Integer Holdings Corp. — Form 10-Q Summary
Business Context and Reporting Period
Integer Holdings Corporation is a medical device outsource manufacturer serving cardiac, neuromodulation, vascular, orthopedics, advanced surgical and portable medical markets, with additional battery products for niche energy, military and environmental applications. The filing covers the 91-day second quarter and 182-day first six months ended July 1, 2022, compared with periods ended July 2, 2021.
Operations are reported in Medical and Non-Medical segments. Integer acquired Aran Biomedical on April 6, 2022, expanding capabilities in medical textiles, coatings and braiding for implantable devices. Aran was funded with revolving-credit borrowings and is included in the Medical segment.
Key Financial Metrics
| Metric | Q2 2022 | Q2 2021 | Six Months 2022 | Six Months 2021 |
|---|---|---|---|---|
| Sales | $350.1 million | $312.0 million | $661.0 million | $602.5 million |
| Gross profit | $92.9 million | $88.7 million | $174.4 million | $173.2 million |
| Gross margin | 26.5% | 28.4% | 26.4% | 28.8% |
| Operating income | $32.7 million | $39.4 million | $55.2 million | $74.0 million |
| Operating margin | 9.3% | 12.6% | 8.4% | 12.3% |
| Net income | $20.8 million | $29.4 million | $32.2 million | $51.0 million |
| Diluted EPS | $0.62 | $0.89 | $0.97 | $1.53 |
| Operating cash flow | Not separately provided | Not separately provided | $37.0 million | $68.8 million |
At July 1, 2022, cash and cash equivalents were $15.6 million, compared with $17.9 million at December 31, 2021. Working capital was $335.3 million and the current ratio was 2.70. Total debt was $947.1 million, including $145.3 million outstanding under the revolving facility. Available revolver capacity was $249.2 million after borrowings and standby letters of credit.
Accounts receivable increased to $221.9 million and inventories increased to $194.5 million from $182.3 million and $155.7 million, respectively, at year-end 2021. Goodwill was $978.6 million and other intangible assets were $841.1 million at July 1, 2022.
Material Changes Versus the Prior Comparable Period
- Sales increased 12.2% in the quarter and 9.7% year to date, driven primarily by Medical segment growth, demand recovery and the Oscor and Aran acquisitions.
- Cardio & Vascular sales increased 24.8% in the quarter and 18.8% year to date. Cardiac Rhythm Management & Neuromodulation sales increased 1.7% and 1.5%, respectively. Advanced Surgical, Orthopedics & Portable Medical sales were approximately flat in the quarter and decreased 0.9% year to date.
- Gross margin declined 190 basis points in the quarter and 240 basis points year to date because of labor shortages, overtime, training, supply-chain disruptions and manufacturing inefficiencies.
- Operating expenses increased 21.9% in the quarter and 20.0% year to date, including higher labor, amortization, research and development, restructuring and acquisition-integration costs.
- Net income declined 29.2% in the quarter and 36.8% year to date. The year-to-date comparison also benefited from unusually large discrete tax benefits in 2021, including tax-audit settlements.
- Operating cash flow fell $31.8 million year to date, primarily because of lower earnings and increased investment in accounts receivable and inventories.
- Investing cash outflow increased to $148.7 million year to date, including $126.6 million for acquisitions and $22.6 million of capital expenditures. Financing activities provided $115.6 million, including $126.0 million of net revolver borrowings and $7.6 million of term-loan principal payments.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide specific quantitative revenue or earnings guidance. Management expects available cash, operating cash flow and revolver capacity to satisfy working capital, debt service and capital expenditure requirements for the next twelve months, although additional financing could be required if needs increase.
- Integer is exiting certain markets within Advanced Surgical, Orthopedics & Portable Medical. Because of customer and regulatory requirements, the transition and related sales decline are expected to take three to four years.
- Operational-excellence initiatives are expected to generate aggregate pre-tax charges of approximately $3 million to $5 million in 2022, with substantial completion by the end of 2023. Strategic reorganization initiatives are expected to be completed by the end of 2025.
- Acquisition and integration costs were $5.3 million year to date, primarily related to Oscor and Aran. Aran consideration included estimated contingent payments with a fair value of $7.4 million and potential maximum payout of approximately $10.5 million.
- Senior secured facilities require a total net leverage ratio no greater than 5.50:1.00, stepping down to 5.00:1.00 beginning in the third quarter of 2023, and an interest coverage ratio of at least 2.50:1.00. Integer reported compliance at July 1, 2022; management calculated leverage at approximately 3.1:1.0 and interest coverage at approximately 13.0:1.0.
- COVID-19-related labor and supply-chain disruption, delayed customer orders, shipment constraints, the Russia-Ukraine conflict, inflationary pressures, customer concentration, pricing pressure, supplier dependence, regulatory requirements and elevated indebtedness remain significant risks.
- Foreign currency translation produced a $35.2 million year-to-date loss, reducing accumulated other comprehensive income to a $5.3 million loss at July 1, 2022.
- Effective tax rates increased to 14.7% in the quarter and 16.1% year to date, compared with 4.4% and 8.6% in the prior-year periods. The filing reports approximately $6.0 million of unrecognized tax benefits.
Investor Verification Checklist
- Verify whether labor, supply-chain and manufacturing inefficiencies improve sufficiently to restore gross margins.
- Assess integration progress, purchase-price allocation changes and performance of the Oscor and Aran acquisitions.
- Monitor debt balances, floating-rate exposure, interest expense, covenant headroom and revolver availability.
- Track working-capital requirements, particularly inventory and accounts receivable, against operating cash flow.
- Evaluate the duration and financial impact of the planned market exits and related restructuring charges.
- Review customer concentration, pricing changes and demand trends in Cardio & Vascular and Cardiac Rhythm Management & Neuromodulation.
- Confirm the effects of COVID-19, geopolitical conditions, foreign exchange movements and regulatory developments on future results.