Greatbatch, Inc. Form 10-Q Summary
Reporting period: Three months ended March 30, 2012, compared with the three months ended April 1, 2011. The source filing identifies the registrant as Greatbatch, Inc.; it does not identify Integer Holdings Corp. Greatbatch operated through Greatbatch Medical and Electrochem Solutions.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Sales | $159.1 million | $148.8 million | +7% |
| Gross profit | $46.9 million | $47.2 million | -1% |
| Gross margin | 29.5% | 31.7% | -2.2 points |
| Operating income | $11.2 million | $18.0 million | -38% |
| Operating margin | 7.0% | 12.1% | -5.1 points |
| Net income | $4.5 million | $11.9 million | -63% |
| Diluted EPS | $0.19 | $0.51 | -$0.32 |
| Net cash from operating activities | $(0.4) million | $25.0 million | Decrease of $25.4 million |
- Adjusted operating income was $15.5 million, or 9.8% of sales, versus $18.7 million, or 12.6%, in the prior-year quarter.
- Adjusted net income was $8.7 million and adjusted diluted EPS was $0.37, compared with $10.8 million and $0.46, respectively, in Q1 2011.
- Electrochem sales increased 99% to $41.3 million, primarily reflecting the Micro Power acquisition. Greatbatch Medical sales declined 8% to $117.8 million; CRM/Neuromodulation declined 4%, Vascular Access increased 11%, and Orthopaedic declined 22%.
- Cash and cash equivalents were $9.5 million at March 30, 2012, compared with $36.5 million at December 30, 2011. Working capital was $174.8 million and the current ratio was 3.24.
- Net cash used in investing activities was $27.0 million, including $17.2 million for acquisitions and $9.8 million for capital expenditures. Capital expenditures for the remainder of 2012 were expected to be $20 million to $30 million.
- Total long-term debt was $238.6 million, consisting principally of $55.0 million drawn on the revolving facility and $197.8 million of convertible subordinated notes due June 15, 2013, net of unamortized discount.
- The company had $345 million of available borrowing capacity, complied with its debt covenants, and reported a 2.35-to-1 total leverage ratio versus a maximum of 4.0-to-1.
Material changes versus the prior comparable period
- Sales grew because acquisitions contributed approximately $20.9 million, while organic constant-currency sales declined 6%. The decline reflected difficult comparisons in CRM and Orthopaedic products, including prior-year customer launches and inventory builds.
- Profitability deteriorated because of European Orthopaedic production inefficiencies, lower CRM and Orthopaedic volumes, increased medical-device research and development, and consolidation and integration expenses.
- Research, development and engineering expense increased 34% to $13.9 million, including approximately $7.0 million related to medical-device development.
- Other operating expenses increased to $2.7 million from $0.2 million, including facility optimization, ERP upgrade, integration, and asset-disposition costs.
- Q1 2011 benefited from a $4.5 million pretax gain on the sale of a cost-method investment; there was no comparable gain in Q1 2012.
- Greatbatch acquired NeuroNexus on February 16, 2012, for preliminary consideration of $13.2 million. NeuroNexus contributed approximately $0.2 million of revenue and reduced net income by approximately $0.2 million during the quarter.
- The company continued integrating Micro Power, acquired in December 2011 for $71.8 million. Micro Power contributed approximately $20.6 million of Q1 2012 revenue.
Guidance, outlook, risks, and unusual items
- Management maintained 2012 sales guidance of approximately $645 million to $665 million, representing 13% to 17% growth, including the full-year Micro Power contribution. Organic growth was expected to be flat to low single digits.
- Adjusted operating margin guidance was 11.5% to 12.5%, adjusted diluted EPS guidance was $1.75 to $1.85, and the assumed average diluted share count was approximately 24 million. Management assumed a 36% annual effective tax rate.
- Management expected results to improve in the second half of 2012 as market comparisons ease, medical-device products commercialize, acquisitions are integrated, and Orthopaedic operations improve.
- Orthopaedic optimization initiatives were expected to require $50 million to $60 million of capital investment and $10 million to $15 million of expense; medical-device facility initiatives were expected to require $15 million to $20 million of capital investment and $2 million to $3 million of expense. Combined initiatives were expected to generate approximately $4 million to $7 million of annual cost savings after implementation.
- Key risks include customer concentration, pricing pressure and customer vertical integration, reliance on limited suppliers, product quality and liability exposure, regulatory approval and commercialization of medical devices, acquisition integration, foreign exchange, healthcare reform, and the need to refinance or repay the convertible notes due in 2013.
- A fire at an extended-chain supplier of cyclododecatriene temporarily disrupted expected supply through the fourth quarter of 2012. Management stated that safety stock and vendor actions were expected to prevent a material operating impact.
- Four customers accounted for 50% of sales in Q1 2012, compared with 60% in Q1 2011. Management reported no material changes to previously disclosed legal proceedings or risk factors.
- Management stated that disclosure controls were effective as of March 30, 2012. Internal controls for the recent acquisitions were still being incorporated into the company’s broader control framework.
Investor verification checklist
- Verify the company identity: the supplied filing is for Greatbatch, Inc., not Integer Holdings Corp.
- Reconcile GAAP results with adjusted operating income, adjusted net income, and adjusted EPS, particularly the treatment of convertible-debt discount amortization and acquisition or restructuring costs.
- Monitor the recovery of CRM and Orthopaedic sales, European Orthopaedic manufacturing performance, and the timing of medical-device commercialization.
- Assess liquidity and refinancing plans for the $197.8 million convertible notes due June 15, 2013.
- Track acquisition integration, contingent consideration of approximately $1.5 million related to NeuroNexus, and any final purchase-price allocation adjustments.
- Evaluate customer concentration, supplier interruption risk, healthcare-reform effects, regulatory milestones, and the execution of planned capital investments and cost savings.