Greatbatch, Inc. Form 10-Q Summary
Filing identity: The supplied filing is for Greatbatch, Inc., not Integer Holdings Corp. It covers the quarter and six months ended June 28, 2013; comparable periods ended June 29, 2012. Results are unaudited and presented under U.S. GAAP.
Business Context and Reporting Period
Greatbatch operated through Implantable Medical and Electrochem Solutions. Implantable Medical served cardiac, neuromodulation, vascular and orthopaedic markets, while Electrochem supplied battery and power solutions, particularly for portable medical and energy applications. Each quarter contained 13 weeks and each year-to-date period contained 26 weeks.
Financial Performance and Position
| Metric | Q2 2013 | Q2 2012 | Six Months 2013 | Six Months 2012 |
|---|---|---|---|---|
| Sales | $171.3 million | $166.5 million | $319.6 million | $325.7 million |
| Gross profit | $57.3 million | $51.9 million | $106.1 million | $98.8 million |
| Gross margin | 33.4% | 31.2% | 33.2% | 30.3% |
| Operating income | $17.1 million | $11.1 million | $31.5 million | $22.3 million |
| Operating margin | 10.0% | 6.7% | 9.8% | 6.8% |
| Net income | $9.8 million | $3.9 million | $15.4 million | $8.3 million |
| Diluted EPS | $0.39 | $0.16 | $0.62 | $0.35 |
- Q2 sales increased 3%; management reported 6% organic constant-currency growth after adjusting for the orthopaedic product-line divestiture.
- Q2 operating income increased 54% and net income increased 153%. Six-month operating income increased 41% and net income increased 85%.
- Adjusted diluted EPS was $0.56 in Q2 and $0.99 for the first six months, compared with $0.43 and $0.79, respectively, in the prior-year periods.
- Cash used in operating activities was $8.6 million in the first six months, compared with $23.5 million of cash provided in the prior-year period.
- Capital expenditures were $11.6 million year to date; net cash used in investing activities was $9.6 million.
- Cash and equivalents were $10.2 million at June 28, 2013, down from $20.3 million at December 28, 2012. Working capital was $189.7 million and the current ratio was 2.92.
- Debt was $237.0 million, entirely under the revolving credit facility, versus $225.4 million at year-end 2012. Available borrowing capacity was $163 million.
Material Changes Versus the Prior Comparable Period
- Implantable Medical Q2 sales increased 3% to $128.6 million, led by 5% growth in cardiac and neuromodulation. Electrochem sales increased 4% to $42.7 million, led by 9% growth in portable medical.
- Six-month sales declined 2%, primarily because of first-quarter customer inventory adjustments, Swiss consolidation effects, the orthopaedic divestiture and weaker Electrochem energy and other sales.
- Organic orthopaedic sales increased 14% in Q2 and 12% year to date, excluding divested product lines, despite temporary plant-validation delays.
- Gross margin improved 220 basis points in Q2 and 290 basis points year to date, reflecting production efficiencies, cost savings and benefits from Swiss facility consolidation.
- Net research, development and engineering expense declined 10% year to date as the company discontinued certain non-core projects and received higher customer reimbursements. SG&A increased 6% year to date because of sales and marketing investments and higher performance-based compensation.
- Interest expense declined 67% in Q2, primarily because the company redeemed its $197.8 million convertible subordinated notes in February 2013 and therefore incurred less discount amortization.
- The company replaced the convertible notes with borrowings under its revolving facility. Six-month financing activity included $215 million of new borrowings and approximately $209 million of principal repayments.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2013 sales at the lower end of its $660 million to $680 million guidance range, implying 5% to 8% organic growth after the $15 million orthopaedic divestiture.
- Adjusted operating margin was expected to approximate 13.0%, adjusted tax rate approximately 33%, diluted shares approximately 25.0 million, and adjusted diluted EPS $2.05 to $2.15, raised from $2.00 to $2.05.
- Management expected full-year capital spending of $20 million to $30 million, approximately half discretionary, and intended to use excess operating cash flow to fund initiatives and reduce debt.
- In June 2013, the company began combining sales, marketing and operations groups across its segments. Expected restructuring charges were $4.2 million to $5.0 million, with $0.9 million incurred by quarter-end; anticipated annual savings were $7.0 million to $7.7 million.
- Orthopaedic and medical-device consolidation programs remained in progress. The company estimated $10 million to $15 million of annual savings from these initiatives, but additional capital and operating expenditures remained.
- Revenue from two cardiovascular devices was temporarily delayed following a voluntary field action and was expected to resume in the second half of 2013. Algostim development and regulatory submissions were proceeding as planned.
- The company faced customer concentration risk: three customers represented 50% of six-month sales. Other risks included product recalls and liability, regulatory and healthcare changes, pricing pressure, suppliers, foreign currency, acquisitions, intellectual property and execution of consolidation programs.
- The company estimated the 2013 medical-device tax would reduce annual gross profit by approximately $0.6 million to $1.0 million. It also expected additional, unquantified compliance costs from conflict-minerals rules.
- A Texas product-liability and wrongful-death action remained at an early stage; potential loss could not be reasonably estimated. The company believed it had defenses and product-liability insurance.
- The company was in compliance with its credit covenants. The adjusted EBITDA-to-interest ratio was 18.9 to 1.0 versus a minimum of 3.0 to 1.0, and total leverage was 2.3 to 1.0 versus a maximum of 4.0 to 1.0.
Most Important Facts to Verify
- Confirm that the intended issuer is Greatbatch, Inc.; the supplied filing does not identify Integer Holdings Corp.
- Reconcile the cash-flow deterioration with increases in accounts receivable and inventory and the $11.5 million tax payment related to the convertible-note retirement.
- Track progress toward the $660 million to $680 million revenue target and $2.05 to $2.15 adjusted EPS guidance.
- Monitor execution, remaining charges and realized savings from the new operating-unit realignment and facility-consolidation programs.
- Assess liquidity after the convertible-note refinancing, including the $237 million revolver balance, $163 million availability and covenant headroom.
- Evaluate customer concentration, cardiovascular product reintroduction, Algostim regulatory milestones and the unresolved product-liability matter.