Integer Holdings Corp annual report, FY2020

Business Context and Reporting Period

Integer Holdings Corporation is a global medical device outsource manufacturer serving cardiac, neuromodulation, vascular, advanced surgical, orthopedic and portable medical markets, with a smaller Non-Medical battery business serving energy, military and environmental applications. The filing is a Form 10-K for the fiscal year ended December 31, 2020; the fourth quarter ended December 31, 2020. Results exclude the Advanced Surgical and Orthopedic product line, which was sold in 2018 and reported as discontinued operations.

Integer acquired certain InoMec assets and liabilities on February 19, 2020 for $7.0 million. The company had approximately 7,500 associates and firm backlog of approximately $289 million at year-end.

Financial Performance and Liquidity

Metric	FY 2020	FY 2019	Change
Sales	$1,073.4 million	$1,258.1 million	Down 14.7%
Gross profit	$285.7 million	$355.0 million	Down 19.5%
Gross margin	26.6%	28.2%	Down 1.6 points
Operating income	$120.6 million	$157.6 million	Down 23.5%
Operating margin	11.2%	12.5%	Down 1.3 points
Income from continuing operations	$77.3 million	$91.2 million	Down 15.3%
Diluted EPS from continuing operations	$2.33	$2.76	Down $0.43
Net income	$77.3 million	$96.3 million	Down 19.8%
Cash flow from operations	$181.3 million	$165.4 million	Up $15.9 million

Fourth-quarter 2020 sales were $269.0 million versus $325.6 million in the fourth quarter of 2019. Fourth-quarter gross profit was $73.2 million versus $76.0 million, and income from continuing operations was $15.4 million versus $11.0 million. The 2020 third quarter included a $28.2 million pre-tax patent litigation gain, which also affected year-over-year quarterly comparisons.

Medical sales declined 13.5% to $1.038 billion. Cardio & Vascular sales fell 6.6%, Cardiac & Neuromodulation fell 24.3%, and Advanced Surgical, Orthopedics & Portable Medical fell 8.0%.
Non-Medical sales fell 39.3% to $35.5 million, primarily due to the energy-market downturn and COVID-19-related demand weakness.
Interest expense declined to $38.2 million from $52.5 million, reflecting lower interest rates and reduced debt.
The effective tax rate was 10.4% versus 13.3%, benefiting partly from final 2020 Treasury regulations related to GILTI, FDII and foreign tax credits. Management characterizes part of this benefit as non-recurring.
Cash and cash equivalents were $49.2 million at year-end versus $13.5 million in 2019. Working capital increased to $256.7 million from $236.3 million, and the current ratio improved to 2.64 from 2.32.
Capital expenditures were $46.8 million, while net cash used in investing activities was $56.6 million. Net debt repayments were $87.5 million.

Debt, Liquidity and Capital Structure

Principal debt outstanding was approximately $738.0 million; carrying value net of debt issuance costs and discounts was $731.3 million.
Debt consisted principally of a $230.0 million term loan A and a $508.0 million term loan B. The senior secured credit facilities mature October 27, 2022.
The $200 million revolving facility had $193.2 million of available capacity at year-end after letters of credit, with no outstanding revolver borrowings.
Estimated 2021 principal and interest payments were approximately $60 million. Total contractual obligations were $942.2 million, including debt, interest, operating leases and other commitments.
The company was in compliance with its debt covenants. Reported total net leverage was approximately 3.2 times and adjusted EBITDA to interest expense was approximately 6.5 times. Management stated that available cash, operating cash flow and revolver capacity should cover requirements for the next twelve months.

Material Changes Versus the Prior Comparable Period

COVID-19 caused delayed or reduced customer orders, procedure-related demand weakness, shipment and supply-chain disruptions, and workforce restrictions. Management used furloughs, reductions in force and temporary shutdowns to align costs with demand.
Gross margin contracted due to customer price reductions, unfavorable mix and lower volume leverage; the comparison was partly helped by $21.4 million of customer-bankruptcy-related cost-of-sales charges in 2019.
SG&A declined by $29.7 million, including a $28.2 million net gain from patent litigation in 2020. Excluding that gain, the underlying SG&A reduction was substantially smaller.
Customer Nuvectra’s 2019 bankruptcy created a $16.7 million sales headwind in Cardiac & Neuromodulation in 2020. Related pre-tax charges were $1.2 million in 2020 versus $24.2 million in 2019.
Operating cash flow increased despite lower earnings, supported by working-capital changes and $73.3 million of accounts receivable sold on a non-recourse basis through a supplier-financing program. This program was not used before 2020.
Debt declined by approximately $83.5 million on a net carrying-value basis, while foreign-currency translation increased accumulated other comprehensive income by $34.9 million.

Guidance, Outlook, Risks and Unusual Items

The filing does not provide clear numerical revenue or earnings guidance. Management expects medical demand and certain COVID-19 effects to recover over time, but emphasizes that timing remains uncertain. Strategic priorities include manufacturing, business-process and sales-force excellence, continued research and development, and selective bolt-on acquisitions.

Three customers represented approximately 48% of 2020 sales, creating concentration and pricing risk. Supply agreements generally do not guarantee minimum purchase levels.
COVID-19 remains the primary near-term uncertainty, including procedure deferrals, renewed restrictions, facility disruptions, supply-chain interruptions and changing customer inventory policies.
Debt refinancing is a material consideration because the senior secured credit facilities mature in October 2022. Variable-rate debt, LIBOR transition and covenant compliance create additional financial risk.
Raw-material availability and pricing, particularly for specialty and precious metals, may affect costs. The company relies on a limited number of suppliers for certain materials and subcomponents.
Regulatory compliance, product quality, recalls, product liability, intellectual property disputes and customer vertical integration could adversely affect results.
Goodwill and other intangible assets totaled approximately $1.6 billion, or 68% of total assets. No impairment was recorded, but prolonged weakness or adverse changes in assumptions could result in future charges.
Unusual 2020 items included the $28.2 million patent-litigation gain, a $5.3 million net gain on equity investments, $7.6 million of other operating expenses, and a $2.0 million reduction in acquisition-related contingent consideration.
The company recorded a $0.3 million environmental liability related to investigations at a former New Jersey facility and stated that additional remediation or damages could arise.

Management reported effective disclosure controls and internal control over financial reporting. Deloitte & Touche issued unqualified opinions on the financial statements and internal controls.

Important Facts for Investors to Verify

Whether medical procedure volumes and customer orders recover sufficiently to restore sales and gross-margin leverage.
The sustainability of reported cash generation, particularly the effect of supplier-financing-related accounts receivable sales.
The company’s ability to refinance or repay the facilities maturing in October 2022 without materially increasing financing costs.
Revenue trends and customer concentration, especially among Abbott, Medtronic and Boston Scientific.
Potential goodwill, tradename, inventory and warranty charges if demand, customer mix or operating assumptions deteriorate.
The recurring earnings impact of the 2020 patent gain and the lower effective tax rate, both of which may not repeat.
Exposure to COVID-19, energy-market weakness, supply constraints, regulatory changes and potential customer insourcing or dual sourcing.