Integer Holdings Corporation — Q1 2022 Form 10-Q Summary
Business context and reporting period
Integer Holdings is a medical device outsource manufacturer serving cardiac, neuromodulation, vascular, orthopedics, advanced surgical and portable medical markets, with a smaller battery business serving energy, military and environmental applications. The filing covers the 91-day quarter ended April 1, 2022, compared with the 92-day quarter ended April 2, 2021.
Operations are reported through Medical and Non-Medical segments. The December 2021 Oscor acquisition contributed $19.0 million of first-quarter sales. On April 6, 2022, after quarter-end, Integer acquired Aran Biomedical and Proxy Biomedical for approximately $131 million, plus up to approximately $11 million of contingent consideration.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Sales | $310.9 million | $290.5 million | 7.0% increase |
| Gross profit | $81.5 million | $84.5 million | 3.6% decrease |
| Gross margin | 26.2% | 29.1% | 290 basis-point decline |
| Operating income | $22.5 million | $34.6 million | 35.0% decrease |
| Operating margin | 7.2% | 11.9% | 470 basis-point decline |
| Net income | $11.4 million | $21.5 million | 47.2% decrease |
| Diluted EPS | $0.34 | $0.65 | 47.7% decrease |
| Operating cash flow | $18.2 million | $36.4 million | 50.2% decrease |
Medical sales increased 6.7% to $302.0 million, led by Cardio & Vascular sales growth of 12.6%. Cardiac Rhythm Management & Neuromodulation sales increased 1.3%, while Advanced Surgical, Orthopedics & Portable Medical sales declined 1.9%. Non-Medical sales increased 18.4% to $8.9 million.
Cost of sales increased 11.4%, outpacing revenue growth. Management attributed margin pressure primarily to labor shortages, overtime, training costs, delayed materials, operating inefficiencies and COVID-related absenteeism. SG&A increased 11.4% to $39.6 million, and research, development and engineering increased 19.5% to $16.1 million.
Cash and cash equivalents were $25.7 million at April 1, 2022, compared with $17.9 million at December 31, 2021. Working capital was $321.7 million and the current ratio was 2.86. Capital expenditures were $10.9 million. Net cash increased $7.8 million during the quarter.
Total debt was $829.6 million, including $15.3 million classified as current debt. The company had $370.2 million of available revolving-credit capacity after outstanding borrowings and letters of credit. Debt maturities include approximately $11.4 million during the remainder of 2022 and $406.7 million in 2026. The company reported a total net leverage ratio of approximately 2.8:1 and an interest coverage ratio of approximately 12.8:1, compared with covenant limits of 5.5:1 and a minimum of 2.5:1, respectively.
Material changes versus the prior comparable period
- Revenue increased $20.4 million, but gross profit declined $3.0 million because cost inflation and labor and supply constraints exceeded volume benefits.
- Operating expenses increased $9.1 million, including higher labor costs, Oscor-related amortization and expenses, higher R&D investment, and restructuring and acquisition costs.
- Restructuring and other charges increased to $3.3 million from $0.9 million, including $1.9 million of acquisition and integration costs.
- Interest expense declined $2.6 million to $6.0 million due to lower interest rates and lower debt-related charges, partially offset by higher debt balances following the Oscor acquisition.
- The company recorded a $2.4 million loss on equity investments versus a $1.3 million loss in the prior-year quarter.
- Operating cash flow fell $18.3 million, primarily because of lower earnings and increased investment in inventory and accounts receivable.
- Product-line sales were recast to reflect planned exits from certain Advanced Surgical, Orthopedics and Portable Medical markets. The transition is expected to take three to four years.
Outlook, commentary, risks and unusual items
Management stated that demand for many products continued to recover from pandemic-related impacts, but labor absenteeism, supply-chain constraints and material delays limited growth and profitability. The company expects 2022 operational-excellence initiatives to generate approximately $3 million to $5 million of aggregate pre-tax charges, with substantial completion expected by the end of 2023. Previously announced 2021 initiatives and strategic reorganization activities are expected to be substantially completed by the end of 2022 and 2025, respectively.
Management believes operating cash flow, cash on hand and available revolver capacity are sufficient for working capital, debt service and capital expenditures over the next twelve months. No specific revenue or earnings guidance is provided in the filing text.
Key risks include continuing COVID-19 effects, labor shortages, supply-chain disruptions, customer concentration and pricing pressure, manufacturing interruptions, cybersecurity, product quality and regulatory matters, acquisition integration, substantial indebtedness, variable interest rates, foreign currency exposure, tax-law changes and the Russia-Ukraine conflict. The company stated that it has no operations or significant direct customer or vendor exposure in Russia or Ukraine but cannot predict broader economic effects.
The filing reports no new material legal proceedings, no material changes to previously disclosed risk factors, effective disclosure controls, and no material off-balance-sheet arrangements. The company was in compliance with its debt covenants at April 1, 2022.
Investor verification points
- Verify whether labor, supply-chain and material-cost pressures improve and whether gross margin recovers from 26.2%.
- Assess the revenue and earnings contribution, purchase accounting and integration progress of the Aran acquisition.
- Monitor the planned exit from certain markets and the resulting three- to four-year sales transition.
- Evaluate cash conversion, inventory growth, capital expenditures and borrowing needs following the acquisition program.
- Review debt maturities, floating-rate exposure, covenant headroom and the effect of higher interest rates.
- Track restructuring, operational-excellence and strategic reorganization charges against management’s estimated ranges.
- Consider customer concentration: three Medical customers each represented at least 14% of Medical segment sales in Q1 2022, and one Non-Medical customer represented 33% of Non-Medical sales.