Business Context and Reporting Period
The filing is Greatbatch, Inc.’s unaudited Form 10-Q for the 13 weeks ended March 29, 2013. The registrant operates through two segments: Implantable Medical, which develops medical devices and components, and Electrochem Solutions, which provides battery and power systems. The filing identifies the company as Greatbatch, Inc.; this should be verified against the requested Integer Holdings Corp. metadata.
Financial Results and Key Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Sales | $148.3 million | $159.1 million | Down 7% |
| Gross profit | $48.7 million | $46.9 million | Up 4% |
| Gross margin | 32.9% | 29.5% | Up 3.4 percentage points |
| Operating income | $14.3 million | $11.2 million | Up 28% |
| Operating margin | 9.7% | 7.0% | Up 2.7 percentage points |
| Net income | $5.7 million | $4.5 million | Up 27% |
| Diluted EPS | $0.23 | $0.19 | Up $0.04 |
| Net cash used in operations | $(7.6) million | $(0.4) million | Higher cash use |
- Implantable Medical sales were $111.4 million, down 5%; Electrochem sales were $36.9 million, down 11%.
- Portable Medical sales increased 1% to $18.9 million, while Energy sales declined 17% to $12.3 million.
- Adjusted operating income was $19.3 million, or 13.0% of sales, versus $15.5 million, or 9.8%, in the prior-year quarter. Adjusted diluted EPS was $0.44 versus $0.37.
- Cash and cash equivalents were $10.1 million at March 29, 2013, compared with $20.3 million at December 28, 2012. Working capital was $169.2 million and the current ratio was 2.65.
- Inventory increased to $118.2 million from $106.6 million at year-end, primarily to replenish safety stock and prepare for expected second-half demand.
- Long-term debt was $233.0 million, compared with $225.4 million at year-end. The company had $167 million of available borrowing capacity under its revolving credit facility.
Material Changes Versus the Prior Comparable Period
- Revenue declined $10.8 million, reflecting CRM market headwinds, customer market-share shifts, customer inventory builds in late 2012, weaker Electrochem Energy and Other sales, and the sale of non-core orthopaedic product lines.
- On a constant-currency organic basis, orthopaedic sales grew 11%; reported orthopaedic revenue was reduced by approximately $4.2 million by the divestiture of non-core product lines.
- Gross margin improved primarily from Swiss orthopaedic facility consolidation, production efficiencies and cost savings, partly offset by pricing concessions to major OEM customers.
- Net research, development and engineering expense decreased 20% to $11.1 million due to greater project focus, discontinued non-core projects and higher customer reimbursements.
- Interest expense increased 60% to $7.0 million because redemption of the convertible subordinated notes accelerated approximately $5.4 million of discount amortization. Management expects interest expense to decline for the remainder of 2013.
- The effective tax rate decreased to 19.9% from 27.0%, primarily because of the reinstated research and development tax credit and higher income in lower-tax jurisdictions.
- The company redeemed $197.8 million of convertible subordinated notes on February 20, 2013, funding the repayment with revolving credit borrowings.
Guidance, Outlook, Risks and Unusual Items
- Management reaffirmed 2013 adjusted operating margin guidance of 12.0% to 12.5% and adjusted diluted EPS guidance of $1.90 to $2.00.
- Management expects sales toward the lower end of the previously issued $660 million to $680 million range, implying organic revenue growth of approximately 5% to 8% after adjusting for the orthopaedic divestiture.
- Expected 2013 adjusted operating income adjustments total approximately $11.5 million to $14.0 million, including $4.8 million to $5.8 million of remaining Algostim development and verification costs.
- Capital expenditures were expected to be $20 million to $30 million for 2013. Consolidation and facility initiatives are expected to produce approximately $10 million to $15 million of annual cost savings when completed.
- A voluntary field action involving two cardiovascular devices is expected to delay approximately $3.3 million of annualized revenue until the second half of 2013; the devices were expected to return to market in the third quarter.
- Algostim development remained on track for a literature-based PMA submission in the second half of 2013, with potential OEM commercialization partners under discussion.
- Three customers represented 52% of first-quarter sales, creating customer concentration and ordering-pattern risk.
- Other risks include pricing pressure, regulatory and healthcare changes, product liability, dependence on suppliers, foreign exchange and interest rates, execution of facility consolidations, acquisitions, and development of new products.
- The company recorded $3.2 million of other operating expense, including $2.6 million of orthopaedic facility optimization costs and $0.3 million for an ERP upgrade.
- The filing discloses an early-stage product liability lawsuit involving Electrochem; the potential loss cannot currently be reasonably estimated. The company believes it has meritorious defenses and has insurance coverage.
- The filing estimates that the medical device tax will reduce gross profit by approximately $0.6 million to $1.0 million in 2013.
Most Important Facts to Verify
- Verify the issuer identity: the supplied filing is for Greatbatch, Inc., not clearly Integer Holdings Corp.
- Verify whether revenue weakness is temporary and whether customer inventory normalization and new product launches support the projected second-half recovery.
- Monitor leverage, covenant compliance and liquidity following the conversion of convertible-note debt into $233 million of revolving-credit borrowings.
- Assess the sustainability of gross-margin improvement from consolidations and production efficiencies after unusual restructuring activity subsides.
- Track the timing and commercial prospects of the cardiovascular device relaunch and Algostim PMA submission.
- Evaluate customer concentration, pricing concessions and the effect of the field action on future revenue.
- Reconcile GAAP results with management’s adjusted measures, particularly the exclusion of development, consolidation, acquisition and debt-related charges.