Greatbatch, Inc. Form 10-Q Summary
Filing identity: The supplied filing is for Greatbatch, Inc., not Integer Holdings Corp. It covers the 13-week second quarter and 26 weeks ended July 3, 2015, with comparisons to July 4, 2014. The financial statements are unaudited and prepared under U.S. GAAP.
Business context and reporting period
Greatbatch operated through two reportable segments: Greatbatch Medical, which designs and manufactures medical devices and components, and QiG, which develops neurostimulation technologies. The August 2014 acquisition of CCC contributed $1.2 million of second-quarter sales and $5.1 million of first-half sales. Management announced a proposed spin-off of portions of QiG as Nuvectra on July 30, 2015, after the quarter ended.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Sales | $174.9 million | $172.1 million | $336.2 million | $346.4 million |
| Gross profit / margin | $58.0 million / 33.1% | $58.5 million / 34.0% | $110.3 million / 32.8% | $116.1 million / 33.5% |
| Operating income / margin | $13.0 million / 7.5% | $19.5 million / 11.4% | $22.4 million / 6.7% | $42.1 million / 12.1% |
| Net income / margin | $9.3 million / 5.3% | $12.3 million / 7.2% | $17.3 million / 5.1% | $27.3 million / 7.9% |
| Diluted EPS | $0.35 | $0.48 | $0.66 | $1.06 |
| Operating cash flow | Not separately provided | Not separately provided | $22.5 million | $26.5 million |
Adjusted diluted EPS was $0.64 in the quarter and $1.19 for the first six months, compared with $0.61 and $1.16, respectively, in the prior-year periods. Adjusted operating margin was 12.7% for the quarter and 12.0% year to date, compared with 14.1% and 13.5%.
At July 3, 2015, cash and cash equivalents were $72.3 million, working capital was $256.8 million, and the current ratio was 3.60. Total debt was $182.5 million, consisting of a variable-rate term loan; the company had $300 million of revolving borrowing capacity available. The company was in compliance with its debt covenants, with a 26.7-to-1 adjusted EBITDA-to-interest ratio and a 1.56-to-1 total leverage ratio versus maximum or minimum covenant thresholds.
Material changes versus the prior comparable period
- Second-quarter sales increased 2%, but first-half sales declined 3%. Foreign currency reduced sales by approximately $5.5 million in the quarter and $9.5 million year to date.
- Second-quarter organic constant-currency sales increased 4%; first-half organic constant-currency sales decreased 2%.
- Cardiac and neuromodulation sales reached a quarterly record of $90.2 million, up 13%. Orthopaedic sales increased 8% on an organic constant-currency basis in the quarter and 13% year to date.
- First-half Greatbatch Medical sales declined 4%, driven by weakness in portable medical, vascular, and energy, military and environmental markets. QiG sales increased 402% year to date, principally from CCC and new product launches.
- Gross margin declined because of customer pricing pressure, partially offset by production efficiencies and volume. SG&A increased 10% in the quarter and 7% year to date.
- Other operating expenses increased to $7.8 million in the quarter and $15.6 million year to date, primarily from capacity, capability, consolidation, optimization, and related initiatives.
- Net income declined 25% in the quarter and 37% year to date. Lower income taxes partly offset weaker operating performance; the first-half effective tax rate was 20.5% versus 32.2%.
- Operating cash flow declined 15% year to date. Investing cash use increased to $26.0 million, including $22.2 million of capital expenditures and $4.5 million of cost-method investments.
Guidance, outlook, risks, and unusual items
- Fiscal 2015 guidance was sales of $715 million to $730 million, GAAP operating margin of 7.5% to 8.5%, adjusted operating margin of 13.7% to 14.0%, GAAP diluted EPS of $1.43 to $1.53, and adjusted diluted EPS of $2.61 to $2.71.
- Capital expenditure guidance was $40 million to $50 million. Management expected currency translation to reduce 2015 sales by approximately $14 million and anticipated revenue near the low end of guidance.
- Guidance included approximately $35 million of excluded costs, including proposed spin-off costs of $10 million to $12 million, other acquisition and consolidation costs, and approximately $4.5 million of intellectual-property litigation expense.
- Management expected final FDA approval for the Algovita neurostimulation system during the second half of 2015, subject to a satisfactory manufacturing inspection, followed by a U.S. commercial launch.
- The proposed Nuvectra spin-off was expected to reduce Greatbatch’s operating expenses by $12 million to $16 million annually and create a long-term manufacturing agreement, but completion, timing, tax treatment, funding, and benefits were uncertain. Greatbatch expected to make a cash contribution to Nuvectra, with the amount not yet determined.
- Key operational risks included customer concentration, pricing pressure, product obsolescence, foreign exchange, manufacturing transfers, regulatory approvals, product liability or recalls, intellectual-property litigation, and the energy-market slowdown. Three customers represented 52% of first-half sales.
- The company expected cardiac and neuromodulation end-of-life products to reduce 2015 revenue by approximately $10 million to $15 million. A voluntary corrective action affected certain orthopaedic products; three potentially related complaints had been received, with no reported adverse events.
Investor verification checklist
- Verify that the intended issuer is Greatbatch, Inc. rather than Integer Holdings Corp.
- Confirm the proposed Nuvectra spin-off’s final structure, completion status, tax treatment, capital contribution, and actual cost savings.
- Reconcile GAAP results with adjusted metrics and evaluate whether consolidation, litigation, spin-off, and other excluded costs are recurring.
- Monitor Algovita FDA approval and commercialization timing, including manufacturing inspection results.
- Assess customer concentration, legacy product end-of-life exposure, pricing pressure, and the recovery of portable medical, vascular, and energy-related sales.
- Review liquidity against planned capital expenditures, term-loan maturities, variable-rate exposure, and the company’s $39.1 million purchase commitment.