 million of capped call transactions.
The company amended its credit facilities, increasing revolver capacity from $400 million to $500 million and extending the revolver and Term Loan A maturities to February 15, 2028. At quarter-end, debt consisted primarily of $119.0 million of revolver borrowings, $400.0 million of Term Loan A principal and $500.0 million of convertible notes. Management reported compliance with all applicable covenants, including a total net leverage ratio of approximately 3.1:1 and an interest coverage ratio of approximately 7.7:1.
Management stated that available cash, operating cash flow and revolver capacity are expected to be sufficient for working capital, debt service and capital expenditure requirements for the next twelve months. Contractual debt service obligations for the remainder of 2023 were estimated at approximately $40 million.
Outlook, Commentary, Risks and Unusual Items
- Management cited continued demand recovery, customer program growth, new product ramps and supplier delivery recovery as key drivers of performance.
- Risks include inflation, labor shortages, supply-chain disruptions, higher borrowing costs, foreign-currency volatility, customer concentration, pricing pressure and dependence on third-party suppliers.
- The company remains exposed to manufacturing interruptions, product quality or regulatory issues, cybersecurity events, intellectual property claims and healthcare-industry regulation.
- Restructuring and other charges were $1.5 million, down from $3.3 million. The company expects additional charges for ongoing operational excellence, strategic reorganization, cost reduction and manufacturing-alignment initiatives; completion dates extend from 2023 through 2025.
- The Aran acquisition-related contingent consideration liability was $10.7 million at quarter-end and was paid in full in April 2023.
- The 2028 convertible notes were not convertible at March 31, 2023. Their potential dilution was antidilutive for reported EPS because the average share price was below the initial $87.20 conversion price.
- No new material legal proceedings or material changes to previously disclosed risk factors were reported. Management concluded that disclosure controls were effective and that there were no material changes in internal control over financial reporting.
Most Important Facts for Investors to Verify
- Whether sales growth and new product ramps continue to offset labor, supply-chain and manufacturing efficiency pressures.
- Whether gross margin recovers from the 25.5% Q1 level.
- Operating cash conversion, particularly the effect of receivables, contract assets, inventory and elevated capital expenditures.
- Debt reduction progress, interest-rate exposure and continued compliance with leverage and interest-coverage covenants.
- The timing and cash cost of remaining restructuring and manufacturing-relocation initiatives.
- Integration and performance of the Aran and Oscor acquisitions, including any remaining contingent consideration.
- Potential dilution or cash obligations associated with the 2028 convertible notes if the share price exceeds the conversion thresholds.