Business Context and Reporting Period
Although the request identifies Integer Holdings Corp., the supplied filing is Greatbatch, Inc. Form 10-Q, filed November 8, 2011, for the 13-week quarter ended September 30, 2011, and the nine months then ended. Greatbatch operated through Greatbatch Medical, which served cardiac rhythm management, neuromodulation, vascular access and orthopaedic markets, and Electrochem Solutions, which supplied batteries and wireless sensing systems.
Key Financial Metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Sales | $131.7 million | $127.5 million | $427.1 million | $400.3 million |
| Gross profit / margin | $41.9 million / 31.8% | $42.0 million / 32.9% | $135.7 million / 31.8% | $129.1 million / 32.3% |
| Operating income / margin | $12.9 million / 9.8% | $13.2 million / 10.3% | $49.2 million / 11.5% | $44.5 million / 11.1% |
| Net income / margin | $7.0 million / 5.3% | $6.0 million / 4.7% | $27.5 million / 6.4% | $19.3 million / 4.8% |
| Diluted EPS | $0.30 | $0.25 | $1.16 | $0.82 |
| Operating cash flow | Not separately provided | Not separately provided | $58.5 million | $72.0 million |
- Reported Q3 sales increased 3%; management stated constant-currency growth was 2%. Nine-month sales increased 7%, or 5% on a constant-currency basis.
- Q3 adjusted operating income was $14.7 million, or 11.2% of sales, versus $14.4 million, or 11.3%, in the prior-year quarter. Nine-month adjusted operating income was $51.9 million, or 12.1% of sales, versus $47.2 million, or 11.8%.
- Q3 adjusted diluted EPS was $0.41 versus $0.34; nine-month adjusted diluted EPS was $1.29 versus $1.06.
- Cash and cash equivalents were $41.6 million at September 30, 2011, versus $22.9 million at December 31, 2010. Working capital was $179.3 million, and the current ratio was 3.43.
- Capital expenditures were $18.2 million for the first nine months, compared with $10.2 million in the prior-year period.
- Total long-term debt was $198.3 million, consisting of $20.0 million drawn on the revolving facility and $197.8 million principal of convertible subordinated notes, net of discount. Debt declined from $220.6 million at year-end 2010.
Material Changes Versus Prior Comparable Period
- Greatbatch Medical sales rose 6% in Q3 and 8% year to date. Vascular access sales rose 26% in Q3 and 16% year to date; orthopaedic sales rose 11% in Q3 and 23% year to date, including favorable foreign-exchange effects.
- CRM and neuromodulation sales rose 2% in Q3 but only 1% year to date amid a contracting underlying market. Management expected full-year 2011 CRM and neuromodulation revenue to be flat with 2010.
- Electrochem sales fell 12% in Q3 because the prior-year period benefited from a one-time energy-customer inventory build; year-to-date sales increased 1%.
- Q3 gross margin declined 1.1 percentage points, primarily from OEM price concessions and higher performance-based compensation, partly offset by productivity and capacity benefits. Nine-month gross margin declined 0.5 percentage points.
- Q3 GAAP operating income fell 2%, while nine-month GAAP operating income rose 11%. Net income increased 17% in Q3 and 42% year to date.
- Interest expense declined 10% in Q3 and 14% year to date, reflecting debt repayment. Nine-month results included a $4.2 million pretax gain on the sale of a cost-method investment.
- Operating cash flow fell $13.5 million year to date, primarily because of higher accounts receivable and inventory and timing of cash receipts and payments.
Guidance, Outlook, Risks and Unusual Items
- Management reaffirmed 2011 guidance for sales of $550 million to $570 million, adjusted operating margin of 12.0% to 13.0%, and adjusted diluted EPS of $1.60 to $1.70.
- Management remained cautious regarding the contracting CRM market, OEM pricing pressure, short customer-order visibility, customer inventory programs, alternative supply arrangements and vertical integration.
- An October 2011 manufacturing optimization plan is expected to require $40 million to $50 million of capital expenditures and $10 million to $15 million of expenses over two to three years. A related note estimated $40 million to $45 million of capital investment and $9 million to $11 million of expense; the filing contains these differing estimates.
- The company expected Q3-level medical-device design-verification testing costs to continue through mid-2012. It also expected gross margin to remain around the current level for the remainder of 2011.
- The new secured revolving credit facility provides $400 million of capacity, expandable to $600 million with lender approval; $380 million was available at September 30, 2011. The facility requires minimum adjusted EBITDA-to-interest coverage of 3.0x and maximum leverage of 4.5x through December 30, 2011, declining to 4.0x thereafter. The company reported compliance, with coverage of 20.2x and leverage of 1.78x.
- The credit facility generally matures June 24, 2016, but could mature March 1, 2013 if the convertible notes are not repaid, modified or refinanced before that date. The $197.8 million convertible notes are due June 15, 2013.
- Four customers accounted for 59% of nine-month sales, highlighting customer concentration. The filing identifies the four customers by letter in the financial statements and identifies Boston Scientific, Johnson & Johnson, Medtronic and St. Jude Medical as collectively representing 59% of sales in the MD&A.
- Other exposures include foreign-currency volatility, healthcare reform, possible lithium-battery transportation regulation, product liability, intellectual-property and regulatory risks, supply-chain dependence and acquisition execution risk.
- Legal proceedings were described as ordinary-course matters with no material changes from the 2010 Form 10-K. A $0.6 million assessment related to the winding down of a workers’ compensation trust was accrued, and the company carried $2.8 million of self-insured medical-plan accruals.
Most Important Facts for Investors to Verify
- Verify the issuer identity: the supplied document is Greatbatch, Inc., not Integer Holdings Corp.
- Reconcile the differing estimates for the manufacturing optimization program’s capital spending and expenses.
- Assess the sustainability of reported earnings after excluding the $4.2 million investment gain, non-cash convertible-note discount amortization and other adjusted items.
- Monitor the September 2011 debt maturity implications, refinancing requirements and compliance with leverage and interest-coverage covenants.
- Evaluate customer concentration, CRM-market contraction and continuing OEM price concessions.
- Track working-capital levels and operating cash flow, which weakened despite higher sales and net income.
- Assess execution and funding requirements for the planned facilities, design centers, production transfers, Switzerland consolidation and ERP upgrade.